During 2001, the airline industry was unfavorably influenced by the global economic deceleration as well as the dreadful September 11 terrorist attack. In addition to these external forces, there was intense contest originated by the surplus in the domestic and international aviation markets. Operating Revenues Nonetheless, CSA has enjoyed from an incline of operating revenue to Renminbi (RMB)16,879 million from RMB 15,178 million in 2000. The rise in revenue is mainly due to an incline of 13. 6% in the passenger revenue, which is accountable for 91. 5 % of the traffic income.

Throughout 2001, the traffic volume became higher and it is because of the improvements in the Asian regions and China. Operating Expenses On the other hand, the operating expenses of CSA also rose up considerably to RMB 15,478 million and it is mainly due to the expansion and operational growth of the company. Furthermore, it leads to an increase of operating profit to RMB 1,400 million in 2001 since the percentage change in operating revenue is relatively greater. Thus, there is no doubt to say that the operating activities of CSA are improving and enlarging. Non-operating Activities

In contrast, the non-operating activities of CSA had been acting as an expense of the company in 2001. The drastic decrease from RMB 250 million in 2000 to RMB 605 million in the following year was due to the drop in gain on sale of aircraft under sale, the leaseback transaction as well as the loss on sale of staff quarter. Net Profit In the advent of the China government’s policies of improving the economic growth by endorsing the domestic demand, CSA has taken advantages from these implementations consistent with an amount of RMB 340 million net profit in 2001, however the net profit was in fact decreasing when compare with 2000.

Investing Activities In accordance with the policy of Civil Aviation Administration of China (CAAC), there was a significant process of merger and restructuring. Indeed, CSA has proposed to restructure with China Northern Airlines and Xinjiang Airlines, which has been approved by the China government in early 2002. Undoubtedly, CSA will treasure this chance and persist to explore business opportunities arising from merger and restructuring in relation to the benefits of economies of scale. Liquidity In spite of this, CSA is actually taking a high risk to run the company repetitively.

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The firm’s liquidity is in fact getting worse and worse in view of the fact that there was an upsurge of the company’s fixed assets that had been using the cash of CSA and boosted up its loans too. Moreover, the current assets of CSA chopped down to RMB 4,378 million, whereas the current liabilities of the company had undesirably amplified to RMB 8,074 million from RMB 7,105 million. Abstract Consequently, it is clear that the company has realized the importance of the growth of assets. Yet, the managers should take all these decisions into a thorough consideration since the group’s ability to repay the debts has been deteriorating.

Although there are guaranteed from the other parties for the loans in the previous years, it is apparent that if CSA is going to keep this trend forward, the creditors may not be willing to lend money to them and even those guaranteed parties may avoid to warrant CSA. Ratios Calculation Before examining the performance of CSA during the year of 2001, a brief understanding about the ratios of the company will be informative and my concerns are on two perspectives: profitability and liquidity of CSA. Other ratios of the company had been attached through Appendix 1.

The calculations from the above table can give a brief idea about the performance of CSA. As a result, the following task will put its emphasis on the interpretation of these ratios in order to examine CSA’s operation Analysis of Profitability According to the Consolidated Profit and Loss Account in Appendix 2, the operating revenue increased by 11. 2 % to RMB 16,879 million in 2001.

Apparently, the domestic passenger revenue escalated by 14. 2% under the above circumstances and while the Hong Kong passenger revenue has a minor fluctuation of -1.3%. Furthermore, the international demand grew up in line with China’s entry of the World Trade Organization (WTO). Consequently, the revenue in this perspective considerably expanded by 20. 2%. Although there was a slight decline in the cargo and mail revenues as well as a reduction in the other revenue that was primarily ensue to a drop in the aircraft lease, the total operating revenue remained on its improving trend. Then, the operating expenses saw a significant amplification of 10. 6% that reached RMB 15,478 million in 2001.

As a general rule, most of the operating expenses of CSA increased except the depreciation and amortization. In majority, the rise was the result of the operational growth and hence the substantial expenses of CSA are from its airline operations.

The expenses in proportion to the operational growth include maintenance of increasing number of fleets; the added insurance costs result from the appalling terror in New York, increase in bonuses for flight personnel and so forth. It is clear that the operating activities in CSA generated a desirable profit, thus, the operating profit increased by 18.5 % that can be shown by the gross profit ratio and mark up ratio. There was an upward trend for both ratios.

However, the non-operating activities acted as a profit reducer for CSA in 2001. In the advent of the drop in sale aircraft, leaseback transaction and the loss on sale of staff quarter, CSA has to pay for RMB 354,546 million more than the previous year. As a result, this dramatic increase of expenditures reduce the net profit of the company and hence, the net profit ratio of CSA decreased by 1. 4%.

Therefore, the management team should pay attentions not only onto the operating activities, but also for the non-operating activities given that the above factors can directly influenced the net profit of a company. In addition, the downward trend of the return on capital employed ratios implies that the entity’s profitability is getting worse and emphasis should be placed in order to protect the company’s growth and shareholder’s benefits. As long as CSA’s net profit kept on reducing throughout the next consecutive years, then the shareholders will seriously suffer.

Even though the shareholders are not in a retrospective concern that means they do not only pay attention to the dividend payouts. Yet, it is important for the company to generate more profit and ensure a nourishing growth. It is obvious that a company’s profitability can be affected by different angles. Definitely, the return on capital employed (ROCE) gives us a better understanding about CSA’s profitability, but it is vital to explore the components of ROCE. The following equation shows a clearer understanding.

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