Topic research on risk management of vietnam airlines assignment 2 quantitative risks impact on business value

lOMoARcPSD|22495817 MINISTRY OF EDUCATION AND TRAINING UEH UNIVERSITY COLLEGE OF BUSINESS SCHOOL OF MANAGEMENT ENTERPRISE RISK MANAGEMENT Lecturer: Dr Tran Thi Thanh Phuong TOPIC: RESEARCH ON RISK MANAGEMENT OF VIETNAM AIRLINES ASSIGNMENT 2: QUANTITATIVE RISKS IMPACT ON BUSINESS VALUE lOMoARcPSD|22495817 Member’s contribution Name Contribution Percentage Bui Hoang Bich Thao 100% Ly Phuong Uyen 100% Bui Nguyen Hoang Van 85% Truong Thuy Vi 100% Tran Ha Vi 85% lOMoARcPSD|22495817 Table of Contents I CURRENT STATE OF THE BUSINESS II KEY RISK SCENARIOS  Debt Management Risk  Equity Management Risk  Profit and sales risk  Featured aviation industry risk  Business environment risk .5 III ASSUMPTIONS FOR CRITICAL RISK SCENARIOS IV FCF FOR EACH RISK SCENARIO .10  Main assumptions 10  Cash flow forecast 10  Business valuation 10  Individual risks 10 V SIMULATION ANALYSIS .12 Scenario analysis 12 Crystal ball analysis .12 R1 - Debt management risk .12 R2 - Featured aviation industry risk 14 R3 - Equity management risk .15 R4 - Profits & Sales risk 16 R5 - Business environment risk 17 lOMoARcPSD|22495817 I CURRENT STATE OF THE BUSINESS Vietnam Airlines was the aviation industry's "giant" before the Covid epidemic This company has a substantial capital, workforce, fleet, and a lengthy history of development Like other airlines, Vietnam Airlines is also heavily affected by the Covid-19 pandemic The point is, in the overall difficult scenario, many airlines incur large losses, planes are lying on the ground, and flight numbers are at an all-time low, but when it comes to losses or the risk of bankruptcy, public opinion and management agencies always name Vietnam Airlines first Vietnam Airlines' pre-tax loss in 2020 is 8,743 billion VND If only passenger transport is counted, the loss is 10,975 billion VND Meanwhile, according to the audited financial report 2020 that Vietjet Air announced that this company lost 1,780 billion VND (before tax); passenger transport efficiency (excluding revenue outside passenger transport) loss of 4,311 billion VND Understandably, VNA's financial indicators in the period of 2019-2020 are below safe, even alarming levels as the following table: Year Ratio 2018 2019 2020 Liquidity ratio - Current ratio 0.63 0.61 0.25 - Quick ratio 0.52 0.50 0.20 - Inventory turnover 24.44 24.05 17.71 - Days of inventory on hand 14.94 15.17 20.61 Capital structure - Liabilities/ Assets 0.77 0.76 0.90 - Debt/Equity 3.41 3.11 9.30 lOMoARcPSD|22495817 Profitability ratio - Profit margin 0.03 0.03 -0.28 - ROA 0.03 0.03 -0.18 - ROE 0.14 0.14 -1.84 - Total asset turnover 1.13 1.24 0.58 When air transport is making losses and the financial situation is severely strained, Vietnam Airlines' best option is to borrow debt to compensate, including debt from the government, leading the debt scale to balloon and the burden to become unbearable Even if the aviation sector returns to regular functioning, Vietnam Airlines will be saddled with debt for many years to come Comparison table of business performance between Vietjet and Vietnam Airlines (31/12/2020) Unit VJC VNA 2020 2019 2020 2019 71 78 107 100 40.0% 44.0% 51.3% 50.1% People 5.476 5.092 21.127 21.255 Revenue Billion VND 18.220 50.602 40.756 99.099 Consolidated profit after tax Billion VND 68 3.807 - 11.178 2.537 Average revenue of employee Billion VND 3,327 9,937 1,929 4,662 Aircraft quantity Unit Domestic market share Human resources lOMoARcPSD|22495817 Average profit per employee Million VND 12,539 747,711 -529,091 119,381 Average personnel/aircraft People/ 77.13 65.28 197.45 212.55 aircraft Debts Debt/Equity Times 2.02 2.28 9.30 3.10 Debt/Asset Times 0.67 0.69 0.90 0.76 Billion VND 2.800 9.023 3.949 9.929 VND 125.000 146.200 28.300 33.800 0.38% 7.52% -27.43% 2.56% 15 24.9 16.4 29.1 10 Budget payment (including direct and indirect fees) 11 Stock price 12 Profit/Revenue 13 Number of passengers transported 2020 Millions of passengers (Source: https://theleader.vn/su-that-the-cua-doanh-nghiep-nha-nuoc-nhin-tu-buc-tranhvietnam-airlines-va-vietjet-1625633375242.htm) It can be seen that Vietnam Airlines is not operating well in the period of 2019-2020 With the difficulties that this company is facing inside and outside, it is facing a lot of risks that are mentioned before, which are Debt Management Risk, Featured Aviation Industry Risk, Profits and Sales Risk, Equity Management Risk and Business Environment Risk lOMoARcPSD|22495817 II KEY RISK SCENARIOS During its operation in 2018-2020, Vietnam Airlines seems to face a lot of disadvantages from the market, competitors