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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 signifies a $60 rise, significantly impacting easyJet's cash flow management. Higher fuel costs likely lead to increased cash outflows as the airline needs more funds to fuel its large fleet of 342 aircraft. This scenario could result in reduced working capital, as higher expenses may not be immediately offset by revenues. If easyJet's cash outflows rise without a corresponding increase in cash inflows, this would tighten working capital availability, thus limiting the company’s flexibility in operations.
Step 2
Potential strategies to mitigate impact on working capital
Answer
Despite the challenges, easyJet may employ several strategies to counteract the negative effects of rising fuel costs: 1. Negotiation with suppliers: As the 7th largest airline, easyJet might negotiate better rates for jet fuel, thereby reducing cash outflows. This could alleviate the strain on working capital. 2. Optimizing fuel management: By analyzing routes and adjusting flight frequencies, easyJet can manage its fuel purchases more effectively, further assisting in controlling costs. 3. Demand management: The airline could incentivize early bookings or adjust flight prices to enhance cash inflow, offsetting outflows resulting from increased fuel prices.
Step 3
Overall assessment of the impact
Answer
In conclusion, the significant rise in jet fuel prices would likely have exerted pressure on easyJet's working capital management, necessitating heightened scrutiny of cash outflows. However, through proactive strategies—such as negotiating better fuel prices and enhancing demand management—easyJet could mitigate some of these challenges. If the management reacts adeptly, it may sustain its operational efficiency despite external pressures.