The document analyzes the financial performance of British Airways (BA) and Air France (AF) from 2009 to 2012, highlighting that both airlines struggled during this period, but BA performed better than AF. It provides insights into profitability, efficiency, liquidity, and financial gearing, indicating that both airlines faced significant financial challenges including low liquidity and high debt levels. Recommendations for improvement include diversifying revenue sources and reducing major cost items.

1. BA & AF Financial Analysis 2009-12
MBA Financial Analysis
Simon Riha, student # EAC0212171
Cohort 13, Aviation Management
Emirates Aviation College

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BA & AF Financial Analysis 2009-12 | 2
Table of Contents
Table of Contents
2
Executive Summary
4
Introduction
6
About British Airways and Air France
7
British Airways
7
Air France
8
Financial Analysis
Profitability
9
9
Return on ordinary shareholders’ funds (ROSF)
10
Return on capital employed (ROCE)
12
Gross profit margin
13
Net profit margin
14
Efficiency
16
Average settlement period for receivables
16
Average settlement period for payables (creditors)
17
Sales revenue to capital employed
18
Sales revenue per employee
19
Liquidity
20
Current Ratio
20
Financial Gearing
24
Gearing ratio
24
Interest cover ratio
25
Horizontal Analysis
26
BA’s and AF’s balance sheets
26
BA’s and AF’s income statements
30

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BA & AF Financial Analysis 2009-12 | 3
Vertical Analysis
32
Conclusion
34
Recommendations
38
Revenue Reinforcement
38
Cost Optimization
38
References
40
Appendix A: BA Balance Sheet
41
Appendix B: BA Income Statement
43
Appendix C: BA Cash Flow Statement
44
Appendix D: AF Balance Sheet
45
Appendix E: AF Income Statement
47
Appendix F: AF Cash Flow Statement
48

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BA & AF Financial Analysis 2009-12 | 4
Executive Summary
This report analyses the financial performance of British Airways (BA) and Air France (AF) between
2009 and 2012 based on their audited annual reports.
Briefly, BA and AF obviously struggled in the last four years. BA did better than AF. Still, both airlines
have to mend their financial health to stabilize and deliver more systematic results.
Both airlines were hit by the economic downturn and suffered from substantial losses in 2009. Then, BA
managed to improve its economy to certain extent, whereas AF did not.
In terms of profitability, BA was able to deliver solid operational results, which were, however,
disturbed by other various one-time cost items related to, for instance, its pension funds and provisions.
AF’s cost base was persistently too high to reach any operational profits. Other various one-time cost
items also worsened this. In general, their returns and margins were negative or low compared to other
industries.
The analysis of efficiency did not discover any irregularities. BA’s and AF’s efficiency measured by
sales revenue to capital employed was low, which is typical for capital-intensive industries. Both carriers
managed to slightly increase its overall efficiency.
Regarding liquidity, BA and AF were suffering from low liquidity. When measured by current ratio,
their current liabilities were exceeding its current assets. The carriers were spending lots of cash on
investments into their products and services. At that, their liquidity was burdened with debt repayments
and interest payments. Debt can be considered as one of their major financial burdens.
Financial gearing was alerting. Both carriers’ long-term debt was higher their equity. Their gearing ratio
was over 60%-70%. Their interest cover ratio was usually negative. BA and AF were at financial risk.
Having analyzed the balance sheets, BA’s balance sheet was relatively sold and improving. BA focused
on strategic investments, such as buying and integrating BMI and benefiting from BMI’s slots in
Heathrow, which is a highly valuable long-term asset. AF balance sheets disclosed that current assets
had been depleting through the repeating losses. AF restructured its equity by decreasing its nominal
share price and adding new additional capital. However, the new capital was used for covering the
previous debts and other due liabilities.

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BA & AF Financial Analysis 2009-12 | 5
The income statements revealed an unusual instability in BA’s revenues. BA seemed to control its
operating costs better than AF. AF managed to slightly grow its revenues but at excessive costs. AF was
suffering from increasing external costs rising faster than revenues.
Based on the critical findings, the following principal recommendations can be made:
•
Mainly BA should focus on building an alternative revenue source, if its airfare revenue fails. A
good example may be Lufthansa having a strong portfolio of other supporting services generating
substantial revenues, for example, its UATP Airplus and Miles & More Mastercards. Another
revenue opportunity is a more intensive use of ancillary services beyond their standard premium
services.
•
On the cost side, both airlines should identify their major cost items following the 80/20 rule.
Basically, these costs are (1) fuel, (2) handling charges and (3) salaries. Just a 5% reduction in one of
these items would result in a substantial improvement of the carriers’ economy.

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BA & AF Financial Analysis 2009-12 | 6
Introduction
British Airways and Air France belong among the traditional significant global players, which have been
shaping the airline industry for decades.
Privatizations of British Airways and Air France along with the extensive market liberalization in
Europe have created a very different environment, in which these two national airlines have to operate.
There have been efficient low cost carriers competing on short haul routes on one side and the Gulf
carriers rivaling on long haul routes on the other side.
The new situation is underlined by the rigid cost structure and social labor unions at both airlines. At
that, British Airways and Air France have been hit by the European sovereign debt crisis since 2009
with the resulting economic slowdown. Both airlines have been slow to adapt to changes in the market
and experienced substantial economic shocks.
This report analyzes the financial status and its developments of British Airways and Air France
between the years 2009 and 2012. The report is based on the audited annual financial reports.
The first chapter briefly presents both carriers.
The second section studies the carriers from the four standard financial perspectives. It examines their
profitability, efficiency, liquidity and financial gearing using regular indicators.
The third section carries out the horizontal analysis of British Airways’ and Air France’s upon both their
balance sheets and income statements.
The fourth section looks at British Airways’ and Air France’s balance sheets using the vertical analysis.
The fifth part concludes the findings resulting from the analyses and provides a holistic view of the
financial status of the two companies.
The final chapter proposes vital recommendations for improvements in British Airways’ and Air
France’s economies.

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BA & AF Financial Analysis 2009-12 | 7
About British Airways and Air France
Before starting any financial analysis, a brief overview of British Airways (BA) and Air France (AF) is
provided for better understanding.
British Airways
British Airways (BA) was founded as a state-owned flag airline by grouping four other carriers in 197174 (BOAC, BEA, Cambrian Airways and Northeast airlines). BA was later privatized in 1987. In 1998,
BA cofounded Oneworld, the third largest airline alliance, in partnership with American Airlines,
Cathay Pacific, Qantas and Air Canada.
Today, it is the UK’s largest international scheduled airline and one of the world’s leading global
airlines also operating a worldwide air cargo business, largely in conjunction with its scheduled
passenger services. Together with its joint business agreements, code share and franchise partners, BA
provides one of the most extensive international scheduled airline route networks with over 400
destinations worldwide.
In 2009-11, BA created a merger with Iberia to form the International Airlines Group (IAG), the world's
third-largest airline in terms of annual revenue and the second largest airline group in Europe.
Nevertheless, IAG plays a role of a parent company, whereas BA and Iberia remained a separate
business entities. As a result, this analysis considers just British Airways and its subsidiary undertakings.
The following table shows BA’s latest economic performance measured by profit/loss after taxation.
BRITISH AIRWAYS’ PROFIT/LOSS AFTER TAX (£ MILLION)
2012
2011
2010
2009
-100
672
170
-425
Table 1: BA's profit/loss after taxes 2009-12 (Source: BA's annual reports)
The figures are evidently instable. Only in four years, BA managed to recuperate from a significant loss
of over £400 million to peak up at nearly a £700 million profit in 2011 to abruptly plummet to a loss of
£100 million just a year after.

