Assignment in Business Deconstructed - Financial analysis and proposing strategy

easyJet plc


Research Paper (undergraduate), 2009

21 Pages, Grade: 1


Excerpt

Table of contents

Introduction

1. Company profile

2. EasyJet‘s legal form and its impact on the interaction with stakeholders
2.1 Legal form
2.1.1 Advantages and disadvantages of a plc
2.2 The shareholders
2.3 The memorandum and articles of association
2.4 Corporate personality
2.5 Corporate governance

Financial analysis and proposing strategy

3. General analysis
3.1 Profitability and efficiency
3.2 SWOT analysis
3.3 Proposed strategy

Implementing strategy

4.1. Budgeting
4.2. The balanced scorecard
4.2.1 Application of the balanced scorecard
4.3 Organisational structures

Conclusion

Bibliography

Appendices
- Five year summary
- Consolidated cash flow statement
- Consolidated balance sheet
- Consolidated income statement

1. Company Profile

EasyJet‘s principal activity is to offer international air transportation services on a low cost basis. The company is a subsidiary of easyGroup Holdings Ltd, which owns the “easy“ brand and licenses it to the airline and to other companies. The subsidiaries owned by easyGroup IP Ltd include: easyCar, easyHotel, easyCruise, easyMobile and others. EasyJet plc acquised Go Airlines Ltd. on 16 May, 2002 and GB Airways Ltd. on 25 October, 2007 to continue its expansion throughout Europe. (easyJet.co.uk, 2009)

The airline focuses on low cost, financial strengths and on high efficiency. EasyJet plc is present in 27 European and North African countries with 380 different routes, operates on 100 airports all over Europe and carried 51.9 million passengers in 2008. EasyJet plc made a profit of £ 2,3 million in the financial year of 2007/08 and is listed at the London Stock Exchange. (easyJet.co.uk, 2009)

2. EasyJet‘s legal form and its impact on the interaction with stakeholders

2.1 Legal Form

A limited company is a corporation whose liability is limited by law. There are three main types of limited companies:

- private company limited by guarantee
- public limited company (plc)
- private company limited by shares (Ltd)

EasyJet plc is a public limited company. A limited company may be private or public. The distinction between those two is that public companies can generally invite the public to contribute to the organization‘s share capital while private companies cannot. (Bové & Thill, p. 96, 2005) The liability of easyJet plc is limited, which means that:

“ If the company becomes unable to pay its debts, the members of that company will not have to contribute towards paying the company ‘ s debts out of their own private funds: they are liable to pay only the amount they have paid, or have promised to pay, for their shares.

(Dine, 1994)

2.1.1 Advantages and disadvantages of a plc

The most significant advantage of a plc is that it has unlimited capital available through investments of shareholders, therefore a plc can grow faster than smaller businesses. Because of an unlimited capital, a plc can invest easier in marketing, research and development, products and other. However, due to the fact that shareholders invest their money in the company and therefore have a voice in certain issues, there is a loss of control in the business and decision making can take longer. Also, the profits of the company are shared among a far greater number of people. (Bové & Thill, 2005)

2.2 The shareholders

Plcs have the obligation to hold an Annual General Meeting, where shareholders are informed about current operations and future plans and can give their votes on certain issues. (Dine, 1994)

“ Many of the decisions necessary for the running of a company can be arrived at by a majority vote of the shareholders taken at the meeting. However, it would be cumbersome for the everyday running of the business to be conducted in this way, so the company votes that certain people should be ‘ directors ‘ of the company and should take care of the everyday running of the company “ (Dine, 1994)

The Board of Directors then runs the company on behalf of all shareholders. The owners with the most shares have (in general) the most power, absolute power is given if one individual or group owns a 51% share.

EasyJet is a public limited company (plc), which means that it may invite the public to subscribe for shares, and therefore, is more suitable for investments by large numbers of people, which distinguishes it mainly from private companies. Shareholders are called investors and they invest their money by buying shares of the company because they are groups and individuals who have an interest in the company. The shareholders, who also run the business of a company benefit from the profits by obtaining dividends on the extent of their capital invested. EasyJets‘ stakeholders are its shareholders, employees, customers, business partners and the community. They all have a major influence on the business and therefore on its performance. Sir Stelios Haji-Ioannou who holds the interests of easyGroup Holdings Ltd. holds with £ 66,076,451 share capital the majority of shares. (Dine, 1994)

2.3 The memorandum and articles of association

The constitution of the company contained in the memorandum and articles of association governs the liabilities and rights of shareholders.(Dine, 1994). Due to the Companies Act of 2006, companies are obliged to have a memorandum of association. Section 2 of the Companies Act requires the following content within any memorandum:

The company‘s proposed name;

whether the company‘s registered office is to be situated in England and Wales or in Scotland or in Northern Ireland;

wether the liability of the members of the company is to be limited, and if so whether it is to be limited by shares or by guarantee, and

wether the company is to be a private or a public company.

