Strategy of Qantas Airways Limited-Free-Samples for Students

Question: Discuss about the Qantas Airways Limited. Answer: Introduction Qantas Airways Limited (QAN) is a well-known Australian air transportation company. Qantas is a listed company on ASX which operates on both international as well as domestic routes with revenue almost equally divided between the two. The strength of the workforce is nearly 28,000 who are predominantly working in Australia. The Chairman of Qantas Airways Limited is Mr. Leigh Clifford and Chief Executive of the company is Mr. Alan Joyce. The main headquarters of Qantas is located in New South Wale Australia. In the year 2016, the total revenue of Qantas Airways Limited was $16,490 million (including other and sales revenues). Till now, the company has owned fleet of 299 aircrafts which includes 11 fulltime freighters aircrafts. The main airlines brands of Qantas are Jetstar and Qantas. However, company also operates other businesses and airlines such as Q-Catering, Qantas freight, Qantas frequent flyer (Qantas, 2016). Jetstar Domestic and internationals routes mainly in Australia, Japan and New Zealand. Approximately, 4000 flights in single week to more than 60 destinations across 17 countries (IBIS, 2017b). Qantas Huge network of domestic and international flights with four travel classes. Full domestic network makes it more of a regional airline in Australia. Nearly, 2000 flights in a single week (IBIS, 2017b). Q- Catering Snap fresh and Q- catering which run nearly five catering and food service/production centres in Australia. (IBIS, 2017b). Qantas frequent flyer One of the imperative program of Qantas which is based on loyalty of more than 10 million users (IBIS, 2017b). Analysis of Financial Statements There are three main financial statements namely the income statement, balance sheet and cash flow statement which need to be analysed in order to provide a glimpse about the overall financial position and operational performance of the selected company. Income Statement Based on the income statement of the last five years, it is apparent that the revenue growth has been rather muted due to which there is negligible top line growth. This may be attributed to the fierce competition that the company faces in both domestic and international flights. In domestic flights, the company faces high competition from Virgin Australia and hence the company has actively focused on increasing flight capacity and market share. Going forward also revenue growth is not expected in this sector. In international travel, the company faces competition from various international players particularly Emirates which is responsible for muted topline (Qantas, 2014). With regards to operating profits, it is apparent that 2014 was a particularly difficult year for the company since the company reported huge losses and also asked for government support. However, the EBITDA margins of the company have continuously improved which augers well for the business especially when toplin e growth is absent. This improvement in topline may be attributed to the transformation program undertaken by the company to rationalise costs and because of the declining fuel costs. After reporting a net loss of $ 2.84 billion in FY2014, the company has turned around to report a profit after tax of $ 0.58 billion and $ 1.03 billion in FY2015 and FY2016 respectively (Qantas, 2016). Balance Sheet With regards to balance sheet, a noticeable trend has been the decrease in short term and long term borrowings over the years which augers well for the company especially at a time when the company is upgrading the fleet to increase capacity and improve services. Also, it is noticeable that in FY2016, there is a decrease in the share capital caused due to the share buyback announced by the company (Qantas, 2016). Further, owing to a huge loss in FY2014, the retained earnings of the company even in FY2016 continue to be negative, however with high earnings in both FY2015 and FY2016, the losses have been largely nullified and it is expected that in FY2017, a positive retained earnings should be reported (Qantas, 2016). Cash Flow Statement Over the last five years (barring FY2014), there has been an increase in the operating cash flow which is a positive trend for the company. The cash outflow in investing activities has shown significant jump in FY2016 as compared to the previous years and $ 778 million is on account of aircraft refinancing which augers well for the company going ahead (Qantas, 2016). With regards to financing, it is a good sign for the company that the cash flow from financing activities is negative in all the last five years except in FY2014. This indicates commitment on the part of the company so as to reduce the debt through various refinancing arrangements and better earnings (Petty et. al., 2012). Ratio Analysis The key ratios of the company over a five year period are indicated below (IBIS, 2017a). The critical observations with regards to key financial ratios are as indicated below. The ROR for the company has significantly improved from a negative value in FY2012 to a significantly positive value in FY2016. The turnaround from FY2014 is quite apparent which augers well for the company. The ROSF has also seen significant improvement from a negative value in FY2012 to a high positive value in FY2016 which is again attributed to the high profits that have been generated. Infact the value in FY2016 is significantly higher than the industry average of 18.46% which provides a context to the stellar performance of company in FY2016. The ROA of the company has also undergone significant improvement and at 6.2% in FY2016, the value exceeds the industry average which highlights the superior performance of the company which may be attributed to the top management team. The profit margin has also shown similar improvement as the other parameters highlighted above. The profit