Financial And Operational Analysis Of Virgin Atlantic Airlines

Financial Analysis

In this report, an attempt is made to critically analyse the commercial and operational performance of Virgin Atlantic. It is one of the most popular British airlines company. It is the trading name of Virgin Atlantic Airways Limited and Virgin Atlantic International Limited. Virgin Atlantic makes use of Boeing and Airbus wide-body aircraft for carrying out the operations. It has operations in North America, Africa, Caribbean, Middle East and Asia, which is conducted from its main head office at London Heathrow and Gatwick Airport. The company is currently considered the main competitor of British Airlines (Grant, 2016). The main aim of this report is to critically analyse the financial and other metrics in order to gain an understanding of the position of the company as compared to industry. Further, the report provides strategic recommendations.

In order to conduct the financial analysis of the entity various ratios have been used. It will be very effective and efficient way of finding out the current financial position and the financial performance of the entity. The ratios are as follows:

Net profit margin ratio:

This ratio indicates the profit earning ability of the company. This ratio further indicates the operational efficiency of the company. In the present case, it is clear that the company has been able to significantly increase its profitability from the year 2015 to 2016. This indicates that the operational efficiency of the company has increased (Treanor et al., 2014).

This ratio indicates the ability of the company to earn profit by utilising the funds of the investor. The company must ensure that the returns of offered by the company matches with the expectations of the shareholders because that is the sole reason of investment of the shareholders in the company (Vogel, 2014). In the given case, it can be seen that in the year 2016 the return on equity of the company has increased in comparison to the previous year. This shows that the company has improved the ability to utilise the funds of the investors.

Current Ratio:

This ratio shows indicates the ability of the entity to meet up its day-to-day current liabilities with the help of its current asset. A good current ratio suggests that the company is in a healthy situation and is capable of meeting up its operational liabilities. In the given case,   it can be seen that the current ratio of the entity is moving up from 2.42 in the year 2015 to 3.93 in the year 2016. It is a good sign that the company has enough current asset but also noteworthy that the company might be in an over invested situation and need to invest more judiciously in its working capital (Wiegmann & Shappell, 2017).

Operational performance analysis of the entity

Debt-equity ratio:

This ratio provides an idea about the capital structure of the entity and the liquidity position of the entity. In the given case, it can be seen that the liabilities of the company with respect to the previous year has decreased. At the same time the equity has remained same this suggests that the liquidity position of the company has improved over the period of one year.

Debt-Asset ratio:

This ratio highlights the relation between the total assets and the total liabilities of the entity. In the case of the entity, it can be observed that the total assets of the company have increased and the total liabilities of the assets have decreased. This suggests that the liquidity position of the entity has improved over the span of one year (Vasigh, 2017).

The operational performance of an entity can be judged from the trends presented via key performance indicators and other important factors that play a critical role in influencing the overall performance of the entity. Some of them are as follows:

Figure 1:  Safety

(Source: Virginatlantic.com, 2018)

In case of an airline company the safety of the passengers, become of paramount importance. The number of accidents has reduced in the last two years to zero which is a big relief for the customers (Berghöfer & Lucey, 2014).

Customers:

Figure 2:  Customers

(Source: Virginatlantic.com, 2018)

The revenue of the company directly depends upon the number of customers. Hence, an increasing trend is always favourable. In this case, the customers plummeted last year but have increased in the current fiscal by 5.0 pt.

Capacity:

Figure 3:  Capacity

(Source: Virginatlantic.com, 2018)

In order to increase the number of customers the company must focus on increasing its capacity over the years. In this case, the company has not increased its capacity rather the capacity of the company has gone down compared to last year. The company must take initiative to increase its capacity by increasing its aircraft (Garg, 2016). 

Revenue:

Figure 4:  Revenue

(Source: Virginatlantic.com, 2018)

The revenue of any airline company comes from two sources i.e.  The travelling expenses charged from the customers and the charges with respect the load carried by them or transported by some entities (Saranga and Nagpal, 2016). In this case it can be seen that the revenue passenger kilometres has reduced over the years and the passenger load factor has not shown any steady trend and Is currently showing a small upward movement.

