Financial Performance Analysis of Ground Handling Industry Before and during the Covid-19 Pandemic
Listya Dewi Kusumawati1*, Imo Gandakusuma1
1 Faculty of Economics and Business, University of Indonesia, Jakarta, Indonesia
*Corresponding Author: [email protected] Accepted: 15 July 2021 | Published: 1 August 2021
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Abstract: The Covid-19 pandemic has brought on a significant negative impact on the aviation industry in Indonesia. The Indonesian government's policies to reduce the spread of Covid-19, such as social restrictions, restrictions on public transportation, and prohibitions on passenger flights for domestic routes, have caused the aviation industry to become sluggish. As a part of the aviation industry but frequently overlooked, the ground handling industry has also experienced the negative impact of Covid-19. By conducting a case study research on the largest ground handling company in Indonesia, this study aims to examine the decline in profitability, liquidity, and financial health of the ground handling industry in Indonesia during the Covid-19 pandemic period. In addition, this research identified implemented strategic responses to overcome the crisis brought by the Covid-19 pandemic. This research contributes to formulating further strategic responses to cope with the ongoing crisis.
Keywords: Covid-19, financial performance, ground handling, liquidity, profitability
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1. Introduction
Coronavirus disease (Covid-19) is an infectious disease caused by a novel coronavirus (WHO, 2020). The novel coronavirus is a new variant of coronavirus discovered in 2019. Covid-19 spreads through droplets or saliva when someone infected by the virus coughs, sneezes, and talk. To prevent the spread of Covid-19, it is recommended to adopt new habits, such as wear masks, wash hands, and avoid the crowd (COVID-19, 2020). It is also recommended to apply physical distancing (Kraus et al., 2020).
Measures to prevent the spread of Covid-19 not only affect people's daily lives but also affect the economy at large (Kraus et al., 2020). Government regulations governing several industries, the implementation of social distancing, and nonessential business restrictions have affected the economy from the supply and demand side (del Rio-Chanona et al., 2020). The aviation industry is one of the industries that is directly affected by Covid-19 (Iacus et al., 2020). It is estimated that by 2020 the airline industry worldwide will experience a 60% decline in passengers and a loss of USD 371 billion in gross revenue from 2019 (ICAO, 2021). As part of the aviation industry, the ground handling industry has also been heavily affected by the Covid- 19 outbreak. To be precise, the largest ground handling company in Indonesia experienced a 42% cut down in total revenue and a deepening 597% in the loss in 2020. In addition, the company has a low liquidity rate during the Covid-19 outbreak (PT ABC, 2021).
To overcome business situations that are not normal, complex, and unstable, the right strategy is needed (Hamidovic, 2014). Mistakes in strategizing can cause huge losses for the company
(Rothaermel, 2017). Therefore, companies need to investigate the impact of the Covid-19 pandemic on company performance. Financial measures such as profitability and liquidity can provide good information in describing company performance (Higgins, 2016) and valuable for encouraging competitiveness (Kementerian Badan Usaha Milik Negara, 2002). In short, this research aims to examine the profitability, liquidity, and health of the ground handling industry in Indonesia during the Covid-19 outbreak.
2. Literature Review
Sustainable Growth Rate (SGR)
Managing a company’s revenue growth is mandatory for managers because too little growth means low profitability and low market share, but too much growth might lead the company into bankruptcy (Higgins, 2016). An important term in managing a company’s growth is sustainable growth rate (Higgins, 2016; Platt et al., 1995; Van Horne & Wachowicz, 2008).
Generally, a sustainable growth rate is the maximum growth rate the company’s revenue can increase without depleting its financial resources (Higgins, 2016). Sustainable growth rate computations proposed by Higgins and Van Horne are the most widely used, and both are equally preferable from the manager’s and researcher’s point of view (Fonseka et al., 2012).
According to Higgins’ computation, a company’s sustainable growth rate is its net profit margin, retention rate, asset turnover, and assets to equity ratio (Higgins, 2016). According to Van Horne’s computation, a company’s sustainable growth rate is determined by its retention rate and ROE (Van Horne & Wachowicz, 2008). Both Higgins’s and Van Horne’s computation for sustainable growth rate focus on retention rate and ROE.
Liquidity
Generally, a company is described as a liquid company when it can meet its current obligations (Libby et al., 2017). Liquidity should be managed because low liquidity runs the risk of unable to meet the current obligation, while too much liquidity indicates unproductive current assets (Libby et al., 2017). The liquidity rate of a company is measured by liquidity ratios such as current ratio, quick ratio, and cash ratio (Libby et al., 2017; Van Horne & Wachowicz, 2008).
