Essay: Financial Statement Assessment For Flight Centre Travel Group.

In the modern world, with the advent of science and technology each and every organization functioning in the economy evaluates their performance with respect to the industrial benchmark of the economy where the company operates (Bernini and Cagnone 2014). This paper specifically deals with the assessment of the financial statement for Flight Centre Travel Group by taking assistance of variable reliable sources like the annual report of the firm in order to gather information. The financial report of the organization aids in providing information with respect to the operations of the business. Flight Centre Travel Limited has been found to be one of the biggest retail outlets with the geographical region of Australia. Flight Centre Travel Limited is an Australian Stock Exchange listed organization and operates in the travel industry.

The company has been reaping profits for the last few years and with the rise in the level of competition there has been a requirement for undertaking an analysis of the financial statements of the firm. The annual report of the organization aids in providing information with respect to the operations of the business. Furthermore, the use of various analytical techniques that includes macroeconomic analysis, business strategy analysis, industry analysis and the accounting evaluation for Flight Centre Travel Group would be helpful in constructing the paper in an effective manner. The paper even analyses the degree of competition that is present in the travelling industry of the region where Flight Centre Travel Group functions (Morrison 2013). Porter’s five forces model has even been utilised in this paper as it aids in evaluating the external environment of Australia and their travelling industry.     

Economic Environment of the Flight Center Travel Group

Economic environment refers to the external variables in the business marketplace and wider economy that impact on the business (Srisaeng 2015). The economic goal of flight centre travel group (FCTG) is to positively contribute to the destination economies they work, stay and travel. Economic environment is broadly classified into two parts that includes- macro environment and microenvironment. Both these type of economic environment plays a crucial role in assessing this company’s success. They also ensure that the advantage and burden of tourism are equally shared in the business. The economic performance of the society to which this organization is connected through their business is vital for this travel company. As worldwide travel business, FCTG is one of the stakeholders in overall communities where they mainly operate and the communities where their customers travel.  The company focuses on the key priorities that the helps them in providing data on economic liability for consultants and generating resources for assisting the education of their customers. They also conduct reviewing of products that aims in identifying commodities that are potentially detrimental and beneficial on the economic level.

Global and individual Economy influencing this Company over the 5 years

Global and individual Economy influencing this Company over the 5 years

Uncertainty in the global economy leads to delay in the growth of FCTG Company over the last five years. Global recession occurred during the period of 2008-2009 affected the financial performance of every organization in the world (Vasigh and Fleming 2016). However, FCTG also faces huge losses during this economic depression period due to reduction in arrivals of foreign tourist. Moreover, this led to increase in unemployment rate of the Australian economy. As the FCTG Company faces huge loss during this financial crisis, they strategize to fire their employees in order to maintain their profitability level. Therefore, this economic slowdown adversely affected their organizational performance over the years. In addition, economic changes in emerging and less developed economies influence the travel sector in Australia. Adoption of new economic policies highly influences the FCTG business as number of foreign visitors reduces. Moreover, implementation new visa policies of the individual economies also affect the business growth of FCTG.

Future Prediction

As the GDP of the Australian economy has been continuously growing over the years, it is predicted that this FCTG enterprise will expand their business as the credit demand increases. In addition expansionary policy adopted by the Reserve Bank of Australia (RBA) will also help this nation to lower their inflation rate below the target level (2%). This will reduce the purchasing power of the visitors and hence this will increase their travel demand ( Woodford 2013). Owing to this, the financial performance of FCTG will improve and hence this would expand their business in the globe.

Macroeconomic Factors Influencing Company’s Performance

The macroeconomic factors are broad economic variables that affect the financial performance and growth of the business (Mankiw 2014). These factors include- interest rate, GDP, Inflation, oil prices and population growth. GDP refers to final goods and services that is produced in Australia within the geographical border of the nation. This macroeconomic indicator is used to measure the economic activity within Australia. GDP growth rate of the nation is directly related with the financial performance of the organization.  As the Australian GDP has expanded to 0.3% in the current period, it improves the financial performance of the FCTG Company. Moreover, cyclical fluctuations that are typified by boom and recession period affects the credit demand of this company.  As the GDP of Australia declined during the recession period (2008-2009), the credit demand decreased and this adversely affected the company’s profitability. However, during expansion period (2010-2017) the Australia’s GDP again increased and this raised the credit demand leading to higher profitability growth in FCTG Company.

