Mananaging finance

This report entrust concentrate on the performance of the two aviation companies, Hong Kong-based mainland China pacific Ltd. and capital of capital of Singapore-based Singapore Air disembowels. The report go away try to help the potential investor in the Asian personal line of creditline diligence to assess the prospects of both companies and their riskiness in regard to each separate and the industry as a whole as well as the returns both companies have to offer to compensate for the risk of their financial position.1. Profitability, offset, return on enthronisationProfitability of the keep company is indicated by the return on equity ratio that shows the dollar return on each dollar of investmentReturn on equity (ROE) = give the sack income/ stockholders equitymainland China has a ROE of 1,604/ 31,052 = 5.16%Singapore Airlines ROE is 849.3/ 11,455.1 = 7.4%SA provides a better return on equity than Cathay, although the decrease in the annual income at Singapore Airlines i n 2003 from 2002 represents a threat to its future earnings and return on equity while Cathays results testify improved performance.Return on assets demonst evaluate how some(prenominal) dollars of income were generated by each dollar of investment and is calculated in the following wayReturn on assets = bread income/ total assetsFor Cathay peace-loving Ltd. this figure is 1,604/ (54,686 + 20,351) = 1,604 / 75,037 = 2.14%For Singapore Airlines, return on assets is at 849.3/ 16,558.4 = 5.13%Thus Singapore Airlines is more efficient in using its assets and offers a better return on the funds tied up in assets.Another profitability measure is the operating margin that expresses operating profit as a percentage of the revenue.For Singapore Airlines, the operating margin is 680.4/ 9,761.9 = 6.97%For Cathay Pacific Ltd., this ratio is 285/ 2,393=11.9%As for exploitation, SIAs revenue dropped in the 2003-2004 fiscal year to $9,761.9 trillion from $10,515.0 million, which represents a 7.7% decrease in revenue. The company executives explain this plunge with the establishs of the SARS outbreak in the Asian region that had a devastating impact in the airline industry.Cathay revenue has as well shown a 11.9% decrease in revenue to $3,792 million from $4,242 million.The drop in revenue was reflected in the net income. At Cathay Pacific Ltd., net income was $167 million as opposed to $511 the year before which is a drop of 67.3%. The income dropped as the company was uneffective to drastically reduce its operating expenses or finance charges in the light of humble revenue.At Singapore Airlines, net income was down 20.2 % at $849.3 million as compared to $1,064.8 million for 2002-2003 fiscal year.2. Current financial position, liquidity, both long and short term, sources of financeThe liquidity of the company is most often assessed in terms of the flowing ratioCurrent ratio = current assets / current liabilitiesFor Cathay Pacific Ltd. current ratio = 20,351/ 14,5 20 = 1.4For Singapore Airlines, current ratio = 3,121.9/ 3,401.6 = 0.92Usually companies are expect to have a current ratio that is no higher than 2.0, otherwise thecompany is believed to be in financial trouble. However, due to advances in information applied science has enabled a pile of companies to minimize the need to hold cash, inventories and other liquid assets. As a result, a lot of successful companies are content to cover their current ratios lower than 1.0.This allows us to conclude that although Cathay seems to be in a better position in terms of short-run liquidity, SIAa lower ratio does necessarily signify trouble.Another useful measure is the quick ratio that indicates how well a firm arsehole satisfy existing short-term obligations with assets that can be converted into cash without difficulty and is computed as followsQuick ratio = (cash + securities + receivables) / current liabilitiesCathay Pacific Ltd. has a quick ratio of (15,200 + 4,573)/ 14,520 = 1.36SA s quick ratio equals (0.4 + 130.2 + 1,518.5)/ 3,401.6 = 0.48Again, based on current ratio, Cathay is much more liquid than Singapore Airlines as it has more assets that can be quick turned into cash.Long-term liquidity of the firm is evaluated using the debt ratio that specifies the overall ability of the company to repay its debtsDebt ratio = Total liabilities/ total assetsAccording to the oecumenical rule of thumb, this ratio should not exceed 50%.For Cathay, the debt ratio is (29,361 + 14,520) / (54,686 + 20,351) = 58.9%For Singapore Airlines, the debt ratio amounts to (446.7 + 2,175.3 + 2,207.2)/ 16,558.4 = 29.16%These calculations make it apparent that although Singapore Airlines is less liquid than Cathay Pacific Ltd., the