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Air France
Air France (AF) was formed as a merger of several airlines in 1933. At the early 1990s, the French
government merged further airlines into AF to create a unified, national carrier with economies of scale
and global reach to counter potential threats from the liberalization of the EU’s internal air transport
market. AF was partially privatized by listing its shares on the Paris stock exchange in 1999. In the same
year, AF entered into a transatlantic partnership with Delta Airlines, which expanded into the SkyTeam
global airline alliance a year after.
In 2003, AF announced a merger with the KLM Royal Dutch Airlines. The merger realized in 2004
forming the Air France-KLM Group. The merger produced the largest airline in the world in terms of
operating revenues, and the third largest (largest in Europe) in passenger kilometers. In contrast to BA,
when referring to AF in the following text, the entire merged AF-KLM group is meant, not only the
preceding Air France itself.
The following table shows AF’s latest economic performance measured by profit/loss after taxation.
AIR FRANCE’S PROFIT/LOSS AFTER TAX (€ MILLION)
2012
2011
2010
2009
-1,187
-805
286
-1,560
Table 2: AF's profit/loss after taxes 2009-12 (Source: AF's annual reports)
The figures are clearly dreadful. A loss of over €1.5 billion in 2009 improved to a minor profit of nearly
€300 million in the following year. However, the next two consecutive years underlined the AF’s
deprived economic performance by plunging into the substantial losses of €800 million and €1.2 billion,
respectively.
In summary, both airlines evidently performed in a poor manner between 2009-12. The following
financial analysis is scrutinizing their financial figures to assess their performance more profoundly and
suggest possible improvements.
An important note: Both BA and AF changed their accounting periods in 2010. Thus, when referring to
their 2009 financial year, the period between the April 1st, 2009 and March 30th, 2010 is meant.

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BA & AF Financial Analysis 2009-12 | 9
However, in terms of 2010, BA’s figures embrace only nine months from April 1st, 2010 till December
31st, 2010, while AF provided its 2010 figures for the entire calendar year. This fact may have a certain
impact on the comparative analysis.
Financial Analysis
According to Atrill & McLaney (2006), financial analysis using the financial ratios provides a quick and
relatively simple means of assessing the financial health of a business. The ratios are also helpful when
comparing the financial health of different businesses. By calculating a relatively small number of ratios,
it is possible to build up a good picture of the position and performance of a business. The following
analysis studies the four principal areas of the financial performance or position of BA and AF:
1. Profitability
2. Efficiency
3. Liquidity
4. Financial gearing
Profitability
Profitability ratios provide an insight to the degree of success in creating wealth for the business’s
owners, which is normally the primary purpose of every business undertaking. They express the profits
made (or figures bearing on profit, such as overheads) in relation to other key figures in the financial
statements or to some business resource. The following ratios may be used to evaluate the profitability
of the business (Atrill & McLaney, 2006):
•
Return on ordinary shareholders’ funds
•
Return on capital employed
•
Gross profit margin
•
Net profit margin

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Return on ordinary shareholders’ funds (ROSF)
ROSF compares the amount of profit for the period left for the owners, with the owners’ stake in the
business in the same period. In general, businesses seek to generate as high value as possible (Atrill &
McLaney, 2006).
=
ℎ
(
)
× 100
To keep the analysis simple, this report does not use average share capital values.
ROSF
2012
12 months to
December 31
BA ROSF
-3.9%
12 months to
December 31
AF ROSF
-24.1%
2011
12 months to
December 31
26.0%
12 months to
December 31
-13.3%
2010
9 months to
December 31
7.7%
12 months to
December 31
4.1%
2009
12 months to
March 31, 2010
-22.2%
12 months to
March 31, 2010
-29.1%
Table 3: BA's and AF's return on ordinary shareholders' funds (ROSF)
Looking at the above figures, they are highly volatile. No trend or consistency can be seen. In 2009, both
airlines performed in a very poor manner. If the BA’s and AF’s investors had only left their money in a
bank, they would have received at least some positive returns. Instead, BA returned -22% and AF -29%,
respectively. Apparently, both carriers were substantially hit by the global economic downturn spreading
from the US since 2007 asserted by the new macroeconomic problems arising in Europe. According to
the annual reports of BA (British Airways Plc, 2010, pp.6-8) and of AF (Air France KLM, 2010), both
carriers were making effort to reduce capacities to address the sharply declined demand for flights and to
cut costs, mainly on fuel and salaries. Still, their efforts did not even match the drop in revenues (£1
billion in case of BA and €3.7 billion in case of AF) resulting mainly from the plummeting premium
business travel.

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BA & AF Financial Analysis 2009-12 | 11
To sum up the year 2009 using the words of BA’s chairman from the annual statement (British Airways
Plc, 2009, p.4): “We are in the grip of a devastating global economic downturn and the next year will be
extremely difficult for us.” At the end of the year, he commented (British Airways Plc, 2010, p.6): “The
economic conditions that prevailed throughout 2009/10 were the most severe we have ever encountered.
As a result of the worst recession for 60 years, our industry has faced a series of permanent structural
changes that have drastically reduced our revenues in the short term and have permanently changed the
economics of running a premium airline.”
In 2010, both airlines finally achieved the first positive net profits since 2007-8. The reason was that
premium travel unexpectedly recovered during the second half of 2010. BA noted an increase in
passenger revenues of £474 million in the nine months to December 31st, 2010, and AF a revenue
increase of €2.6 billion compared to the same period of the previous year. Assessment of both carriers’
operating costs did not show any significant contribution to the improved ROSF values.
In 2011, BA’s ROSF hit the impressive 26%, while AF’s ROSF fell to -13%. BA managed to increase
revenues and experienced an exceptional substantial net financing income relating to pension funds of
£160 million compared to a financing expense of £15 million in the prior year. Thus, BA’s ROSF can be
considered one-time and extraordinary. Regarding AF, despite its equity decreased by 13% (reserves
and retained earnings) and its revenues rose by 5%, which positively affected AF’s ROSF, its operating
cost increased by 6% asserted by other extensive non-current expenses (EU fine related to AF’s previous
anti-competitive practices) instead of non-current income in the previous year (sale of Amadeus shares).
In 2012, BA’s ROSF fell to the negative -4%. AF dived even further to -24%. Though BA’s year-onyear revenues increased by 8% and its operational cost by 11%, BA still delivered good operating result.
However, extraordinary cost items, specifically high debt finance cost of £173 million, financing
expense related to pensions of £215 million and the cost of discontinued operations as a result of BMI’s
acquisition deteriorated BA’s economy. Regarding AF, its net profit significantly deteriorated with all
the key cost items, that is, operations costs, debt financing cost and other financial expenses, increased
significantly.
In terms of ROSF, BA performed better than AF in this four-year period. Further indicators will help
discover more clues why their economies were so instable and why they were not doing so well in last
four years.

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BA & AF Financial Analysis 2009-12 | 12
Return on capital employed (ROCE)
According to Atrill & McLaney (2006) ROCE is a fundamental measure of business performance. This
ratio expresses the relationship between the net profit generated during a period and the long-term
capital invested in the business during that period. The profit figure used is the net profit before interest
and taxation, because the ratio attempts to measure the returns to all suppliers of long-term finance
before any deductions for interest payable to lenders, or payments of dividends to shareholders.
=
!
ℎ
+#
$
× 100
%
To keep the analysis simple, this report does not use average share capital and loan values.
ROCE
2012
12 months to
December 31
BA ROCE
0.6%
12 months to
December 31
AF ROCE
-4.5%
2011
12 months to
December 31
14.1%
12 months to
December 31
-3.7%
2010
9 months to
December 31
5.0%
12 months to
December 31
3.0%
2009
12 months to
March 31, 2010
-7.0%
12 months to
March 31, 2010
-11.8%
Table 4: BA's and AF's return on capital employed (ROCE)
ROCE enables to analyze and compare BA and AF without the impact of local taxation, which may be
quite different in UK and France, and without the impacts of any dividend payments and the cost of
financing the long-term capital. On the other hand, ROCE considers the long-term debt as a part of
capital, which is not the case of ROSF, considering only own shareholders’ investment into the
company. Thus, ROCE reveals how BA and AF truly economized on its overall capital.
At first sight, BA was doing better than AF. It did not deliver the positive return in the 2009 crisis year.
But then it managed thanks to improving revenues from premium travel in 2010 and 2011 and an
exceptional event in its pension program in 2011. However, the performance significantly weakened in
2012. The reasons were again extraordinary besides the fact that the operational costs rose 2 percentage
points over BA’s revenues. BA realized a loss of £66 million as a result of its partnership with Iberia