The higher liquidity rate indicates a higher ability to meet current obligations. During the Covid-19 pandemic, companies seem to be facing concerns regarding liquidity problems (Albers & Rundshagen, 2020; Kraus et al., 2020; Linden, 2021).
State-Owned Enterprise Health
A state-Owned Enterprise is a business entity in which all or most of its capital is owned by the country through direct inclusion derived from separated State Assets (Presiden Republik Indonesia, 2003). Regarding the development of business and economic conditions in Indonesia, the Ministry of State-Owned Enterprise finds it is necessary to construct a performance assessment system for State-Owned Enterprises (Kementerian Badan Usaha Milik Negara, 2002). The assessment is intended to improve the efficiency and competitiveness of the enterprises. The assessment consists of financial and operational sections. The points included in the financial section are ROE, ROA, cash ratio, current ratio, collection periods, inventory turnover, total asset turnover, and equity to asset ratio. The achievement on each point of assessment is weighted and subsequently, a total weighted score is computed. The enterprises are rated based on the total weighted score. A State-Owned Enterprise's total weighted score might increase or decrease over time depending on their financial performance (Lasmana &
Wijayanti, 2016). Thus, State-Owned Enterprises should improve their financial performance to increase competitiveness (Bahara & Saifi, 2015).
Wenzel’s Classification of Strategic Responses Toward Covid-19 Pandemic
Measures to prevent the spread of Covid-19 are focus on saving people’s lives, but at the same time they also negatively affect firms and the economy on a global scale (Kraus et al., 2020).
To overcome the negative impact of the Covid-19 pandemic, firms may employ four types of strategic responses: retrenchment, persevering, innovating, and exit (Wenzel et al., 2021).
Awareness of these responses has implications for both manager and researcher. According to Wenzel’s classification of strategic responses toward the Covid-19 pandemic, European Airlines mostly employ retrenchment, persevering, innovating, and exit response strategies respectively (Albers & Rundshagen, 2020).
3. Research Method
This research adopted the qualitative method. A case study research is conducted to seek understanding regarding ground handling industry financial performance before and during the Covid-19 pandemic. The adoption of case study research is necessary due to the novel characteristics of the crisis caused by the Covid-19 pandemic. In addition, the ground handling industry has distinctive properties compared to airlines and airports.
This research was conducted at the largest ground handling company in Indonesia in terms of market share and service area coverage. The data used in this research are financial statement data and management reports. This research featured data from 2015 to 2020. All data were obtained from the Financial Analysis & Cash Management unit of PT ABC.
In measuring financial performance, this research used sustainable growth rate, liquidity rate, and company’s health. In analyzing company growth, this research compared actual revenue growth during the 2015-2020 period to sustainable growth rate computed using Higgins’ model and Van Horne’s model. In inquiring about liquidity rate, this research measured current ratio, cash ratio, and net working capital. In measuring the company’s health, this research applied State-Owned Enterprise Health measurement as instructed in SKEP-100/MBU/2002 issued by the State-Owned Enterprise Ministry of Indonesia.
In depicting PT ABC’s strategic responses, this research adopted Wenzel’s classification for the company’s responses toward the Covid-19 pandemic. The responses and actions taken by the company were listed and classified into retrenchment, persevering, innovating, and exit.
4. Result and Discussion
Sustainable Growth Rate (SGR)
Sustainable growth rate calculation for the company's financial data of 2015-2020 indicated almost similar results for both Higgins and Van Horne methods.
Table 1: Sustainable Growth Rate of PT ABC 2015 – 2020
Description 2015 2016 2017 2018 2019 2020
Net Profit Margin 4% 2% 3% 4% -1% -12%
Retention Ratio 100% 100% 100% 100% 100% 100%
Total Asset Turnover Ratio 1,31 0,84 1,76 1,84 1,35 0,75
Asset to Equity Ratio 2,51 4,61 2,19 2,00 1,92 2,59
Higgins' SGR 13% 7% 13% 13% -3% -23%
Retention Ratio 100% 100% 100% 100% 100% 100%
Net Profit 53.796 28.261 54.801 67.476 (18.330) (127.759) Equity 399.971 385.319 419.965 508.292 710.480 556.956
Van Horne's SGR 16% 8% 15% 15% -3% -19%
Actual Growth Rate 9% 13% 8% 15% -1% -42%
Since the retention ratio throughout 2015 to 2020 remained at 100%, the calculation result of sustainable growth rate according to Higgins’s and Van Horne’s models at PT ABC was only influenced by net profit and equity through ROE. Both Higgins' and Van Horne's calculation results indicated a relatively similar movement pattern, that is, when ROE increased, the sustainable growth rate also increased and vice versa. This finding is consistent with the finding of Fonseka et al. (2013). However, the exact calculation results of the two methods are different.
