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operation.
Introduction
The purpose of this paper is to examine the financial health of the two dominant airlines in
Malaysia; MAS and Air Asia.
All figures presented in this paper are in Malaysia Ringgit dollars. As of September 12, 2001,
1USD=RM3.16.
This paper is outlined as follows:
First, a brief discussion of the history of commercial aviation in Malaysia
Second, a presentation of the financial ratios comparing MAS and Air Asia
Third, a discussion and comments of the financial ratios for MAS and Air Asia
Strengths and weakness of Air Asia
2 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
3 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
Financial Performance
The airline business is very typical in the term of investing capital. It has been used heavy
capital over the past century and people still invest the money on this extraordinary business.
The accounting review of AirAsia is going to be conducted based on its financial statement
for the year 2009 and 2010.
2010
2009
1,476
718
777
872
18
21
Prepaid expenses
326
251
277
359
2,874
2,221
9,318
7,942
8.74
8.74
ASSETS
Cash And Short Term Investments
Total Recivables, Net
Total Inventory
Goodwill, net
4 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
2010
2009
--
--
153
27
142
449
26
13,240
11,398
Accounts payable
100
94
Accrued expenses
376
376
48
554
492
814
699
1,844
1,710
7,303
7,068
Total debt
7,857
7,608
--
--
Minority interest
--
--
453
9,599
8,777
277
276
1,222
1,206
2,142
1,138
--
--
--
--
0.49
0.59
3,641
2,621
13,240
11,398
2,773
2,758
--
--
Intangibles, net
LIABILITIES
SHAREHOLDERS EQUITY
Common stock
5 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
INCOME STATEMENT
Fiscal Year Ending Dec 31 2010
2010
2009
3,948
3,133
2,113
1,752
70
54
Depreciation/amortization
520
448
Unusual expense(income)
5.69
(30)
99
71
2,881
2,220
Operating income
1,067
913
--
--
1,099
622
37
116
1,061
506
--
--
1,061
506
--
--
Net income
1,061
506
1,061
506
1,061
506
2,762
2,456
0.38
0.21
0.38
0.21
2,770
2,456
0.38
0.21
0.38
0.21
0.03
77
--
--
382
371
OPERATING EXPENSES
Cost of revenue total
Selling, general and admin. expenses, total
Other, net
Dilution adjustment
Diluted weighted average shares
SUPPLEMENTAL INCOME
6 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
2010
2009
Depreciation, supplemental
520
448
5.69
(30)
1,105
592
0.19
(5.65)
38
110
1,067
482
1,067
482
0.39
0.20
0.39
0.20
NORMALIZED INCOME
Normalized income before taxes
Effect of special items on income taxes
Income tax excluding impact of special items
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical
values taken from an enterprise's financial statements. Often used in accounting, there are
many standard ratios used to try to evaluate the overall financial condition of a corporation or
other organization. Financial ratios may be used by managers within a firm, by current and
potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use
financial ratios to compare the strengths and weaknesses in various companies. [1] If shares in
a company are traded in a financial market, the market price of the shares is used in certain
financial ratios.
Formula:
7 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
Components:
2874
1.58
1844
2221
CurrentRat io2009
1.3
1710
CurrentRat io 2010
As of December 31, 2010, with amounts expressed in millions, Air Asia Berhad current assets
amounted to RM2,874 million (balance sheet), which is the numerator; while current
liabilities amounted to RM1,844 million(balance sheet), which is the denominator. By
dividing, the equation gives us a current ratio of 1.58.
Commentary:
Generally, current ratios greater than one indicate a measure of liquidity; this indicates that
the company has enough short-term assets (defined as cash, short term investments, accounts
receivable, prepaid expenses, and inventory) to meet its short-term financial obligations. In
the case of airlines, short-term obligations (liabilities) include bank debt, accounts payable,
advanced ticket sales, non-refundable passenger credits, and the current portion of long-term
debt or leases. In theory, the higher the current ratio, the better.
In the case of Air Asia, the current ratio increased in 2010 to 1.58 from 1.3 in 1009. These
ratios are lower than average current ratio for industry which is 1.12. Air Asia looks like an
easy winner in a liquidity contest. It has an ample margin of current assets over current
liabilities, a seemingly good current ratio.
QuickRatio
CurrentAss et inventories
CurrentLia bilities
Components:
QuickRatio 2010
2874 18
1.55
1844
8 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
QuickRatio 2009
2221 21
1.29
1710
As of December 31, 2010, with amounts expressed in millions, Air Asia quick assets
amounted to RM2,856 million (balance sheet); while current liabilities amounted to RM1844
million (balance sheet).By dividing, the equation gives us a quick ratio of 1.55.