as well as the heavy devastation of the COVID pandemic, especially in the period of 2019-2020 The repercussions they leave for VNA are extremely difficult to recover from Thus it is extremely likely that in the future, when the economy has gradually recovered, VNA will face the aforementioned risks  Debt Management Risk The airline business is a service industry that uses its earnings to pay down debt This puts airline firms under a lot of stress because they are continually under pressure to produce business and thus cash in order to pay off their debt Currently, the amount of overdue debt has reached VND 6,240 billion and is falling into an extremely difficult situation, on the brink of bankruptcy while commercial banks have not received the Government's VND 12,000 billion rescue package so Vietnam Airlines are not allowed to have further disburse or extend or grant credit limit  Equity Management Risk In the period 2019-2020, the prolonged epidemic situation and difficult business activities made Vietnam Airlines fall into a difficult situation, leading to the inevitable consequences of a cash flow deficit and a decline in equity In addition, the financial income also decreased by 84% due to the reduction of interest on exchange rate differences Interest on deposits and loans equal 1/5 of the same period The Corporation also no longer recognized income from the liquidation and sale of fixed assets as in the same period  Profit and sales risk Vietnam Airlines Corporation has just released its consolidated financial statements for the fourth quarter of 2020 with net revenue of VND 8,200 billion but still down 65% compared to the same period last year due to flight routes Besides, Vietnam Airlines has a gross loss of nearly 7,200 billion dongs, making a net loss from business activities of 11,600 billion dongs, losses before tax and after-tax are 10,881 billion dongs and 11,097 billion dongs, respectively This result caused Vietnam Airlines to end 2020 with a cumulative loss of VND 9,260 billion lOMoARcPSD|22495817  Featured aviation industry risk Featured risks are unavoidable risks in the operation of Vietnam Airlines For the aviation industry, airport technical infrastructure and air traffic control are still limited, leading to a limited number of train stations at domestic airports; Scarcity of high-end resources, especially resources for pilots, and technical engineers  Business environment risk With the outbreak of the COVID-19 epidemic, the recovery ability of international flights was almost zero In addition, fluctuations in the cost of aircraft materials will directly affect the results of production and business activities of Vietnam Airlines lOMoARcPSD|22495817 III ASSUMPTIONS FOR CRITICAL RISK SCENARIOS lOMoARcPSD|22495817 Risk Debt management risk Description Financial impact ● High debt may be the result of slow growth, while increasing Growth rate decrease to -17% debt and reducing growth To partially address this issue, R&R COGS increase to 110% (2012) has complemented their analysis of the relation between NOWC growth rate decrease to debt and growth by considering prolonged periods of high debt -10% The results suggest that, during periods of debt overhangs, Increase Enterprise Cost growth tends to be considerably lower Management to 5% ● During the pandemic isolation, most of the flight was cut, which led to the volume of purchase decreasing This factor directly affected COGS and NOWC growth rate to increase company debt ● The above factors had pointed out that the company’s finance management is quite poor, which needs improving the quality of resource management Featured aviation industry risk ● Airport technical infrastructure and air traffic control are still COGS increase to 128% limited, not keeping pace with development, leading to a limited Increase Enterprise Cost number of train stations at domestic airports ● State policy on access to the right to take off/landing at major international airports Meanwhile, with the rapid pace of technology research and development, alternative technology Management to 6% lOMoARcPSD|22495817 stand up after the economic crisis Business environment risk ● Due to the strong outbreak of the COVID-19 epidemic in Europe ● The number of bookings decreases again with a new variant, the recovery ability of international -> COGS increases to 110% flights was almost zero in Q1/2021 At the same time, IATA did ● NOWC growth rate decrease to not change its opinion on the cash flow of airlines when -12% continuing to evaluate airlines, which will start to be profitable ● Increase Enterprise Cost from Q4/2021 ● Fluctuations in the cost of aircraft materials will directly