Financial Analysis of Pakistan International Airlines Essays

Financial Analysis of Pakistan International Airlines Essays Financial Analysis of Pakistan International Airlines Essay Financial Analysis of Pakistan International Airlines Essay Submitted by Chemical Engineer Adnan Khalid Submitted to : Dr rashid Ahmed Institute Of Business and Management, UET, Lahore. PAKISTAN INTERNATION AIRLINES Back ground and History Airline Industry General Environmental Analysis The airline industry is very stable and unlikely to change in the near future. There are many reasons for this. Air travel continues to grow and will continue in this fashion as long as the economy stays in an upward trend. US domestic air traffic grew 2. 3% in 1999 and 3. 5% in the first six months of 2000 according to Air Transportation Association. The percentage of flyers has increased an average of 2% each year and the percentage of people who have ever flown before increased from 73% in 1993 to 81% in 1997. (Airport Transport Association, Internet). The top three reasons that people fly are business trips (47%), visiting relatives (38%) and going on vacation (13%). Most airline revenues are gained from the fares they charge these passengers, but they also earn ancillary revenues from transporting mail, shipping freight, selling in-flight services and from serving alcoholic beverages (Airport Transportation Association, Internet). The primary target market of airline passengers today is the business traveler because business trips account for the majority (47%) of airline flights. Airline industry has been subject of intense price competition since it was deregulated, and the result has been a number of new carriers which specialize in regional service and no-frills operations. These carriers typically purchase older aircraft and often operate outside the industry-wide computerized reservations system. In exchange for these inconveniences, passengers receive low fares relative to the industry as a whole. This research examines two low fare air carriers, ValuJet and Southwest Airlines. By investigating these air carriers, we can better understand the economic impacts of price versus service in the airline industry as a whole, as well as, the impacts on passenger and investor confidence. Until 1978, air transport rates were approved by the government, which meant that price was not a primary competitive factor. Instead, airlines would compete on service and image. : The airline industry was dominated by giants (American, United, and TWA) which offered nationwide and some international service, and by regional carriers, such as Southwest, which offered short trips between airports not served by the nationals. 1 MARKET INFORMAITON DIRECTORS REPORT TO THE SHAREHOLDERS The Directors are pleased to report that the airline has earned a pre-tax profit of Rs. 1. 5 billion in the first quarter of 2003 as against a profit of 1. 1 billion in the first quarter of 2002. Total revenue for the quarter amount 13. 05 billion as against Rs. 197 billion in the corresponding quarter showing an over all increase of 9% over the same period last year. Expenses for the current quarter amounting to Rs. 11. 07 billion indicate an increase of 8% over Rs. 10. 2 billion expenditure last year. This is mainly due to increase in fuel prices in the international markets and an ad hoc provision for increase in employees salaries and allowances. Issue of Term Finance Certificates (TFCs) As reported in the Annual Report 2004 the airline launched Term Finance Certificates (TFCs) for Rs. 15. 14 billion in February 2004. The issue was the largest in the history of Pakistan financial market. Despite the size, the issue was over subscribed up to the extent of 40% showing confidence in the policies followed by the airline Management. The airline has utilized the money wised through TFCs to pay off bridge financing of Rs. 7. 73 billion borrowed earlier. The airline has also liquidated its liabilities towards employees fund over due creditors amounting to Rs. 4. 