Controlling Airlines and Airports

02 Reading Financial Statements

Prof. Dr. Arne Schulke

1
The Basic Financial Statements
Cash Flow
Statement (CF)
Balance Sheet
(BS)
Income Statement
(P + L)
„A banker‘s view of all cash
account relevant changes
during the last period“

„A lawyer‘s and bankers

view of items owned
„A lawyer‘s view of (assets) and matching
contracts with suppliers items owed (liabilities)“
and customers during the
last period“

Financial statements summarize the financial activities of the business

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 2
Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities and
shareholders' equity at a specific point in time, and provides a basis for computing
rates of return and evaluating its capital structure. It is a financial statement that
provides a snapshot of what a company owns and owes, as well as the amount
invested by shareholders.

The balance sheet adheres to the following accounting equation, where assets on one
side, and liabilities plus shareholders' equity on the other, balance out:

Assets = Liabilities + Shareholders’ Equity

This formula is intuitive: a company has to pay for all the things it owns (assets) by
either borrowing money (taking on liabilities) or taking it from investors (issuing
shareholders' equity).
Source: Investopedia

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 3

Income Statement/Profit&Loss

An income statement is one of the three (along with balance sheet and
statement of cash flows) major financial statements that reports a company's
financial performance over a specific accounting period.
Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)
Total revenue is the sum of both operating and non-operating revenues while
total expenses include those incurred by primary and secondary activities.
Revenues are not receipts. Revenue is earned and reported on the income
statement. Receipts (cash received or paid out) are not.
An income statement provides valuable insights into a company’s operations, the
efficiency of its management, under-performing sectors and its performance
relative to industry peers.
Source: Investopedia

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 4

Cash Flow Statement

The cash flow statement or statement of cash flows measures the sources of
a company's cash and its uses of cash over a specific time period.
A cash flow statement is generally divided into three main parts:
Operating activities: Analyzes a company’s cash flow from net income or
losses by reconciling the net income to the actual cash the company
received from or used in its operating activities.
Investing activities: Shows the cash flow from all investing activities,
which generally include purchases or sales of long-term assets, such as
property, plant, and equipment, as well as investment securities.
Financing activities: Shows the cash flow from all financing activities,
such as cash raised by selling stocks and bonds, or borrowing from
banks.
Source: Investopedia

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 5

 Basic Terms

• Earnings increase the profit reported in the Income statement of the same year they
are accounted for. As far as incurring cash in, they will be reported in the cash flow
statement (Cash Flow from Operating Activities)
• Revenues increase the profit and come from external sources. They are reported in the
income statement and in the cash flow statement of the same year or different years –
it depends!
• Receipts are incoming cash flows. They are reported in the cash flow statement of the
same year
---------------------------------------------------------------------------------------------------
• Expenditures decrease the profit of the same year they are accounted for. As far as
incurring cash out, they will be reported in the cash flow statement (Cash Flow from
Operating Activities)
• Spending decreases the profit and goes to external sources. It is reported in the
income statement and in the cash flow statement of the same year or different years –
it depends!
• Payments are outgoing cash flows. They are reported in the cash flow statement of the
same year.
© Prof. Dr. Arne Schulke AVI150 - CAA Slide 6
Basic terms: Earnings, Revenues and Receipts
Impact on
Earnings

Cash flow Statement

Income Statement

Statement
Balance
Revenues**

Receipts

Ass.
L&E
Examples
Appreciation of asset values + + 0 0

Sales of services against credit + + 0 0

Sales of goods (at inventory value) against credit 0 0* 0 0

Sales of services against cash + + 0 +

Ticket sales for a future flight against cash 0 + + +

Sales of fixed assets at book value against cash 0 0* 0 +

© Prof. Dr. Arne Schulke AVI150 - CAA * Asset swap = total assets remain the same Slide 7
** Warning on wording: Earnings and Revenues often not clearly separated in financial reporting!
Basic terms: Expenditures, Spendings and Payments
Impact on

Cash flow Statement

Income Statement
Expenditures

Statement
Balance
Spending**

Ass.
L&E
Examples
Payments Depreciation of assets – – 0 0

Buy services against credit – 0 + 0

Buy materials against credit 0 + + 0

Buy services against cash – – 0 –

Buy materials against cash 0 0* 0 –

Buy non current assets (for example: Aircraft)

0 0* 0 –
against cash
* Asset swap = total assets remain the same
** The term »Spending« is used rather than »Expenses«. Commonly expenses are referred to being accounted for against
revenues. However, whereas revenues do not include non cash earnings (like appreciation of assets), expenses include non
cash expenditures (like »depreciation expenses«).
© Prof. Dr. Arne Schulke AVI150 - CAA Slide 8
The Income Statement: Sources and Distribution of Profit

Wrong wording!

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 9

The Income Statement: Sources and Distribution of Profit

Total Revenue

./.