margin for the company in FY2016 is superior to the industry average of 6.06%. The company has been able to rationalise the workforce so as to significantly improve the net profit per employee which in FY2016 stands at $ 38,100 and is significantly higher in comparison to the industry average of $ 25,340 which highlights the higher efficiency of processes and productivity of employees. Gearing ratio of the company is an indication of the capital structure. The gearing ratio peaked out in FY2014 when the company took a debt in order to restructure and bring about a turnaround which has led to future savings which have been reaped in FY2015 and FY2016. In the recent years, there has been a decrease in the gearing ratio as a result of which this value for the company is close to the industry average of 0.78 as on June 30, 2016. This implies that the balance sheet of the company is not overleveraged and in this aspect, the company is comparable to the peer group which is critical considering the outstanding debt concerns in the past (Petty et. al., 2012). The interest cover has also improved significantly in the recent years which provide greater comfort to the lenders that the company would be able to meet the interest obligations (Petty et. al., 2012). The interest cover as on June 30, 2016 is significantly higher than the industry average of 4 which implies that the company could avail incremental debt at lower interest rates compared to the peer group. The trend in current ratio seems worrisome as there is a declining trend which raises issues over the short term liquidity. Additionally, when seen in the context of airline industry also, it is apparent that the companys current ratio as on June 30, 2016 is inferior to the industry average of 0.62. Thus, it clearly highlights the need to improve for the company in this regard (IBIS, 2017a). Future of the business In order to understand the future of the company, it is imperative to briefly describe the huge turnaround that the company has witnessed in fortunes since 2014. In 2014, the company was reeling under debt and was at the verge of closure which forced the company to approach the Federal government to consider a bailout package which was turned down (Sandilands, 2014). As a result, the company embarked on an ambitious turnaround plan which involved cutting down on jobs, dropping unprofitable routes, retiring the old fleet of aircrafts and deferring the purchase of aircrafts along with cost rationalisation (Park, 2017). This plan has helped the company to turn around and reap $ 2.1 billion in savings in 2017 alone. Also, the lower fuel costs contributed immensely to the turnaround for the company (Sheedy, 2016). Going forward, it is expected that the fuel prices in the short to medium term would be low only which augers well for not only Qantas but the airline industry as a whole. Also, the competition between Virgin Australia and Qantas has eased in the recent years owing to excess capacity generation by both players (Freed, 2016). Further, low cost subsidiary of Qantas i.e. Jetstar is performing well both in terms of revenue and profitability and going forward better results may be expected (Chung, 2016). Also, going forward, the company should look at improving the topline which has been stagnant. Further, the key aspects of the turnaround strategy must be continued so as to reap cost savings going ahead as well. Besides, the company must look at improving the services so as to build on the market share and the brand. Political competitive environment impact The political environment tends to have a significant impact on the operation of airlines and Qantas is no different. One of the recent ways in which the government is impacting the airline industry is through various environment related taxes owing to the airline emissions (Kenny, 2014). In Australia also, the scrapping of carbon tax in 2014 has proved to be positive development for Qantas. Introduction of green taxes can adversely impact the profitability of the airlines especially against international players based in geographies where such taxes do not exist (Freed, 2015). Another way in which the government impacts the airline industry is through the means of taxes which are not only limited to corporate profits but also on the fuel and the other services. Most of this tax burden is passed on to the consumers and determines the final cost to be borne by the customer. A lower tax structure would not only mean higher profitability for the company (Qantas) but also would lead to h igher growth in passengers (Qantas, 2016). Also, considering that Qantas derives about 40% of the revenue from international flights, hence the currency rate is also a critical factor which tends to impact the overall competition (IBIS, 2017b).. Offlate there has been a decline in the value of Australian dollar which has favoured Qantas and thus it has been able to witness lower competition from international airlines. Thus, various government policies tend to impact the currency rate and in turn the consumer decisions as explained above (Pash, 2017). Thus, it would be fair to consider that political factors tend to have a significant impact on the competitive environment of the company (Qantas, 2014). Relevant Ethical Considerations It is well known that insolvency has legal considerations but it also has ethical considerations. This is because it tends to adversely impact the industry credibility in the eyes of not only the shareholders but also the suppliers and lenders. In most of the bankruptcies, the role of the management is pivotal and in most cases there is a fraud with the collusion of the management especially in case of failure of big companies. This tends to enhance the agency costs for the remaining firms and dampens the sentiment. If every firm starts acting in this manner, the participation of these key stakeholders would dwindle and hence even genuine