27 billion Market Development In the first quarter the airline has increased passenger capacity by 10% over same period last year. In the international markets passenger capacity has been increased by 6% and domestic markets by 8%. Capacity for Hajjis for Hajj 2003. This year airline was successful in operating Hajj flights for 108,000 Hajjis as compared to 91,000 in 2002. The airline achieved passenger growth of 7% in the first quarter of 2003 over the same period last year. Increase in the international as well domestic markets excluding Hajj was up to the extent of 4%. The airline has also been able to float excess cargo capacity and increase its utilization. Cargo capacity was increased by 9 % whereas its utilization was 23% over last year the same quarter. PIAS SUBSIDIARIES + ASSOCIATED COMPANIES PIAS SUBSIDIARIES 1. 2. 3. 4. 5. 6. PIA Holdings (Pvt. ) Limited Duty Free Shops Limited International Advertising (Pvt. ) Limited Skyrooms (Pvt ) Limited Airport Hotel, Karachi Airport PIA Shaver Poultry Breeding Farms (Pvt) Limited Midway House (Pvt. ) Limited Hotel Midway House, Karachi Airport ASSOCIATED COMPAN IES (Overseas) 1. 2. 3. 4. PIA Investments Limited Minhal incorporated Pakistan Pakistan Services Limited Pakistan Tourism Development Corporation Limited. 3 PIA Domestic Route Map 4 WEIGHTED AVERAGE COST OF CAPITAL Capital Assets Pricing Model CAPM is a model based on proposition that my stocks required rate of return is equal to the risk free rate of return plus a risk premium, where risk reflects diversification. Portfolio Returns: The expected return on a portfolio k^p is simply the weighted average of the expected returns on the individual stocks in the portfolio, with the weights being the fraction of the total portfolio invested in each stock K^p = W1K^1 + W2K^2 + W3K^3 + - + WnK^n The portfolio return of Askari Bank is as follows K^p = 0. 16(88. 67%)+ 0. 16(1. 4%)+ 0. 16(7. 2%) + 0. 16(2. 716%) = 15. 9 % 5 Correlation Co-efficient (r): A measure of the degree of relationship between the two variables The stock will be perfectly negative correlated when one stock move up and other stock or security move down, move in the opposite direction R = -1. 0 Perfectly positively correlated stocks would move up and down altogether R = +1. 0 Cost of Debt Financing Debt financing is when a creditor decides to loan funds in exchange for reimbursement in the future with accumulated interest. Debt financing is generally considered smart because debtors to not surrender any ownership interests in their business. Debt financing comes in two forms, secured and unsecured A secured loan is an agreement to pay the debt back at a later date. If the debtor ever defaults on the loan agreement, then the creditor can recover their money by confiscating the property or asset used to secure the debt. An unsecured loan is also a promise to payoff a debt. An unsecured loan differs from a secured loan because u don’t have to grant the creditor interest in any specific property to support the promise. In case if bankruptcy, the unsecured creditor is frequently the last to be paid if the borrower runs into difficulties. 6 Cost of Debt financing In Pakistan Outside Pakistan 006 15,532,870 370,185 15,903,055 2005 11,038,399 422,535 11,460,934 Particulars of borrowing from financial institutions In local currency In foreign currency 15,532,870 370,185 15,903,055 11,038,399 422,535 11,460,934 Details of bowering from Financial Institutions In Pakistan local currency Secured Borrowing from State bank of Pakistan under export refinance scheme Unsecured Call borro wings 90,000 15,532,870 220,000 11,038,399 7,328,515 8,114,325 3,392,329 7,426,070 Outside Pakistan – foreign currency Overdrawn accounts unsecured 370,185 15,903,055 422,535 11, 460, 93 7 Cost of Equity Financing Equity financing employee’s stock ownership plans. The company issues stocks to get the money. In return the company gives dividends and interest to them. Authorized Capital 150,000,000 ordinary shares of Rs. 10 each 2006 1,500,000 2005 1,500,000 Issued, subscribed paid up 67,500,000 ordinary shares of Rs. 10 each issued for cash 675,000 675,000 46,667,943 ordinary shares of Rs. 10 each issued as fully paid Bonus shares 466,680 1,141,680 412,314 1,087,314 GROWTH ANALYSIS OF PIA 8 TOTAL ASSETS Rupees in million 90,000 80,000 70,000 60,000 50,980 50,000 40,000 30,000 20,000 10,000 0 70,313 5,387 Assets 2004 2005 2006 Total assets of PIA in 2004 were 50,980 million which increased to 70,313 million in 2005 which further increased to 85,387 million in 2006. The growth rate was about 38% in 2004and was about 21. 