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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. Jet fuel price... 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 increase in jet fuel prices from 97 per barrel in July 2018 represents a significant rise of $60 per barrel. This steep increase leads to higher cash outflows for easyJet, as the airline relies on jet fuel for its fleet of 342 aircraft. As fuel costs constitute a major part of operational expenses, rising prices demand increased cash reserves, which can strain working capital. This situation may force easyJet to limit its flight operations to manage fuel costs effectively, exacerbating the scenario with potentially reduced cash inflows from ticket sales as consumers might face higher fares.
Step 2
Possible Counterbalancing Factors
Answer
Despite the adverse effects, easyJet’s position as the seventh largest airline may provide leverage to negotiate more favorable jet fuel prices. Furthermore, the airline could mitigate cash outflows by transitioning to a strategy of purchasing jet fuel in smaller quantities, hence controlling its cost exposure. Another consideration is the company’s ability to implement promotional offers or incentives, enticing customers to book flights earlier, yielding quicker cash inflows that could assist in stabilizing working capital.
Step 3
Conclusion
Answer
Overall, while the soaring jet fuel prices may initially hinder easyJet’s working capital management, strategic adaptations and negotiations with fuel suppliers could potentially alleviate such impacts. Therefore, the overall scope of effect hinges on easyJet's responsive measures in managing operational costs against fluctuating fuel prices.