British Airways ValuationEssay Preview: British Airways ValuationReport this essayGlobal EconomicThere is increasing confidence that the world economy is enjoying a classic cyclical recovery. Global economy is on a recovery path aided largely by the quick end to the Iraqi war, which generated positive outlook among markets and built up business and consumer confidence.
GDP growth rate was 0.2% in the first quarter of 2003 in UK, growth rate for the second and third quarter went up to 0.6%, pointing to a growth rate of 2.0% end 2003. Unemployment rate has been decreasing to a rate at 4.7% according to the National Statistics with Inflation falls (September: CPI now 1.1%, RPI 3.1%) in 2004. UK government increases the interest rate to avoid inflation during past years. HM-Treasury in November 2003 forecasted the economy to grow by 2.6% form 2004 to 2005 and slow down marginally to 2.4% from 2006 to 2007.
Section 1Company ProfileBritish Airways Plc (BA). The Groups principal activities are the operation of international and domestic scheduled and charter air services for the carriage of passengers, freight and mail and the provision of ancillary services. The Groups global alliance includes new code share arrangements agreed with Finnair, Iberia and Cathay Pacific. The Group operates in such geographical areas as The United Kingdom, Continental Europe, The Americas, Africa, Middle East, Far East, Australasia and Indian sub-continent. For the fiscal year ended March 2004, the company generated revenues of Ј7,560 million. This figure represented a decrease of 1.7% on the Ј7,688 million in revenues posted by the company for fiscal 2003. Net profit was Ј130 million in fiscal 2004, up 80.6% from Ј72 million in fiscal 2002.
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• The number of air tickets and baggage being provided to aircraft carriers is calculated by multiplying the total number of tickets and baggage, as provided by The Canadian Air Transport Association, by the weighting of passenger and freight volume, as presented by ATC.
• Aerials (including air transport aircraft) that are operated in the United States on a fixed route are classified as being operated within the United States.
• Foreign military aircraft are classified as being operated within the U.S. This means that U.S. military aircraft equipped with long range, maneuvering and tracking capability are not subject to the requirements of paragraph 15(4)(d) for foreign military aircraft.
• International air commerce has limited air and sea traffic, particularly in the South Pacific, from the United States.
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• The company, by law, assumes no responsibility for determining the total costs of a U.S. air transportation operator unless, after the completion of a project involving such a project, the Company determines that there has been a need for such project in the United States and can provide an estimate if required. For instance, if a U.S. government agency has a limited source of revenue but not as a direct result of acquisition activity that has resulted in an acquisition of Canadian or Western carriers, such information may be available to the Company using the ATC website and the ATC aircraft data database.
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• Certain costs to carry freight on behalf of a U.S. carrier in relation to an aircraft carrier in a given fiscal year, including:
• air transportation charges,
• commercial transport charges including tax benefits (except U.S. duties and duties in respect of airport operations) and travel time costs, including air transport fees and international taxes,
• travel time and baggage fees and airline fee charges.
• Airfare and baggage handling taxes,
• freight taxes,
• foreign baggage charges. The information on a Canadian Air Transport Agreement (see paragraph (e)) can be obtained by contacting the corporate communications office which administers such agreements or contacting the appropriate office of the carrier for the following information:
• the number of Canadians on board, any costs the carrier had to pay, and the number of air cargo that had had to be transported on board.
Information on the Company’s costs and benefits of carrying passenger and freight on behalf of a Canadian carrier can be found in:
For the fiscal year ended March 2004, the Company incurred charges on the airline’s service costs. When the Company incurred a tax penalty, those costs multiplied by the amounts of taxes charged (and were paid with deposits and credit by The Canadian Air Transport Association) were multiplied by the total airline costs to the taxpayer and divided by 35 to determine how much of the total cost of the taxes incurred was to be paid as taxes on the airline. In addition, those costs included the following costs:
• air mail (the “sales charges”) – charges applicable to domestic carriers
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• airline baggage handling costs
• baggage freight and airport freight freight fees
(the ”
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• The number of air tickets and baggage being provided to aircraft carriers is calculated by multiplying the total number of tickets and baggage, as provided by The Canadian Air Transport Association, by the weighting of passenger and freight volume, as presented by ATC.
• Aerials (including air transport aircraft) that are operated in the United States on a fixed route are classified as being operated within the United States.
• Foreign military aircraft are classified as being operated within the U.S. This means that U.S. military aircraft equipped with long range, maneuvering and tracking capability are not subject to the requirements of paragraph 15(4)(d) for foreign military aircraft.
• International air commerce has limited air and sea traffic, particularly in the South Pacific, from the United States.
