The purpose of this paper is to develop an in-depth analysis of financial reports for the Royal Dutch Airlines (KLM), the flag carrier of the Netherlands. The review will analyze the Company’s crucial financial statements and documents to determine its performance in the last three years. With a focus on the Company’s income, balance sheet, cash flow, and profit & loss statements, the analysis sought to determine the Company’s operations and worthiness as a destination for global investors seeking to increase their credit value.
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The Company’s mission and vision are outlined in its global operations protocol. It seeks to be at the forefront of the European Airline industry, one of the most critical sectors that help in connecting the region and the other parts of the world. It seeks to offer reliability and a healthy dose of the Netherland Pragmatism.
With more than 30,000 employees, the Company seeks to provide innovative products for its products and services, offering safe, efficient and service-oriented operations that seek to attain sustainability at the end (Buyck, 2004).
The vision of the Company is to “be on the forefront of the airline industry by being smarter than the others” (Slager & Kapteijns, 2012).
Known by its initials KLM NV, the Koninklijke Luchtvaart Maatschappij N.V. (Royal Dutch Airlines) is one of the largest flag carriers in the modern world. The Company was founded in 1919 after a successful aviation exhibition in Amsterdam (Deetman & Airlines, 2000).
The Company entered its first joint venture in 1993 after the U.S. Department of Transportation granted the Company and the US-based Northwestern Airlines an antitrust immunity (Alexander, Britton, Jorissen, 2011). This allowed the companies to operate between Europe and the U.S., with KLM holding 25% share at Northwestern Airlines (Farquhar, 2002).
The Company acquired a 26% share in the Kenya Airways, the national flag carrier in Kenya and one of the few profitable Airlines as well as largest Airlines in Africa. It entered into a merger with Air France, becoming a subsidiary of Air France-KLM in 2003 (McLaughlin & Fitzsimmons, 2006).
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Currently, KLM is predominantly a Dutch corporation but a part of the Air France-KLM S.A. Group, a global corporation with a number of affiliates (Gossling &Upham, 2010). The major areas of focus for GEC include strategy, technology, fleet development, commerce, information technology, procurement, commerce, and finance (Smeritschnig, 2013). A
t KLM, cooperation between the Company and a number of other parties play an important role in its daily operations. One of the most important aspects of the Company’s operations is the relationship and cooperation with Schiphol Airport’s management in Amsterdam.
The Company cooperates with its primary partners to enhance growth and development on the international platform. Apart from the main partner, Air France, the Company’s strategic partners across the globe play an important role in the general expansion. Among the most important partnership is the cooperation between KLM and Kenya Airways (K.Q.).
The Company reports that KQ is its largest strategic partner, which helps in offering a large number of destinations across the African continent and connection between African and other continents, particularly Europe, Asia, and the Americas. KLM has invested heavily in a rights issue at the K.Q. (KLM, 2013).
General financial performance for the Group
In 2012, the Company’s income decreased by more than €55 million compared to the previous performance. However, the Company still achieved a positive income of about €153 million. The executive reports that the increased operating expenses such as the increase of the international fuel bill and pension costs are responsible for the decline in its income.
The Company also achieved revenue of €9,473 million, a 6.4% increase from the previous records. Passenger transport revenues were €6,630 million, which is about 9.5% increase from the previous year. In addition, the volumes of cargo revenues were more than €1,660 million, a decrease of about 1.5% from the previous year.
The Company’s expenses on the global scale increased by more than 7% to hit €9,320 million compared to the previous records. Among the most important aspects of the increase is an increase of more than 17% in oil costs, with an average fuel price for jets ranging at 9.7% higher than the previous year (KLM, 2012).
Analysis of the consolidated financial statements for KLM Group (Including the subsidiaries)
Analysis of the income statement (2011- 2012)
Between 2010 and 2012, the Company experienced an increase in its revenues. In the 2011 financial year, the Company’s total revenues were valued at € 8,904 million but increased to €9,473 million in the 2012 financial year (KLM, 2013). This was a 6.4% increase in revenues per annum. The increase is generally commendable since the Company had experienced an increase of about 5.4% in its revenues between 2010 and 2011.
In the 2012 financial year, the Company’s expenses were comprised of external expenses, employee compensation, and benefits, depreciation and amortization. These aspects of expenses increased from €8,696 million in 2011 to €9,320 million in 2012. This was an annual increase of 7.18% in revenues. As mentioned, the major contributing factor was an increased rate of fuel and operation costs on the global market. In addition, the Company experienced a decrease in its income from operating activities, which amounted to €58 million.
