The Performance Evaluation Of Airasia Berhad

In this report, the ratio analysis is used to evaluate the performance of AirAsia Berhad in terms of their financial position, profitability and efficiency. The financial statements of Airasia Berhad for the years ended 2009, 2010 and 2011 were reviewed to assess the necessary information for calculating the ratios.

Comments

Ratio Analysis

There are six ratio analysis computed for the three financial years of AirAsia Berhad. The results are shown in graphs or pie chart below and the computations are shown in Appendices.

Year 2009 – 2010

There was a revenue growth of 26.01% to RM3948mil from RM3133mil previously. At that period, the number of passengers increased significantly which causes it to become the main source of revenue. This can be seen in the sales of passenger seats which elevated from RM2138mil to RM2831mil (airasia.com).

AirAsia is also well known as the ‘Best Asian Low-Cost Carrier’ in 2005, 2008 and 2009 (thestar.com.my). The low-cost strategy such as eliminating administration fees and only the fare and airport tax were charged in 2009 had contributed to a 21% rise in number of passengers (thestar.com.my). Plus, their ‘Mind Blowing Fare’ campaign held in 2010 which offered only RM1 for one way flight in both domestic and international travel had resulted in a sale of 36,781 tickets per hour and 538,000 tickets sold out in only a day (airasia.com).

Besides relying on the sales of tickets to boost revenue, the ancillary income also plays an important role in enhancing the revenue growth. There are various ancillary services provided by AirAsia, such as, the in-flight food and beverages, travel insurance and AirAsia credit card. In the period, there were also new services introduced, which are the ‘Baggage Supersize’ and the seating service, ‘Pick A Seat’ (thestar.com.my). This also induced the rise in the ancillary income per passenger from RM29.10 in 2009 to RM44.00 in 2010. What is more, 45% of the ancillary services were made up of baggage fees (airasia.com).

Moreover, the other income of AirAsia also had increased at 77% to RM624mil against RM353mil last year which also affected the revenue growth. The other income includes the various services provided, for example, the excess baggage, freight and cancellation, baggage handling fee, documentation, and booking fee (airasia.com).

Year 2010 – 2011

Revenue growth hiked up at 13.86% to RM4495mil in 2011. As compared to previous report, the passenger seat sales had an 8% increase to RM3056mil. It is also reported that the number of passengers carried by them in 2011 amounted to 29mil passengers (airasia.com). This may be due to the offer they had that year, which offered 1 million low fare seats that excluded airport tax and other fee, but the lowest cost was only RM5.00 (thestar.com.my). When the promotion started, 402,222 seats were sold out within a day (airasia.com).

Furthermore, although there was a rise in fuel price, AirAsia managed to overcome it by the increased in their ancillary income, thus, contributing to their revenue growth. In that period, 18% of the revenue is from ancillary income. It rose to RM45.00 from RM44.00 per passenger. Among the ancillary services, the baggage fee was the highest contributor towards the increased in ancillary income. It was seen that the service increased at 25% to RM363mil from RM290mil before (airasia.com).

On the other hand, the other income for 2011 showed a rise of 19% to RM397mil against RM333mil last year, excluding the baggage fee. Besides, the assigned seat, other fees and on-board sale of meals and merchandise are included in the other income. The on-board meal sales were reported to rise 33% that year. It may be due to the vegetarian meals introduced to their menu in consideration of religion basis (airasia.com).

Year 2009-2010

Based on Figure 2, the ROCE is 1.1% higher at 10.68% as compared to 9.63% at 2009. The earnings before interest and tax (EBIT) showed an increase from RM913mil to RM1067mil which is a 17% rise. Although the expenses increased from RM2220mil to RM2881mil, but the healthy revenue was enough to cover the expenses incurred. The other operating expenses were seemed to have the most significant rise of 109% to RM192mil against RM92mil previously. It comprised of rental of land and building, auditors’ remuneration, rental of equipment, and advertising costs (airasia.com).

Year 2010 – 2011

The percentage also rises to 11.97% in 2011. This is initiated by the increased of EBIT at 9% to RM1163mil. The report showed that the expenses grew again amounting to RM3332mil. Yet, the favorable revenue that year had helped maintain a high ROCE ratio. As compared to the previous year, the expenses were affected by the 155% sharp rise from other losses, which consisted of interest rate contracts, fuel contracts, and ineffectiveness on cash flow hedges (airasia.com).

Year 2009 – 2010

Referring to Figure 3, the ratio had a drop at 6.05% to 68.33%. The decrease in gearing indicated that the company had taken more borrowings. There was a high long term borrowing whereby it increased from RM7068mil to RM7303mil, while the short term borrowings also increased from RM540mil to RM554mil (airasia.com).

Year 2010 – 2011

The percentage also reduced to 65.85%. The company’s increase in borrowings had again contributed to the low gearing. Even though the long term borrowings had decreased to RM7187mil, it was insignificant as it only decreased by 2%.As for short term borrowings, it had rose at 7% to RM594mil (airasia.com).