The sustainable growth rate calculated according to Higgins' method consistently smaller than the one calculated according to Van Horne's method.
The downward trend in revenue growth and the sustainable growth rate has occurred since 2019. PT ABC's revenue decreased or grew negatively in 2019 due to reduced revenue from the main segment of Garuda Indonesia. On the other hand, total expenses in 2019 grew by 4,4%, so that in 2019 PT ABC recorded a loss of 18.33 billion rupiahs. As a follow-up impact, ROE were negative, so the results of the calculation of sustainable growth rate, both according to Higgins’s and Van Horne’s models, were also negative. In 2020, due to the impact of the Covid- 2019 pandemic, PT ABC's total revenue decreased by 41,6%, while total expenses decreased by 33,6%, so that PT ABC recorded a loss of 127,7 billion rupiah. This loss drove the ROE a negative value of 28,7%. Likewise, the results of the calculation of sustainable growth rate, both according to Higgins and Van Horne, are also negative.
Liquidity
PT ABC's liquidity level as measured by the current ratio, cash ratio, and net working capital varies. The lowest level of liquidity occurred in 2016, and the highest level of liquidity occurred in 2019. Cash and cash equivalents, current assets, and current liabilities increased from year to year from 2015 to 2020. In 2020, PT ABC experienced a decline in liquidity compared to 2019. However, compared to previous years, the current ratio, cash ratio, and net working capital values in 2020 were still within a safe range.
Tabel 2: Liquidity of PT ABC 2015 – 2020
Description 2015 2016 2017 2018 2019 2020
Current Ratio 1,54 1,17 1,74 2,02 2,33 1,72 Cash Ratio 0,31 0,25 0,33 0,32 0,73 0,32 Net Working Capital 133.929 63.544 219.874 329.172 568.196 431.650 Cash and Cash
Equivalent 76.351 91.720 98.531 102.152 313.600 191.317 Account Receivables 161.042 117.361 163.006 334.664 454.031 583.981 Current Assets 382.949 435.305 516.325 653.257 996.932 1.031.271 Current Liabilities 249.020 371.761 296.451 324.085 428.736 599.621
The decreased liquidity during the Covid-19 pandemic is consistent with the research conducted by Krauss et al. (2020) which was managements in European companies were concerned about the declining liquidity due to the crisis brought by the Covid-19 pandemic. In the context of crisis at all, the declining liquidity during the aviation crisis was consistent with the finding of Nolan et al. (2004), which was airlines experienced declining liquidity due to the aviation crisis brought by the 9/11 terrorist attack.
State-Owned Enterprise Health
The performance of the financial aspects of PT ABC from 2015 to 2020 according to KEP- 100/MBU/2002 can be seen in table 3. Table 3 shows the result of financial performance measurements
Table 3: Assessment on Financial Aspect of PT ABC 2015 – 2020
No Indicators Unit Score
2015 2016 2017 2018 2019 2020 1 Return on Equity (ROE) % 13,4% 7,3% 13,0% 13,3% -2,6% -22,9%
2 Return on Investment (ROI) % 12,8% 7,3% 21,6% 13,0% 2,3% -3,4%
3 Cash Ratio % 30,7% 24,7% 33,2% 31,5% 73,1% 31,9%
4 Current Ratio % 153,8% 117,1% 174,2% 201,6% 232,5% 172,0%
5 Collection Periods times 44,68 28,73 36,78 65,50 90,07 198,31
6 Inventory Turnover times 3,05 2,40 2,33 2,54 2,69 4,68
7 Total Asset Turnover % 131,3% 84,1% 176,1% 183,6% 135,1% 76,2%
8 Ratio of Equity to Asset % 39,8% 21,7% 45,7% 50,0% 52,1% 38,6%
Referring to table 3 regarding the performance assessment of PT ABC's financial aspects for 2015 to 2020 based on KEP-100/MBU/2002, PT ABC has varied performance from year to year. The highest performance occurred in 2017, and the lowest performance occurred in 2020.
Poor financial performance has occurred since 2019, because PT ABC bore Losses, thus resulting in negative ROE and ROI. After the outbreak of the Covid-19 pandemic, financial performance in 2020 has worsened.