This was a decline because it had achieved €197 million in the previous year (KLM, 2012). It is also worth noting that the net cost of financial debt in 2011 was €123 million but increased to €128 million in 2012. Thus, the Company’s pre-tax income decreased from -5million in 2012 to -46 million in 2012. The large rate of decline was contributed by a sharp increase in expenses and a decrease in income from current operations and operating activities.
Finally, the Company experienced a decline in its profitability, which reduced from € I million in 2011 to -44 million in 2012.
Analysis of the Group’s Balance Sheet
As a global Airliner, KLM focuses on maintaining a good balance between its assets and liabilities. The Company’s assets are an important aspect of its annual operations because they are set to offset any increase in its liabilities. In 2011 and 2012, the Company attempted to maintain a good balance between its total assets and total liabilities. The non-current assets in both financial years increased significantly. In 2010, the Company’s total non-current assets were valued at €7,983 million but increased to €8,217 million in 2011 (KLM, 2011).
In addition, it recorded a further increase in the non-current assets in 2012, which were valued at €8,304 million. This means that the total increase in non-current assets in 2011 was 2.85% per annum (KLM, 2012). However, the value only increased by 1.1% in 2012, which means that there was a decline in the value of non-current assets. According to the income statement, the major non-current assets for the Company were property, plant and equipment, and pension assets, which contributed to more than 46% of the total short-term assets.
The Company’s current assets in the three financial years (2010-2012) decreased significantly. For instance, in 2010, the Company’s current assets were worth €2,710 million but declined to €2,400 million in 2011. This was a 12.55% decrease in the value.
However, there was a slight increase in the net worth of current assets in 2012, which were valued at €2,484 million or a 3.5% increase from the previous year or 8.34% decline from the value recorded in 2010. Thus, the total assets in the three consecutive financial years increased from 10,693 million in 2010 to 10,788 million in 2012. The major contributing factors were the increase in cash and cash equivalents, inventories, and international trade.
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It is also worth noting that the total equity for the Company decreased by a slight margin from €2,531 million in 2010 to €2,441 million in 2012, although there was a slight increase in 2011 (€2,558 million). The major cause of the decline was a decrease in the Company’s capital and reserves and retained earnings.
The Company’s non-current liabilities increased from €4,795 million in 2010 to €5,073 million in 2012. For instance, the Company accrued loans from the current Company worth €476 million, a slight increase from the previous accruements that were valued at €388 million and €387 million in 2010 and 2011 respectively.
However, the Company reduced its current liabilities from €3,367 million in 2010 to €3,274 million in 2012. This was a 2.76 reduction in the current liabilities. Thus, the total liabilities for the Company increased from €8,162 million in 2010 to €8,347 million in 2012.
The difference between the total liabilities and total assets in 2012 was €2,441 million compared to €2558 million and €2531 million in 2011 and 2010, respectively. Since the differences were always positive, the Company had a high capacity to offset its liabilities using its assets. This is an indication that it was financially healthy throughout the three financial years because its assets were worth more than its debts.
Analysis of the Cash flow statement
The net flow from operating activities and net cash flow from operating activities experienced an increase throughout the period. For instance, the Company’s net cash flow from operating activities was valued at €269 million in 2010 but increased to €315 million in 2012. Similarly, the net cash flow from operating activities increased from €144 million in 2010 to €572 million in 2012 (KLM, 2013).
However, the Company increasingly reduced its investments. For instance, the cash used to invest in 2010 was (€242 million) compared to (€354 million) used to invest in 2012. Similarly, the Company’s net cash flow from financing activities declined from 122 million in 2010 to -€41 million in 2012 due to a large decrease in long-term debt and long-term receivables (KLM, 2013).
In economics and finance, financial analysis provides an important tool for determining the financial position of a company in terms of liquidity and solvency (Weston, 2010). It is a major system of determining and analyzing a company’s financial performance in a given period. Six major aspects of determining ratios for a company are used to evaluate its performance over a given period (Bodie, Kane, & Marcus, 2013). In this case, these categories will be applied as follows:
Liquidity ratios provide information on a company’s short-term liquidity and solvency positions at a given time (Houston & Brigham, 2009). They determine whether a company can use its short-term assets to meet the short-term liabilities, thus avoiding insolvency. The current ratio, quick ratio, and absolute liquid ratio are normally used to determine this aspect. In the case of KLM, current and quick ratios will be determined.
