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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 price of jet fuel surged from 97 per barrel in July 2018. This substantial increase in fuel costs likely led to elevated cash outflows for easyJet, as fuel is a major expense for the airline. Consequently, easyJet may have had to allocate more cash towards fuel purchases, which could have resulted in a decline in its working capital. Additionally, greater fuel expenses could restrict the company's ability to invest in other areas, affecting operational flexibility.
Step 2
Potential implications for cash inflows
Answer
Rising fuel costs may have also made it challenging for easyJet to maintain ticket prices competitive. If easyJet was forced to raise ticket prices to compensate for higher fuel costs, it might have deterred some customers, leading to reduced demand. A drop in demand would further decrease cash inflows, straining working capital. Additionally, higher prices could lead to negative customer perceptions and brand reputation issues, compounding these challenges.
Step 3
Counterbalancing factors
Answer
Despite the aforementioned negative impacts, easyJet's status as the 7th largest airline grants it some negotiating power to secure better fuel prices through favorable contracts. This could help mitigate cash outflows. Furthermore, easyJet might improve its cash management strategies, such as incentivizing customers to pay for their flights earlier. These measures could improve cash inflows and help stabilize working capital despite the challenges posed by rising jet fuel prices.
Step 4
Overall assessment
Answer
In conclusion, the sharp increase in jet fuel prices between November 2015 and July 2018 likely strained easyJet Plc's management of its working capital due to higher cash outflows and potential reductions in cash inflows. However, various strategies and market positioning may have provided some leeway to alleviate these financial pressures.