(opsi.gov.uk, 2009)

2.4 Corporate personality

EasyJet is “ a corporate body, an artificial person recognised by the law, with an identity separate from the members who compose it. “ (Ellison & Harrison, p. 158, 1999) The concept of corporate personality means that due to the status of being a legal entity and an artificial person, the organisation has some of the powers and responsibilities which a natural person has. This means that easyJet can sign contracts, buy, own and transfer property, conduct its business, sue and also be sued (Bové & Thrill, p. 95, 2005)

This concept of company law mainly emphasizes on the concept of limited liability and prevents the members of an organisation “ from escaping liability by hiding behind the company. “ (Ellison & Harrison, p. 161, 1999)

2.5 Corporate governance

“ The ways in which a firm safeguards the interests of its financiers and the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparancy in the firm ‘ s relationship with its all stakeholders. “ (Dine, p. 101, 1994)

According to easyJet‘s annual report, easyJet “ is committed to meeting the required standarts of corporate governance “ (easyJet Annual Report, p. 28, 2008)

3. General analysis

illustration not visible in this excerpt

*before interest and tax

Fig.1, Source: easyJet plc Financial Accounts 2008, Adapted by Sven Elmers

As figure 1 shows, the turnover increased by 31.47 per cent, however operating profits fell by 47,09 per cent. This result was achieved despite the strong cashflow, growth in passenger numbers and capacity growth and is mainly due to the significant increased jet fuel prices. According to easyJet‘s financial report, total costs per seat increased by 19.4% or £7.02 to £43.14 in 2008, the fuel price rise accounted for £4.08 of this increase. Furthermore, airport charges and maintenance costs show an increase. Due to these developments the profit margin declined by 59.77 per cent. Therefore, easyJet plc was able to generate 9.57 per cent in profit from its 2007 sales, but only 3.85 per cent in 2008.

3.1 Profitability and efficiency

illustration not visible in this excerpt

Fig. 2, Source: easyJet Financial Accounts 2008, adapted by Sven Elmers

In 2007, easyJet plc underwent a significant decline in their capital returned. The airline earned £ 9.07 for every pound used in 2007, but only £ 4.16 in 2008 which means a decline by 54.13 per cent. As mentioned earlier, the reason might be the increased jet fuel prices, airport charges and maintenance costs. Moreover, easyJet‘s overall financial performance, which is measured by the leaverage ratio show that their dependence on outside capital increased. In 2007, 25.2 per cent of easyJet‘s assets were financed through borrowings, in 2008 the figure went up a bit to 26.0 per cent. Because of the acquisition of GB Airways Ltd., easyJet plc expanded enourmously and therefore had to rely on extended financial assets.

Andrew Harrison, CEO of easyJet plc said in April 2009, that “ Because of the current economic downturn, bookings, especially for long-distance flights will decrease enormously. Bookings for short-distance flights, the market on which easyJet focuses on decreased by only 5%. It is easier for easyJet to extend its market share in a crisis than in good times. (ftd.de, 2009)

However, because easyJet plc operates on a low cost basis, it is hard for the airline to find more ways to save money by reducing costs or to increase selling prices, because easyJet‘s business model is to offer the lowest fares. Therefore, easyJet plc should continue to concentrate on low cost travel because especially in an economic downturn people compare prices and take the cheaper option.

[...]

Excerpt out of 21 pages

Details

Title
Assignment in Business Deconstructed - Financial analysis and proposing strategy
Subtitle
easyJet plc
College
New College Durham
Grade
1
Author
Year
2009
Pages
21
Catalog Number
V181277
ISBN (eBook)
9783656042488
ISBN (Book)
9783656042310
File size
6597 KB
Language
English
Tags
assignment, business, deconstructed, financial
Quote paper
Sven Elmers (Author), 2009, Assignment in Business Deconstructed - Financial analysis and proposing strategy, Munich, GRIN Verlag, https://www.grin.com/document/181277

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