Operating Expenses Sources

(Expenditures)

Operating Profit/Loss

Fiscal Authorities
Distribution
Shareholders

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 10

 Driver
Passenger revenue 21,549 RPK, Fare level
Cargo revenue 1,173 RTK (Sold Cargo Tonnes km), Fare level
Other revenue 1,684
Total revenue 24,406
Employee costs 4,812 ASK, Service Level, Wage level
Fuel, oil costs and emissions charges 5,283 ASK, Fuel efficiency of the fleet
Handling, catering and other operating costs 2,888 ASK, Service Level, Wage level
Landing fees and en-route charges 2,184 A/C Km, # landings
Engineering and other aircraft costs 1,828 Flight hours
Property, IT and other costs 918
Selling costs 1,046 Revenue, Channel mix, Commission rate
Depreciation, amortisation and impairment 1,254 Fleet size and age
Aircraft operating lease costs 890 Aircraft type and number of A/C
Currency differences 73
Total expenditure on operations 21,176
Operating profit 3,23

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 11

Balance Sheet – Belongings and Funding

Invest-
ments
to be turned
over

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 12

Balance Sheet – Belongings and Funding
€ million 2018 Driver
Non-current assets
Property, plant and equipment 12,437 A/C, Maintenance Facilities, …
Intangible assets 3,198
Employee benefit assets 1,129 Incentive schemes
Derivative financial instruments 221
Deferred tax assets 536
Other non-current assets 309
17,941
Current assets
Inventories 509 Materials
Trade receivables 1,597
Net revenue, time between charging and payment (40% of n)
Other current assets 1,175 Investment in Credit Deposits (CD)
Current tax receivable 383
Derivative financial instruments 155 Fuel Hedging
Other current interest-bearing deposits 2,437
Cash and cash equivalents 3,837 Ending Cash reported in Cash Flow Statement
10,093
Total assets 28,034

Shareholders’ equity
Issued share capital 996
Share premium 6,022 # of shares, Share price when issued
Treasury shares -68
Other reserves -236
Total shareholders’ equity 6,714
Non-controlling interest 6
Total equity 6,720

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 13

The Statement of Cash Flows – Receipts and Payments

+ Receipts from sales, rent, etc.

– Cash paid to suppliers and employees, for rent,
selling activities, interest, and taxes etc.

+ Proceeds from sales of fixed assets, investments,

securities, property, etc.
– Purchase of fixed assets, property, investments, etc.
+ Financial income (interest / dividends etc.)

+ Proceeds from issuance of notes, debt, sale of

shares, etc
– Amortization of debt, dividend payments

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 14

Managing Cash Flow and Funding of Investments

Cash flow statement

(€ millions)

Cash as of cash equivalents at January 1, 2018 3,292

Net cash flow from operating activities 3,236

Net cash flow from investing activities (1,234)

Net cash flow from financing activities (1,410)

Net foreign exchange difference (38)

Cash and cash equivalents as of December 31, 2018 3,837

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 15
Analysis of Cash Flow – Operating Activities

Income statement
Earnings - Expenditures
Non cash expenditures

Cash flow
≠
Expenditures
or Earnings

„non operations
operating activities“

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 16

Analysis of Cash Flow – Investment Activities

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 17

Analysis of Cash Flow – Financing Activities

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 18

Cash Flow Statement:

Cash flows from operating activities Cash Flow Allocation

Operating profit after exceptional items 3,678 Operating Activities
Depreciation, amortisation and impairment 1,254 Operating Activities
Movement in working capital -64 Operating Activities
Payments related to restructuring -220 Operating Activities
Employer contributions to pension schemes -898 Operating Activities
Pension scheme service costs 55 Financing Activities
Provision and other non-cash movements -114 Operating Activities
Interest paid -149 Financing Activities
Interest received 37 Financing Activities
Tax paid -343 Operating Activities
Net cash flows from operating activities 3,236

Cash flows from investing activities

Acquisition of property, plant and equipment and intangible assets -2,802 Investment Activities
Sale of property, plant and equipment and intangible assets 574 Investment Activities
Decrease/(increase) in other current interest-bearing deposits 924 Financing Activities
Other investing movements 61 Investment Activities
Net cash flows from investing activities -1,243

Cash flows from financing activities

Proceeds from long-term borrowings 1,078 Financing Activities

Repayment of borrowings -275 Financing Activities
Repayment of finance leases -824 Financing Activities
Acquisition of treasury shares -500 Financing Activities
Distributions made to holders of perpetual securities -312 Financing Activities
Dividend paid -577 Financing Activities
© Prof. Dr. Arne Schulke AVI150 - CAA Slide 19
Net cash flows from financing activities -1,41
Other Key Figures (not (all) from the 3 core statements)

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 20

 Self-Test Question 1

• Responsibility Accounting
Which costs do you influence in your role as…
‒ Fleet planner, adding a new aircraft to the fleet?
‒ Route planner, adding a new route to the network?
‒ Ops planner, deciding if a flight is operating or cancelled?
‒ Sales person, selling a ticket on a flight?

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 21

Self-Test Question 2
• Financial Analysis
Starting with EBITDAR,
please offer a short
explanation for IAG’s
2018 cash flow items line
by line. Mark each line as
CFOps, CF Invest or CF
Financing. Remember
that this is not the P&L
and that you need to
sensibly interpret the type
of CF (in or out)

© Prof. Dr. Arne Schulke AVI150 - CAA Slide 22