Table 4: Enterprise Health Assessment on Financial Aspect of PT ABC 2015 – 2020
No Indikator Max.
Weight
Weight
2015 2016 2017 2018 2019 2020
1 Return on Equity
(ROE) 15 13,5 7,5 13,5 13,5 1 1
2 Return on Investment
(ROI) 10 7 4 10 8 2,5 0
3 Cash Ratio 3 2,5 2 2,5 2,5 3 2,5
4 Current Ratio 4 3 2,5 3 3 3 3
5 Collection Periods 4 4 4 4 3,5 3 1,6
6 Inventory Turnover 4 4 4 4 4 4 4
7 Total Asset Turnover 4 4 2,5 4 4 4 2,5
8 Ratio of Equity to
Asset 6 6 4 5,5 5 5 6
Total Weight 50 44 30,5 46,5 43,5 25,5 20,6
Percentage to Max. Weight 100% 88% 61% 93% 87% 51% 41%
Table 4 shows the weighted value for each financial measure based on the weight calculation guidelines in KEP-100/MBU/2002. The valuation weights of ROE and ROI were low due to the losses. In addition, reduced cash ratios, increased collection period, and decreased total asset turnover drove the total financial aspect weight of PT ABC in 2020 being 20.6 or 41% of the reference weight.
Strategic Responses Toward the Covid-19 Pandemic
In response to the crisis brought by the Covid-19 pandemic, PT ABC conducted retrenchment, persevering, and innovating strategies. PT ABC’s strategic responses toward the Covid-19 pandemic can be seen in table 4.
Table 4: PT ABC’s Strategic Respons Toward the Covid-19 Pandemic
Response
Category No Corresponding Response Retrenchment 1 Reduced the Number of Outsourced Personel
2 Closed LSW Branch
Perservering 1 Funded Operational Cost With Right Issue Fund 2 Deferred GSE Rental Expense
3 Reduced Some of Personel Benefits 4 Deferred All Planned Investment in 2020 Innovating 1 Created Youtube Channel
2 Establised Logistic Cooperation with AP Logistic 3 Establised Airport Helper Cooperation with AP 2
Exit -
In the retrenchment response category, there are two prominent response strategies conducted by PT ABC in reducing its business scope to survive the aviation crisis brought by the Covid- 19 pandemic. For the year 2020, PT ABC reduced the number of outsourced personnel up to
49% compared to its number of outsourced personnel in 2019. PT ABC also closed its branch office in the Malikus Saleh Airport di Lhokseumawe due to the low number of flights.
In the persevering response category, PT ABC conducted four strategies. The first strategy was funded operational costs with the right issue fund obtained in 2019. The action was necessary due to the negative amount of cash flow from operating activities. The second action was deferred GSE rental expenses for a year range period, effective from May 2020 to April 2021.
The third action was to reduce some of the personnel benefits such as position allowance and food allowance. The fourth action was to defer all planned investment in 2020 which was mostly dominated by the new GSE acquisition.
In the innovating category, PT ABC conducted three strategies. The first strategy was to create a Youtube channel. The Youtube channel is intended to broaden the market exposure through the company’s product education. The second action was to establish logistic cooperation with Angkasa Pura Logistic, one of Angkasa Pura 1 subsidiaries specialized in logistic services. The last action taken by PT ABC was to establish Airport Helper cooperation with Angkasa Pura 2 in the CGK office branch.
The result of the company response strategies toward the crisis brought by the Covid-19 pandemic showed rather a different result compared to those found by Wenzel et al. (2020) and Albers and Rundshagen (2021) which was most airlines company mostly conducted retrenchment and then followed by persevering.
5. Conclusion
The Covid-19 pandemic not only affects people through the implementation of health protocols but also business and industry at large. The Covid-19 pandemic has brought significant negative effects on the ground handling industry in Indonesia. In 2020 the largest ground handling company in Indonesia had to bore huge losses, resulting in negative ROE, thus negative sustainable growth rate. In addition, the company also experienced a decrease in liquidity compare to the previous year, even though the resulted liquidity was relatively safe according to the past year's accomplishments. The financial aspect assessment for State-Owned company health indicates that from 2019 through 2020 the company is not healthy. The most contributing factor for the company's unhealthiness was the negative ROE.
To survive the aviation crisis brought by the Covid-19 pandemic, the company conducted several strategic actions. Mostly, the company’s strategic response was directed toward persevering the status quo condition by the spent reserve fund, deferred expenses, reduced expenses, and deferred investments.
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