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Business and Financial Analysis: Qantas Airways Limited

Course:  Bachelor of Business / Bachelor of Accounting

Unit: Business Analysis & Valuation

Unit Code: B01BAVA320

Unit Learning Outcomes addressed

1) Understand the basic techniques of financial analysis and business valuation. 2) Explain the linkage between industry analysis, strategic business analysis, accounting analysis, financial analysis and prospective analysis. 4) Demonstrate inter-relationships between differing business disciplines: financial accounting, financial management and strategic management. 7) Demonstrate work-ready disciplinary knowledge with the application of all three major aspects of financial accounting, financial management and strategic management.

ASSESSMENT DESCRIPTION:

Topic For Group Written Report: 1. Read the case studies of Qantas in the prescribed textbook of this unit Palepu, K., Healy, P., Wright, S., Bradbury, M., Lee, P., 2015, Business Analysis and Valuation Using Financial Statements - Text and Cases, 2nd ed, Asia Pacific Edition, Cengage Learning, Australia:: Chapter 2: page 51 – page 66 Chapter 4: page 125 – page 128 (Internet retrieve of Qantas annual reports if needed) Chapter 5: page 188 – page 194 You are also required to explore and collect more information on the company to complete this assignment. Hence, additional research must be performed.

2. Then, answer ALL the following questionsin both of your oral presentation and written report:

a) Analyse the competitive forces facing Qantas, using the ‘five forces’ framework. b) Conduct a SWOT (Strengths, Weaknesses, Opportunities and Threats) evaluation of Qantas’s competitive strategy. c) What has been Qantas’s corporate strategy across its domestic and international divisions since 1992? How has that strategy changed in response to market changes? d) Identify any two (2) accounting policy choices that you think should be closely watched by auditors and analysts for a company in the airline industry. Discuss in details for each of the two accounting policy choices above and explain why you have chosen each of them. e) Evaluate Qantas’s financial performance (Revenues and Expenses) and financial position (Assets, Liabilities, and Owner’s Equities) at the end of 2013 and at the end of latest financial year that you can find (Example: Qantas annual report 2016 or 2017). f) Analyse the differences and similarities in your findings between part (e). Then, make a clear recommendation to potential/existing investors on whether they should buy or sell Qantas shares. Clearly explain your opinion.

Answer

Introduction  

With the ramified changes, there are several business and financial analysis tools to assess the business viability and financial performance of Company. In this report, Qantas Airway Company has been taken into consideration. Qantas Airways is Australian leading firm into Transportation sector. It has been popularly known for bigger successful strategic decisions over the period of time from 1992 to 2018. The objective of the paper is to conduct and study in detail the porter five force model, SWOT Analysis and in the last segment the paper discusses Qantas competitive strategy across its domestic and international division. This report also shows the financial performance of company and its business viability throughout the time. Ratio analysis and capital structure analysis tools have been used to assess how well company has been making profit in its business. 

A. Porter Five Force Analysis 

The five force model suggested by Porter studies the profitability of the firm in the industry. The five force are discussed as follows 

  1. Threat of new entrants 
  2. Bargaining power of the supplier 
  3. Bargaining power of the buyer 
  4. Threat of the substitute product 
  5. Rivalry among the existing players in the industry 

Threat of new entrants 

New entrants in the transportation industry are increasing with the new technology and quick response rate with the efficient workers. This reduces the cost and still manages to provide the value to the customers. In order to deal with the new entrant threat the Qantas will have to innovate their existing products and the services, marketing them to the market to attract new customer base. Qantas also needs to build the economies of scale to boost their profitability by reducing the per unit cost. This will further help them fight with the entering businesses in the industry. When the bigger and existing players like Qantas keep improving and exploring their industry, and continue working on the R&D the new entrants do not enter (Veyrat.2015).

Bargaining power of the supplier 

The bargaining power of the supplier in the market is high due to the fact that in the entire transportation industry the individual companies purchase from numerous suppliers. Suppliers are in the dominant position, as they work for the critical industry. Therefore, the overall profitability decreases. In order to reduce the supplier bargaining power, the company needs to strict the supply chain and limit the same to a few suppliers with good inter personal connections (TN, 2008).