Future Prediction

The rate of interest helps in measuring the return rate that the lenders expect for using their money. Higher rate of interest curbs the investment in the business and this lowers the profitability level of the organizations (Goodwin et al. 2013). This is because increase in interest rate shrinks positive NPV investments in the business. On the contrary, lower rates of interest provide the entities with huge opportunities of borrowing money at low rate and thus leading to higher profitability. As the Reserve bank of Australia (RBA) sets lowers the interest rate to 1.5% for the current year, this raises FCTG’s business spending leading to increase in profitability. Hence, this reduces the financial risk and enhances the business growth.

Rate of inflation relates to change in goods price level within the economy over a certain period. Change in rate of inflation influences the consumer’s purchasing power and business cost. However, high inflation rate reduces the purchasing power owing to low money value and hence decreases goods and services demand (Frechtling 2013). In addition, it also increases the production cost leading to reduction in company’s profitability. As the inflation rate rose to 4.4% during the recession period, this increased the airfare and hence reducing the number of tourist. As a result, the revenue and profitability level of FCTG Company decreased. After this period, the inflation rate of the Australian economy lowered and this increases the consumer’s purchasing power. Thus, the company’s financial performance improved in the current period.

Volatility in the oil industry poses risk to this travel agency company. An increase in prices of crude oil lifts the input cost of the FCTG (Borio 2014). On the other hand, reduction in prices of oil lowers the airfares and hence spurs travel demand. This however pushes the travel company to expand their business and attain higher profitability.

Fluctuations in foreign currency rate influences expenditure in destination. Appreciation in foreign exchange rate adversely affects the financial performance of FCTG owing to lower number of tourist (Ashimov et al. 2012). Moreover, currency fluctuations expose FCTG to economic uncertainties and risk in foreign exchange. At present situation, depreciation in foreign exchange rate increased the number of visitors leading to increase in profitability. However, FCTG fianciak performance improved from the previous years.

Evaluating the Level of Competition in the Industry where Flight Centre Travel Group operates in and uses Porter’s Five Forces Model

This section mainly deals with external environmental analysis for Flight Centre Travel Group where the company operates in travel industry in Australia (Flight Centre Travel Group Limited. 2017). Here, Porter’s five forces model had been used in the study to find out the underlying forces that governs external environment of the travel industry in Australia. Below is the diagram of Porter Five Forces Model that had been segregated into five broad forces such as bargaining power of suppliers, bargaining power of customers, threat from suppliers, threat from customers and competitive rivalry (Flight Centre Travel Group Limited. 2017).  

Macroeconomic Factors Influencing Company’s Performance

Figure: Porter’s Five Forces Model of Flight Centre Travel Group

(Source: Flight Centre Travel Group Limited. 2017)

Threat of competition from existing firm is lower for Flight Centre Travel Group.

Low risk from rivalry firm- In the travel industry of Australia, there is low risk from the competitors because the cost incurred is low. The competitors can easily unload the inventory at any point of time. The reason behind the situation is that low storage costs act as a positive impact for the travel based company in and across Australia (Flight Centre Travel Group in this case) (Flight Centre Travel Group Limited. 2017). The rivalry firm of Flight Centre Travel Group is few in number and still need brand recognition to compete with the case company.

Large Industry size- The travel industry in Australia enjoys large industry size as it allows multiple firms for prospering without making an effort to steal the market share of other firms. Therefore, large market size can be termed as positive impact that it had on Flight Centre Travel Group (Rothaermel 2015). Due to large industry size, there is huge opportunity present to the companies who belong to this industry in the present and near future as well.  

Figure: Industry Segment performance

(Source: ibisworld.com.au. 2017)

The above diagram shows the industry segment performance for Flight Centre Travel Group from the year 2012 to 2017. With each year, there is percentage change in revenue. The negative percentage in the year 2017 reveals the fact that Flight Centre Travel Group has low revenue that is not preferable and poor financial position that need improvement in the near future (Flight Centre Travel Group Limited. 2017).  

Figure: Industry Revenue (Travel industry in Australia)

(Source: ibisworld.com.au. 2017) 

Figure: Market Share of Flight Centre Travel Group Limited

(Source: ibisworld.com.au. 2017)

From the above figure, it is noted that major players in travel industry that has market share in the Australian market are Flight Centre Travel Group (20%), Helloworld Limited (13.2%) and others (66.8%).

Differentiation- It is important to consider the fact that travel industry in Australia in actual differentiate themselves by diverse range of product lines that are evaluated by them. The segments that are differentiated based on travel industry are International visitor arrivals, international visitor snapshot and International visitor spend (Flight Centre Travel Group Limited. 2017). To explain in detail, main market segmentation of travel industry comprises of 30.5% of Australians who are travelling internationally, 29.5^ of Australians who are domestic business travelers, 19.7% of International visitors and 20.3% of Australian who are domestic leisure travelers (Eden and Ackermann 2013).