Commentary:
As previously mentioned, the quick ratio is a more conservative measure of liquidity than the
current ratio as it removes inventory from the current assets used in the ratio's formula. By
excluding inventory, the quick ratio focuses on the more-liquid assets of a company.
The basics and use of this ratio are similar to the current ratio in that it gives users an idea of
the ability of a company to meet its short-term liabilities with its short-term assets. Another
beneficial use is to compare the quick ratio with the current ratio. If the current ratio is
significantly higher, it is a clear indication that the company's current assets are dependent on
inventory.
Acid test ratio for the year of 2010 is better than year 2009. The industry average of 1.04 is
lower than Air Asia Ratio, which indicates that Air Asia may not have trouble meeting short
term needs.
Average collection period ratio
The average collection period is the number of days, on average, that it takes a company to
collection its credit accounts or its accounts receivables. In other words, the average
collection period of accounts receivable is the average number of days required to
convert receivables into cash.
Formula:
AverageCol lectionPeriod
Account Re veivable
DailyCredi tSale
Components:
777
365 72days
3948
872
365 101.6days
3133
Commentary:
The Air Asia average collection period 2010 is more efficient than 2009, but both are is still
under 45 days debt.
9 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
OIROI
OperatingIncome
TotalAsset s
Components:
OIROI 2010
OIROI 2009
1067
8.1%
13240
913
8.01%
11398
Commentary:
After finding OIROI of a firm, this ratio is compared with the operating return on investment
of the peer group. If this ratio is higher than that of the peer group, it means that management
is generating significantly more income on $1 of assets than similar firms.
The Industry average is 3.25. OIROI Air Asia shows that in 2010 and 2009 for RM1 total
asset invested the operating income 8 , which above industry average.
Operating Profit Margin
Operating income, or operating profit as it is sometimes called, is the total pre-tax profit a
business generated from its operations. It is what is available to the owners before a few other
items need to be paid such as preferred stock dividends and income taxes.
Formula:
OperatingIncome
Sales
Components:
1067
27%
3948
10 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
913
29%
3113
Commentary:
Operating Profit Margin of Air Asia for the year of 2010 is lower than 2009. It shows that in
2010 every RM1 sales Air Asia operating income is 27 while in 2009 Air Asia is 29.
Sales
TotalAsset s
TotalAsset Turnover
Components:
3948
0.3times
13240
3133
0.27times
11398
Commentary:
The industry average is 0.66. For Air Asia, this figure is 0.3 in both 1999 and 2000, This
indicates that Air Asia needs to figure out how to squeeze more sales ringgits out of its assets.
With Total Asset of RM13,240 million in 2010, Air Asia has can only generate sales of 0.3
times worth of the asset .
Account receivable Turnover
Accounts receivable turnover ratio is a measure of the liquidity of a company's account
receivable asset. Typically, the higher the turnover is, the more favorable it is. An interesting
counter argument to the preceding statement is that a too high an account receivable turnover
ratio may point to an overly restrictive credit policy and that good sales may be lost
impacting the overall health and organic growth of the company.
Formula:
Account Re ceivableTurnover
Components:
CreditSale s
Account Re ceivable
11 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
3948
5.08times
777
3133
3.6times
872
Commentary:
The industry average is 12.96. Air Asia Account Receivable in 2010 is more efficient than
2009, but both are is still under 45 days debt collection.
Inventory turnover
In accounting, the Inventory turnover is a measure of the number of times inventory is sold or
used in a time period such as a year. The equation for inventory turnover equals the cost of
goods sold divided by the average inventory. Inventory turnover is also known as inventory
turns, stock turn, stock turns, turns, and stock turnover.
Formula:
InventoryTurnOver
CostofGoodsSold
Inventory
Components:
2113
117 times
18
1752
InventoryTurnOver 2009
83times
21
InventoryTurnOver 2010
Commentary:
The industry average is 48.25. Air Asia Inventory Turnover for the year of 2010 is very much
efficient compared to the year of 2009 which is managed the Inventory Turnover for 83 times
only.
Fixed Asset Turnover
This ratio is a rough measure of the productivity of a company's fixed assets (property, plant
and equipment or PP&E) with respect to generating sales. For most companies, their
investment in fixed assets represents the single largest component of their total assets. This
annual turnover ratio is designed to reflect a company's efficiency in managing these
significant assets. Simply put, the higher the yearly turnover rate, the better.
Formula:
FixedAssetTurnover
Components:
Sales
FixedAsset
12 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
3948
0.38times
10366
3133
FixedAssetTurnover 2009
0.34times
9117
FixedAssetTurnover 2010
Commentary:
Fixed Asset Turnover for Air Asia for the year 2010 is a bit higher compared to 2009.