Bargaining power of the buyers 

The buyers purchase in the lowest price possible, pressurizing the Qantas Airways and lowering their profitability, the smaller the customer base the higher will be the buying power, and the higher the ability to seek discounts and offers (Kenton 2018).  Because of the high competition in the market, the buying power of the customers is high; as this reduces the customer’s switching cost. Qantas will have to increase the customer base by increasing the products and services, to compete with the competitors (Spee, & Jarzabkowski, 2011).

Threat of the substitute product 

Since there are less substitute products in the transportation industry, Qantas being an airline company suffers less in terms of threat from the substitute products, however, the company still would need to work upon providing more personal services, than just focusing on the products. The company also needs to understand the customers’ core need and catering them, by eventually raising their switching cost (TN, 2008).

Rivalry among the existing players in the industry 

There are a number of existing players in the market, such as, Singapore Airlines, Etihad Airlines, Emirates, British Airways, etc., therefore, it can be observed from the review, that the competition within the industry is intense which affects the overall profitability (Karim, 2011).

B. SWOT Analysis 

Strength 

The company has a consistent growth from 1992 to till date; the company has been in service since 1920. The company’s strategic decisions and framework are the biggest strengths. The company also provides superior high quality services to its travelers, with easy check in options. The company also invests in improving products, services, ambience and airport lounges. Another strength is in domestic business being catered by the company when the virgin airlines stopped from increasing their capacity to any further (Gartentein., 2018).

Weakness 

Despite the success and the strength Qantas Airlines, however faces union issues, the company struggles with the union negotiation. The company also faces a pressure working with the international business despite the low profitability. The company is also facing challenges in introducing a direct Australia to Europe flight (Eddleston, Kellermanns, & Sarathy, 2011).

Opportunity 

The business travel across the world has increased tremendously, when the people are not travelling for business purposes, the holiday travel has gained peak. According to the review, it has become a year round travel business and is new opportunity for Airline industry. The number of passengers has increased in business and economy class (De Wit, & Meyer, 2010).

Threat 

Competition is the biggest threat to the company; the emerging and existing bigger brands with newer technology such as, Air France, British Airways and American Airlines are the biggest threat to fight. The great fluctuation in fuel prices is another threat being posed on the industry (Cassidy, 2016).

C. Qantas competitive strategy across its domestic and international division 

Qantas in 2012 separated its domestic and international business into two divisions, in order to restructure the business of different segments. Each business needs to work independently according to the customer demand and the business priorities and national and international market conditions.

How has the strategy changed in response to market change? 

The international market for the company was not being profitable, the fuel prices were also volatile and the demand from the passengers was also reducing, therefore, the company decided to reduce the cost and take measure in order to international market profitability. 

  1. The firm, in order to curb this issue cut down 500 jobs, to reduce the cost from the company’s engineering and maintenance division. 
  2. The Qantas Airlines, also withdrew their flights from many international routes, the major routes were, Singapore-Mumbai and the other one was, Auckland- Los Angeles. 
  3. However, the company’s’ domestic business was growing, therefore, they were enjoying the market share and there was no cost cutting and no route withdrawal.
  4. The major aim for the international business was to attract customer base, attracting new customers and holding the existing customers. 
  5. The other strategy was to only allow the flight to fly in the in demand route, follow strategies to compete with the competition. 
  6. In the domestic division, the target was to ensure the company maintains the top position while fighting competition with the lower groups. 
  7.  Accounting Policies which could be used by auditors to analysis the company in Airline Industry

It is analyzed that accounting policies are the set of principles and procedures that are being implemented by the management of company. It is used to prepare the financial statements of company. It is considered that accounting policies may differ from the accounting principles are these are accompanied with the set rules and policies which needs to be adhered by the accountant  to record the financial data in its books of account.  The freedom of choice has been permitted by IFRS where each and every auditors could use particular accounting policies to analysis the company. However, in case of the aviation industry, auditors should focus on following the consistency accounting policies in which all the assets and liabilities of the company should be regularly monitored. The audit risk model in this case shows that detention and control risk of the auditors would be high in aviation industry and it may negatively impact the business functioning of organization. The consistent accounting policies is required by auditors to strengthen the transparent view of the assets and liabilities recorded in the books of accounts of companies in Aviation industry. The IAS 136 would be followed to assess the carrying value and market value of the assets and liabilities recorded in the books of account. Auditors will determine the impairment loss of the organization by implementing the impairment test as per the consistent accounting policies adopted by the companies in aviation industry (Yazdanfar, and Öhman.,  (2015).

