DETECTING HIDDEN FINANCIAL POSITION OF AIRLINES COMPANIESTHE CASE OF BRITISH AIRWAYS

04/09/2023

2BA Motivations?

Detecting hidden financial position of airlines companies - The case of British Airways

Why would they do it?

Two different reasons.

04/09/2023

3BA Financial Statements

Detecting hidden financial position of airlines companies - The case of British Airways

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

4BA Financial Statements II

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

5BA Financial Statements III

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

6BA Financial Statements IV

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

7Operation vs. Finance Lease

Operating lease commitments are valued £635 million, which is relatively low (27.4%) compared to the £2,315 million of capitalized finance lease obligations and hire purchase arrangements.

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

8Lease Cash Payments

Future cash flows of lease cash payments will be used to find present value that will be capitalized

in £ million

Year Cash Flow Year Obligations2010 67.00£

2011 67.00£ 2011 261.00£

2012 65.25£ 2012 195.75£

2013 65.25£ 2013 130.50£

2014 65.25£ 2014 65.25£

2015 65.25£ 2015 297.00£

2016 59.40£ 2016 237.60£

2017 59.40£ 2017 178.20£

2018 59.40£ 2018 118.80£

2019 59.40£ 2019 59.40£

2020 59.40£ 2020 -£ Table 1. Source: Authors

Lease Cash Payments

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

9Interest Rate

To determine which the interest rate to discount the lease outflows we used the weighted average interest rate associated with BA global debt.

nominal rates

Rates Weight Final result

8.75% 19.75%

2.02% 13.61%

1.43% 3.90%

4.75% 12.74%

0.88% 33.04%

2.89% 4.78%

4.63% 12.18% 3.66%

Table 2. Source: Authors

Debt Interest Rates

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

10PV of Lease Obligations

in £ million

Measure Value

Leased assets 518.13£

Accumulated depreciation (217.41) £

Net assets 300.72£ Table 3. Source: Authors

Leased Assets

We assume a life of 22 years for the aircraft as it is stated in Note13c of the British Airways 2011 Annual Report:

NPV of Cash Flows related to operational leases: £518.13 millionAverage Life of Aircrafts: 9.23 yearsDepreciation: £23.55 million

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

11Depreciation Expense

in £ million

Measure Value

Depreciation 23.55£

Average Life of Aircrafts 9.23(in years)

Accumulated Depreciation 217.41£ Table 4. Source: Authors

Depreciation and Useful Life

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

12Adjusted Financial

Statements

in £ million

Assets

Leased assets 518.13£

Accumulated depreciation 217.41£

Net assets 300.72£

Liabilities

Current Liabilities 64.64£

Long-term liabilities 453.50£

Deferred income taxes (48.77) £

Total Liabilities 469.36£

Retained earnings (168.64) £

Debt plus equity 300.72£

Table 5. Source: Authors

Adjusted Balance Sheet

Balance Sheetin £ million

Income Statement

Rent expense 63.75£

Interest expense (20.52) £

Depreciation expense (23.55) £

Income Tax expense (5.51) £

Net Income 14.17£ Table 6. Source: Authors

Adjusted Income Statement

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

13Comparing before and

after adjustments

in £ million

Measure Reported Adjusted Change

Current Assets 2,879.00£ 2,879.00£ 0.00%

Total Assets 12,780.00£ 13,080.72£ 2.35%

Current Liabilities 5,861.00£ 5,925.64£ 1.10%

Total Liabilities 10,968.00£ 11,437.36£ 4.28%

Net Income 170.00£ 184.17£ 8.34%

Total Equity 1,812.00£ 1,643.36£ -9.31%Table 7. Source: Authors

Comparison Before-after Ajustments – Figures

in £ million

Ratio Reported Adjusted Change

Current Ratio 49.12% 48.59% -1.09%

Return on Assets 1.33% 1.41% 5.84%

Return on Equity 9.38% 11.21% 19.45%

Debt to Equity 6.05x 6.96x 14.98%

Debt to Total 85.82% 87.44% 1.88%Table 8. Source: Authors

Comparison Before-after Ajustments – Ratios

Large movers in figures: Net income ↑, Total Equity ↓

Large movers in ratios: ROA ↑, ROE ↑, D/E ↑

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

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Conclusions

• British Airways acted in good faith, probably.

• After adjustments, BA looks more profitable for shareholders (20% more), but also way more leveraged (6x to 7x).

• Large accumulated depreciation can act as a tax shield once IAS 17 gets approved.

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

15Importance of IAS 17

Exposure Draft

• Country GAAPs:• Lack of transparency• Too much freedom given to companies

• Leads to:• Misconception about indebtness• Lack of comparability

• The IAS 17 exposure draft:• Very welcome• About 800 comments on the 1st draft

04/09/2023Detecting hidden financial position of airlines companies - The case of British Airways

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Questions?

Thank you!