Financial And Operational Analysis Of Heathrow Airport
Current Ratio
In this report, an effort has been made to conduct a financial and operational analysis of the airport and determine the state of operations and financial health of the company. The analysis will be done with the help of various financial ratios of the airport and detailed analysis of the key performance indicators of the airport. The conclusion drawn from the results of the analysis of the financial and operational indicators will enable suggestions and recommendations to the company.
Heathrow airport is one of the major airports in all of United Kingdom. It is in fact the world’s second busiest airport. In addition to this it is the busiest airport in all of Europe.
The financial analysis will comprise of study of various type of ratios the results of which will have a direct implication with respect to the financial and non-financial performance of the airport (Wensveen, 2018). For being able to lead within any industry an entity is supposed to have a very strong financial performance base.
- Current ratio:
|
CURRENT RATIO |
||
|
|
2015 |
2016 |
|
CURRENT ASSETS |
1020 |
1118 |
|
CURRENT LIABILITIES |
1476 |
1594 |
|
CURRENT RATIO |
0.69 |
0.70 |
The current ratio demonstrates the relationship between the current assets and current liabilities of an entity. It establishes the ability of an entity to pay of its short term liabilities with the help of its current assets like cash and cash equivalents. It can be easily deciphered that the current ratio of the company is very low. It is not a good performance indicator as it implies that the entity might become incapable to pay its short term debt in the near future due to non-availability of current or liquid assets (Madavan caes et al., 2016).
|
DEBT EQUITY RATIO |
||
|
|
2015 |
2016 |
|
TOTAL LIABILITIES |
14165 |
14739 |
|
EQUITY |
2484 |
1760 |
|
DEBT EQUITY RATIO |
5.70 |
8.37 |
The debt equity ratio demonstrates the liquidity position of an entity. It projects the results of the relationship between the total liabilities of the entity and the total stake holder’s equity of the entity. In this case it can be easily seen that the debt-equity ratio of the company has already reached a high risk degree and despite of that the ratio further increases which suggests that the entity is heavily levered. The entity’s ability to pay back its liabilities via the funds of the stakeholders is reducing at year on year basis. The equity shareholder funds have reduced significantly over the period of one year which is a very poor indicator for the solvency position of any entity (Flouris & Oswald, 2016).
|
DEBT ASSET RATIO |
||
|
|
2015 |
2016 |
|
TOTAL LIABILITIES |
14165 |
14739 |
|
TOTAL ASSETS |
16649 |
16499 |
|
DEBT ASSET RATIO |
0.85 |
0.89 |
This ratio gives the relationship between the total liabilities and the total assets of the company. It determines the ability of the entity to pay of its liabilities by using its assets. In the given case it can be easily seen that the total assets of the company has reduced and the total liabilities have increased. This situation has resulted in worsening of the liquidity ratio of the company. The reducing support from the assets in respect of paying back of the liabilities of the company will result in incapability on the part of the company to pay its liabilities on time in the near future (Flouris & Oswald, 2016).
- Return on equity:
|
RETURN ON EQUITY |
||
|
|
2015 |
2016 |
|
NET INCOME |
776 |
48 |
|
SHAREHOLDERS EQUITY |
2484 |
1760 |
|
RETURN ON EQUITY |
31% |
3% |
Debt Equity Ratio
This ratio determines the relationship between the net profit earned by the company and the total stakeholder’s equity. It implies that how much profit the company is giving out as return in respect of the amount invested by the shareholders in the company. In the given case it can be noticed that the company’s return on equity has reduced drastically over the period of one year. The net profits along with the equity have fallen significantly. This is an indication that the company is unable to create value for the shareholders. The company must endeavour to increase its profitability to increase its return on equity (Flouris & Oswald, 2016).
The analysis will reflect the present position of the operational efficiency and effectiveness of the airport and the remedial steps that can be taken in case of scope of improvement or deviation from the standard set by the industry itself and its competitors.
- The airlines has been able to reduce its waiting time by 40% by ensuring better management of the two runways and shifting from segregated mode to mixed mode (Eriksson & Steenhuis, 2015).
- The comparison of the segregated mode with the mixed mode the company has been able to reduce CO emissions by 21%, the emissions of NOx by 56% and the HC emissions by 19.2% (Eriksson & Steenhuis, 2015).
- The number of aircrafts handled by the airport has increased by around 13.8% (Eriksson & Steenhuis, 2015).
