This report aims to provide sufficient financial evidence into the performance of Easyjet in comparison with its rival Ryanair in order to come to a conclusion as to whether its position is suffering in the current downturn. The report will then evaluate

approximate 6,107 people. With the company founded in 1995, the main transitional point was its partnership with ‘GO’, another rival low cost airline in 2002. With the merging of these 2 companies, Easyjet was able to expand its number of aircrafts. Within the same year Easyjet placed an order of 120 Airbus A319 aircraft, also by swiftly entering into the German market by 2003 (Easyjet annual report, 2008). Easyjet’s early marketing strategy was based on 'making flying as affordable as a pair of jeans' were they basically followed the business model of Southwest Airlines in the US. The low cost strategy comes from two driving principles and these include ‘sweating’ the assets and high operating efficiency. In terms of operating efficiency this would include: • Aircraft fly out of low cost airports. • Aircraft are tightly scheduled. • Aircraft must leave and arrive on time. • There are fewer cabin crew than full-fare rivals. Speedy Boarding is recognized as a valuable customer offering and also a crucial factor in generating consistently good revenue. One of the key avenues for the continued development of revenue for Easyjet is the introduction of the checked bag charge which has significantly contributed to the total revenue. Partner revenues continue to improve and of particular note this year was the improvement in insurance revenues following changes such as the introduction of annual, multi-trip, and one-way policies and enhancement of the website presentation. Easyjet’s low cost and efficient operation is a key competitive advantage and its continued aggressive cost management is vital to Easyjet’s future success. Easyjet has put in place clear targets for further cost reduction over the next three years in the areas of ownership, maintenance, crew and fuel burn. These initiatives are expected to deliver more than £100 million of savings by 2011. Founded in 1985, Ryanair has grown exponentially to become Europe’s largest airline carrier. Currently the airline services 830 low fare routes across 26 European countries, employing approximately 5,290 people. They currently operate low fare scheduled passenger airline serving short haul, point to point routes between Ireland, the UK and Continental Europe. Since Ryanair pioneered its low-fares operating model in Europe in the early 1990s, its passenger volumes and scheduled passenger revenues have increased significantly because it has substantially increased capacity. Ryanair’s annual booked passenger volume has grown from approximately 945,000 passengers in the calendar year 1992 to 50.9 million passengers in the 2008 fiscal year. Its self professed image as the ‘world’s favourite airline’ is further substantiated by its large customer base and annual turnover (€1,811million in 2008). Operating in a sector suffering from several external factors such as the war in Iraq and subsequent rises in the cost of fuel, the recession and the ensuing impact on the disposable income of the consumer, the company’s success can only be levied on its commitment to lowering prices and the efficiency in which it conducts its business (Sum Chau & Kao, 2009). The combination of expanding passenger volumes and capacity, high load factors and aggressive cost containment has enabled Ryanair to continue to generate operating profits and profits after taxation despite increasing price competition and increases in certain costs, particularly fuel costs. Ryanair’s total break-even load factor was 66% in the 2007 year and 67% in the 2008 year. The fact that Ryanair carries more travelers than any of its competitors evidently dictates that it has a higher market share (Prescott et al., 1986). This is in line with the High volume, low cost strategy commonly existent with differential pricing strategies. Ryanair is currently Europe’s largest airline carrier. Its position as market leader and indeed cost leader is down to its ability to provide low cost travel across its business spectrum and emphasis on reaping scale or absolute cost advantages from all sources (Porter, 1985; Johnson and Scholes, 2001). At July 31, 2008 the Company owned 29.8% of Aer Lingus, which it acquired at a total cost of €403.0 million. The balance sheet value of €311.5 million reflects the market value of the Company’s stake in Aer Lingus as at March 31, 2008, as compared to a value of €406.1 million as of March 31, 2007.   