  1.  Evaluation of the Qantas’s financial performance of Company

The financial performance of Qantas Airline Company has been decreasing throughout the time.  After assessing the income statement of company financial data for 2013 and 20`8, it is inferred that total revenue of company has decreased to 5.89% in 2018 from 6% profit in 2013. In addition to this, receivable turnover ratio has also gone down to 1.76 times in 2018 which is 10 time lower as compared to data shown in 2013.

Computation of financial data of  Qantas Airline  Company 
Details 
 
Qantas Airline  Company- financial data AUD $ in million)
 
 
2013-10
2018-10
Total revenue 
 
3,109,000
41,981,101
Cost of goods sold
 
34,588,000
-42,249,173
Gross profit
 
-31,479,000
-19,911
Operating profit
 
-31,479,000
-19,911
Net profit
 
3299000
-251,586
Interest
 
0
-508,766

(Yahoo finance, 2019).

It shown negative implication of the capital in the business and has reduced the capital value. The inventory turnover of company is zero as there is no inventory in the books of account. In context with the income statement of company, it is found that gross profit of company has highly decreased by 49% in 2018 which reflects the negative indicator for the business growth of the Qantas Airline, The net profit has been converted to loss of 1.6% in 2018 which was reflecting 106% profit in 2013 (Qantas Airline Company., 2013).

Description
Formula
Qantas Airline 
 
 
2013-10
2018-10
Profitability
 
 
 
Net profit
Net profit/revenues
6%
5.89%
Return on assets
Net profit/Equity
34%
25%
Financial leverage 
EBIT / EBIT - Interest 
1.1
1.1
Asset turnover
total assets / total sales *365
380.1
409.9
Earnings per share
Net income - pref div / shares outstanding 
0.3
0.2

 The increasing business losses and downfall in its profitable income may result to the high sustainability risk of Qantas in long run. The interest coverage ratio of company is also showing high financial leverage and if company fails to pay off its interest payment then it may result to winding up of company. Currently company has. 039 time interest coverage ratio (Qantas Airline Company., 2018).

Computation of financial data of  Qantas Airline  Company 
Details 
Qantas Airline  Company- financial data AUD $ in million)
 
2013-10
2018-10
Inventory
317
351
Current assets
4932
3,712
Cash and cash equivalents
3173
285
Receivables 
1196
908
Current liabilities
7525
7596
Payables
613
2295
Shares outstanding 
2862
3956
Equity
2862
3956
Total liabilities
14456
14691
Total assets
17318
18674
Market share price
165
174

The above given table reflects that company has increased its investment and deployed more funds in its business activities, The current assets of Qantas Airline has increased by 30% since last five year. In addition to this, efficiency ratio of company has also increased which strengthen the return on capital employed of company (Schwarzbichler, Steiner, and Turnheim, 2018).

F. Analyses the differences and similarities in finding between part (e) and make the recommendation 


After assessing all the details and financial information of company, it is inferred that the main similarities of the given data shows that Qantas has been increasing its investment in its assets. It has positive interrelation between the increased total revenue and increased business investment. Since last five year, Qantas has increased its investment by 40% in its total assets. Nonetheless, company has decreased its financial leverage by strengthen its profit earning capacity. Qantas Airline Company has lower down its financial leverage which will not only strengthen its business sustainability but also helps in reducing the cost of capital. In addition to this, the differences in the found data is that Company has been increasing its operating expenses which eventually lower down its profitability. It might be negative indicator for the Qantas for its business sustainability (Schwarzbichler, Steiner,  and Turnheim, 2018).

Investment advice to investors

It is found that if investors wants to invest their capital in the capital of Qantas Company then they must invest their capital for long run instead of short run capital investment. The long term investment in Qantas will give them more return on capital employed. Currently, company has decreased its profit as compared to last five year due to the sluggish market condition. In future, there is chances that company will have higher profitability base on its investment plan sustainable business practice (Qantas Airline Company., 2018).

Conclusion 

      After assessing the income statement of company financial data for 2013 and 20`8, it is inferred that total revenue of company has decreased to 5.89% in 2018 due to the sluggish market condition, Company has been facing high completion due to the sluggish market condition. However, in future, company may have higher profitability and could easily sustain its business. 

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