Singaporean company has less long-term obligations and thus is less risky for the investor.Thus, Cathay relies primarily on debt to finance its operations, while Singapore Airlines is predominantly equity-financed.3) Changes to the organizations and their effectAt Singapore Airlines, a more streamlined organizational structure was introduced at the beginning of the financial year. Under the new structure, sixe senior executives including those heading serve and Operations, Marketing, Corporate Services, Finance, Human Resources and Planning bequeath report directly to the CEO of the company. Hopefully, this simplified structure will make possible a speedier implementation of decisions.Cathay Pacific Ltd. basically retained the same corporate structure in the fiscal year analyzed.4) The status of the companies in the financial merchandises and relative to their industry sphere.In the aviation industry where both companies belong, the mediocre market cap, according to Yahoo Finance, is $895.52 million. Both Cathay with about $5.96 billion and SIA with $7.86 significantly exceed this number.On the other hand, revenue growth in the industry has been 12.8% on the average of late as opposed to the drop in the revenue of both airlines. As for profitability, the average operating margin for the airline industry is 6.81% compared to 6.97% at SIA. Cathay with 11.9% is well ahead of the market.The average return on equity in the aviation sector is 8.3% as compared to Cathay 5.16%, Singapore Airlines 7.4%.5) Past performance and projected future trendsCathay Pacific Ltd.Cathay Pacific Ltd. is Hong Kongs largest air carrier bill for a third of all passenger flights through Hong Kong. Cathay owns a minority stake in its competitor Dragonair that holds another tenth of the market.Recently Cathay entered a contract with Air China that it will buy a 9.9% stake in the Air Chinas initial public offering. The partnership will allow joint marketing and sales activities, cooperation in engineering, ground handling, purchasing, security as well as better coordination of the two companies schedules. This arrangement will allow Cathay to optimize its cost structure.The cooperation with Air China offers a strategic advantage as it provides improved access to Beijing Capital foreign Airport, a major hub in inland China.China is one of the worlds fastest growing regional aviation markets and the one coveted by many carriers. Competition was until recently restricted by the limitations on the number of flights performed by foreign carriers imposed by the Chinese government. Cathay and Hong Kong have pressured Chinese authorities to allow more flights between Hong Kong and mainland China.Cathay centering has been trying to get access to passenger flights between Hong Kong and Shanghai sooner than the agreed troth of October 2006 when a second Hong Kong airline will be allowed to start serving Shanghai with passenger flights. Liberalization of these restrictions could boost Cathays revenue dramatically since this route is very lucrative because of heavy business travel.In 2003 Cathay resumed air services in mainland China after a 1-year absence from the market. hither it faces competition from its former partn er Dragonair. Now it plans to make its three-time -a-week flights to Beijing daily in December, add even more Beijing flights next year and prove passenger services to Xiamen and cargo services to Shanghai.Regular air companies like Cathay and Dragonair now face tougher competition from budget carriers Air Asia from Malaysia and Virgin spirited of Australia forcing the veterans of the market to cut their costs. Earlier Cathay representatives admitted that the prices are somewhat higher in this market than in others but attributed this to the difference in exchange rates and other long-term factors.The tendency towards more open skies pursued by Singapore, Thailand and Malaysia will draw more passengers through their airports but can damage the market share and financial performance of Hong Kong airlines including Cathay.Asian governments are slowly dismantling obstacles on the way of foreign air carriers and can be judge to occur with this policy. This could improve Cathays pros pects in mainland China but sharpen competition in Hong Kong itself. However, the epidemic of severe acute respiratory syndrome has attracted the publics attention to the benefit of having a local air carrier since Cathay kept flying at the time when foreign airlines suspended their operations.Overall, since Cathay is in the business of air cargo travel, it can be reasonably assumed to profit from the worlds economic recovery projected to lead to above-average growth in the global