Economist and many financial experts gave different definitions about finance, but the basic understanding of finance, procurement of funds and effective utilization of those funds. The field of finance is also includes appropriate estimation of future cash inflows to meet the projected cash outflows of the future. The efficient management of finance is possible by appropriate planning and controlling of cash transactions of the business. The area of finance is very wide spread as it needed in every organization and industry (Morell, 2007). In order to give detail understanding of finance and funding in the travel and tourism sector, this report is made in the context of BRITISH AIRWAYS (BA) which is a UK based international Airline company dealing in travel and tourism sector. The report will explain how funding and management of finance taking place in the BA (British Airways, 2014).
The travel and tourism sector looks bright and beautiful as it is related with the luxury and comfort. When the aspect of luxury included that means the cost of operation and prices are high for that particular product or services and the same perspective follows in airline firms like British Airways. Each organization put significant emphasis to reduce its cost of operation to gain higher profit margin (Vasigh, Taleghani, and Jenkins, 2012). Airline companies usually gets large customer at the time of peak season (Vacations time, occasions, festivals, Christmas and New Year and etc). On the other time it didn’t get that much customers. Firms like BA categories their customer market segment on the basis of business class, economy class, and consumer for private charter and on the basis of this categorization they provide auxiliary services. Airline companies like BA undertakes CVP analyze their operational cost, sales volume, and profit generation. CVP method helps in the determination of variations in profit due to fluctuations in cost, volume and prices of the fares. The management of BA will able to forecast the quantity of sales the organization has to be made to achieve the standard target (profit). CVP techniques is widely adopted as it saves the organization from financial loses as is helps the manger to determine what minimum quantity of sale it should achieve to organization The technique also give the idea about what profit the firm should obtained to avert financial loss (Doganis, 2001). CVP includes all the costs incurred in the operation of the business activity in order to set appropriate price of the air ticket. The technique evaluates contribution margin per unit which signifies the BA revenue proportion in the each unit sold. This contribution obtained by subtracting the variable expenses from sales revenue will be adjusted against the fixed cost of the company. The profit of the firm will be derived after writing off the fixed expenses of the BA.On the basis of CVP analysis CVP chart is prepared which presents the BEP point of the firm, margin of safety, and targeted profit (Meersman, 2004).
Every organization set different pricing strategies depending upon its capability and market condition. The decision related to setting of price is considered to very a crucial aspect as the price of the product or services is set by identifying and evaluating of various factors like fuel prices, government tax policy, airport charges, administration and marketing and distribution expenses, competitor pricing strategy, and market force (Vasigh, Fleming, and Mackay, 2010). The pricing strategy used in the airline firm like BA are-
Dynamic Pricing Strategy- This price strategy is used to set price according to change in the business environment. The prices are determined after careful analysis of market force, targeted customer, competitor pricing strategy, fuel prices, government policies related to tax and duties, festivals, occasions and etc.
Discounted pricing –This pricing strategy is used when there is downfall in demand of travel and tourism. This strategy is particularly followed to compensate the cost of operation (Morell, 2011). In this pricing strategy, high discounts are offered for pre-booking and travel to particular destination.
Peak User Pricing- This pricing strategy is used by the airline firms like BA when the firm is providing differentiated service like providing special route service on peak season, or services at the business rush hour say in morning 6:00 am or at 7:00 am. In this pricing strategy, airline firms charge higher fare for the travel (Doganis, 2002).
Segmented pricing- In this strategy the price of the air ticket is set according to the type of consumer segmentation like business class customer, economic class customer. Here, the service to the consumers will also be different like different cabins for business class and economic class.
Visible pricing – This pricing strategy is adopted by the airline firm when they provide specialized auxiliary services to the customer apart from traveling like BA is known for his specialized services such as lounges, the club world and etc (Lam, 2010).
Underneath are the factors which impact travel and tourist business like BA-
Season- Season means the peak time or the period in which large number of people travel to different countries to spend their leisure time. BA varies the prices of its ticket fare depending upon the season. The prices would be usually set high at the time of vacations and leisure time in Europe and also at the time when large number of foreign tourist visits European countries (Kumar, Johnson, and Lai, 2009). At this time high competition can be seen in the travel and tourism industry for air fare.
Taxes and Duties- Taxes are the amounts which are levied by the government in form of service tax, corporate tax, and wealth tax. When the government charge high taxes then the prices of the fares goes up which negative affects the demand of airline service.