businesses would face issues (Lubben, 2011). From a utilitarian perspective also, the businesses should try to extend benefit to the greatest number of stakeholders through business decisions which is possible when the company is operational and is professionally managed. Winding up tends to be detrimental to the interest of the various stakeholders and needs to be avoided. These arguments are further true for a company such as Qantas which acts as the national carrier of Australia. However, businesses that are not sustainable due to the faulty business model or inefficient operations must not be given support by the government and other stakeholders and it is best that these are shut down as they tend to act as a drag for the resources which could be deployed elsewhere (Sandilands, 2014). External factors to be considered One of the external factors that is pivotal with regards to consolidation is competition. In a competitive industry such as airlines where there are frequent price wars for customer acquisition, profitability can be wafer thin especially when the oil prices are high. As a result, it is imperative to keep the costs down so as to ensure higher profitability margins even when the topline growth is muted (Posh, 2017). This typically requires economies of scale whereby the scale becomes pivotal. Further, it is not feasible for too many players to survive in such a competitive industry as only a few would make profits. Thus, Qantas can potentially look at the players that are making losses but have potential to be turned around as possible acquisition targets. Further, the industry dynamics is such that an airline business has various verticals and usually a particular company does not have strong presence in each of these. Hence, it makes sense for a company like Qantas to make acquisition in one of these verticals in order to increase market share. For instance in the airline catering business, Qantas has a paltry market share of 4% and thus can potentially acquire bigger players in this segment so as to enhance the overall share and reap synergies (IBIS, 2017b).. However, the regulatory environment would also need to be considered which would be particularly relevant if for instance Virgin Australia and Qantas decide to merge as it would create a virtual monopoly in domestic flights and hence may be objected to. Recommendation The above discussion indicates that the company has had a turnaround from FY2015 onwards and it is expected that the company would continue to outperform the industry in the near future especially till the crude oil prices remain reasonably low. Even though from the low price of around $ 1.5 seen in FY2014, the Qantas stock has tripled but considering the sound management in place, increasing tourism in Australia, market leadership in international flight, lower competition in domestic flights and low price of crude oil, it makes sense to invest in the company from a medium term perspective. However, the company performance needs to be carefully monitored since the industry has significant external leverages such as political environment and crude oil prices. References Chung, F. (2016), Qantas posts record $1.53 billion full-year profit, Perth Now, [Online] Available at https://www.perthnow.com.au/business/companies/qantas-just-had-its-best-year-ever/news-story/f19ad5ddc1320591487eec0a5ffab7ab [Available August 25, 2017]Freed, J. (2015). The five reasons Qantas is back in the black, The Sydney Morning Herald, [Online] Available at https://www.smh.com.au/business/aviation/the-five-reasons-qantas-is-back-in-the-black-20150224-13nbws.html [Available August 25, 2017] IBIS (2017a), Industry Average Financial Ratios, IBIS World Website, [Online] Available at https://clients1.ibisworld.com.au/reports/au/enterprisepremium/averages.aspx?entid=32 [Available August 25, 2017] IBIS (2017b), Segment Subsidiaries, IBIS World Website, [Online] Available at https://clients1.ibisworld.com.au/reports/au/enterprisepremium/environment.aspx?entid=32 [Available August 25, 2017]Kenny, M (2014), Qantas 'pressured on carbon tax', The Sydney Morning Herald, [Online] Available at https://www.smh.com.au/federal-politics/political-news/qantas-pressured-on-carbon-tax-20140306-34a8c.html [Available August 25, 2017]Lubben, S. (2011), Corporate Bankruptcy Raises a Question of Ethics, The New York Times, [Online] Available at https://dealbook.nytimes.com/2011/12/09/corporate-bankruptcy-raises-a-question-of-ethics/?mcubz=0 [Available August 25, 2017] Park, K. (2017), Qantas Turnaround Wizard Joyce Has a One-Word Lesson for Cathay, Bloomberg Website, [Online] Available at https://www.bloomberg.com/news/articles/2017-03-16/qantas-turnaround-wizard-joyce-has-a-one-word-lesson-for-cathay [Available August 25, 2017] Pash, C. (2017), The Qantas turnaround is complete, Business Insider, [Online] Available at https://www.businessinsider.com.au/the-qantas-turnaround-is-complete-2017-8 [Available August 25, 2017] Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2012) Financial Management, Principles and Applications. 6th edn. NSW: Pearson Education, French Forest Australia. Qantas (2014), Annual Report 2014, Qantas Website, [Online] Available at https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2014AnnualReport.pdf [Available August 25, 2017] Qantas (2016), Annual Report 2016, Qantas Website, [Online] Available at https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf [Available August 25, 2017]Sandilands, B. (2014), Qantas strategy runs into political, investor headwinds, Crikey Blog, [Online] Available at https://blogs.crikey.com.au/planetalking/2014/02/27/qantas-strategy-runs-into-political-investor-headwinds/ [Available August 25, 2017] Sheedy, C. (2016), Qantas: The most remarkable turnaround in aviation history?, ICAS Website, [Online] Available at https://www.icas.com/ca-today-news/qantas-nine-lives-flying-kangaroo [Available August 25, 2017]