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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 substantial increase in jet fuel prices, rising by approximately $60 per barrel, likely led to heightened cash outflows for easyJet, as fuel is a significant cost given the company operates a fleet of 342 aircraft. Increased fuel costs may necessitate purchasing less fuel, which could restrict easyJet's ability to maintain operations across its 35 countries. Additionally, the rising costs might reduce cash inflows, as higher ticket prices resulting from jet fuel surcharges can diminish customer demand, thereby adversely affecting working capital.
Step 2
Potential counterbalancing factors
Answer
Despite these challenges, easyJet, being the seventh largest airline, may possess negotiating power to mitigate some costs by obtaining better terms from fuel suppliers. Furthermore, the airline can consider diversifying its fuel sources or managing its inventory levels more effectively to reduce cash outflows. Delaying payments to suppliers could also serve as a method to alleviate immediate cash flow issues. Additionally, easyJet might opt to incentivize earlier payments from customers to improve cash inflows.
Step 3
Conclusion on working capital management
Answer
In conclusion, while the surge in jet fuel prices likely posed challenges for easyJet's working capital management due to increased cash outflows and reduced demand, the company's potential negotiating power and strategic financial management could help mitigate some of these negative effects. Ultimately, the extent of the impact on its working capital would depend on how effectively management responds to these challenges.