- The airline is facing difficulties in commissioning of an additional runway due to reasons like increased amount of noise pollution as a result of increased amount of aircrafts, destruction of natural habitat of wildlife living near the premises of the airport, degrading quality of life of the population that lives in close vicinity tot eh premises of LHR. (Eriksson & Steenhuis, 2015)
The SWOT analysis will enable the process of obtaining the insights which are vital for the prediction of future viability of the operations of the airport within the industry. Such analysis is beneficial for the company itself ass it will help it to analysis its weaknesses and take correctives steps along with giving it the opportunity to objectively further strengthen its strength points (Jackson, 2016). This enables any entity to get a competitive advantage over its competitors in the industry and also to perform better in order to increase the value creation for its stakeholders (Turney, 2017).
STRENGTHS:
- The airport has taken initiative to become the airport of choice in all of Europe. In pursuance of this huge amount of capital expenditure has been incurred by the company in order to modernise its facilities to comprehensively improve their functionality
- The customer base of network carriers enjoyed by Heathrow is brilliant. It gives it an added advantage due to the fact that all the three top global alliances in the airlines industry have significant operations at Heathrow. It has become the centre of operations for many of the major alliances over the years.
- The most important and significant advantage of Heathrow is its location. It caters to the customers coming belong to America, Europe, Asia and Africa. The prime location facilitates connectivity for local demand as well as to the international demand of large international markets and economic centres of the world. It is currently providing leading connectivity to 70 long haul destinations that are unattainable from other UK airports.
WEAKNESSES:
- The UK government decided against the opening of new runways in the south east. In the near foreseeable future Heathrow airport is going to have make do with two runways only. The fact that the airport is presently operating near to the limit of its operational capability it will be unable to launch new flights.
- At present Heathrow airport has only 4 operational terminals. Hence, due to the constraints the connectivity between the customers and their baggage’s between some terminals is not smooth. In fact they are much weaker than most of the other leading European hubs. Therefore the minimum connectivity time is not as low as compared to its competitor hubs.
- Heathrow doesn’t have the required amount of airport runway capacity to facilitate the arrivals and departures of flights all day long and hence is unable to offer enough operational resilience. Heathrow also possess only a half of the footprint enjoyed by other European hubs like the Frankfurt. It often results in higher construction costs.
OPPORTUNITIES’:
- Heathrow has an immense opportunity of developing its two runway masterplan. This will enhance the connectivity across the campus and improve the experience of the customers in respect of minimum connectivity time. The customers will also benefit from leading edge hub facilities.
- As a near future opportunity the company is fostering over the plans of operational freedoms and airline consolidation. Operational freedoms refer to the package of measures developed by the airline to meet the objectives of the South East Airports task force that are designed for the more resilient use of runways of the airport and the air space capacity. Airline consolidation refers to the recent acquisition of the BMI by IAG which present the opportunity of exploiting more efficient use of the scarce slot resources at Heathrow.
- The airport in parallel to increasing the capacity of its operations is focussing on improving the customer experience of using Heathrow as their preferred air travel means.
THREATS:
- The competing hubs in Europe with more runway capacity are continuously adding new destinations to their portfolio of destinations. They are way ahead in offering flights to fast emerging markets like the Africa, Middle East and Asia. Its competitors like Paris and Frankfurt are already offering 1000 more flights than it to three largest cities in China.
- The European hubs are continuously leveraging their less constrained capacity in offering more comprehensive network of European short haul feeder routes. Many of the regional hubs of UK outside of south east are served by major European hubs other than Heathrow.
- The hubs of Middle East have already invested heavily on infrastructure. The hubs are fighting or European regional routes along with routes that fly over Europe like those linking the USA with India. The loss of such critical connections will be very detrimental to the interests of Heathrow.
After conducting a detailed analysis of the financial, operational and SWOT analysis with respect to the Heathrow airport and studying the implications of the results obtained some suggestions and recommendations are made in respect of its operations.
- The company should immediately change or modify its capital structure. In doing so it should focus on reducing the amount of debt and increasing the amount of stakeholder’s funds. This is because of the fact that the company is already having a degraded state of solvency and the ratio is degrading year on year basis.
- The company with immediate effect try to increase its capacity. Otherwise not only will it be overtaken by its competitors within Europe the Middle Eastern airlines will take up the important and rather critical routes from it. That will result in the airport losing its footprint to a disastrous extent.
- In addition to increasing its operational capacity the airport must foster in the spirit of optimisation of the current facilities within the entity like improving the connectivity between the terminals which has become an eyesore for the company due to the presence of only four functional terminals.
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