SWOT Analysis

In this section, SWOT Analysis is conducted so that an appropriate recommendation can be made.

Strengths:

• One of the main strengths of the Virgin Atlantic is that the brand reputation of the company is immense. Its brand recognition took it to the sixth position in the ranking done by AirHelp. It covered aspects such as speed of dealing with the customers, punctuality and quality of service provided.
• The Virgin Atlantic has also modernised its fleet of aircrafts. It has also made efforts in making new systems like mobile app and self-service air ticket booking service (Borenstein & Rose, 2014).

Weakness:

• The company is dependent a lot on its owner Richard Branson who formulates the entire picture of the company. The company might lose its direction after Richard is gone. It must work on some succession plan.
• The company is facing strict competition from its competitors like the British Airways, the American airlines and alarmingly from cash rich airlines like the Etihad or Emirates that operate on the same routes as of the Virgin Atlantic.

Opportunities:

• One of the most promising opportunities that have presented itself in front of the company is that there has been a proposal to add an extra airstrip at the HEATHROW airport. This can prove immensely beneficial for the company (Choi et al., 2015).
• The previous fiscal year was characterised by low fuel prices, interest rates and if such favourable factors continue to occur, the company will definitely set sail for a higher return.

  Threats:

• There is a lot of uncertainty and threat to business with respect to the aftermath of the Brexit.
• The weather condition of the UK is becoming worse day by day which includes sudden dangerous storms and extreme water conditions (Wu, 2016).  

After analysing the financial and operational performance of the entity, the following recommendations are discussed below.

The company should increase the influence of its operations on a global scale by way of promoting its brand value all over the market place. This will help the company to increase the number of customers. By promoting its brand, the company is trying to capitalise on its strength that is the ability to make use of its brand name.

Another strategy that can be recommended to the company is to improve its skill to improve the experience of the customers and reduce their service costs while providing an outstanding experience to the customers.

The company should focus on modernising its assets and its business strategy. This will enable the company to reduce its operational costs and increase the profitability of the operations in a relatively short period of time. Due to the reduction in the cost of operation the company will be able to enjoy profitability even if there is no substantial increase in the customers immediately.

The company is increasing its current ratio over the years that shows that the company is losing returns on a substantial amount of capital which is earning no return due to the fact that it is remaining invested in the working capital of the firm instead of any other avenues which would have earned good returns for the company.

Reference

(2018). Virginatlantic.com. Retrieved 21 March 2018, from https://www.virginatlantic.com/content/dam/vaa/documents/footer/mediacentre/VAL_FY16_Annual_Report.pdf

Berghöfer, B., & Lucey, B. (2014). Fuel hedging, operational hedging and risk exposure—Evidence from the global airline industry. International Review of Financial Analysis, 34, 124-139.

Borenstein, S., & Rose, N. L. (2014). How airline markets work… or do they? Regulatory reform in the airline industry. In Economic Regulation and Its Reform: What Have We Learned? (pp. 63-135). University of Chicago Press.

Choi, K., Lee, D., & Olson, D. L. (2015). Service quality and productivity in the US airline industry: a service quality-adjusted DEA model. Service Business, 9(1), 137-160.

Garg, C. P. (2016). A robust hybrid decision model for evaluation and selection of the strategic alliance partner in the airline industry. Journal of Air Transport Management, 52, 55-66.

Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Saranga, H. and Nagpal, R., 2016. Drivers of operational efficiency and its impact on market performance in the Indian Airline industry. Journal of Air Transport Management, 53, pp.165-176.

Treanor, S. D., Simkins, B. J., Rogers, D. A., & Carter, D. A. (2014). Does operational and financial hedging reduce exposure? Evidence from the US airline industry. Financial Review, 49(1), 149-172.

Vasigh, B. (2017). Foundations of airline finance: Methodology and practice. Routledge.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Wiegmann, D. A., & Shappell, S. A. (2017). A human error approach to aviation accident analysis: The human factors analysis and classification system. Routledge.

Wu, C. L. (2016). Airline operations and delay management: insights from airline economics, networks and strategic schedule planning. Routledge.

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