affect the results of production and business activities of Vietnam Airlines Management to 6% lOMoARcPSD|22495817 IV FCF FOR EACH RISKS SCENARIO  Main assumptions In general, the revenue growth rate has slowed down significantly in the period from 2018 This is the common result of most businesses due to the impact of the pandemic 2020 is the year VNA faces a profound decrease of nearly 60% It is forecasted that in the coming years, this problem will be improved and the index will be average (-13.5%) Cost of goods sold (% of revenue) and general and administrative expenses (% of revenue) are in balance before 2020 2020 is still the year where the indexes are most volatile gradually more stable In terms of net fixed asset growth and NOWC growth, 2020 is still a year causing many difficulties for VNA, and when the pandemic is over, these factors will improve  Cash flow forecast The analysis shows that Net Operating Working Capital has an average of 10,417,487,770,387 VND Largely leading to this figure is the effect of 2020 In terms of free cash flow, we will see a decline in the period from 2019 to 2022, the average of these years will be 1,807,092,091,383 VND The current value will be in the middle of more than 1.7 thousand VND  Business valuation VNA is an enterprise applying the steadily increasing pricing model Elements like Free Cash flow after 2023 will be around 1.8 thousand VND The value of the business is also determined and valued at about 72.8 thousand VND The intrinsic value of a share is determined at a price of about VND 29,150  Individual risks In terms of risk analysis, the excel sheet has shown many indicators of factors that are likely to have many potential risks This report will present some important profitability metrics such as ROA, ROE, Liquidity Ratios, and Leverage Ratios We not see too much difference between 2020 and 2021 in ROA (3.15% and 3.32%) and ROE (13.92% and 13.64%), however, in 2022, it is forecasted that ROE will decrease more 184% and ROA will also decrease (-17.87%) 10 lOMoARcPSD|22495817 Next, the Liquidity ratios recorded a significant decrease when predicted in 2022 in each of the indicators such as Current Ratio and Quick Ratio In general, these indicators will tend to decrease by more than 50% compared to the previous year Finally, another important stat is the Leverage Ratios This ratio in detail includes a significant increase in Total Debt/Total Equity in 2022 (90%) Another factor is that Total long-term debt/loss has a year-on-year decrease between 2020 and 2021, and an increase in 2022 compared to 2021 On the other hand, total debt/equity has a similarity between 2020 with 2021 (77% and 76%) In 2022, it will increase to more than 10%, so this indicator is around 90%  Perform 1-way analysis Cost of goods sold (% of revenue) Based on the results of the 1-way Sensitivity Analysis table, the cost of goods sold affects FCF, company value, value per share, and ebit which is large compared to the remaining inputs This means that the company is likely to suffer huge losses over the next few years because the safety margin of this input is virtually nonexistent Revenue growth every year VNA's revenue growth in the next few years is bound to be negative because its growth momentum slows down over time Therefore, we must definitely take measures to improve the growth momentum Net fixed asset growth If the net fixed asset growth percentage goes above -4%, then ebit, company value, and value per share all exceed the margin of safety Enterprise administration expenses (% of revenue) The percentage of administrative costs increased but only had a significant impact on ebit because our base already has a high management cost range compared to the current situation, so we can't push the costs out of control So we should use other methods to improve Ebit We can manage the remaining outputs, which are in the safe zone Growth NOWC NOWC growth has no significant effect on output values In conclusion: When we sort the risk by value from largest to smallest, which will harm the business and cause loss, we get the following list: 11 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 Cost of goods sold (% of revenue) Revenue growth every year Net Fixed Asset Growth Business administration expenses Growth NOWC In order to help the company avoid losses, we can suggest some solutions such as combining technology and improving supplier contracts in a lean manner or examining items that require non-routine maintenance in order to reduce the cost of goods sold V SIMULATION ANALYSIS Scenario analysis In this report, we have analyzed possible scenarios and given forecast numbers on the revenue growth