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BA & AF Financial Analysis 2009-12 | 13
though the IAG and had to one-time recognize the negative £215 million in its pension financing to get
compliant with the new IAS 19 ‘Employee Benefits’ standard effective after January 1st, 2013.
Regarding AF, its ROCE was negative with the only exception of the year 2010, when AF benefited
from the quick rebound of premium business travel at the end of the period. Otherwise, AF’s business
activity always ended up at loss making the returns on capital adverse. AF was not able to generate any
profits due to its persistently unfortunate cost base. This will be, among other matters, examined in the
further analyses.
Gross profit margin
This ratio relates the gross profit of the business to the sales revenue generated for the same period.
Gross profit represents the difference between sales revenue and the cost of sales. It is therefore a
measure of profitability in producing and selling goods or services before any other expenses are taken
into account. As cost of sales represents a major expense for many businesses, a change in this ratio can
have a significant effect on the ‘bottom line’ (Atrill & McLaney, 2006).
&
%
$
=
&
× 100
The table below shows the gross profit margins calculated for BA and AF. This margin measures
profitability and compares BA and AF from the perspective of their core economic activity, which is
flying for money.
GROSS PROFIT MARGIN
2012
12 months to
December 31
BA Gross profit margin
2.2%
12 months to
December 31
AF Gross profit margin
Table 5: BA's and AF's gross profit margin
-1.2%
2011
12 months to
December 31
5.2%
12 months to
December 31
-1.4%
2010
9 months to
December 31
5.1%
12 months to
December 31
0.1%
2009
12 months to
March 31, 2010
-2.9%
12 months to
March 31, 2010
-6.1%

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BA & AF Financial Analysis 2009-12 | 14
It can be seen that BA performed consistently better than AF in the period subject to the analysis. At
BA, the operating margin belongs to one of the most important Key Performance Indicators (KPI).
According to the Annual report (2011), “We must achieve a consistently strong financial performance if
we are to continue investing in the future success of the business and provide adequate shareholder
returns.” BA managed to grow its sales while controlling and decreasing its operating costs with the
exception of 2012, when it was hit by the increase in aircraft operating lease costs (up by 34% on yearto-year-basis), fuel (up by 14%), aircraft maintenance (up by 15%) and airport charges (up by 15%).
AF, on the contrary, clearly struggled with its operating costs in the entire analyzed period. Though it
managed to increase its revenues by 11% in 2010, while its operational costs rose only by 4%, it is
known that the revenue increase was caused by an unexpected short-term rebound in premium travel
segment. Other than that, AF’s revenues and operational costs grew by steady 5% in 2011 and 2012.
According to AF, the company was making effort to fight its rising costs. The airline ran a cost saving
initiative between 2007-8 and 2011 called ‘Challenge 12’, which resulted in the €2.9 billion savings
(38% in processes and productivity, 41% in procurement, 14% in fleet and 7% in distribution cost).
Apparently, it was still insufficient to win the revenue cost battle. Thus, AF introduced a new cost
saving initiative in 2012 called ‘Transform 2015’. The airline has been making effort to limit capacity
growth and investments (which is actually revenue adverse) and to achieve immediate cost reductions.
AF continued to run transformation projects (such as its medium-haul network, which alone lost €700
million in 2011) and opened renegotiations of collective labor agreements, which did not impact its
economy in 2012 yet.
Now, net profit margins are to be studied in order to see whether the airlines were able to improve its
profitability by the other than core activities.
Net profit margin
This ratio compares one output of the business (profit) with another output (sales revenue). Attrill &
McLaney (2006) recommend that the net profit before interest and taxation be used in this ratio as it
represents the profit from trading operations before the interest costs are taken into account. This is often
regarded as the most appropriate measure of operational performance, when used as a basis of

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BA & AF Financial Analysis 2009-12 | 15
comparison, because differences arising from the way in which the business is financed will not
influence the measure.
%
$
=
!
× 100
Net profit margin measures and compares BA and AF from the perspective of their overall economic
gains and sales activities. Compared to the gross profit margin focusing only on the core performance,
the net profit margin shows the similar with the influences of other financial and miscellaneous
activities.
NET PROFIT MARGIN
2012
12 months to
December 31
BA Net profit margin
0.3%
12 months to
December 31
AF Net profit margin
-2.6%
2011
12 months to
December 31
8.4%
12 months to
December 31
-2.3%
2010
9 months to
December 31
4.2%
12 months to
December 31
2.1%
2009
12 months to
March 31, 2010
-4.7%
12 months to
March 31, 2010
-8.2%
Table 6: BA's and AF's net profit margin
Comparing BA’s and AF’s gross and net profit margins, their net profit margins are considerably worse.
The only exception was AF in 2010, when AF sold certain shares in Amadeus, and BA in 2011, when it
benefited from the reassessment of its employee’s pension financing. However, this may not be reflected
positively, since, in case of AF, it may be deemed as a one-time sale-off of valuable assets to receive
required additional cash to finance core operations, and in case of BA, as a one-time financial
accounting event unrelated to its business operations.
Otherwise, both BA and AF recorded various miscellaneous costs rather then gains from various nonoperating activities, such as other current and non-current financial income and expenses, sale on
property and equipment, charges related to available-for-sale assets, etc.
In conclusion to the analysis of BA’s and AF’s profitability measured by using various ratios, the results
were poor and instable in 2009-12. BA enjoyed increasing revenues, could cope with operating costs to

16. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 16
deliver positive returns, but suffered from various one-time extraordinary non-operating costs. AF
enjoyed increasing revenues, too, but could hardly cope with its overwhelming costs in general.
Efficiency
Efficiency indicators measure the efficiency with which particular resources have been managed and
used within the business. The following ratios may be used to evaluate the efficiency of the business
(Atrill & McLaney, 2006):
•
Average settlement period for receivables
•
Average settlement period for payables
•
Sales revenue to capital employed
•
Sales revenue per employee
Average settlement period for receivables
Atrill & McLaney (2006) state that businesses will usually be concerned with how long it takes for
customers to pay the amounts owing. The speed of payment can have a significant effect on the cash
flow. The average settlement period for receivables calculates how long, on average, credit customers
take to pay the amounts that they owe to the business.
'
$
%
!
=
(
!
× 365
A business will normally prefer a shorter average settlement period to a longer one as, once again, funds
are being tied up that may be used for more profitable purposes.

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BA & AF Financial Analysis 2009-12 | 17
AVERAGE SETTLEMENT PERIOD FOR RECEIVABLES
2012
2011
12 months to
December 31
16.5
BA Debtor turnover
15.7
12 months to
December 31
26.5
2009
9 months to
December 31
16.8
12 months to
December 31
AF Debtor turnover
2010
12 months to
December 31
22.8
12 months to
December 31
26.5
12 months to
March 31, 2010
27.8
12 months to
March 31, 2010
37.2
Table 6: BA's and AF's average settlement period for receivables
At first sight, both airlines show relatively short settlement periods to other industries, knowing that
usual values amount to between 30-60 days (1-2 months). Both airlines also managed to shorten their
settlement periods between 2009 and 2012 – BA by 6 days and AF by almost 11 days. Still, BA was
able to collect its revenues in average faster by 20 days than AF, which certainly favored its liquidity.
These quick times can be most probably explained by the complete implementation of e-ticketing, recent
shortenings of reporting and settlement periods in IATA Clearing House (ICH) and IATA Bank
Settlement Plans (BSP), since almost all of the airlines’ revenues were generated by passenger ticket
sales. The difference between BA and AF may be explained by their different arrangements with credit
card acquirers, who tend to keep the collected money as long as possible to minimize their liability to
credit card holders, and probably by the geographical differences where the airlines’ revenues were
generated. However, these hypotheses cannot be verified due to lack of available data.
Average settlement period for payables (creditors)
This ratio measures how long, on average, the business takes to pay its trade payables. As trade payables
provide a free source of finance for the business, businesses attempt to keep their average settlement
period for trade payables as long as possible when taking into account good business relationships with
their suppliers. (Atrill & McLaney, 2006)
'
$
%
!
=
(
!
ℎ
× 365

