Operating (EBIT) Margin Research

Introduction

This ratio indicates the company's operating income earned per euro of total revenue. Aegean's operating margin for the year 2016 was 5.768% implying that it made an operating income of EUR0.0576 for each euro of total sales (Gibson, 2013). The positive sign means that its operations were profitable as its operating costs were less than the revenues. The ratio declined from 11.62% in 2014 to 9.889% and 5.768% in 2015 and 2016 respectively, showing a fall in its profitability. The decline in operating margin is due to increased competition primarily from Ryanair as well macroeconomic challenges facing the European Union (CAPA, 2016). Aegean's revenue per available seat kilometer (RASK) declined from 6.83 in 2015 cents to 6.31 cents in 2016 (Aegean, 2016, p. 46). Total operating costs increased due to growth in aircraft leasing and maintenance costs, partly offset by a decline in fuel costs. However, the rise in operating costs was partially offset by the growth in total revenues. Aegean's total revenues increased in 2016 due to the growth in passengers by 12.5 million, 7% compared to 2015.

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Net Profit Margin

In the fiscal year 2016, Aegean's net profit margin was 3.1570% implying that it earned 3.15 cents for each euro of total revenue. This shows that it was profitable in 2016. The net income margin decreased from 8.80% in 2014 to 6.958% in 2015 and then to 3.157% in 2016. The decline in revenues indicates a reduction in the profitability of the airline. It was as a result of an increase in operating costs partly reduced by the improvement in total revenues. Besides, the hike in the VAT by 11 percentage points eroded the group's after-tax earnings (Reuters.com, 2017). Due to the fall in margins, Aegean is no longer Europe's highest-margin full-service carrier (CAPA, 2016). A high net profit margin is essential for the sustainability of the company's operations and ensuring a high return to shareholders. Due to the fall in net income, the company cut its total dividend payment from EUR49.99199 million in 2015 to EUR49.889 million in 2016.

Return on Equity (ROE)

Aegean's return on equity for 2016 was 13.82%. This shows that it made a net income of 31 cents for each euro of average shareholders' equity in the year 2016 (Gibson, 2013). It generated a positive return on shareholders' funds. However, the ratio declined from 37.38% in 2014 to 31.2% in 2015 before dropping further to 13.82% in 2016. This trend shows that the profitability of Aegean deteriorated between 2014 and 2016. The decline was a result of an increase in the VAT and operating costs, partly offset by an increase in revenues.

Liquidity Analysis

Current Ratio

It indicates whether Aegean's total current assets are sufficient to cover its short-term obligations (Gibson, 2013). Strong liquidity is essential to ensure smooth operations and drive profitability. As at December 31, 2016, Aegean's current ratio was 1.3300. It implies that its current assets were 133% of the total current liabilities hence it had adequate current resources to repay all its current obligations (Gibson, 2013). Aegean's current ratio slightly declined from 1.2387 at the end of 2014 to 1.1853 as on December 31, 2016. It then increased to 1.33 in 2016 implying that the liquidity of Aegean improved. The improvement is liquidity is primarily due to the increase in cash and cash equivalents from EUR152.933 million at the end of 2015 to EUR248.478 million as at 31 December 2016. The growth in cash and cash equivalents was driven by the increase in revenue as well as efficient working capital management by the airline.

Efficiency or Asset Management Analysis

Total Asset Turnover

It gives the amount of revenue the company generates per euro of average total assets utilized during the period. It is vital since it measures the level of the firm's efficiency in using its assets to generate revenues and profits. According to Weygandt, Kieso & Kimmel (2015), efficient use of total assets is one of the critical drivers of return on equity as indicated by the DuPont equation. A higher total asset turnover leads to a higher return on assets which, in turn, increases the company's return on equity.

Aegean Group's total assets turnover for the year 2016 was 1.5464 showing that it made a revenue of EUR1.5464 for every euro of average total assets it used in 2016. This indicates that Aegean is efficiently using its assets to generate revenues. The ratio dropped from 1.534 in 2014 to 1.5166 in 2015 then rose to 1.5464 in 2016. The trend indicates that Aegean's efficiency of total assets use improved on 2016 though it declined slightly in 2015. The increase in 2016 was caused by an increase in total revenues coupled with a decline in total assets.