airfreight market, according to a Lufthansa report (2004). Lufthansa experts base their assessment of tonnage increase of 5.9% in international air cargo market in 2004 on expectations of the boom in the Asian market and gradual recovery in North America.Singapore AirlinesSingapore Airlines is also in the business of air transportation, engineering, airport terminal and pilot training. Its operations cover Asia, Europe, North and South America, South West Pacific and Africa. Due to this global focus, the c ompany is also expected to benefit from the boom in the Asian market. Unlike Cathay, the diversity of the routes makes it easier for Singapore Airlines to balance its risks that can occur because of an economic downturn in one of the markets.Singapore Airlines is primarily focused in its business on the Asian business as it is the largest carrier in terms of market capitalization with $7.86 billion in market cap as compared with Cathay Pacific Ltd. with $5.96 billion.Singapore Airlines has posted strong second quarter results that beat analysts expectations. The reason behind strong growth is increase in travel demand.Singapore Airlines is listed on the first London derivation Exchange office in Asia, and on the first New York Stock Exchange office in Hong Kong along with 15 other Chinese companies. This development can contribute to greater transparency of their accounting procedures and lend credibleness to their financial information, which in turn can help them bring down thei r cost of borrowing and attract more investors money. There are a lot of European investment funds waiting to be put into the thriving Chinese economy.Investors are attracted by the huge potential of the Chinese outbound market that has already surpassed Japan as the top location in the Asia Pacific outbound ranking. After surviving an epidemic of SARS, the market is forecast by many analysts to return to very strong growth in 2004-2005. China outbound trip volume has increased about five times in the historic decade. In 2002 the annual volume was 16.6 million outbound departures as compared to 3.7 in 1993. The market is predicted to show double-digit annual increases if only the outbreak of SARS is not repeated.Singapore Airlines is fully positioned to take advantage of this trend as it is one of the leading carriers in the Asian-Pacific region, so a dramatic rise in revenue can be expected.According to the corporate news, the company is making efforts at slashing its costs. On No vember 23, it announced the plan to outsource jobs in uplift flight voucher processing and some aspects of interline billings, making 66 jobs in the Finance Division. This effort could help raise the companys efficiency and improve the bottom line in the long run.The most important challenge for the airline industry is the rising fuel costs. Singapore Airlines admitted that higher fuel costs hold their halfyear net profit to $616 million. A lot for the airlines will depend on the evolution of the world oil prices. Further uncertainties surrounding the operation of the pipeline in Iraq or disruptions in Russia caused by the Yukos legal proceedings could drive up the oil price further up, negatively affecting Singapore Airlines net income. According to the companys calculations, that a one-dollar-per-barrel increase in the oil price amounts to the additional $ 14 million fuel spending for Singapore Airlines.Another worry for the management of the airline is the advent of low-cost carr iers that puts increasing pressure on the companys cost structure.All Asian carriers should hope that an epidemic of SARS will not be repeated as it had a devastating effect on the revenue of Singapore Airlines and other companies. Works citedBeveridge, Dick (October 20, 2004), Cathay Pacific Buys into Air China, goldsea.com/Asiagate/410/21cathay.htmlBradsher, Keith (October 22, 2004), A Struggle over Air Routes in East Asia, http//www.nytimes.com/2004/10/22/business/worldbusiness/22aviation.html?ex=1184817600&en=477bd65aaf1258d7&ei=5035&partner=MARKETWATCHHong Kong, China bear on New Aviation Deal (Associated Press, September 8, 2004)Lufthansa Cargo forecasts swift recovery of the global airfreight market, http//www.lufthansa-cargo.de/content.jsp?path=0,1,14871,15152,15452,16898Niem, Andrea (2004), London Stock Exchange Aims to Lure Chinese, Companies, http//www.axcessnews.com/business_110304b.shtmlWorld buy the farm Trends, 2003-2004, WTMGlobal Travel ReportAnnual reportsCathay 2003 Annual Reporthttp//www.cathaypacific.com/intl/aboutus/investor/0,,31343,00.htmlSingapore 2003/2004 Annual Report http//www.singaporeair.com/saa/app/saa?hidHeaderAction=onHeaderMenuClick&hidTopicArea=AnnualReporttSite=global