Overview In order to gain an understanding of the overall performance of these two companies, it is important to examine the key activities that have taken place in the past year. On 31st January 2008, Easyjet finalized their acquisition of GB Airways, a primarily London-based airline which gave them the role of leading service provider at Gatwick and coincided with their strategy for long term expansion (Easyjet, 2008). As a result, interest payable increased by £9.9 million between September 2006 and 2007 (Easyjet, 2007) and long term borrowing by £91.6 million between September 2007 and 2008 (Appendix 1) which may have a considerable effect on the long term liquidity of the company. Furthermore, shareholders suffered a decrease in earnings per share of 46% and total current liabilities increased by 46% in the same year (Appendix 1). However, the future prospects for the newly integrate company mean that earnings per share are bound to increase. An additional consequence was that intangible assets increased by a massive £78.8 million (Appendix 1), which on one hand improved the outlook of the company, but on the other hand had a negative effect on certain aspects of the financial analysis for Easyjet. Another key occurrence in the last financial year was Ryanair’s purchase of 29.82% shares of Aer Lingus, which could be set to increase if Ryanair are successful with their next bid (ExecDigital). This should have had a similar effect to the Easyjet acquisition but financial figures fail to coincide with this theory. As you can see from the following graph, Easyjet’s total revenue grew by 31.5% to £2362.8 million between September 2007 and 2008. This shows a positive result of the recent structural changes and indicates a higher level of revenue than Ryanair, who’s reached just £2171.06.     However, the graph below shows that operating profit for the same year decreased by 47% compared to Ryanair who’s profit increased by 14%.  This could be down to GB Airways integration costs for Easyjet of £12.9 million and other additional acquisition costs (Appendix 1) and the fact that a few of Ryanair’s major expenses for the year were not included in operating expenses such as the loss on impairment of an asset available for sale (Appendix 2).               Ratios So far this report has given a summarised view of the financial performance of Easyjet in comparison with its rival Ryanair, but by simply looking at figures such as sales and profits it is difficult to interpret their situation appropriately (Smart et al., 2008. Pg.43). In order to gain a better perspective of whether Easyjet is in fact suffering due to the economic climate and indeed has to worry about the performance of its competitor, this section will take a further look into the financial statistics of both companies by using ratios to effectively analyse the data. Profitability, efficiency, long term liquidity, short term liquidity and coverage ratios will be used at is believed that these best illustrate the position of both firms, starting with those which provide evidence that Easyjet have reason to believe they are performing adequately in the economic situation. Efficiency Ratios These kinds of ratios refer to the efficiency with which the resources in the company have been used (Atrill and McLaney, 2008. Pg. 183). Working Capital This constitutes the short term availability of cash for a company (Correja et al., 2007. Pg.112). The following graph shows the change in working capital from 2001 to 2008 for both Easyjet and Ryanair. Easyjet have constantly had lower levels of cash, which could simply mean that their strategy aims to maintain a relatively low level in order to avoid risk of a takeover bid. There is also the large amount of short term liabilities incurred by Easyjet as a result of the acquisition. However, Easyjet have managed to keep levels relatively similar in the last few years despite the economic downturn which is a good sign, whereas Ryanair saw a decrease of 47% in the year 2007-2008. The only downside of low amounts of cash is the risk associated with being unable to meet essential cash commitments (Correja et al., 2007. Pg.112).           Profitability Ratios These analyse the degree to which businesses can create wealth for their owners. (Atrill and McLaney, 2008. Pg.183) Asset Turnover Asset turnover is referred to as the ability of a company to generate sales from its assets (Bernstein and Wild, 2000. Pg.249). Below are the figures for Easyjet and Ryanair in 2007 and 2008. Both companies have fairly low rates of asset turnover, which is due to the fact that the airline industry is very capital intensive. However, Easyjet have managed to generate almost twice as many sales from assets than Ryanair, meaning that economic circumstances and huge structural changes have not deterred their ability to utilise their assets.   