Receivables Turnover

High liquidity is essential for effective operations of an airline. Management of receivables is crucial since it affects the liquidity as well as the profitability of the company. Receivables turnover shows how efficient Aegean manages its trade and other receivables. It shows the number of times it collects its receivables in a year (Horngren, Sundem & Elliott, 2014). Aegean's receivable turnover for 2016 was 9.6963 times implying that it received money from its debtors, on average 9.7 times during 2016. It also means that it took an average of 37 days from the date of a credit transaction to receive the amounts owed. The ratio had declined from 10.22 times and 11.07 times in 2015 and 2014 respectively. The decline means that the efficiency of Aegean in collecting its receivables fell in both 2015 and 2016. However, the drop in receivables turnover is mainly due to the high revenue growth and has little do with the efficiency of Aegean in collecting receivables. Its total revenues increased by 4% while customers and other trade receivables grew by only 1% in 2016.

Solvency or Leverage Analysis

Debt to Equity Ratio

It compares the amount of debt with that of equity in Aegean's capital structure. A higher amount of debt shows that debt holders have a higher claim on the company's assets hence weak solvency (Horngren, Sundem & Elliott, 2014). High leverage reduces the company's access to further borrowing and increases the financial risk, including the risk of default. Aegean's debt to equity ratio as on 31 December 2016 was 1.6641 meaning that its total liabilities were 166% of the total shareholders' equity. This implies that its solvency is weak since liabilities exceed its shareholders' equity. The ratio declined from 2.0131 and 1.899 at the end of 2015 and 2014 respectively. This decrease shows that the solvency of Aegean Airline Group improved in 2016. This was due to its measures to preserve its high ranking credit rating. Low leverage leads to higher credit ratings, which enhance access to capital markets and reduce the cost of additional borrowing.

Times Interest Earned Ratio/Interest Cover

The Group's interest coverage for the year 2016 was 1.15 times indicating that its EBIT was 150% of its financial expense for the year. It shows that Aegean generated sufficient earnings to pay interest financial expenses. The cover declined from 2.49 and 2.82 in 2015 and 2014 respectively, implying that Aegean's ability to pay financial expenses out of its earnings fell in 2016 and 2015. This is because its operating income decreased in 2015 and 2016 as its operating costs increased faster than the revenue growth rate. However, the group does not have a significant default risk as indicated by other financial measures.

Conclusion

The ratio analysis above shows that Aegean Group is financially stable. Its profitability is high although this declined in 2015 and 2016 due to stiff competition as well as a weak economy. However, its revenues have maintained a positive growth over the last four years. Measures the group has taken such as the acquisition of Olympic Airline and reduction in capacity, as well as initiatives to improve efficiency, are likely to enhance its profitability in the coming years. It has a high liquidity and is also efficient in the management of its current and non-current assets. It has a low to moderate solvency since its total debt is greater than equity. It is committed to preserving its high credit rating hence the high leverage is not a serious issue. Its profitability, efficient use of assets and debt are contributing to its high return on equity.

References

CAPA (2016). Aegean Airlines: no longer Europe's highest-margin FSC. Competition and the economy weigh in. [online] CAPA - Centre for Aviation. Available at: https://centreforaviation.com/insights/analysis/aegean-airlines-no-longer-europes-highest-margin-fsc-competition-and-the-economy-weigh-in-274337 [Accessed 8 Apr. 2018].

Gibson, C. (2013). Financial statement analysis. Mason (Ohio): South-Western Cengage Learning.

Horngren, C., Sundem, G. & Elliott, J. (2014). Introduction to financial accounting. Harlow: Pearson Education Limited.

Reuters.com. (2017). UPDATE 1-Greece's Aegean Airlines profit drops, cuts dividend. [online] Available at: https://www.reuters.com/article/aegeanair-results/update-1-greeces-aegean-airlines-profit-drops-cuts-dividend-idUSL5N1H01DW [Accessed 8 Apr. 2018].

Weygandt, J., Kieso, D. & Kimmel, P. (2015). Financial accounting. Hoboken (N.J.): Wiley.