DebtRatio
Components:
9599
72.7%
13204
8777
DebtRatio 2009
77%
11398
DebtRatio2010
Commentary:
Air Asia Debt Ratio is very high for the both year . On the other hand, the airline industry,
and air travel in particular, is not a very stable industry. Specifically, travel, both from
business and leisure passengers, is one of the first items to decline in times of economic
contraction. Therefore, the ratios for other airline are certainly more risky than Air Asia.
Times Interest Earned Ratio
The times interest earned ratio is an Indicator of a companys ability to meet the interest
payments on its debt. The times interest earned calculation is a corporations income before
interest and income tax expense, divided by interest expense.
The higher the times interest earned ratio, the more likely it is that the corporation will be
able to meet its interest payments.
Formula:
TimesInter estEarnedRatio
OperatingIncome
InterestExpense
13 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
Components:
1067
2.79times
382
913
2.39times
382
Commentary:
Air Asia Times Interest Earned Ratio is quite high. This is the evidence that this Group uses
less debt financing, especially in the year of 2010.
Formula:
Components:
ROE 2010
1061
29%
3641
ROE 2009
506
19%
2621
Commentary:
14 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
As of December 31, 2010, with amounts expressed in millions, Air Asia had net income of
rm1,061 million (income statement), and average shareholders' equity of $3,641 million
(balance sheet). By dividing, the equation gives us an ROE of 29% for FY 2010.
This means that for RM1 of equity invested in the company, 29 cents was returned in 2010
alone.
Return on equity, for most companies, certainly should be in the double digits, and value
investors often look for 15 percent or higher. A return of more than 20 percent is considered
excellent.
References
Internet Sources/Website
http://www.investopedia.com/features/industryhandbook/airline.asp#ixzz1a3lXbYIX
http://www.centreforaviation.com/analysis/airasias-unique-franchise-of-jvs-drive-profits-andhttp://beginnersinvest.about.com/od/incomestatementanalysis/a/operating-incomehttp://www.infinancials.com/Eurofin/control/company?view=snapshot&type=0&company
15 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.
http://essaysforstudent.com/Business/Porter-five-forces-AirAsia/83826.html
http://www.oppapers.com/essays/The-Air-Asia-Establishment/191387
http://www.reuters.com/finance/stocks/companyProfile?symbol=AIRA.KL
http://investing.businessweek.com/research/stocks/financials/financials.asp?
ticker=AIRA:MK
http://www.investopedia.com/university/ratios/#axzz1Z8pXpb7q
http://www.airasia.com/my/en/corporate/corporateprofile.page?
http://www.ecomaxmc.com/blog/?p=12
http://en.wikipedia.org/wiki/Air_Asia
http://www.airbus.com/newsevents/news-events-single/detail/airasia-orders-200-a320neo
http://www.zacks.com/stock/news/46361/Airline+Industry+Outlook+-+Jan.+2011
http://www.icmr.icfai.org/casestudies/catalogue/business strategy / airasia.html
http://en.wikipedia.org/wiki/Financial_ratio
http://bizfinance.about.com/od/financialratios/f/Avg_Collection_Period.htm
http://www.answers.com/topic/leverage-finance#ixzz1aSGlc1mN
http://blog.accountingcoach.com/times-interest-earned/
http://www.marketdiary.asia/2011/07/air-asia-airamk-taken-off-but-still.html
http://bataviase.co.id/node/237257
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1. Francis, G., Humphreys, I. and Ison, S. (2003) "Airports' perspectives on the
growth of low-cost airlines and the remodeling of airport-airline relationship".
Tourism Management.
2. Kho, C., S. H. Aruan, et al. (2005). AirAsia- Strategic IT Initiative. Faculty of
Economics and Commerce University of Melbourne: 3.
3. Porter, M.E. (1985). Competitive Strategy: Creating and Sustaining Superior
Performance. New York: The Free Press.
4. Johnston, H. (1996), Partnership Up in the Air, Asian Business, August, p.53
5. Phillip Kotler and Gary Armstrong, Principles of Marketing, 9th ed. (Upper Saddle
River, NJ:
Prentice Hall, 2001), p.245
6. Mok Kim Man, Jainurin Bin Justine, International Business & Economics Research
Journal December 2005 Universiti Malaysia - Sabah, Malaysia
7. Tengku Akbar Tengku Abdullah, Competition in the airline industry:
The case of price war between Malaysia Airlines and AirAsia. Central
Asia Business Journal, 3, November 2010.
8. Foundations of Airline Finance: Methodology and Practice By Bijan Vasigh, Ken
Fleming, Liam Mackay