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Assess whether the change in price of jet fuel between November 2015 and July 2018 may have affected easyJet plc's management of its working capital - Edexcel - A-Level Business - Question 1 - 2022 - Paper 2
Question 1
Assess whether the change in price of jet fuel between November 2015 and July 2018 may have affected easyJet plc's management of its working capital. The price of j... show full transcript
Worked Solution & Example Answer:Assess whether the change in price of jet fuel between November 2015 and July 2018 may have affected easyJet plc's management of its working capital - Edexcel - A-Level Business - Question 1 - 2022 - Paper 2
Step 1
Negative effects of rising jet fuel prices
Answer
The significant increase in jet fuel prices, from 97 per barrel, likely led to increased cash outflows for easyJet plc. As a budget airline operating a large fleet of 342 aircraft, the rise in fuel costs may have resulted in a noticeable decrease in working capital. This is because high fuel expenses could necessitate that easyJet purchase less fuel, limiting its ability to respond to demand across its 35 countries of service.
Moreover, the increased cost of jet fuel may have prompted easyJet to experience reduced cash inflows. As jet fuel prices rise, it could force the airline to increase ticket prices, which might lead to diminished customer demand. Consequently, a decrease in customer demand could further reduce cash inflows, affecting the working capital negatively.
Step 2
Possible counterbalance to the negative effects
Answer
On the other hand, easyJet is the seventh largest airline in the world and may have leverage to negotiate lower jet fuel prices with suppliers. This could result in a mitigation of cash outflows, thereby helping the company manage its working capital more effectively.
Additionally, easyJet has the potential to offer incentives to customers, encouraging them to pay for flights earlier. This strategy could enhance cash inflows, improving the management of working capital despite rising fuel costs. By offering earlier payment options, easyJet could see an increase in cash flows, counterbalancing the negative impact of fuel price hikes.
Step 3
Potential judgement on working capital changes
Answer
Overall, the drastic increase in the price of jet fuel of $60 per barrel likely had a substantial impact on easyJet's management of working capital. Given that jet fuel accounts for a significant portion of operational costs, the higher fuel price may have led to increased cash outflows and a challenging environment for maintaining working capital. However, easyJet's size, potential negotiation power, and pricing strategies could provide avenues to mitigate these effects somewhat.