Interest Rate- Interest rate fluctuates with the change in monetary policy of the central government of the country (Leask and Rihova, 2010). When Central government increase the interest rate to decrease the inflation in the market then it increases the prices of each product as the firm cost of operation increases. This affect the market force of the industry as less people will prefer to travel by paying higher prices of the service.
Fuel Prices- The cost of operation of airline firms are most impacted by fluctuations in the fuel prices (Müller, 2002). The prices of fuel plays crucial role in deciding the price of air ticket fare in the companies like BA.
Profit- Firm operates in the market to earn income from its business activities. If it didn’t get appropriate return in its products and services then its existence will be pointless. Organization like British Airways sets their pricing by keeping in view the profit maximization objective of the business (Bowyer, and Davis, 2012).
Management accounting information is the combination of accounting, finance, and management and control. It is used to make essential financial planning and controlling of the business activities. It helps in framing plans and strategies to minimize the cost and maximize the firm’s profit. It includes preparation and analyzing of financial reports (Bamford and Xystouri, 2005). BA managers can use the following type of management accounting information to draw important organization decisions-
Budget- BA can make budgets to achieve the set targets in the best optimum manner. With the help of budget, BA can measure the actual performance of a business activity with the planned objectives.
Variable cost report- Manager of BA can prepare the report of total variable overheads incurred during the particular period. This report can be further used to compare the variable cost of current year with the past year report (Lawton, Rajwani, and O'Kane, 2011). With the help of this comparison the management of BA will able to assess its strength and weakness in terms of operational activities.
Fixed cost- Fixed cost is the costs which remain same over a period of time. With the help of this report BA will determine the economies of scale of the firm.
Performance report- The performance report of the firm contains the whole detail about the business activities performed during the period. This report will help the management to analyze overall operational activities of the business entity (DeFeo and Janssen, 2001). From this report, comparison of actual results with the framed standard can be easily done.
Inventory management through ERP- Enterprise Resource planning is a computerized management accounting information that can be used in the airline firm’s for systematic planning and management of inventory like food and beverages, toiletries, fuel and other can be made though ERP management accounting system (Haron, Rahman, and Smith, 2013).
In today’s time management accounting system has major role in the decision making and setting strategies of the organization to meet the requirement of competitive environment. In fact the use of management accounting information couldn’t be measurable as it has significant role in financial planning and control of business. The most important element of management accounting information is preparation and evaluating of budgets. Organization like BA makes budgets to direct the organizational activities in the line with planned business objectives (Madanoglu, Chang, and Chu, 2004).
Different types of budgets are made such as Cash flow budget, variable cost budget, production budget, inventory budget, sales budget, master budget for effective planning and controlling of business activities. The values estimated in the budget are compared with the actual performance or results of the firm. When the actual results are according with the planned budget means the business has performed effectively but if there is any deviation between actual and estimated then the reason is analyzed and on the basis of that corrective actions are made (Treanor, 2012).
Enterprise resource planning is widely adopted and implemented management accounting information tool in the organizations. It helps in the timely decision making which helps to eliminate unforeseen events. The tool is mostly used for effective inventory management, supplier relation management, customer relationship management and etc. With the help of ERP, feedback of customer are properly recorded and analyzed to meet their expectation in the real time (Airline Industry- Year 2011, 2011). Tools and techniques of management accounting information prove prolific for the computation and measurement of cost. Moreover, it helps the firm to estimate the future cash requirement in the business to meet the operational and other expenses.
Management accounting information also helps in assessing the financial performance and position of the firm by computing ratio analysis related to profitability, solvency, liquidity, leveraging, and efficiency of the firm (Doganis, 2001).
The Ratio analysis of BA for the year 2011 and 2012 is done to interpret the financial performance and efficiency and effectiveness of the firm. In the ratios analysis profitability, liquidity, solvency, efficiency, and gearing ratio are computed. Underneath are the interpretations of the ratio comparison-
Operating profit Margin: The operating profit margin of the BA in the year 2012 decrease by almost 50% as compared to previous year. Though the company’s sales revenue increased in the year 2012 but the company increased operational expenses wipe-out the firm revenue (Annual report, 2012).
Net profit Margin: In the year 2012, company booked £100 million loss due to high financial cost and expenses as compared to last year. Company profit margin decreased by almost 7% in the year 2012. This indicates the negative performance of the firm.
