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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. In November 20... 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 could lead easyJet plc to incur higher cash outflows, as it would have to spend more on fuel for its large fleet of 342 aircraft. This escalation in costs may result in a decline in working capital as cash is directed towards fuel expenses rather than operational needs.
Additionally, easyJet might have to purchase less jet fuel due to its high cost, limiting its operational capacity to meet passenger demand across its 35 destinations. Increased fuel expenses could also reduce cash inflows, as higher ticket prices may deter customers, further affecting working capital negatively.
Step 2
Possible Counterbalancing Strategies
Answer
However, as the 7th largest airline in the world, easyJet may have leverage to negotiate lower jet fuel prices. This could potentially help in managing rising cash outflows effectively.
Moreover, easyJet might consider switching its fuel purchases to only essential quantities or delay payments to suppliers, which would ease cash flow pressures and allow better management of working capital.
Step 3
Impact on Working Capital Management
Answer
In conclusion, while the rising jet fuel prices certainly pose challenges to easyJet’s working capital management by increasing cash outflows, possible strategies such as negotiation and efficient fuel management could mitigate some adverse effects. The overall reliance on jet fuel makes it critical for easyJet to navigate these outflows wisely. Therefore, the change in fuel prices significantly impacts the airline's ability to maintain sufficient working capital for operational needs.