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ACCT2005 Financial Analysis For Qantas Airways

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Questions:

1. Analyse and interpret annual report information in order to evaluate performance and financial position
 
2. Identify and explain significant financial accounting information contained in the notes to the accounts.
 
3. Recognise the limitations of annual reports and identify alternate sources of information to aid decision making by external stakeholders.
 
4. Communicate the results of annual report analysis and interpretation to a variety of stakeholders.
 
 

Answer:

About Qantas

Australia’s largest domestic and international airline, Qantas Airways restricted was supported in 1920 within the outback of Australian state. Qantas is one the foremost booming airlines company within the world with its robust whole image, well-tried safety records, operational dependableness and high client satisfaction rate each in Australia and within the international stage (Zhang, et al., 2018).

The Qantas Group's main endeavor is that the transportation of passengers by means that of 2 complementary airline brands - Qantas and JetStar. It conjointly operates subsidiary businesses together with Qantas fright, Qantas link, Qantas company and Qantas loyalty. The airline operates largely in Australia, New island, Asia and now could be increasing its services wide to the USA and alternative long-haul destinations like GB, city and Santiago.

Globally, Qantas employs over thirty,000 folks with regarding ninety-three per cent of them based mostly among Australia. As at Gregorian calendar month 2017, Qantas holds associate calculable thirty-nine.1% of the market share within the domestic market and nineteen.8% of the market share within the International market (Qantas Airways restricted, 2017).

 

Introduction

Financial Analysis refers to a set of methodologies utilised by an analyst to create a perception about a firm regarding its stability, solvency, liquidity and profitability which enables the investors to make decisions regarding an investment in the venture (Investopedia, n.d.).

For the completion of this assignment the report is divided into several segments based on the nature of financial metric used which are Ratio Analysis, Cash Flow Analysis and Overall financial performance & position; followed by recommendations.

Ratio Analysis

A ratio is a numerical relationship between two variables (Drake). Ratio analysis is an integral part of financial statement analysis which is generally deployed to acquire swift understanding on an entity’s performance and position (Business Finance Online, n.d.). For the purpose of evaluating Qantas, the ratios are segregated amongst several categories namely, Operating Ratios, Liquidity Ratios and Capital Structure.

Operating/ Activity Ratios:

The two ratios taken herewith are Assets Turnover Ratio and Unearned income to total revenues ratio for the purpose of evaluating the management’s operating efficiency. Reasons for selecting the aforementioned ratios are discussed along with the verdict in the ratios.

Assets Turnover Ratio:

Assets Turnover Ratio is a relationship between the revenues and average total assets. The reason for choosing this metric is the notion that in Aviation industry, any company’s assets side is dominated by planes (the carriers) which are eventually responsible for generating the majority chunk of its revenue (Maverick, n.d.). Therefore, it is a quick indicator to make an approximation as to how the assets are performing in terms of generating revenues. For Qantas, the Assets turnover ratio has been increasing steadily over the past four years. In absolute terms, the ratio has increased from 0.908 times in FY 2015 and is currently pegged at 0.951 times in FY 2018 (Qantas Airways Limited, 2018).

Unearned Income to Total Revenue:

This ratio is generally not regarded as a pervasive ratio for activity-based understanding, however, in case of Aviation industry it becomes a mandate because of the nature of the industry as the tickets are booked prior to the delivery of the service. In over case of Qantas, the said metric has been fluctuating and has shown variations of plunging deepest to ~21.76% in FY 2016 and subsequently mounting in FY 2017 at ~23.32%. Furthermore, the metric has settled at 23.09% in FY 2018 (Qantas Airways Limited, 2018).

Liquidity Ratios:

Current Ratio:

The Current ratio is the ratio between the company’s current assets and its respective current liabilities (Drake). The current ratio signifies an entity’s capacity to meet out its current liabilities with the current assets in hand. The current ratio of Qantas has demonstrated a significant decline in FY 2016, dropping from 0.68 times in FY 2015 to 0.49 times. In a nutshell, in the past five years, the current ratio has declined from 0.66 times in FY 2014 to 0.49 times in FY 2018 (Qantas Airways Limited, 2018).

Cash Flow Ratio:

The cash flow ratio is another very important metric when it comes to investment management, it is a ratio between cash flow from operations and current liabilities. The ratio indicates a company’s operating performance in terms of meeting out its current liabilities. Although the cash flow ratio has been improving during the past five years, only with an exception being FY 2017, where it declined slightly; the increase to reach 0.45 times in FY 2018 is not enough in terms of meeting the current liabilities (Qantas Airways Limited, 2018).