Current Ratio: Current ratio indicates the working capital management of the firm or says liquidity available with the firm. Airlines companies always look forwards for strategic alliance for expansion and for this they require adequate liquid funds. BA current ratio decreased to .59 from .75 which means the company has higher current liabilities than current assets (British Airways, 2014). It is advisable to have current ratio more than 1.
Quick Ratio: This ratio represents the availability of cash and cash equivalent in the business to meet immediate liability of the business. The ideal quick ratio is 1:1. In the year 2011, BA has .71 proportions of quick assets to meet the immediate obligation but in the year 2012 due to financial loss the availability of quick assets stood at .51. This indicates the firm has deficiency of liquid assets.
Total Asset turnover Ratio: It indicates the efficiency of the firm in achievement of sales revenue by using the total assets of the firm. From the analysis this can be interpret that as compared to last year company has more effectively used its assets to achieve higher revenue.
Return on capital employed: This ratio is calculated to determine the profitability of the firm in respect to total capital employed in the business for operation (Dobeuszkes, 2006). Higher ROCE indicates higher efficiency of the business performance. But the result of 2012 is not satisfactory for the companies stakeholders as the firm ROCE decreased to 3.13% from 6.73%. This indicates the firm has not used its total funds in the best possible manner to meet the expectation of shareholders. The efficiency declined due to huge financial cost and expenses.
Return on equity: The ROE of the British Airways states what proportion of total equity investment was earned from the business operation. It is calculated by dividing profit after tax with total equity fund. The year 2012 result shows that the firm has not achieved any return for its shareholders even it decreased the value of their capital investment (Marks, 2010). In the year 2011 the company registered 5.91% profit but it vanished in the year 2012.
Gearing Ratio: This ratio shows how effectively the firm has planned it capital structure which will bear less cost of capital. This ratio shows the amount of debt and equity capital in the company (). The ratio indicates that the firm has higher debt capital which is incurring higher finance cost and this cost is wiping out the firm’s profit and shareholder earning (Yates, 2013). It is seen in the past that 200 air carrier companies become bankrupt due to high debt. The ideal debt-equity ratio is .50:1. But in the case of British Airways it is 3.29 which mean the firm has huge burden of paying debt and interest. This can be reduced by issuing equity capital.
Sources of finance for British Airways to expand its business operations
Issue of equity shares: This method of funding could be the best source that British Airways can use for its development project or to increase the fleets. This is the source of finance where the funds are obtained from the public by inviting them to invest in the company and yield good returns (Dobeuszkes, 2006). The investor’s inflow their surplus funds in the company to earn higher return as compared to risk-free rate of return. The company can go for Follow on Public offer as it is already listed in LSE.
Bank Loan: BA can obtain the bank loan for the capital intensive project. Different bank charges different interest rate depending upon its policy and the creditworthiness of the individual and the firm.There would not be high variations in the interest rate but the small reduced interest rate can save the large profit of the BA (Treanor, 2012). The company has to give assets security in against of the loan as a guarantee for the repayment.
Revenue from Business Operation: The Company can finance its development project by carefully estimating its sales revenue and expenses. If the firm will able to retain significant amount of funds after meeting all the business expenses then it can use its own fund for the development of capital intensive project. The shortfall of this source of finance can be seen as the firm will not be able to transfer surplus in retained earnings and also the firm may not distribute profits to the shareholders. So this source of finance has opportunity cost (DeFeo and Janssen, 2001).
Leasing: This is most common practice in airline companies. It is a contact which is made between the airline company and the manufacturer of aircraft for certain period of time in which the lessee has to make monthly rental payment to the lessor for the use of assets or property and at the time of maturity the lessee has to return the assets to the aircraft manufacturer company.
Sale of assets: This is also a good source of finance when the firm didn’t want to get funds through equity and loan and has enough assets that it can flog to obtain the funds (Kumar, Johnson, and Lai, 2009). BA can sell off those assets or aircraft which are become obsolete and is not used in business operation activities. Company can raise enough amounts of funds by selling its unused assets. The benefit of this source of finance is that firm will be able to raise fund immediately by selling the assets (Lam, 2010).
From the whole report, it can be construe that the importance of finance and funding is inevitable aspect of the business entity like British Airways. The management has to perform various roles and responsibilities for the efficient and effective planning and controlling of financial activities of the business enterprise.