rate, cost of goods sold (% of revenue), G&A expenses (% of sales), net fixed asset growth, and NOWC growth, all figures are updated and shown in the Scenario Analysis table After giving the forecast results (percentage for each factor), we applied and calculated the results of EBIT, Free Cash Flow, Total corporate value, and Intrinsic value per share of the current value After completing the calculation, we have given the results on scenarios equivalent to potential risks: Debt management risk (142.29%), Featured aviation industry risk (114.74%), Equity management risk ( 145.16%), Profits and sales risk (125.80%), Business environment risk (134.56%) Overall, we see that Equity management risk and the Featured aviation industry account for the highest and lowest proportions of the selected risks, respectively The above figures also clearly show the probability of risks that VNA may face in the future Crystal ball analysis R1 - Debt management risk After having specific analysis in the above sections, in this part, this report will continue to use a tool to provide the possibilities and parameters of the mentioned risks, the tool we use here is the Crystal ball program 12 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 For Debt Management isk, the result after using the crystal ball analysis method of the Skewness index of this factor is determined to be negative The analysis chart shows an increasing trend towards the price level of 1.5 million VND and gradually decreasing to VND According to the figures presented in Crystal Ball's sensitivity analysis on the likelihood of this risk, we see a very high number (98.5%) This means VNA will face a very high debt capacity Because of the severity of the effect, any change (increase or decrease) will profoundly affect the likelihood of this risk occurring As for the revenue growth rate, which in this case is also determined at (1.1%) 13 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 Mean of Risk Value: -20231 The probability that makes the risk value negative is 100% It means that this risk has a 100% chance to make the risk value >0 R2 - Featured aviation industry risk Next in this section, we will continue to use Crystal Ball analysis to show the change or fluctuations of industry-specific risks faced by VNA The determined skewness index continues to distribute at a negative number (-0.3627) 14 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 Continuing to analyze the risk sensitivity of the airline industry, we see that the cost of goods sold (% of revenue) has a rate of 72.4% In addition, this same factor but in the year forecast will be at 4.8% The revenue growth rate also has a difference of 17% for the forecast year and 0.2% for the present Mean of Risk Value: -50579 The probability that makes the risk value negative is 83.73% It means that this risk has an 83.73% chance to make the risk value > R3 - Equity management risk Thirdly, For Equity Management Risk, this risk chance percentage is only 4.2% This means that Vietnam Airlines would hardly face this risk in the future However, the result after using the crystal ball analysis method of the Skewness index of this factor is determined to be negative (-0.3091) Mean of Risk Value: -18880 The probability that makes the risk value negative is 82.31% It means that this risk has an 82.31% chance to make the risk value > 15 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 R4 - Profits & Sales risk Fourthly, we still use Crystal Ball analysis to show the Profits and Sales risks faced by VNA The determined skewness index continues to distribute at a negative number (-0.6975) The determined skewness index continues to distribute at a negative number (-0.6975) Mean of Risk Value: -22781 Probability that makes risk value negative: 99.76% It means that this risk have 99.76% chance to make the risk value >0 16 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 R5 - Business environment risk Mean of Risk Value: -22387 Probability that makes risk value negative: 99.22% It means that this risk have 99.22% chance to make the risk value >0 After running the crystal ball simulation and calculating the values of each risk case We see the impact of the risks sorted in descending order as follows: Debt Management Risk, 17 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 Featured Aviation Industry Risk, Profits and Sales Risk, Business Environment Risk, Equity Management Risk Table: Risk value assessment Sensitivity chart shows us the influence of each risk component on the risk value For example, in Risk 1, the Probability factor contributes 98.5% to changing the risk value In general, the Sensitivity Chart