Year 2009 – 2010

In that period, the ratio had inclined from 1.30 to 1.56. The increase was resulted from the rise in current assets and drop in current liabilities. At 2009, the current assets were RM2221mil and then rose at 30% to RM2874mil at 2010. The high current assets were due to the large sum of deposits, cash and bank balances that rise to RM1505mil from RM746mil. In contrast, the current liabilities were RM1710mil at 2009 and RM1844mil at 2010 which were lower than the current assets. The main factor for current liabilities was trade and other payables which was RM873mil in 2009 and RM913mil in 2010 (airasia.com).

Year 2010 – 2011

The current ratio showed was ideal as it increased to 1.73. The current assets rose at a percentage of 32% to RM3794mil. In 2011, the deposit, cash and bank balances are also the main contributor for current assets which amounting to RM2105mil. Conversely, the current liabilities were RM2194mil. The trade and other payables was RM1137mil which made up 52% of the current liabilities (airasia.com).

Year 2009 – 2010

Figure 5 showed that the ratio increased from 3.15 to 3.37. The interest cover ratio shows whether the interest expenses are enough to be covered by profits. For year 2009 and 2010, the profit before interest and tax (PBIT) and net payment interest were RM913mil and RM290mil, RM1067mil and RM 317mil respectively (airasia.com). Besides, the high borrowings were the cause of increase in interest expenses. However, there were still enough profits to cover the interest expenses incurred in both years.

Year 2010 – 2011

The ratio continued to rise at 11% to 3.73 from 3.37 previously. As compared to last year, the interest expenses were RM312mil and the PBIT rose to RM1163mil in 2011 (airasia.com). Therefore, the profits were enough to cover the interest expenses although the interest expenses increased from year to year.

Year 2009 – 2010

Based on Figure 6, the ratio increased from 0.32 to 0.35. The reason may be due to the high revenue which also led to the rise in EBIT at that period. Furthermore, another factor that affects the asset turnover ratio is the asset utilisation which is the utilisation of aircrafts. The utilisation of aircrafts a day was recorded as 12 hours in 2009 and rose to 12.2 in 2010 (airasia.com).

Year 2010 – 2011

From 2010 to 2011, the ratio showed 0.03 differences and hiked up to 0.38. It was also affected by the incline in revenue and EBIT. Moreover, the utilisation of aircrafts slightly increased from 12.2 hours per day to 12.3 hours per day (airasia.com). Hence, it can be said that AirAsia has high efficiency rate as their asset turnover ratio was favorable.

Limitations of Ratios

When assessing the performance of a company, the ratio analysis is deemed to be useful. However, it needs to be taken note that it also has various limitations for its use. During the analysis, past data are referred where the company’s future performance cannot be clearly indicated (Gitman & McDaniel, 2009).

Moreover, there may be different views by the company regarding the terms used. The terms used either same or different, may not portray the exact meaning. When computing the ratios, methods used may be different from the other company’s idea. The period of its use also depends on the company (Khan & Jain, 2007).

It is not advisable to get a final result by using a particular ratio for certain purpose. For example, to measure the efficiency rate of a company, it should not base primarily on asset turnover ratio only but should also consider the debtor turnover ratio, creditor turnover ratio and stock turnover period to confirm the efficiency of a company (Khan & Jain, 2007).

Furthermore, ratio analysis only gives the results between two balance sheet dates. The interim period is not shown (Khan & Jain, 2007).

The interest cover ratio was a momentary indication of whether the interest expenses were enough to be covered by profits, because interest expenses do not exist after loan is repaid.

References

Siddiqui, S. A. & Siddiqui, A. S. (2005), Managerial Economics And Financial Analysis, Delhi: New Age International (P) Ltd.

Gitman, L. J. & McDaniel, C. (2009), The Future of Business: The Essentials, Fourth Edition, USA: South-Western Cengage Learning.

Khan, M. Y. & Jain, P. K. (2007), Financial Management: Text, Problems and Cases, Fifth Edition, New Delhi: Tata McGraw-Hill Publishing Company Limited.

AirAsia Berhad (2013), Annual Reports [Online]. AirAsia. Available from: http://www.airasia.com/my/en/about-us/ir-annual-reports.page [3 March 2013].

The Star Online (2009), AirAsia Profit Soars on High Passenger Growth [Online]. The Star Online. Available from: http://biz.thestar.com.my/news/story.asp?file=/2009/5/29/business/4005896&sec=business [5 March 2013].

The Star Online (2009), AirAsia, Named Best Asian Low-Cost Carrier [Online]. The Star Online. Available from: http://biz.thestar.com.my/news/story.asp?file=/2009/10/9/business/4872014&sec=business [6 March 2013].

The Star Online (2009), AirAsia Scraps Admin Fees to Make Tickets Cheaper [Online]. The Star Online. Available from: http://biz.thestar.com.my/news/story.asp?file=/2009/6/24/business/20090624150653&sec=business [6 March 2013].

The Star Online (2011), AirAsia Offers Low Fares for One Million Seats [Online]. The Star Online. Available from: http://thestar.com.my/news/story.asp?file=/2011/2/22/nation/8109409&sec=nation [7 March 2013].