Ratio Formula 2012 2011:
Current Current assets ÷ current liabilities 0.76 0.76
Quick assets ÷ current liabilities 0.65 0.66
Since the ratios are positive, the Company can avoid insolvency on a short-term basis (Williams, Haka, Bettner, Carcello, 2008). This means that it has positive financial health.
These ratios are used to test the ability of an organization to meet its long-term liabilities using the long-term assets (Weygandt, Kieso & Kell, 2006). Thus, it seeks to determine the long-term solvency of an organization.
Ratio Formula 2012 2011:
Debt ratio Total liabilities/ total assets 0.77 0.76
Debt to equity (Long-term Debt + Leases)/ average shareholders’ equity 2.07 2.062
Long-term debt to equity Long-term debt / total assets 0.47 0.45
Financial analysis of KML’s International associates and jointly controlled entity
Apart from the KLM group of companies, the Company also runs Schiphol Logistic Park C.V, a jointly controlled entity, where it owns 53% stake. In addition, it holds 27% stake at Kenya Airways and 40% at Transavia France SAS. The two companies are KLM associates. Their financial analysis is as follows;
Income statement for Schiphol Logistic Park
In 2012, the Company’s profit before income tax was valued at €253,876 million. After meeting an income tax of €57,438, the Company obtained a net profit of €196,438 (Schiphol Logistics Park, 2013). The shareholder’s net result was valued at €198,714. In addition, earnings per share were €1,068. With a 53% stake at the Company, KLM gained €105,318 from its investment at the Company.
Income statement for Transavia SAS
In 2012, Transavia’s balance sheet indicated that the net profit was €6,421 (Transavia, 2013). With 40% stake at the Company, KLM Group was entitled to €2,568.
Income statement for Kenya Airways
In 2012, the Kenya Airways balance sheet indicated that the net profit after tax was Ksh 573 million (Kenya Airways, 2013). With a 27% stake at the Company, KLM Group obtained Ksh 154.71 million. With a foreign exchange of about sh110 per Euro, KLM’s value at the Company was €5.2 million at the end of the trading period.
The solvency and liquid ratios experienced a slight change between 2011 and 2012. This means that the Company’s financial health was not only positive but also stable. This is an indication that the Company is an important corporation for investors to consider when increasing the net value of their wealth (Groppelli & Nikbakht, 2010).
It is recommended that the Company continue with its current operations, especially through partnerships with regional and international airlines in order to continue increasing its performance and worth in the industry.
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Bodie, Z., Kane, A., & Marcus, J. (2013). Essentials of Investments, McGraw-Hill Irwin.
Buyck, C. (2004). Mariage de Raison: Air France and KLM face significant challenges to creating a new global airline leader but are confident they can be overcome. ATW: Air Transport World, 41(1), 238-247.
Deetman, C., & Airlines, K. R. D. (2000). Applications of operational research in the airline industry. London: OUP
Farquhar, M. A. (2002). Flying high: an interview with Henk de Graauw, General Manager for Japan KLM Royal Dutch Airlines. Asian Studies Review, 15(3), 38-43.
Gossling, S., & Upham, P. (2010). Climate Change and Aviation: Issues, Challenges and Solutions. London: Routledge
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Houston, J., & Brigham, F. (2009). Fundamentals of Financial Management. Cincinnati, OH: South-Western College.
Kenya Airways. (2013). Kenya Airways 2012-2013 Annual report. Nairobi: KQ.
KLM. (2011). KLM Royal Dutch Airlines Annual Report 2010. Amsterdam: KLM
KLM. (2012). KLM Royal Dutch Airlines Annual Report 2011. Amsterdam: KLM
KLM. (2013). KLM Royal Dutch Airlines Annual Report 2012. Amsterdam: KLM
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Schiphol Logistics Park. (2013). Annual Report 2013. Schiphol: Schiphol Logistics Park.
Slager, B., & Kapteijns, L. (2012). Implementation of cargo revenue management at KLM. Journal of Revenue and Pricing Management, 3(1), 80-90.
Smeritschnig, F. (2013). WOW and SkyTeam Cargo: An In-depth Analysis of Strategic Alliances for Air Cargo Carriers and the Impact on Cargo Airlines’ Operations and Success. Harmburg: Verlag
Transavia. (2013). Annual Report 2012-2013. Paris: Transavia
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Weygandt, J. J., Kieso, D. E., & Kell, W. G. (2006). Accounting Principles. New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc.
Williams, J., Haka, S., Bettner, M., Carcello, V. (2008). Financial & Managerial Accounting. McGraw-Hill Irwin.