British Airways VS Ryanair.

Topics: Airline, British Airways, Southwest Airlines Pages: 13 (3205 words) Published: November 28, 2005
Both British Airways (BA) and Ryanair (RA) are successful airlines at the top of their respective markets. BA is a more traditional, long haul full service carrier, while RA is part of the new bread of short haul, low cost, low frills carriers. The aim of this report is to give an overview of the industry, and the two companies, looking briefly at their history and future strategy and then to perform a financial analysis on both companies from users perspective: long-term investment for the common shareholder, creditors, analysts and providers.

Industry Overview

The airline industry, as many industries, is an imperfect oligopoly. A few carriers dominate long-haul traffic, while several dozen small carriers compete for short-haul flights. After five consecutive years of losses, major providers are losing market share.

S&P Airlines stock price underperformed the overall market. In 2004, the overall airline industry lost $5 billion dollars. To overcome this situation, large airlines are undertaking aggressive cost cuts to survive, but many of them have been unable to offset oil prices cost increase. Oil prices, labour costs, overcapacity, competitive pressures and a high debt to assets ratio are driving major airlines to ally, merge or change dramatically its business strategy in order to survive. British Airlines and Ryanair have been successful during this difficult period.

Oil prices. Airlines are energy-intensive operators. Fuel costs accounted for 19% of total revenues in 2004, versus 15% in 2003. Incumbent airlines have been forced to acquire new airplanes and to reduce waiting time in airports.

Labour costs. Airlines are intensive in capital, labour and technology. Labour costs represented 36% of the revenues of the industry in 2004, down from 39% in 2003 and 44% in 2004. This is forcing major carriers to enter into salaries and benefits renegotiations, including pension plans.

Overcapacity. Low fare and regional airlines are entering to markets that were dominated by big airlines. The cost structure of low cost airlines (low labour, maintenance and fuel costs) is 40% lower than major airlines. A 50% load factor break-even point allows these companies to cut prices and continue its market share expansion. Discount carriers are growing rapidly, offsetting capacity cuts by the incumbent carriers in niche markets.

Competitive pressures. Airlines compete in both, service and price. Because airlines have high fixed costs relative to marginal costs, fare wars are common when capacity exceeds demand. Overcapacity is putting pressure on prices since 2001, and low- cost carriers are thriving in this challenging environment. United Airlines and US airways filed for bankruptcy in 2002. Delta, after a $5.2 billion net loss in 2004 and a debt burden of $21 billion, filed for bankruptcy this year.

Debt. For major airlines, interest expense averaged about 4% of revenues in 2004. Some airlines have filed for bankruptcy, but most of them are using cash and debt to survive to this crisis. Many are in their debt limit. High debt levels are increasing interest expenses, while the interest earned and investment income are diminishing.

British Airway (BA)

British Airways is the largest airline in the United Kingdom and one of the largest in the world with a total number of employees about 50,000 and a route network comprised of 150 destinations in 72 countries. Its fleet is composed of more than 350 aircrafts. BA is the airline company with the most flights from Europe to North America in the world.

BA was formed in 1973, as the outcome of the merger between State-owned British Overseas Airways Corporation to British European Airways. The Conservative Government then privatised the airline in 1987. During the 90s, BA was the world's most profitable airline. Its slogan was: "The World's Favourite Airline". In addition to jointly operating the famous Concorde supersonic airline, it pioneered "flat-bed seats"...
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