Capital Structure:

Debt-Equity Ratio:

The debt-equity is a pervasive financial metric to identify an entity’s capital structure, although the ideal DE ratio is presumed to be 2:1 but that is not so because debt requirements differ from industry to industry, taking example of manufacturing and services industry where the former requires debt financing and the later usually avoids it. The debt equity ratio has increased overall but the journey in past five years have been a roller coaster ranging between lowest of ~1.03 times in FY 2015 and highest being ~1.73 times in FY 2018. However, the ratio has been stable and hasn’t displayed any alarming avenues (Qantas Airways Limited, 2018).

 

Interest Coverage Ratio:

Interest Coverage ratio is often regarded as a red alert signal in the industry because of its indicators. It is a ratio between the earnings before interest and taxes (EBIT) and the current interest expenses. In a nutshell, the lower the ICR, higher is the risk of an entity’s default and bankruptcy. Starting from the slumping state of -13.19 times in FY 2014 to stabilizing itself at ~6.84 times in FY 2018 and thus indicating an increasing metric showcasing its recovery from red alert and bankruptcy situations (Qantas Airways Limited, 2018).

Debt Service Coverage Ratio:

The DSCR is a commonly accepted financial metric which is frequently used in leveraged buyout transactions in order to ascertain and calculate the debt paying capacity of an entity (Corporate Finance Institute, n.d.). The DSCR is calculated as the ratio EBITDA to Interest expenses along with principal payments. The DSCR has also been increasing steadily since the slump in FY 2014 at -2.52 times towards a healthy ~2.48 times in FY 2018, indicating an increased credit capacity of the company (Qantas Airways Limited, 2018). 

Cash Flow Analysis:

Cash flow analysis enables an analyst or any user to get an understanding of sources and uses of funds in a year of any organisation. The cash flow statement is divided into three subsections namely, operating activities, Investing Activities and the Financing Activities, which are discussed as under:

Cash flow from Operating Activities:

This section highlights the sources and uses of funds from an organisation’s operations and its forte. The cash flows from operating activities have been increasing steadily by a CAGR of 33.67% during the period FY 2014 – FY 2018. In absolute terms, the cash flows have increased from AUD 1,069 Mn in FY 2014 to AUD 3,413 Mn in FY 2018 (Qantas Airways Limited, 2018).

Cash Flow from Investing Activities:

This section represents all the gains or losses and investments made with a mindset of developing business and progressive investment. The Cash used in investing activities had been increasing by a CAGR of ~19.78% during the said period and in absolute terms it has increased from AUD ~ 1,069 Mn in FY 2014 to AUD ~ 2,201 Mn in FY 2018 (Qantas Airways Limited, 2018).

Cash Flow from Financing Activities:

This section encloses all the financing of funds related to the organisation type of activities whether it’s a source or use of fund. Cash used in financing activities have been decreasing on an average basis during the period FY 2014-18. However, the trend has not been straight, it had been a roller coater ride for the same with FY 2017 indicating an increase while all the other financial years in consideration have decreased (Qantas Airways Limited, 2018). 

An Overview on Financial Performance and Position:

The Total consolidated revenues for the company have been increasing steadily during the period FY 2014-18. The total revenues have increased by an average rate of ~2.67% during the said period, which is way below the industry benchmark of 5%. In absolute terms, the total consolidated revenues of Qantas have increased from AUD ~15.3 Bn in FY 2014 to reach at AUD ~17 Bn in FY 2018 (Qantas Airways Limited, 2018).

On the profitability front, the company has been able to leverage on declining fuel expenses to increase its PAT figure during the said period. However, since the inception of FY 2016, the PAT has been flat consistently till FY 2018. In absolute terms, the statutory profit for the period has declined from AUD ~ 1,029 Mn in FY 2016 to AUD ~ 980 Mn in FY 2018 (Qantas Airways Limited, 2018).

While on the financial position side, the reported total assets of the company were pegged at AUD ~18.64 Bn in FY 2018, growing by ~8.28% on a Y-O-Y basis. As discussed earlier in the ratio analysis section, the company maintains a healthy capital structure and is generating enough cash flows to meet out its current debt and interest obligations (Qantas Airways Limited, 2018). 

Recommendations:

Pros:

  • Achieved highest ever during the past five years, earnings per share of 56 cents per share.
  • Strong Returns on capital at 22%, marginally lower than what was in FY 2016 at ~22.7%.
  • Every business vertical making more return on invested capital as compared with its respective weighted average cost.
  • Highest ever cash flow from operating activities at AUD ~3.4 Bn.
  • Innovative and rewarding loyalty program.
  • Equity reduction procedures since FY 2015.
 

