Read the In the News article below and then answer the questions:
08 May 2008
Low-cost airline easyJet announced its interim financial results yesterday. The headline figures for the six months to the end of March 2008 make interesting reading. There are lots of positive results for the company. Passenger numbers are up by 15% to 18.9 million and total revenue has risen by nearly a quarter to £892.2 million. The load factor (the proportion of seats on each flight that are filled) has remained stable at around 81% and total revenue per seat has risen by 1.5% compared to the year before. (Source of data: easyJet.com).
In the commentary on the results the chief executive of easyJet, Andy Harrison, noted that the company had continued to successfully integrate GB Airways, which it bought from British Airways (BA) in October 2007 into its business. The acquisition strengthened easyJet's position from Gatwick and has allowed the company to expand its routes. Harrison commented that the acquisition and the expansion of the business had enabled easyJet to establish a network with "280 million Europeans living within an hour's drive of an easyJet flight". Ensuring that customers have access to their product is an important part of the strategy of the business.
All these positive results, however, were overshadowed by the problems the company has had in trying to cope with rising costs. With oil prices reaching $122 a barrel this week, companies that use oil or its constituents face significant challenges. It was announced by easyJet that fuel costs had risen by almost a quarter per seat compared to last year. Jet fuel has risen by 35% in the first three months, it said, and its fuel costs were now 80% higher than a year ago.
The rise in fuel costs meant that the company made a loss of £57.5 million in the six months to March 31st. The scale of the problem was highlighted by the comment that fuel costs rose by £2.5 million for every $10 per barrel rise in the oil price. In January 2007, the oil price was around $60 a barrel; yesterday's price of $122 means that the rise in fuel cost for easyJet has risen by over £15 million in the last 15 months alone!
The story is an important reminder that the business of making profit is actually very simple - it is just a case of revenue and costs. The complexity comes in trying to control costs and boost revenue; the detail of how to do these two things is the really interesting part of the subject!
Listen to the podcast [mp3 1.17 MB]
1. Using an example, explain the meaning of the term 'profit'. (4 marks)
2. Explain why the 'load factor' and 'revenue per-seat' are important metrics for a business like easyJet. (8 marks)
3. Why might easyJet have a target of establishing a network with "280 million Europeans living within an hour's drive of an easyJet flight"? (8 marks)
4. easyJet reported a loss for the six months to March 31st. Analyse the impact of such a loss on the company's future viability. (10 marks)
5. Assess two ways in which a company like easyJet might cope with the rise in fuel costs? (10 marks)