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BA & AF Financial Analysis 2009-12 | 18
Expecting normal values of 1-2 months, that is, between 30-60 days, both carriers met this expectation
in the analyzed periods.
AVERAGE SETTLEMENT PERIOD FOR PAYABLES
2012
2011
12 months to
December 31
47.9
BA Creditor Turnover
51.8
12 months to
December 31
2009
9 months to
December 31
62.0
12 months to
December 31
49.3
AF Creditor Turnover
2010
12 months to
December 31
61.1
12 months to
March 31, 2010
42.0
12 months to
December 31
49.2
12 months to
March 31, 2010
56.0
Table 7: BA's and AF's average settlement period for payables
Also, comparing the average settlement periods for receivables and payables, both carriers were able to
collect their receivables faster than to pay their outstanding bills. This was positive for their cash flows,
which will be examined at a later stage.
Sales revenue to capital employed
According to the definition, sales revenue to capital employed (or asset turnover ratio) measures how
effectively the assets of the business are being used to generate sales revenue. Higher values indicate
that assets are being used more productively in the generation of revenue. (Atrill & McLaney, 2006)
%
=
ℎ
+
+
!
Clearly, both carriers had similarly low values. It was caused by the fact that the airline industry is
overall very capital-intensive. Airlines require lots of capital to run their businesses, for the cost of
having and operating aircrafts is very high.

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BA & AF Financial Analysis 2009-12 | 19
SALES REVENUE TO CAPITAL EMPLOYED
2012
12 months to
December 31
1.5
BA Sales revenue to capital
employed
12 months to
December 31
1.5
AF Sales revenue to capital
employed
2011
2010
12 months to
December 31
9 months to
December 31
1.3
0.9
12 months to
December 31
12 months to
December 31
1.3
1.3
2009
12 months to
March 31, 2010
1.2
12 months to
March 31, 2010
1.2
Table 8: BA's and AF's sales revenue to capital employed
Next, the trend to intensify the use of assets can be observed. Both airlines identically improved their
values from 1.2 to 1.5 in the examined period. The asset turnover ratio proves that their certain efforts to
become more efficient have materialized in the past four years.
Sales revenue per employee
The sales revenue per employee provides a measure of the productivity of the workforce, which
constitutes one of the most significant business resources. (Atrill & McLaney, 2006)
%
=
%!
%
To be able to compare BA and AF, BA’s values were converted from British pounds to Euros using an
average exchange rate found in the ECB Statistical Data Warehouse at
[http://sdw.ecb.europa.eu/browseSelection.do?DATASET=0&sfl1=4&FREQ=A&sfl3=4&CURRENCY
=GBP&node=2018794].

20. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 20
SALES REVENUE PER EMPLOYEE
2012
2011
2010
2009
12 months to
December 31
AF Sales revenue per employee
9 months to
December 31
12 months to
March 31, 2010
£250,550
0.8569
€292,396
£248,112
0.8569
€289,551
£167,797
0.8569
€195,822
£192,654
0.8569
€224,831
12 months to
December 31
BA Sales revenue per employee
Average EUR/GBP exchange rate
BA Sales revenue per employee
12 months to
December 31
12 months to
December 31
12 months to
December 31
12 months to
March 31, 2010
€254,596
€239,207
€222,658
€196,375
Table 9: BA's and AF's sales revenue per employee
Two facts can be identified. First, BA is more labor productive than AF. Second, both carriers were
improving its labor productivity.
Liquidity
Liquidity is vital to the survival of a business. Money is the blood of every business. There must be
sufficient liquid resources available to meet maturing obligations (that is, debts that must be paid in the
relatively near future). So-called current ratio is widely used. Besides the ratios, a careful analysis of the
cash flow report is helpful to study the cash position. (Atrill & McLaney, 2006)
Current Ratio
The current ratios compares the liquid assets, that is, cash and other assets turning into cash soon, with
the current liabilities. The higher the ratio, the more liquid the business is considered to be. As liquidity
is vital to the survival of a business, a higher current ratio is usually preferred to a lower one. On the
other hand, a very high current ratio may imply that too much funds are tied up in cash and other liquid
assets and are not, therefore, being used as productively as they might otherwise be. (Atrill & McLaney,
2006)
=
'
# !
Looking at the table below, it is obvious that both BA and AF have considerably low current ratios
below one. Their short-term liabilities constantly exceeded their short-term assets. This shows that both

21. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 21
airlines had low liquidity, which can be deemed as negative. BA’s current ratio even decreased down to
0.6 in 2012.
A closer look at the airlines’ cash flow statements is necessary to better explain their low liquidity.
CURRENT RATIO
2012
12 months to
December 31
BA Current ratio
0.60
12 months to
December 31
AF Current Ratio
0.77
2011
2010
12 months to
December 31
0.75
9 months to
December 31
0.79
12 months to
December 31
0.70
12 months to
December 31
0.77
2009
12 months to
March 31, 2010
0.71
12 months to
March 31, 2010
0.77
Table 10: BA's and AF's current ratio
The following table represents a short exempt from BA’s cash flows statements listing only the most
significant items for interpretation purposes. The complete statements can be found in the appendices.
BA CASH FLOW - EXEMPT
£ million
Operating profit
Depreciation, amortisation and impairment
Operating cash flow
Interest paid
Net cash generated from operating activities
Net cash used in investing activities
Net cash flow from financing activities
Cash and cash equivalents at beginning of period
Cash and cash equivalents at period end
Table 11: BA Cash flow - an exempt with significant items
2012
2011
2010
2009
12 months to
December 31
12 months to
December 31
9 months to
December 31
12 months to
March 31,
2010
233
720
953
(139)
715
(683)
(68)
570
481
518
683
1201
(147)
836
(826)
(265)
779
570
342
570
912
(87)
792
(735)
(94)
786
779
(231)
732
501
(136)
331
(337)
350
402
786

22. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 22
Looking at the cash status at the beginnings and ends of the analyzed periods, BA improved its cash
liquidity only once in 2009. Despite the negative operating profit, BA managed to generate some
operating cash flow. BA held back cash otherwise probably used in various investing activities.
Compared to the other years, BA invested only £337 million in 2009 to preserve vital cash in the year of
strong economic downturn. Actually, BA improved this item by one-time selling property for £102
million and decreased its interest-bearing deposits by £52 million. Further to expand its cash position,
the careful analysis reveals that BA secured additional £1053 million by long-term borrowings as one of
its financing activity in 2009.
The other three years, BA cash flow was decreasing hitting a minimum of £481 million at the end of
2012. BA seemed to undergo this risk intentionally. BA was experiencing an improving economic
environment underlined by the increasing demand. Business was picking up, while its operating cash
flow was up and healthy. Keith Williams, BA’s Chief Executive, said: “We recognise that investment is
essential if we are to develop our position as a global leader in premium air travel. We have committed
to a major capital investment programme, which will see expenditure rise steadily over the next five
years, from nearly £600 million in 2010 to more than £1.5 billion in 2015.” (British Airways Pls, 2011,
p.12)
The above can be obviously seen in the net cash used for investing activities in 2010-12. BA has been
acquiring its first modern B777-300 ER since 2010. BA has been investing into its product, cabin, flight
entertainment, business lounges, etc., to improve its competitive edge and to support its future cash
inflows from passengers’ revenues. On the other hand, BA’s cash flow was chronically burdened with
cash payments to pension schemes, which spent some £300-350 million in cash p.a. in 2011 and 2012,
interest paid on its significant borrowings (between £90-150 million a year), and with financing
activities, whose largest portion is made of repayments of borrowings and payments of finance lease
liabilities.

