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Aarti J answered on May 20 2021
Financial Analysis – Air Canada
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Financial Analysis – Air Canada
Introduction
Air Canada is Canada’s largest airlines and is also one of the largest passenger airlines of the world which covers more than 180 destinations across the globe. The company on an average have more than 1570 daily scheduled flights which covers 64 destinations in Canada, 55 destinations in US and 87 destination in the Europe, Africa, Middle east, Australia, Asia and other countries. The subsidiary companies also operates in also cost carriers segments and also provides services to the customers in the lower density markets as well as higher density market. It also provides cargo services.
Industry Analysis
The airline industry in Canada is highly dominated by two major airlines which includes Air Canada and Canadian airlines, the other airlines offers limited services. There are different characteristics of the Canadian airline industry, the first aspect is that the demand of the air travel in Canada is highly seasonal and the activity of the company is highly defined by the season and the industry is highly characterized by the high overhead and capital costs, so even small increase or decrease in the traffic affects the profits and the losses of the company.
Looking at the industry and the overall competition, Air Canada has a strong opportunity in the freight sector. The value of the global air freight sector declined in 2013 and 2016, with increases in 2014 and 2015 and forecasts for the upcoming years suggest moderate growth. According to MarketLine, the global air freight sector generated total revenues of $101.3 billion in 2016, representing a compound annual growth rate (CAGR) of 0.7% between 2012 and 2016. In comparison, the Asia-Pacific sector grew at a CAGR of 0.9% and the US sector declined at a CARC of 3.5% respectively, over the same period, to reach respective values of $43.8 billion and $13.2 billion in 2016. Furthermore, the performance of the sector is forecast to accelerate, with an anticipated CAGR of 3.2% for the five-year period 2016–21, which is expected to drive the sector to a value of $118.1 billion by the end of 2021.
Analysis:
For the analysis the financials, we would be considering the financials of Air Canada, Air France, Alaska Airlines and China southern. In the year 2018, Air Canada’s revenue passenger miles increased by 7.2% and the operating revenues of the company increased by 426 million. In the year 2018, the company witnessed losses and reported the loss of 231 million, so overall there was a decrease of 239 million net income in the year 2018.
Profitability ratios:
Profitability ratios helps in analysing how profitable the companies are, how much the company is earning and the return company gives to its shareholders.
Return on Operating income
2018
2017
2016
2015
2014
Air Canada
11.63
15.74
18.83
28.71
23.66
Air France
-4.36
9.42
7.11
5.02
-1.51
Alaska Airlines
10.59
20.68
29.92
43.07
33
Looking at the competitors and performance of the companies, we can see that Air Canada is able to perform better than other companies. Air Canada recorded the net operating margin of 11.63% in 2018 while in 2017 the net operating margin was 15.74%, overall the profitability of Air Canada has decreased over the period of time. Some of the major reasons for the decline in the profitability of the companies is because of the high fuel costs and operating expenses as well as increasing competition. Looking at the other companies, we can say that Air Canada’s performance is much better than other companies.
Return on Assets
2018
2017
2016
2015
2014
Air Canada
0.91
12.42
6.19
2.55
0.99
Air France
-1.16
3.41
0.51
-0.81
-6.91
Alaska Airlines
4.04
9.99
9.84
13.34
10.07
Looking at the return on assets, we can see that Alaska Airlines has best return on assets as compared to other companies because of low assets that are held by the company.
The reason for low profitability by the company is majorly because airlines is one of the biggest capital intensive industry and high tax rates and operating expenses incurred by the companies operating in this industry. Overall, Air Canada has remained profitable considering the operating income. With the high tax rates and other finance costs, Air Canada has incurred heavy losses in the year 2018.
Liquidity ratios (short term solvency):
Liquidity ratios are the ratios which helps in telling how effectively, the company is able to meet up its short term obligations.
Current ratio
2018
2017
2016
2015
2014
Air Canada
1.24
1.05
0.98
1.08
0.98
Air France
0.82
0.75
0.63
0.61
0.73
Alaska Airlines
0.61
0.79
0.81
0.92
1.05
As we see the short term solvency of the companies we can see that the companies usually has low short term obligations. The current ratio of Air Canada has seen some growth in the year 2018 and 2017 because of increase in current assets and slight decrease in current liabilities. Considering other competitors, it can be seen that Air Canada has better ability to pay off its short term solvency and debts.
Long term debt: (Long term solvency)
When looking at the financials and the long term solvency of the company, it can be seen that Air Canada has been one of the best companies in terms of performance considering from profitability or meeting up short term or long term solvency.
Debt to equity
2018
2017
2016
2015
2014
Air Canada
1.65
1.81
5.43
491.85
0
Air France
2.48
6.59
40.36
4.5
4.86
Alaska Airlines
0.56
0.69
1.01
0.28
0.38
Air Canada reported adjusted net debt of $5,858 million at December 31, 2018 versus adjusted net debt of $6,116 million at December 31, 2017, a decrease of $258 million. In the year 2018, there has been an increase in the long term debt and finance lease.
Asset management
Asset management assets helps in analysing how effectively the company is evaluating its assets. Looking at the ratios we can see that the companies report low asset turnover ratios which states that the company is not able to utilise its assets very effectively to...