44% in 2006. TOTAL LIABILITIES 9 Rupees in millions 90,000 80,340 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 48,402 66,140 Liabiliies 2004 2005 2006 Liabili ties in 2004 were 48,402 which increased to 66,140 in year 2005and they further increased to 80,340 in year 2006. The growth rate in 2005 was 36. 65% and in 2006 it was about 21. 50 %. Although there is increase in liabilities in these three years but the growth rate reveals that as compared to 2005 the percentage increase is quite low in 2006. SHAREHOLDERS’ EQUITY Rupees in million 10 1,160 1,142 1,140 1,120 1,100 1,080 1,060 1,040 1,020 1,000 980 1,036 1,087 Equity 2004 2005 2006 Shareholders’ equity in 2004 was 1,036 and there was a slight increase in 2005 up to 1,087. The equity increased to 1,142 in 2006. The growth rate shows 4. 92% increase in 2005 and about 5. 06% increase in 2006. The percentage increase in 2005 is more than the percentage increase in 2004. NET INCOME 11 Rupees in Million 1200 1000 800 600 400 200 0 2004 2005 551 687 1,103 Net income 2006 Net income means the income or the profit available to shareholders after taxation. Net profit in 2004 was 551 which increased to 24. 68% i. e. to 687 in 2005 and 60. 55% i. e. 1,103 in 2006. OPERATING INCOME 12 Rupees in million 2,000 1,500 1,244 1,000 500 0 2004 2005 1,008 1,902 Operating income 2006 Operating in come means earnings before interest and taxation (EBIT). EBIT in 2004 was about 1,008, in 2005 it was about 1,244 and in 2006 it was about 1,902. Growth analysis reveals 23. 1% increase in earnings in 200 and 52. 89% in 2006. 13 EARNINGS PER SHARE Figures in Rupee 10 9 8 7 6 5 4 3 2 1 0 9. 66 6. 32 5. 3 Earnings per share 2004 2005 2006 EPS= NP / Numbers of equity share Earnings per share (EPS) in 2004 were 5. 3 which increased by 19. 24% in 2005 and 52. 85 % in 2006, which is due to 60. 55 % boost in the net profit in year 2006. 14 TAXATION Rupees in Million 800 700 600 500 400 300 200 100 0 2004 2005 458 557 799 Taxation 2006 Taxation in 2004was 7, 99 which is 43. 45 % more than 2005. And taxation in 2005 was 557 which was 21. 62 % more than 2006. The increased rate of axation is due to increase in net profit. 15 RATIOS OF PIA Liquidity ratio CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES = 4. 48 TIMES = 4. 18 TIMES 2004 2005 This ratio shows that the current ratio of PIA decline and the difference of 0. 3 comes up . DEBT MANAGEMENT RATIOS DEBT RATIO = TOTAL DEBT TOTAL ASSETS 2004 2005 = 17. 8 % = 20% The debt includes both current liabilities and long term debt . This debt ratio shows that PIA has taken more loans as compared to previous year. TIMES INTEREST EARNED (TIE) RATIO = EBIT INTEREST CHARGES 16 2004 2005 = 1. 36 times = 2. 98 times The TIE ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest costs. PROFITABILITY RATIO Profitability is the net result of a number of policies and decisions . The profitability ratios show the combined effects of liquidity, assets management and debt management on operating results. BASIC EARNING POWER (BEP) = EBIT TOTAL ASSETS 2005 2006 =2. 1 % = 2. 79 % This ratio shows the raw earning power of the firm’s assets before the influence of taxes and leverage and it is useful for comparing AIRLINE with different tax situations and different degrees of financial leverage. There is increase in earning power ratio because in 2005 it was 2. 1 percent which in 2006 increased to 2. 79 percent. RETURN ON TOTAL ASSETS = NET INCOME TOTAL ASSETS 17 2005 2006 = 1. 1% = 1. 4 % RETURN ON COMMON EQUITY = NET INCOME COMMON EQUITY 2005 2006 = 20. 3 % = 23. 