Long term Liquidity Ratios Gearing This is expressed as a percentage and refers to the amount of capital in a company that is financed by long term debt (McLaney and Atrill, 2008. Pg.223). The graph below shows not only the gearing levels for Easyjet and Ryanair but also Flybe, a key competitor in the low-priced airline industry. This shows that Easyjet have managed to maintain a lower level of gearing despite the huge changes to the company in this period of difficult financial circumstances. This will be of particular interest to long term lenders and makes it more difficult for Ryanair to borrow funds (McLaney and Atrill, 2008. Pg.223). Nevertheless Ryanair can take solace in the fact that Flybe have huge levels of over 70%.     Short term liquidity Current Ratio This statistic measures current assets in relation to current liabilities and relates to how quickly the assets can be converted into cash in order to finance short term debt (Atrill and McLaney, 2005. Pg.234). Shown are the figures for Ryanair and Easyjet from 2001 to 2008 and for Flybe between 2007 and 2008. In previous years, Ryanair have had a superior ability to pay their short term debts as they become due, but again Easyjet have better handled the recession and in fact now taken over not just Ryanair but also Flybe.     The next few ratios include statistics that Easyjet may need to address as Ryanair have handled the management of these areas in a superior manner. Profitability Return on Capital Employed The Return on Capital Employed is considered the most significant ratio and tells us “how much profit we earn from the investments the shareholders have made in their company” (Biz/Ed, 2009). Easyjet are suffering in this area as a result of a huge increase in assets that are yet to generate sufficient revenue. This is because the impact of the acquisition is yet to take off. In the coming years this is bound to take effect and it is in fact Ryanair who may need to address this issue as 11.13% is still relatively low.      Coverage Ratios These relate to the capability of a firm to cover its financial charges. (Horne and Wachowicz, Pg.141) Interest Cover This is identified as the ability of a firm to finance interest payments from profit (Atrill and McLaney, 2006. Pg.193). This chart shows interest cover for 2007 and 2008. Easyjet are finding it harder to meet interest payments due to the low profit margins and increased interest as a result of the purchase of GB Airways. They are, nonetheless still able to cover these payments almost three times over, which means they are yet to experience difficulty in this area. Ryanair have managed to handle increased interest due to increased operating profit margins.     Evaluation The analysis of the Easyjet and Ryanair financial statements in this report have given a clearer indication on the status of both companies than the financial statements alone could. Revenue and operating profit figures appeared to show that Ryanair were a stronger more profitable company than Easyjet. After considerations which included Easyjets purchase of GB Airways were taken into account the real picture became clearer. Growth: Both companies recently experienced structural changes due to Easyjet’s acquisition of GB Airways and Ryanair’s purchase of shares in Aer Lingus. Thanks to their strategies focused on customer loyalty, revenues continued to increase for both firms, with Easyjet managing to overtake Ryanair. However, operating profit for Easyjet was negatively affected as they incurred high integration costs, whereas Ryanair did not have to deal with such expense. Profitability: The economic downturn and aforementioned acquisitions had a negative impact on both companies, particularly for Easyjet who saw particularly poor levels of interest cover and return on capital employed. However, Easyjet managed to use their assets to the best ability and are now in a better position for the future, which can be seen in their low levels of gearing. Earnings per share are set to increase as a result of growth and due to increasing levels of revenue, acquisition costs will soon be covered. Efficiency: Easyjets ability to use their assets efficiently has meant that they are continuing to cover costs, both in the short term and long term. This is backed up by an adequate current ratio which translates as a superior capability to turn assets into cash. Long term lenders will appreciate their ability to maintain low levels of gearing at this time. Ryanair on the other hand, have incurred high levels of operating profit but are failing to use assets to the same extent as Easyjet.   Conclusions and Recommendations The directors of Easyjet PLC were particularly concerned that Ryanair would be perceived to be the more successful company. After careful analysis it can be reported that Easyjet appear to be in a stronger financial position for the future than Ryanair. Indeed in the coming years it could be predicted that Easyjet will enjoy financial dominance over Ryanair. Easyjet who purchased GB Airways incurred the integration costs of staff, the logistics of 39 new routes and a fleet of 15 planes, McGrath, (2007). These costs were absorbed in the financial year ending September 2008. 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