British Airways' balance sheet

Résumé du document

For this assignment, I have decided to work on the British Airways Group. This choice allows us to study the finance of a big company, which is totally international and is known by everybody. When I use the term company, I mention the group because I've only used the group's figures. I am going to analyze three years balance sheet of British Airways, in order to see the major differences and their reasons. The objective is to interpret the differences from the point of view of the shareholder. We must take into account the fact that British Airways has changed its accounts with the IFRS, so some figures are different between two reports even for the same year.

Extraits

[...] British Airways hasn't distributed dividends because it invests lots. First because it wanted to strengthen the balance sheet, then it invested into the company Quantas and also into the 5th Terminal in Heathrow. Nevertheless regarding to the Total Shareholder Return, British Airways is the 13th highest performing company out of the 93 FTSE 100 companies remaining for the performance period April,1st 2003 to March, 31st 2006. The board of director indicated its intention to resume the payment of dividends at an appropriate time. [...]

[...] The formula is the following: Ko = Ke (Ve/Vo) + Kd (Vd/Vo) Where: Ke is the cost of equity Ve is the value of equity Kd is the cost of debt Vd is the value of debt Vo is the total value of the firm: The WACC is: We can see that the WACC felt to a very lower level in 2005 and then doubles in 2006. These variations can be explained by the fact that in 2005, the action share was low compared with the two other years, so the value of equity is also reduced. The second reason is due to the little variation of the capitalisation of the FTSE 100 between 2004 and 2005. This implies also a cost of equity lower for this year and also a decreasing WACC. [...]

[...] Nevertheless, British Airways' main source of external funding, being secured aircraft financing, is less sensitive to credit rating than the unsecured bond. So the impact of the credit rating is not so important for some parts of the debt. To calculate the market value of debt, I decide to use the fair values of the debt, because based on British Airways' report, the "fair values of the Euro-Sterling notes and Euro-Sterling Bond 2016 are based on the quoted market values at March The fair values of floating rate borrowings are deemed to be equal to their carrying values." This is the example in March, 31st 2006: So, the market value of the debt is: The problem of these market values is that they blend the current liabilities. [...]

[...] Beside we can say that the company is quite entirely finance by debt. But we must highlight that British Airways has got a big amount of leases and hire purchase arrangement (especially for the aircraft), which exceeds two times the bank loans. Income Gearing Calculating the capital gearing only indicates the security of creditors' funds in a crisis and may be an unduly cautious way of viewing debt exposure. When using income gearing ratio we can see the reliability of the company's income in relation to its interest commitments. [...]

[...] Cost of debt To obtain, the cost of debt, the best ratio is to divide the interest payable by the debt: I decided to include all the debt in order to have a representative picture of the cost of debt. The cost of debt expresses the same result as before which is a decreasing of the debt and also of the interests. Regarding to the debt, we can add that no additional debt has been taken in 2006. All the purchases have been made by internal cash flow. [...]