23. EAC ECM05EFA
AF CASH FLOW – EXEMPT
€ million
BA & AF Financial Analysis 2009-12 | 23
Net income for the period
Amortization, depreciation
Gain on Amadeus operation
Deferred taxes
Other non-monetary items
Subtotal
(Increase) / decrease in trade receivables
Increase / (decrease) in trade payables
Change in other receivables and payables
Net cash flow from operating activities
Purchase of property plants, equipment
Proceeds on Amadeus transaction
Proceeds on disposal of property, plant and
equipment and intangible assets
Net cash flow used in investing activities
Issuance of debt
Repayment on debt
Payment of debt resulting from finance lease
liabilities
New loans
Repayment on loans
Net cash flow from financing activities
Cash and cash equivalents and bank overdrafts at
beginning of period
Cash and cash equivalents and bank overdrafts at
end of period
Interest paid (flow included in operating
activities)
2011
2010
2009
12 months to
December 31
2012
12 months to
December 31
12 months to
December 31
12 months to
March 31, 2010
(1,192)
1,748
(97)
(14)
505
802
(140)
(307)
431
851
(1,472)
466
745
(809)
1,697
(266)
(369)
353
(49)
690
(75)
934
(2,433)
1,168
289
1,667
(1,030)
(305)
46
843
121
(41)
95
1,043
(2,037)
193
1,054
(1,559)
1,675
(591)
143
(243)
(89)
126
(564)
(798)
(2,097)
1,053
(245)
1,780
(847)
(514)
(1,829)
1,414
(990)
(838)
(836)
532
(640)
(618)
(967)
2,704
(326)
(522)
(90)
100
434
2,126
(145)
265
(311)
3,351
(78)
224
(567)
3,706
(73)
151
1,931
3,466
3,163
2,126
3,351
3,635
(414)
(468)
(427)
(357)
Table 12: AF's Cash Flow - an exempt with significant items
AF was managing to maintain its positive cash flow between €2,100 million and €3,700 million in 200912. A significant tool used for this purpose was issuance of debt. Without having managed to receive
additional funds through debts, AF would have probably suffered from serious financial problems.
Looking at the net cash flow from operating activities, AF showed positive values with the exception of
the critical year 2009. A closer look discloses that AF’s values for amortization and depreciation are

24. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 24
relatively very high to other values. Basically, if the amortization and depreciation of aircrafts and other
assets are taken out of the negative net income, AF’s economic outcome is positive. This would deserve
a closer analysis, which exceeds the scope of this paper. AF probably uses higher depreciation rates to
artificially increase cost and lower profits having a certain strategy in the background, such as saving
more resources for future fleet upgrades and other later substantial investments.
Another enormous amount of cash is, similarly to BA, devoted to new investments (€1.5-2.5 billion
p.a.). According to the annual reports, AF was regularly investing into new aircrafts, cabin upgrades,
business lounges, etc., to make its products and services better and more competitive. At the same time,
AF was selling redundant and old property and other assets, such as its shares in Amadeus, to improve
its cash position. This helped AF to recover approximately €1 billion p.a.
Identically to BA, AF is burdened with significant repeating leasing payments (aircrafts) and excessively
with repayments on existing debt and interest payments resulting from these borrowings.
Financial Gearing
Financial gearing is the relationship between the contribution to financing the business made by the
owners of the business and the amount contributed by others, in the form of loans. The level of gearing
has an important effect on the degree of risk associated with a business. Where a business borrows, it
takes on a commitment to pay interest charges and make capital repayments. Where the borrowing is
heavy, this can be a significant financial burden. Most of businesses are geared to some extent for two
possible reasons. Owners may have insufficient funds and/or want to increase their returns, which is
possible if the returns generated from borrowed funds exceed the cost of paying interest. Two ratios are
widely used to assess gearing (Atrill & McLaney, 2006):
•
Gearing ratio
•
Interest cover ratio
Gearing ratio
The gearing ratio measures the contribution of long-term lenders to the long-term capital structure of a
business (Atrill & McLaney, 2006).

25. EAC ECM05EFA
&
BA & AF Financial Analysis 2009-12 | 25
$
=
ℎ
% (
# $
+
+#
) !
$ % (
)
!
× 100
The table below shows that BA and AF are highly geared businesses. They both have high shares of
long-term debt in their long-term capital structure. The financial risk attached to the both carriers is
considerable.
BA managed to repeatedly decrease its debts in the analyzed period. AF, on the contrary, increased its
debt to peak at 72% in the last financial year 2012. BA seems to have a solid operational performance,
which helped pay off certain debts and thus decrease its financial burden. AF did not deliver any
positive operational returns, which probably led to going for more debt in order to finance its incurred
losses.
GEARING RATIO
2012
12 months to
December 31
2011
64.7%
BA Gearing ratio
12 months to
December 31
2009
9 months to
December 31
65.5%
69.3%
12 months to
December 31
72.0%
AF Gearing ratio
2010
12 months to
December 31
71.6%
12 months to
December 31
66.7%
12 months to
March 31, 2010
61.8%
12 months to
March 31, 2010
68.9%
Table 13: BA's and AF's gearing ratio
Interest cover ratio
The interest cover ratio measures the amount of profit available to cover interest payable. The lower the
level of profit coverage, the greater the risk to lenders that interest payments will not be met, and the
greater the risk to the shareholders that the lenders will take action against the business to recover the
interest due (Atrill & McLaney, 2006).
,
=
-
!
,
!
BA had a positive interest cover ratio only once in 2009 in the analyzed period. In this year, BA was
able to cover its interest payments 2.4 times by its current profit. The other years BA profits did not

26. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 26
cover interest to be paid at all. AF’s situation was very similar. Both companies may be deemed as risky.
Basically, they were not able to earn revenues even to cover their basic interest payments.
INTEREST COVER RATIO
2012
12 months to
December 31
BA Interest cover ratio
-0.2
12 months to
December 31
AF Interest cover ratio
-1.5
2011
12 months to
December 31
-5.2
12 months to
December 31
-1.2
2010
9 months to
December 31
-2.3
12 months to
December 31
1.1
2009
12 months to
March 31, 2010
2.4
12 months to
March 31, 2010
-4.2
Table 14: BA's and AF's interest cover ratio
Horizontal Analysis
Horizontal analysis of financial statements is an analysis that assesses relative changes in different items
over time. It can be carried out upon financial ratios or upon a line item over a number of accounting
periods. This kind of analysis may also help identify a trend how certain financial parameters develop in
the course of time. Horizontal analysis can be performed either by absolute or percentage comparisons.
Absolute comparison is usually helpful in identifying the items that change the most. Percentage
comparison is typically useful when comparing performance of two companies of different scale and
size. (Ready Ratios, n.d.)
This paper builds the horizontal analysis upon BA’s and AF’s balance sheets and income statements. It
looks at the changes in the key areas of both statements. This chapter enhances the previous fundamental
findings mentioned in the previous section based on the horizontal analysis, for example, in the
calculations of ROSF and ROCE.
BA’s and AF’s balance sheets
BA’s total assets were rising in the analyzed period, that is, BA’s total balance sheet was growing at a
certain pace between 2.6% and 4.1%. This shows a certain steady and careful growth of the entire
company. In contrast to BA, AF indicated less convincing development, even shrinking the balance by

27. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 27
3.1% between 2010-11. BA’s non-current assets rose, while its current assets rose in the first analyzed
period and then were declining. A closer look onto the balance sheet explains what was occurring.
Besides the rising fleet value, the major increase was in the value of landing rights (from £202 million
up to £655 million) by buying bmi. Landing rights, especially in the congested Heathrow airport, are
indispensably valuable long-term asset. In this way, BA secured its long-term growth potential in its
home base to a certain extent.
BA BALANCE SHEET – HORIZONTAL ANALYSIS
£ million
2012
Dec 31
2011
Dec 31
2010
Dec 31
2009
March 31,
2010
7,973
Total non-current assets
9,201
621
7.2%
8,580
487
6.0%
8,093
120
1.5%
Total current assets and receivables
2,634
(140)
-5.0%
2,774
(52)
-1.8%
2,826
152
5.7%
2,674
11,837
468
4.1%
11,369
417
3.8%
10,952
275
2.6%
10,677
Total shareholders' equity
2,558
(24)
-0.9%
2,582
382
17.4%
2,200
287
15.0%
1,913
Total non-current liabilities
4,681
(223)
-4.5%
4,904
(73)
-1.5%
4,977
153
3.2%
4,824
Total current liabilities
4,398
715
19.4%
3,683
108
3.0%
3,575
(165)
-4.4%
3,740
11,837
468
4.1%
11,369
417
3.8%
10,952
275
2.6%
10,677
Total assets
Total equity and liabilities
Table 15: BA's Balance sheet with key items and their horizontal absolute and percentage changes
Another significant non-current asset item, which even surprisingly rose from £483 million to £1,194
million, was ‘employee benefit assets’. These are related to BA’s pension fund scheme and are equities,
bonds and other savings reserved for employees’ retirement. As previously mentioned, this scheme
represents a substantial financial burden for BA. Due to a change in accounting standards and, of course,
for the obvious reason of BA’s social responsibility, BA was making effort to prop up the funds along
its own financial rehabilitation after the 2007-9 crisis. However, this was leading to decreasing current

28. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 28
assets, mainly its cash and other cash equivalents. This was already previously observed in the liquidity
analysis.
Looking at the equity and liabilities side of the balance sheet, it can be noted that BA’s total
shareholders’ equity was rising between 2009-11. This corresponds with BA’s profits reached in these
years, which were retained as reserves and were not paid out as dividends. A slight decrease in the
equity in 2012 again corresponds with the loss BA incurred last year.
Another striking item is a sharp increase in current liabilities by 19.4% in 2012, which must have a
negative influence on BA’s liquidity again. The portion of long-term borrowings to be paid off in shortterm risen from by 21% £385 million to £465 million, other payables by 15.5% from £3117 million and
‘short-term provisions’ by 97.3% from £148 up to £292 million. Other payables understand mainly other
miscellaneous creditors, sales in advance of carriage and deferred income. Short-term provisions for
liabilities mean various expected estimated near-future burdens related to investigations, such as unfair
passenger fuel charges before 2006, employee claims related to age discrimination and holiday pay,
customer compensations and other miscellaneous items.
Compared to BA, which was doing relatively fine judged by the horizontal developments of its balance
sheet, AF was doing obviously worse. An unexpected drop in AF’s non-current assets by 4.8% in 212
was mainly caused by depreciating VLM’s goodwill, one of its AF’s regional subsidiaries, due to the
reorganization of the all AF’s regional activities within its ‘Transform 2015’ restructure initiative.
The development of AF’s current assets is worth of attention. It was first decreasing by 5.3% and 15.7%,
respectively, to rise by 18.3%. Basically, since AF was experiencing operating losses as already found
before, AF was financing the losses partly by selling redundant assets of €91 million in 2010, partly by
simply decreasing its cash and cash equivalents by 34.17% in 2011, which meant €1,213 million euros
translated into absolute terms. This substantial cash decrease was financed from AF’s own equity – from
its reserves. The cash prop-up seems to have been carried out through getting rid of non-current assets,
since the decrease in fleet value, good will, property and plant equipment and other non-current financial
assets amounts approximately to the €1.2 million cash increase in 2012.

29. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 29
AF BALANCE SHEET – HORIZONTAL ANALYSIS
€ million
2012
Dec 31
Total non-current assets
19,895
(1,014)
-4.8%
20,909
328
1.6%
20,581
826
4.2%
7,579
1,171
18.3%
6,408
(1,190)
-15.7%
7,598
(422)
-5.3%
8,020
27,474
157
0.6%
27,317
(862)
-3.1%
28,179
404
1.5%
27,775
Equity attributable to equity
holders of Air France-KLM
4,924
(1,116)
-18.5%
6,040
(940)
-13.5%
6,980
1,617
30.2%
5,363
Total non-current liabilities
12,667
591
4.9%
12,076
776
6.9%
11,300
(590)
-5.0%
11,890
9,827
680
7.4%
9,147
(700)
-7.1%
9,847
(620)
-5.9%
10,467
27,474
157
0.6%
27,317
(862)
-3.1%
28,179
404
1.5%
27,775
Total current assets
Total assets
Total current liabilities
Total liabilities and equity
2011
Dec 31
2010
Dec 31
2009
Mar 31,
2010
19,755
Table 16: AF's Balance sheet with key items and their horizontal absolute and percentage changes
A highly interesting event happened to AF’s equity in 2010. It changes namely by 30.2%. The issued
capital shrank by €2,252 million, that is, by 88.2% by reducing the nominal share value from €8.50
down to €1. Additionally, investors paid in €2,252 million in 2010. This event would have normally
translated in the increasing assets, usually current assets. However, this did not happened in this case.
Instead, a significant decrease in long-term debt (€386 million), other non-current liabilities (€388
million) and various items in the current liabilities in the total value of €620 million can be discovered
using the horizontal analysis. In other words, AF simply rehabilitated its debts and other liabilities
through its own equity. AF’s investors had to pay for AF’s previous mediocre performance.
The following years were still showing AF’s inability to generate profits. AF’s equity was still falling by
reducing reserves and retained earnings by 13.5% and 18.5%, respectively, gained by the paid-in capital
in 2010. At the same, total liabilities were slightly growing.
In conclusion, this reasserts the deprived economic situation at AF and reconfirms the solid economy of
BA.

30. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 30
BA’s and AF’s income statements
Comparing BA’s revenues and total expenditures in the course of 2009-12, it was already said in
relation to ROSF and ROCE, that BA was able to cope well with the changes in external demand and
with steering its operational costs accordingly. Still, it is thought provoking how volatile the overall
performance is and how sensitively profits and losses react on changes in revenues and expenditures in a
multiplied way. For example, in 2009 when the revenues decreased by 16.4% and operational
expenditures by 22.9%, BA managed to increase its operating profit by 248.1%. As mentioned in the
previous text, though BA managed to maintained a solid operational bottom line, its performance was
repeatedly hit by external factors, such as pension scheme, bmi discontinued operations and loss
compensations for Iberia.
BA INCOME STATEMENT – HORIZONTAL ANALYSIS
£ million
2012
2011
2010
2009
Revenues
10,827
840
8.4%
9,987
3,304
49.4%
6,683
(1,311)
-16.4%
7,994
Total expenditure on operations
10,553
1,084
11.4%
9,469
3,128
49.3%
6,341
(1,884)
-22.9%
8,225
233
(285)
-55.0%
518
176
51.5%
342
573
248.1%
(231)
(Loss)/profit before tax
(139)
(818)
-120.5%
679
522
332.5%
157
688
129.6%
(531)
(Loss)/profit after tax
(100)
(772)
-114.9%
672
502
295.3%
170
595
140.0%
(425)
Operating profit
Table 17: BA's Income statement with key items and their horizontal absolute and percentage changes
Regarding AF, the horizontal analysis of its income statement discloses an excessive volatility, though,
in contrast to BA, AF was increasing its revenues steadily by optimizing its route network underlined by
transformation of the medium-haul network (Air France KLM, 2010). AF introduced a new business
model at the end of 2009 to increase competitiveness mainly of its medium-haul network. According to

31. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 31
the annual report (2010, p.20), the medium-haul network is strategic for Air France-KLM in that it
represents more than a third of passenger revenues and feeds the long-haul flights with connecting
traffic. This network nonetheless underwent a large-scale crisis with a very sharp fall (-30%) in business
traffic during the 2009-10 first half. The restructuring project was based on three pillars: repositioning
the commercial offer, reducing expenses and particularly logistics costs and adjusting flight schedules.
AF INCOME STATEMENT – HORIZONTAL ANALYSIS
€ million
2012
2011
2010
2009
25,649
1,247
5.1%
24,402
1,085
4.7%
23,317
2,318
11.0%
20,999
Income from current operations
(300)
53
15.0%
(353)
(381)
-1361%
28
1,313
102.2%
(1,285)
Income from operating activities
(880)
(400)
-83.3%
(480)
(1,114)
634
2,266
138.8%
(1,632)
Income before tax
(1,094)
(63)
-6.1%
(1,031)
(1,055)
24
2,153
101.1%
(2,129)
Net income of consolidated companies
(1,121)
(335)
-42.6%
(786)
(1,085)
299
1,842
119.4%
(1,543)
Net income from continuing operations
(1,187)
(382)
-47.5%
(805)
(1,091)
286
1,846
118.3%
(1,560)
Revenues
Table 18: AF's Income statement with key items and their horizontal absolute and percentage changes
The project seems to have worked on the revenue side. However, judging AF’s income from current
operations, the initial success in turning the loss into profits managed in 2010, when AF increased its
income from current operations by 102.2%, was not repeated in further years. The major problem can be
identified in the items of ‘external expenses’ (constantly rising by a few percentage points faster than
revenues), ‘depreciation and provisions’ (one-time jump in 2012 previously mentioned) and also
‘salaries’ (one-time jump by €200 million in 2012).
Summarizing the horizontal analysis of both airlines’ income statements, both airlines have mainly
difficulties with their costs. BA was mastering its operating costs better than AF. BA was suffering from

32. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 32
unexpected one-time costs beyond its operations, which affected its results. AF suffered from the same,
but could not control its operational costs sufficiently.
Vertical Analysis
By definition, vertical analysis of financial statements is a technique in which the relationship between
items in the same financial statement is identified by expressing all amounts as a percentage of a total
amount. This method compares different items to a single item in the same accounting period. (Ready
Ratios, n.d.)
This coursework employs the vertical analysis upon BA’s and AF’s balance sheets. When applying this
method on the balance sheet, all of the three major categories accounts, that is, assets, liabilities, and
equity are compared to the total assets. All of the balance sheet items are presented as a proportion of the
total assets. These percentages are shown along with the absolute currency amounts. It is also useful to
perform vertical analysis over a number of periods to identify changes in accounts over time. It can help
to identify unusual changes in the behavior of accounts. (Ready Ratios, n.d.)
The vertical analysis of BA’s and AF’s balance sheets shows that their structure of non-current and
current assets are similar. Non-current assets make some three quarters and current assets some quarter
of total assets.
It is also obvious at first sight that current assets are lower than current liabilities at both airlines. This
was previously analyzed using current ratio. This indicates low liquidity levels.
Comparing BA’s and AF’s total equity, that is, shareholders’ capital, reserves and retained earnings
reveals that BA managed to increase its share on total assets from 19.8% to 23.3% between 2009 and
2012, whereas AF’s own equity, despite its capital restructuring transaction in 2010, further decreased to
only 18.1%. At the same time, BA managed to decrease its third party long-term financing from the
45.2% share down to 39.5%, whereas non-current liabilities rose from 42.8% up to 46.1% at AF.
The vertical analysis openly discloses that BA has been rehabilitating financially by growing its equity
and lowering its debt to some extent. On the contrary, AF was burning its own equity and increased its
debt.

33. EAC ECM05EFA
BA & AF Financial Analysis 2009-12 | 33
BA BALANCE SHEET – VERTICAL ANALYSIS
£ million
2012
Dec 31
2011
Dec 31
2010
Dec 31
2009
March 31, 2010
Total non-current assets
9,201
77.7%
8,580
75.5%
8,093
73.9%
7,973
74.7%
Total current assets
2,634
22.3%
2,774
24.4%
2,826
25.8%
2,674
25.0%
Total assets
11,837
100.0%
11,369
100.0%
10,952
100.0%
10,677
100.0%
Total equity
2,758
23.3%
2,782
24.5%
2,400
21.9%
2,113
19.8%
Total non-current liabilities
4,681
39.5%
4,904
43.1%
4,977
45.4%
4,824
45.2%
Total current liabilities
4,398
37.2%
3,683
32.4%
3,575
32.6%
3,740
35.0%
11,837
100.0%
11,369
100.0%
10,952
100.0%
10,677
100.0%
Total equity and liabilities
Table 19: BA’s Balance sheet with key items and their horizontal absolute and percentage changes
AF BALANCE SHEET – VERTICAL ANALYSIS
€ million
2012
Dec 31
2011
Dec 31
2010
Dec 31
2009
Mar 31, 2010
19,895
72.4%
20,909
76.5%
20,581
73.0%
19,755
71.1%
7,579
27.6%
6,408
23.5%
7,598
27.0%
8,020
28.9%
Total assets
27,474
100.0%
27,317
100.0%
28,179
100.0%
27,775
100.0%
Total equity
4,980
18.1%
6,094
22.3%
7,032
25.0%
5,418
19.5%
12,667
46.1%
12,076
44.2%
11,300
40.1%
11,890
42.8%
9,827
35.8%
9,147
33.5%
9,847
34.9%
10,467
37.7%
27,474
100.0%
27,317
100.0%
28,179
100.0%
27,775
100.0%
Total non-current assets
Total current assets
Total non-current liabilities
Total current liabilities
Total liabilities and equity
Table 20: AF’s Balance sheet with key items and their horizontal absolute and percentage changes

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BA & AF Financial Analysis 2009-12 | 34
Conclusion
This financial analysis studied British Airways (BA) and Air France-KLM (AF), two significant
traditional European airlines. The assignment examined their financial health in the period of 2009 –
2012 from four standard views, that is, profitability, efficiency, liquidity and financial gearing, using
respective usual financial indicators. The analysis was extended by vertical and horizontal analyses of
the airlines’ balance sheets and income statements. All the data were taken from their audited annual
reports available on their public websites.
Principal findings follow in bullets:
Profitability
•
Both airlines’ economy was highly volatile and inconsistent in the analyzed period. No trend could
be observed. Each of the four analyzed years was different with repeating up-and-downs.
•
Both airlines were significantly hit by the economic downturn in 2009. Their profitability measured
by four different indicators returned negative values. AF was showing worse results than BA.
•
In 2010, premium travel rebounded. BA and AF benefited and improved their profits sharply.
However, it was rather a result of the external demand shift than of their successful management. For
example, AF prettified its result by selling a portion of its precious shares in Amadeus, the world’s
largest airline system provider.
•
At first sight, BA excelled in 2011. A closer look revealed BA’s profitability had been distorted by
an exceptional revaluation of its huge pension funds, which usually burden BA’s economy. AF was
suffering from increasing operating costs and other various non-current expenses, which were
pushing AF into further losses.
•
In 2012, BA was burdened by exceptional events despite its solid operational performance. AF’s
profitability fell deeper due to still increasing costs.
•
Both airlines showed poor returns on capital and below-the-average margins. BA performed better
than AF showing more positive returns and higher margins than AF, though the values may still be
considered as unattractive and too risky due its volatility and unpredictability. AF predominantly
showed negative returns and margins. Thus, AF economy may be deemed as failure.

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BA & AF Financial Analysis 2009-12 | 35
Efficiency
•
Efficiency measured by average settlements periods for receivables and payables did not discover
extraordinary or surprising outcomes. Both BA and AF show usual values. In average, both airlines
can collect their receivables faster than they have to pay their outstanding invoices. BA is faster at
both than AF.
•
Efficiency measured by sales revenue to capital employed indicates low efficiency typical for
capital-intensive industries. Both airlines have the same values slightly exceeding 1. Both also
managed to increase its sales revenues to capital employed from 1.2 in 2009 to 1.5 in 2012 mirroring
their certain efforts to increase their efficiency.
•
This trend is reconfirmed by sales revenue per employee. Both airlines were increasing revenues
generated per worker. Though, BA was more productive then AF in each analyzed year.
Liquidity
•
BA and AF were suffering from low liquidity. Measured by current ratio, their current liabilities
constantly exceeded their current assets.
•
Analyzing the cash flow statements, both BA and AF seemed to intentionally spend substantial
amounts of cash on investments into its product and service to improve its competitive edge and thus
to secure future revenues. This undertaking kept their liquidity low.
•
Both airlines’ liquidity was substantially burdened with aircraft leasing payments, debt repayments
and interest payments. Debt and interest payments may be considered as both airlines’ major
economic issue.
Financial gearing
•
Both BA and AF indicated a great portion of long-term debt in their overall capital structure. The
portion was higher than their own equity – reaching the gearing ratios values over 60-70%.
•
This situation can be considered risky and expensive, since substantial long-term debt induces
substantial interest payment burden.
•
Regarding the airlines’ ability to cover their current interest payments by their profits, measured by
interest cover ratio, their ratios were mostly negative. Nor BA or AF was able to finance their
interest payments from their current earnings. This can be deemed very risky.