of each Risk is quite similar (except for Risk 1) With the largest proportion being the COGS factor (% rev), followed by revenue growth rate, risk probability, This means, if the business wants to minimize the loss of each risk They should focus on reducing COGS, because this is the factor that accounts for the most change in risk value To this, the company should think of "pre-servicing" planes, improve supplier contracts in a lean manner or examine items that require non-routine maintenance Equipment should be modified in our business 18 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 19 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 References A Guide to Cost of Goods Sold Oracle NetSuite (2022) Retrieved 21 April 2022, from https://www.netsuite.com/portal/resource/articles/financial-management/cost-ofgoods-sold-cogs.shtml Aerospace.honeywell.com 2022 Three Great Fuel Saving Hacks for Airlines [online] Available at: [Accessed 27 March 2022] Baotintuc.vn 2022 Vietnam Airlines xoay xở vượt bão COVID [online] Available at: [Accessed 27 March 2022] Cophieu68.vn 2022 Lịch sử giá HVN - Tổng Công ty Hàng không Việt Nam - CTCP [online] Available at: [Accessed 18 March 2022] https://nld.com.vn 2022 Vietnam Airlines thông qua phương án tăng vốn 8.000 tỉ đồng [online] Available at: [Accessed 27 March 2022] https://dangcongsan.vn 2022 Vietnam Airlines triển khai giải pháp ứng phó với đại dịch COVID-19 [online] Available at: [Accessed 27 March 2022] Investopedia 2022 The Average Debt-to-Equity Ratio of Airline Companies [online] Available at: [Accessed 27 March 2022] ONLINE, T., 2022 Vietnam Airlines 'thoát' âm vốn chủ sở hữu cách nào? [online] TUOI TRE ONLINE Available at: [Accessed 27 March 2022] Pescatori, A., Sandri, D., & Simon, J (2014) Debt and Growth: Is There a Magic Threshold? SSRN Electronic Journal https://doi.org/10.2139/ssrn.2407527 Pyke, D., & Sibdari, S (2022) Risk Management in the Airline Industry Retrieved 21 April 2022, from 20 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 Pyke, D and Sibdari, S., 2022 Risk Management in the Airline Industry Slate Accounting and Financial Services 2022 What is Liquidity Risk Management? - Slate [online] Available at: [Accessed 27 March 2022] Sự thật đằng sau tình trạng lâm nguy Vietnam Airlines Tạp chí Kinh tế Sài Gịn (2022) Retrieved 21 April 2022, from https://thesaigontimes.vn/su-that-dang-sau-tinh-tranglam-nguy-cua-vietnam-airlines/ Sự thất doanh nghiệp nhà nước nhìn từ tranh Vietnam Airlines Vietjet TheLEADER (2022) Retrieved 21 April 2022, from https://theleader.vn/su-that-thecua-doanh-nghiep-nha-nuoc-nhin-tu-buc-tranh-vietnam-airlines-va-vietjet1625633375242.htm Three Great Fuel Saving Hacks for Airlines Aerospace.honeywell.com (2022) Retrieved 21 April 2022, from https://aerospace.honeywell.com/us/en/learn/about-us/blogs/threegreat-fuel-saving-hacks-for-airlines The Average Debt-to-Equity Ratio of Airline Companies Investopedia (2022) Retrieved 21 April 2022, from https://www.investopedia.com/ask/answers/061615/what-averagedebtequity-ratio-airline-companies.asp Vietnam Airlines thông qua phương án tăng vốn 8.000 tỉ đồng https://nld.com.vn (2022) Retrieved 21 April 2022, from https://nld.com.vn/kinh-te/vietnam-airlines-thong-quaphuong-an-tang-von-8000-ti-dong-20210714133929257.htm Vietnam Airlines xoay xở vượt bão COVID Baotintuc.vn (2022) Retrieved 21 April 2022, from https://baotintuc.vn/doanh-nghiep-doanh-nhan/vietnam-airlines-xoay-xo-vuotbao-covid-20210731073712801.htm Vietnamairlines.com (2022) Retrieved 21 April 2022, from https://www.vietnamairlines.com/~/media/FilesDownload/AboutUs/InvestorRelations/Bao-Cao-Thuong-Nien/bao-cao-thuong-nien-2020.pdf Vietnamairlines.com (2022) Retrieved 21 April 2022, from https://www.vietnamairlines.com/~/media/FilesDownload/AboutUs/InvestorRelations/Bao-Cao-Thuong-Nien/new-bao-cao-thuong-nien-2019.pdf VietstockFinance 2022 HVN: Tổng Công ty Hàng không Việt Nam - CTCP - Vietnam Airlines - Tài | VietstockFinance [online] Available at: 21 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 [Accessed 18 March 2022] VietstockFinance 2022 HVN: Tổng Công ty Hàng không Việt Nam - CTCP - Vietnam Airlines - Tài | VietstockFinance [online] Available at: [Accessed 18 March 2022] VietstockFinance 2022 HVN: Tổng Công ty Hàng không Việt Nam - CTCP - Vietnam Airlines - Tài | VietstockFinance [online] Available at: [Accessed 18 March 2022] What is Liquidity Risk Management? - Slate Slate Accounting and Financial Services (2022) Retrieved 21 April 2022, from https://slate.ac/what-is-liquidity-riskmanagement/ 22 Downloaded by hay hay (vuchinhhp8@gmail.com) lOMoARcPSD|22495817 23 Downloaded by hay hay (vuchinhhp8@gmail.com)