9 % The return on the total assets and common equity has increased . MARKET VALUE RATIOS PRICE / EARNING (P/E) RATIO = PRICE PER SHARE EARNINGS PER SHARE 2005 2006 = 4. 46 TIMES = 5. 33 TIMES 18 RATIOS OF PIA Liquidity ratio CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES = 2971418 1171755 = 2. 53 TIMES . AEROASIA current ratio is below average . Its liquidity position is relatively weak . DEBT MANAGEMENT RATIOS DEBT RATIO=TOTAL DEBT TOTAL ASSETS = 13589590 67328388 = 20. 1 % TIMES INTEREST EARNED (TIE) RATIO= EBIT INTEREST CHARGES =10 TIMES. The AEROASIA is covering its interest charges by a high margin of safety. 19 PROFITABILITY RATIOS BASIC EARNING POWER (BEP)= EBIT TOTAL ASSETS = 153588 2608454 = 5. 8% RETURN ON TOTAL ASSETS = NET INCOME TOTAL ASSETS = 669447 67328 = 9. 9 % The AEROASIA return on total assets is perfect. RETURN ON COMMON EQUITY = NET INCOME COMMON EQUITY = 669447 4125711 = 16. 2 % 20 MARKET VALUE RATIOS PRICE / EARNING (P/E) RATIO= PRICE PER SHARE = 10 EARNINGS PER SHARE 2. 63 = 3. 8 TIMES. CORPORATE ACHIEVEMENTS FOR ACBL Winning isnt everything, its the only thing. Amidst tough competition, our efforts to go an extra mile in providing superior services to our customers have been acknowledged at the national as well as international levels. These acknowledgements serve as a great source of encouragement and appreciation at one hand and inspire us to perform even better, on the other. PIA has been honored with the THE BEST AIRLINE 21 Common size balance sheet For the years Ended December31,2005and2006. DESCRIPTIONS 2005 % Assets: Cash and balances with treasury banks Balances with other banks Lendings to financial institutions Investments Advances Other Assets Operating fixed Assets Defferred tax assets Liabilities: Bills payables Borrowings from financial institutions Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to lease Other liabilities Deferred tax liabilities Net Assets Represented by: Share capital Reserves Unappropriated profit Surplus on revaluation of assets- net of tax Note: Percentages are calculated by taking group total as base . . 82% 3. 10 6. 75 25. 80 52. 44 1. 67 2. 31 1. 21 19. 75 76. 74 0. 040 1. 190 1. 007 2006 % 7. 59% 1. 85 4. 85 38. 02 42. 7 2. 58 2. 36 0. 91 17. 32 78. 21 0. 0024 1. 493 1. 96 22. 62 54. 67 22. 65 26. 05 46. 47 27. 40 22 Common size profit and loss account For the years Ended December31, 2005and2006 DERIPTIONS 2005 % Mark up/ return/ interest earned 170. 76% Mark up/ return/ interest expense 57. 8 Net mar k up/ interest income 112. 53 Provisions against non performing loans and 12. advances Provisions for diminution in the value of investments 100 Bad debts written off directly Net mark up / interest income after provisions 21. 95 Non mark up /interest income: 1. 57 Fee, commission and brokerage income 4. 72 Dividend income 11. 67 Income from dealing in foreign currencies 39. 97 Other income Total non markup/interest income 60. 20 Non mark up/ interest expense: Administrative expenses 0. 051 Other provisions/ written offs 60. 25 Other charges Total non mark up/ interest expenses 36. 2 Profit before taxation: Taxation – current (3. 16) prior year`s deferred Profit after taxation: 46. 23 Unappropriated profit b/f Profit available for appropriation Appropriation: 9. 24 Transfer to: 9. 57 Statutory reserves 4. 70 Proposed cash dividends (Rs 2 per share) 22. 63 Capital reserves(reserves for bonus shares issuance) Revenue reserves Note: Earnings per share has increased by 62% as compared with previous year. And percentages are calculated by taking net mark up/ interest income as 2006 % 325. 5% 202. 6 123. 53 23. 5 0. 002610 100 27. 97 1. 80 12. 20 14. 77 56. 75 73. 15 0. 143 73. 25 29. 50 8. 060 46. 009 9. 21 14. 50 3. 23 19. 05 23 Conclusion Although there is a NOW A LOT OF COMPETITION IN AIRLINES BUT EVEN THAN IN PAKISATN PIA IS LEADING AIRLINE It is successfully achieving its targets and that is the main reason that this airline is growing day by day and doing a profitable business. They should provide good services to their costumers. Better food Re commendations 24