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BA & AF Financial Analysis 2009-12 | 36
BA balance sheet and income statement highlights
•
Between 2009-12, BA was obviously investing into non-current assets, such as new aircrafts,
software, bmi and mainly into landing rights in Heathrow airport. Thus, BA was increasing its
company’s value and improving its future revenue generation.
•
BA’s headache must be its pension funds and their financing. According to the annual reports, there
were a few principal changes in the related accounting standards and valuation methods. And still,
BA has a backlog at contributions into these funds.
•
Total shareholder’s equity was solid and slightly rising between 2010-11 thanks to retained earning
generated by good profits.
•
BA indicated a sharp increase in current liabilities in the last financial year due to massive short-term
provisions for potential financial spending resulting from several on-going investigations.
•
Otherwise, BA balance sheet looked relatively solid and improving.
•
The income statement points out the extreme instability in revenues, that is, in demand for premium
air travel.
•
Next, BA’s results were predominantly negatively affected by a few extraordinary one-time factors
in particular financial periods, such as compensating losses of Iberia, pension scheme and BMI
discontinued operations.
AF balance sheet and income statement highlights
•
AF balance sheets disclose that its current assets were depleting due to repeating losses. Mainly its
cash and cash equivalents were dangerously decreasing.
•
AF solved the situation by restructuring its equity in 2010. It decreased the nominal value of its
shares, while the investors injected new additional capital worth of €2,252 million. Most of this was
used to rehabilitate AF’s existing debts and other liabilities.
•
Despite the above action, AF’s equity was further depleted due to repeating losses financed mainly
by the reserves through the previously injected capital.

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BA & AF Financial Analysis 2009-12 | 37
•
AF’s balance sheet indicates the airlines’ deprived economic situation.
•
AF was better than BA at maintaining stable increases in revenues avoiding volatility. However,
external costs were AF’s major problem. They were rising faster than respective revenues.
In conclusion, both BA and AF seem to have struggled in the last four years. BA may have been more
successful than AF in coping with the overall financial difficulties. Still, both carriers have to mend their
economies to get their financial health back. Next chapter will provide a few key hints.

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BA & AF Financial Analysis 2009-12 | 38
Recommendations
Revenue Reinforcement
The previous analysis disclosed the importance of revenue generation for both airlines. BA suffered
from the excessive external volatility of revenues, whereas AF’s support to generate higher revenues
was negatively affecting its cost base.
For example, BA may address its difficulties with revenue volatility by creating stronger non-passenger
operations and developing a more valuable portfolio of strategic and financial assets. Lufthansa may be
a good example for this. When Lufthansa struggles to generate revenues from its passenger services, it
usually manages to substitute them by the other activities to write black figures. In its portfolio,
Lufthansa has LSG SkyChefs, Lufthansa Technik, Lufthansa Systems, and other business units for flight
training, safety auditing and mainly financial services such as UATP and credit cards, which are able to
earn significant profits.
Another opportunity may be to examine possibilities in the area of ancillary revenues. According to
different sources, low-cost airlines usually manage to earn additional 10-20% with ancillaries on top of
their airfares. Premium airlines cannot certainly offer bare-bone services and charge for the rest.
Though, a careful selection and perhaps a new range of extra services may work for this purpose. There
is a new vehicle for distribution ancillary services in airline GDS called EMD (Electronic Miscellaneous
Document). BA and AF may study its profound adoption to generate more extra revenues.
Cost Optimization
Profit is a function of both revenues and costs. The airlines shall certainly look not solely into revenues
to cure their economy. They shall make systematic effort to optimize their costs, too, in order to support
its base for revenue generation. The expression ‘optimization’ is used intentionally. The airlines shall
not simply cut cost, since it could lead to undermining future revenues.
According to the income statements, BA’s three major operational cost items are (1) employee costs, (2)
fuel and (3) handling charges, catering and other operational costs. These three items represent
approximately 70% of all BA’s operational costs. AF’s major operational costs are (1) external expenses

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BA & AF Financial Analysis 2009-12 | 39
and (2) salaries, which total approximately 90% of all AF’s operational costs. Following the time-proven
80/20 rule, both carriers may reach the most efficient results having the highest impact when addressing
these particular cost items.
For example, fuel is basically an external cost, which means, external forces drive its price. It is true that
airlines may be able to influence their fuel prices by hedging operations. However, it may only work to
some limited extent and it can also sometimes work against if the market develops other than
anticipated.
Richard Anderson, CEO of Delta Air Lines, said in a panel discussion at the last IATA AGM in Cape
Town earlier in June, 2013, that airlines must be fools when leaving one of their biggest cost item,
usually making some 20-30% of the operational costs, at a discretion of the unpredictable and
uncontrollable market forces. Delta solved this by simply buying an oil refinery for $180 million in
2011. According to Seeking Alpha (2013), the refinery will lower Delta’s fuel expenses by around $300
million in 2013. To provide context, Delta’s operating income in 2012 was a little under $2.2 billion.
Thus, fuel cost savings from the refinery operations will significantly expand Delta’s margins in 2013.
Another substantial cost item is employee cost. It is well known that salaries are high in Europe. It is
also known that well organized trade unions can easily negotiate their salary requests by strike threats.
However, when this basically makes BA and AF hardly competitive in the global aviation market, BA
and AF have to find a break-through solution to this persistent problem. The previous analysis showed
certain achievements in BA’s and AF’s productivity. But still, if their employee costs had been lower
by, for instance, only 5% in 2012, BA would have saved additional £117 million, which would have
resulted into a slight loss before tax of £22 million instead of the actually incurred loss of £139 million,
and AF would have saved extra €383 million, which would have lowered the loss from operating
activities from €880 million to €497 million. It is clear that BA and AF have to make more effort to
drive down their employee cost.
Next, BA and AF shall certainly reduce their long-term debts substantially. The analysis repeatedly
showed what a financial burden this means in terms of cost of financing debt. It would be wise to focus
on this effort. AF’s cost of debt drained its economy by over €400 million p.a., which was equal to
approximately 40% of AF’s recent annual losses.
Bvc

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BA & AF Financial Analysis 2009-12 | 40
References
Air France KLM, 2010. Annual Report 2009-10.
Air France KLM, 2011. Annual Report 2010-11.
Air France KLM, 2012. Annual Report 2011.
Air France KLM, 2013. Annual Report 2012.
Atrill, P. & McLaney, E., 2006. Accounting and Finance for Non-Specialists. 5th ed. FT Prentice Hall.
British Airways Plc, 2009. 2008/9 Annual Report.
British Airways Plc, 2010. 2009/10 Annual Report and Accounts.
British Airways Plc, 2012. Annual Report and Accounts, Year ended 31 December 2011.
British Airways Plc, 2013. Annual Report and Accounts, Year ended 31 December 2012.
British Airways Pls, 2011. Report and Accounts to December 2010.
Ready Ratios, n.d. Horizontal Analysis of Financial Statements. [Online] Available at:
http://www.readyratios.com/reference/analysis/horizontal_analysis_of_financial_statements.html
[Accessed 15 June 2013].
Ready Ratios, n.d. Vertical Analysis of Financial Statements. [Online] Available at:
http://www.readyratios.com/reference/analysis/vertical_analysis_of_financial_statements.html
[Accessed 15 June 2013].
Seeking Alpha, 2013. How Will Delta's Oil Refinery Help Its Business? [Online] Available at:
http://seekingalpha.com/article/1252471-how-will-delta-s-oil-refinery-help-its-business [Accessed 14
June 2013].

41. Simon Riha | ECM05EFA
Appendix A: BA Balance Sheet
BA & AF Financial Analysis 2009-12 | 41

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BA & AF Financial Analysis 2009-12 | 42

43. Simon Riha | ECM05EFA
BA & AF Financial Analysis 2009-12 | 43
Appendix B: BA Income Statement

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BA & AF Financial Analysis 2009-12 | 44
Appendix C: BA Cash Flow Statement

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Appendix D: AF Balance Sheet
BA & AF Financial Analysis 2009-12 | 45

46. Simon Riha | ECM05EFA
BA & AF Financial Analysis 2009-12 | 46

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BA & AF Financial Analysis 2009-12 | 47
Appendix E: AF Income Statement

48. Simon Riha | ECM05EFA
BA & AF Financial Analysis 2009-12 | 48
Appendix F: AF Cash Flow Statement