Improvements:

  • Company should put a stress over its capital structure, as being a highly leveraged company in an uncertain industry, where income is not fixed it varies; if in distress can lead to catastrophic cascading chain of effects which can bankrupt the whole company in a single year.
  • As we all know, Qantas being one in every of the enormous within the Airlines trade, it will foresee to purchasing new planes that runs on renewable supply of energy which might save them lots of cash and contribute to the atmosphere and may distinguish themselves from the remainder of the airlines.
  • Providing a free Wi-Fi Facility on board across all its services can even encourage be a good strategy to enhance the profits and a good thanks to interact and facilitate individuals to pay quality time on the flights. As most of the time international flights takes very long time to succeed in the destination, thus it's easier for individuals to speak and pay blast.
  • Keeping ‘people-over-profits’ could be a strategy that can be a gratifying strategy for the business in long run. This includes, giving individuals nice client service, providing additional facilities than they have, taking care of little things, as a result of individuals foresee for a good expertise on these journeys and if they'd an honest expertise they give the impression of being forward to return back and willing to pay any worth.
  • Lack of personalisation and convenience in the loyalty program as compared with ones in leisure industry.
  • Lack of human resource diversity, in order to call the company a global brand.
  • Unpenetrated blooming Asia-Pacific Region.
  • Lack of innovation in customer’s experience.
 

Strategic Analysis of Qantas:

The essence of strategic management is to develop a singular market position that analyses and explains the 5 forces of competition (Porter, 1980) to minimize threats and maximize the opportunities. firms must examine the inner and external setting and monitor the market trends to come up with favorable economic performance. The Qantas cluster maintained its sturdy position within the Australia domestic market in 2016/2017.

Through a twin whole strategy, Qantas continued to service the premium leisure and business market section, whereas JetStar provided low fares to countless customers within the price-sensitive market. Between them, these 2 airlines have close to ninety per cent of the domestic profit pool from common fraction capability share. (Qantas, 2017)

JetStar is that the most popular low-coast carrier in Australia for domestic travel (House of Brands huntsman, 2018) and is hierarchical in concert of the world’s safest low-coast carriers. (Airline Ratings, 2018).

The majority of industries has some major players. The definition of a significant player could be a company that operates primarily inside the relevant business and generates over five.0% of business revenue. The chart shows the market share of every major player and also the collective concentration of all dominant business players. Major players that relish massive market share typically get pleasure from massive price benefits additionally as having a competitive edge. characteristic industries defined by a high level of market concentration is very important, because the dominance of a choose few major players typically acts as a possible barrier to entry for brand new competitors within the business. (Ibis World, 2018)

Overall Qantas and JetStar have a no-hit and property competitive strategy that has reached in 2017 the second highest performance in its ninety-seven years of history, as a results of the Qantas Group’s margin advantage over native and world challenger, that has been underpinned by completion of its three-year transformation program.

Also, the strength in its core markets helped the JetStar cluster deliver the second highest profit in its thirteen years of operation. Qantas is ready to reward shareholders, recognize the labor of its folks and invest for client.

 

References

Airline Ratings. (2018). Airline Ratings. [Online] Available at: AirlineRatings.com

House of Brands Tracker. (2018). House of Brands Tracker. [Online] Available at: https://investor.qantas.com/FormBuilder/_Resource/_module/AH_NGR9NxUaXc0W8Qv3Kfg/docs/QantasAnnualReview2017-06-Delivering-Against-Clear-Strategic-Pillars.pdf

Business Finance Online. (n.d.). Ratio Analysis. [Online] Retrieved from Zen Wealth: https://www.zenwealth.com/BusinessFinanceOnline/RA/RatioAnalysis.html

Corporate Finance Institute. (n.d.). Debt Service Coverage Ratio. [Online] Retrieved from CFI: https://corporatefinanceinstitute.com/resources/knowledge/finance/debt-service-coverage-ratio/

Drake, P. P. (n.d.). Financial Ratio Analysis. [Online] Retrieved from James Madison University: https://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf

Ibis World. (2018). Ibis World. [Online] Available at: https://clients1.ibisworld.com.au.ezproxy.laureate.net.au/reports/au/industry/majorcompanies.aspx?entid=471#MP32

Investopedia. (n.d.). Financial Analysis. [Online] Retrieved from Investopedia: https://www.investopedia.com/terms/f/financial-analysis.asp

Maverick, J. B. (n.d.). Key Financial Ratios to Analyze Airline Companies. [Online] Retrieved from Investopedia: https://www.investopedia.com/articles/active-trading/082615/key-financial-ratios-analyze-airline-companies.asp

Porter, M. E., (1980). Competitive Strategy: techniques for analysing industries and competitors: with a new introduction. New York: Free Press.

Qantas Airways Limited. (2017). Annual Report 2017. [Online] s.l.: Qantas Airways Limited.

Qantas. (2017). Annual Report. [Online] s.l.: Qantas.

Qantas Airways Limited. (2018). Annual Report. [Online]

Zhang, Y., Sampaio, B., Fu, X. & Huang, Z., (2018). Pricing dynamics between airline groups with dual-brand services: The case of the Australian domestic market. Transporation Research Part A, 108(February), pp. 1-11.

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