Finance has been readily available to most airlines, despite a worsening record of profitability when compared to other industries and the cyclic nature of earnings, primarily driven by seasonal travel patterns of customers. Unlike other industries, most airlines are owned either solely or partially by the respective governments and as such tend to receive funds from the government or have loans guaranteed by the government.
Besides, airlines primarily look for funding to purchase aircraft which is an asset that most financial institutions have been funding at 80 to 90% of total expense on medium or long-term basis. Therefore, borrowings will be evident in most Airline financial statements. However, it is important for airlines to consider factors such as time and repayment period of financing, economic factors such as expected changes to lending and interest rates, fuel pricing and currency rate fluctuations. As these factors could introduce financial risks for an airline.
Based on the 2016 Balance sheet of IAG-BA – the company’s total assets accounts to a total of Euro 27,373m. Multiple options for acquiring land and building worth 20% of Net assets will be presented in the following sections for the chosen organization IAG-BA. The formula being used will be ((Total assets – Total Liabilities ) * 20%]
IAG decreased its capacity to Africa, Middle East and South Asia due to weaker demand resulting from geopolitical issues. Flying was reduced this year to Angola, Nigeria, Morocco, Tunisia and Uganda. Other decreases resulted from the full year impact of reductions made last year to Entebbe, Senegal and Gambia. Additional capacity was deployed to South Africa with Iberia reintroducing Johannesburg and British Airways launching a Cape Town route from London Gatwick. Passenger load factor improved 0.9 points.
In Asia Pacific, the capacity increase was driven by the full year impact of the network and aircraft changes made by British Airways last year on Kuala Lumpur, Singapore and Haneda. In 2016, Iberia launched its new service to Tokyo and Shanghai. Passenger load factors increased to 82.5 per cent, one of the highest regions on the IAG network.
The 2016 Group performance includes Aer Lingus for the full year. Aer Lingus was acquired on August 18, 2015, therefore the Group’s 2015 comparator performance only includes Aer Lingus since the acquisition date. Metrics reported as on a like-for-like basis include Aer Lingus for the full year in the base. (http://www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-newsArticle&id=2249128, 2016)
In 2016, IAG- carried more than 100 million passengers – double the number British Airways and Iberia carried in 2010, a year before IAG was created.”It is committed to providing a sustainable dividend for it’s shareholders and is pleased to confirm that the Board is proposing a final dividend of 12.5 euro cents per share. This brings the full year dividend to 23.5 euro cents per share, subject to shareholder approval at our AGM in June.
“Also announcing that it intends to carry out a share buyback of €500 million during the course of 2017 which may be implemented through one or more share buyback programmes. It has a great confidence in IAG’s future prospects and are increasing cash returns to it’s shareholders.”
At current fuel prices and exchange rates, IAG expects its operating profit for 2017 to show an improvement year-on-year.
This announcement contains inside information and is disclosed in accordance with the Company’s obligations under the Market Abuse Regulation (EU) No 596/2014. (http://www.iairgroup.com/phoenix.zhtml?c=240949&p=irol-newsArticle&id=2249128, 2017)
Option 1: Current Assets
In the event IAG-BA were to get the cash from its current assets, then its resulting impact on the current ratio also needs to be examined.
As per the balance sheet of 2016, the following details can be derived.
|Description||Before acquiring land and buildings||After acquiring land and buildings|
Using this option will decrease the current ratio by 0.12 and recuing the ratio to below 1, suggesting that the company will be unable to honor its obligations should they become due at that point in time. The ideal current ratio preferred by banks is 1.33:1. While the ideal level as per industry benchmark is 2:1. A higher current ratio depicts the company’s capability to pay-off its short-term liabilities.
Option 2: Retained Earnings and cash equivalents
A part of net income which is retained by the company and/or cash equivalents can be a source for internal funding.
Based on the Balance sheet of IAG-BA:
Retained earnings is Euro 952,000,000 (p104, Annual report 2016) as at 31st December 2016.
Cash and Cash equivalents is Euro 3,337,000,000 (p102, Annual report 2016) as at 31st December 2016.
The contribution from Retained earnings will not impact the liquidity ratio (current ratio) of the company; while a reduced contribution from the cash and cash equivalents would still protect the liquidity ratio (i.e. current ratio)
The above scenario looks to be favorable for IAG-BA should they choose to adopt this approach.
Option 3: Fixed Assets
In option 2 the consideration of current assets enables the company to convert such items to cash within a short period of time. While, in the case of fixed assets, the conversion to cash would take a longer time. However, IAG-BA has some fixed asserts which could be converted in a shorter period of time but would not be normally considered for short term access to finance.
The Euro 73,000,000 from available for sale financial assets could form part of the required funds and thus contributing to the capital of the company.
Option 1: Increase capital via increased borrowings
IAG-BA has an adjusted net debt of Euro 8,159,000,000 of which interest bearing long-term borrowings is Euro 7,589,000,000 and the net debt is Euro 2,087,000,000 ( a reduction of Euro 687,000,000 in the year due to stronger cash position). IAG -BA being a strong aviation group of companies, continues to have good access to a range of financing solutions. In 2016, it raised secured debt from a broad range of financial institutions. The groups high cash balances and committed financing facilities mitigate the risk of short-term interruptions to the aircraft financing market. The same approach could be adopted to either part or fully fund the purchase of the proposed land buildings worth Euro 1,133,000,000.
Option 2: Share Capital
As at 31st December 2016, IAG-BA has a share capital of Euro 1,066,494,371.50. in the stock exchange.
Inspection of the Gearing ratio is also critical to the evaluation of the company’s financial structure and bankruptcy risk.
|Gearing Ratio IAG-BA||Gearing Ratio JAL|
|Adjusted net debt||8,159,000,000||8,510,000,000||Net debt||2,938,000,000||2,590,000,000|
|Adjusted net debt + Adjusted equity||15,900,000,000||15,838,000,000||Capital Employed||6,745,000,000||6,212,000,000|
|Current Gearing Ratio||51%||54%|
|New Gearing ratio||55%||Gearing ratio||44%||42%|
The overall capital of IAG-BA is in relation to its operations and volume of entities and business transactions. Even though it is easy for the company to raise additional capital, funding for the additional land and property from the capital funds will increase its gearing ratio by 4%, putting it further at risk against its competitor JAL.