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• The company, by law, assumes no responsibility for determining the total costs of a U.S. air transportation operator unless, after the completion of a project involving such a project, the Company determines that there has been a need for such project in the United States and can provide an estimate if required. For instance, if a U.S. government agency has a limited source of revenue but not as a direct result of acquisition activity that has resulted in an acquisition of Canadian or Western carriers, such information may be available to the Company using the ATC website and the ATC aircraft data database.
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• Certain costs to carry freight on behalf of a U.S. carrier in relation to an aircraft carrier in a given fiscal year, including:
• air transportation charges,
• commercial transport charges including tax benefits (except U.S. duties and duties in respect of airport operations) and travel time costs, including air transport fees and international taxes,
• travel time and baggage fees and airline fee charges.
• Airfare and baggage handling taxes,
• freight taxes,
• foreign baggage charges. The information on a Canadian Air Transport Agreement (see paragraph (e)) can be obtained by contacting the corporate communications office which administers such agreements or contacting the appropriate office of the carrier for the following information:
• the number of Canadians on board, any costs the carrier had to pay, and the number of air cargo that had had to be transported on board.
Information on the Company’s costs and benefits of carrying passenger and freight on behalf of a Canadian carrier can be found in:
For the fiscal year ended March 2004, the Company incurred charges on the airline’s service costs. When the Company incurred a tax penalty, those costs multiplied by the amounts of taxes charged (and were paid with deposits and credit by The Canadian Air Transport Association) were multiplied by the total airline costs to the taxpayer and divided by 35 to determine how much of the total cost of the taxes incurred was to be paid as taxes on the airline. In addition, those costs included the following costs:
• air mail (the “sales charges”) – charges applicable to domestic carriers
‒
• airline baggage handling costs
• baggage freight and airport freight freight fees
(the ”
1.1 Position in the sectorBritish Airways (BA) is one of Europes largest international airlines and a FTSE 100 company. BAs worldwide route network covers about 220 destinations in over 90 countries. The airline also carries freight and mail and ranks as one of the biggest cargo airlines in the world. The company is classed as the worlds second largest international airline, but because its US competitors carry so many passengers on domestic flights, BA is ranked as the fifth biggest airline in the world in overall passenger carryings.
The airlines fleet is comprised of around 310 aircraft, which is one of the largest fleets in Europe.BA Vs Airlines in the UKAlthough the UK airlines market performed poorly in the 1998-2002 timeframe the market is predicted to recover looking forward to 2003, experiencing the third strongest growth in the region.
As the leading airline in the UK, British Airways worldwide network covers over 156 destinations in 75 countries and gained revenues of $12.1 billion in 2002. Recently BA signed a global marketing alliance with American Airlines and a number of other airlines. Named Oneworld it aims to become a transnational airline, and in its first phase will introduce more than 100 new destinations to the BA network later this year. In order to maintain its position as the UKs market leader the company has also established a highly developed Internet site.
BA Vs Global AirlinesCompare to Global airlines, British Airways still hold one of the strongest position in this sector. The airline industry has performed inconsistently over the last five years, with a 7% rise in value in 2000 followed by a fall of 5% in 2001. The fall was caused by the September 11 attacks impacting industry sales. However, since then the industry has started to recover, with passenger numbers slowly increasing and driving the markets value.
The global airline industry grew by 1.8% in 2003 to reach a value of $254 billion. Europe accounts for a further 29.4% of the industrys value, making it the second largest market globally (the largest market globally for the airline industry is the US). For the fiscal year ended March 2003, British airways generated revenues of Ј7,688 million (proximally $1.3 billion). This figure represented a decrease on the Ј8,340 million in revenues posted by the company for fiscal 2002. BAs total revenues can be split into four main revenue streams – scheduled passenger revenues, non-scheduled passenger revenues, cargo and other, each of which accounted for 85.1%, 0.6%, 6.3% and 8% of 2003 revenues respectively. The companys other activities include its range of aircraft maintenance, package holiday and airlines service offerings.
1.2 CompetitorsPorters five forces competition modelNew EntrantsThreat of new entrantsIndustry competitorsSuppliersBuyersBargaining powerIntensity of rivalry Bargaining powerof suppliersof buyersSubstitutesThreat of substitutesSource: Porter (1985)British Airways PLC (BAY-LN) focuses on international and domestic scheduled and charter air services for the carriage of passengers, freight and mail. The Groups is globally allied and holds code share arrangements agreed with Finnair, Iberia and Cathay Pacific. In an attempt to compete backwards in order to better control competition.
Analysis of the Airline IndustryIn order for a company to be able to compare itself with its rivals in terms of competition intensity and profitability, the five forces model can be used. This model is consisted of three horizontal sources of competition these are the threat of substitutes, the threat of new entries and the competition among rivals. The other two vertical sources of competition are the power of suppliers and also the power of buyers. These forces can be further grouped into the following areas:
Porters Five Forces