Threat of new entrants is lower for travel industry companies in Australia.

Implementing advanced technologies- In order to prevent new entrants at Flight Centre Travel Group, the company should implement advanced technologies in the operations so that the new competitors face it difficult to enter the travel industry (Flight Centre Travel Group Limited. 2017).  The existing travel companies in Australia need to first implement those advanced technologies and then start with the competition and attain the level of success as soon as possible.

Economies of scale- It is necessary for the travel industry in Australia to have economies of scale as it positively help the producers for lowering the cost at faster pace. For this, it is required to produce next unit of output at lower costs in the near future (Hill and Jones 2013).

Higher cost of production- It is important to note the underlying fact that any new competitors who show willingness in entering the travel industry in Australia, they will definitely have access to higher cost of production that links to smaller economies of scale (Flight Centre Travel Group Limited. 2017).  

Skilled employees as well as human resources- On analysis, it is noted that travel industry mostly search employees who are low-skilled so that they do not have to pay much for their work. In that way, profit margin is kept lower as compared to other brand companies (Flight Centre Travel Group Limited. 2017). Therefore, changes are needed in the macro economy as it largely influences new entrants and act major challenges in the same industry.

The travel industry in Australia faces low threat from substitute products or services. The reason to that is as follows with proper justification:

Switching cost- When customers find that quality of service is lower, they have a tendency to switch to other brands. In that way, Flight Centre Travel Group need to maintain its quality of service so that their customers are loyal to the company and that makes it barrier to new entrants and substitute products (Barney 2014).

Lower quality of services- Flight Centre Travel Group is a company who has many substitutes who are making strategies to lower the quality of services. But, this strategy does not actually work as customers are more concerned about quality of services rather than any other factor (Flight Centre Travel Group Limited. 2017).

The travel industry in Australia faces medium bargaining power from customers. The reason to that is as follows with proper justification:

Large number of customer base- The travel companies in Australia has large customer base where the customer in real have medium bargaining power (Flight Centre Travel Group Limited. 2017).

Price sensitive- In this case, the customers who uses services of Flight Centre Travel Group are mostly less sensitive to prices as they believes in getting best quality at affordable rates (Flight Centre Travel Group Limited. 2017). The customers mostly look at the services that align or match with their social status.  If the company comes to understand that the customers are only looking for quality and not price, then the price automatically increases that need to be taken into account.

The travel industry in Australia faces high bargaining power from the suppliers. The reason to that is as follows with proper justification:

Intense competition- The travel companies in Australia faces huge competition from the suppliers where they make strategies to reduce the prices if they avail the services of the company (Peppard and Ward 2016).

Diverse distribution channel- On analysis, it is noted that there are diverse distribution channel that give rise to high bargaining power from the single distributor that prevails in the travel industry in Australia. It is where the volume becomes critical to the suppliers who supply for Flight Center Travel Group (Flight Centre Travel Group Limited. 2017).  

Reliant on high volumes- On analysis, it is noted that the suppliers becomes highly reliant upon high volumes and that lead to high bargaining power of supplier. Here, the producers have no scope to cut down the volumes that negatively reduces profits of the suppliers (Hill, Jones and Schilling 2014).  

Against the background of significantly low airlines fares and low customer confidence in some of the countries during the financial year 2016 that have comfortably gone past the TTV records. In addition to this, the company business strategy was successful in achieving revenue in by topping approximately $350 million in the underlying profit for the third time in the history of the company. In addition to this, the company business strategy have been successful in generating GBP $1 billion sales (Kubasek, Brennan and Browne 2016). The business strategy of the company has been designed to in such a manner that it lays down the foundations for future growth by investing and introducing the new system of benefit with lower costs and improved productivity.

The business strategy of the company is designed in enhancing the new revenue streams including the new and unique kind of goods and services. The business strategy of Flight Centre Travel Group has been able to enhance the international store network with the help of rolling out the next generation shop and designs.  The company develops the new innovative people consumer centric initiatives that comprises of the flexible workplace arrangement and programs, which will increase the degree of ownership with its business (Kew & Stredwick 2017). The company significantly grows the culture of its online presence with the help of digital capabilities.

The business strategy of Flight Centre Travel Group aims at expanding the corporate travel footprint mainly with the help of organic growth but also through the strategic acquisition in the key markets of Asia, Europe and America. The acquisition of Netherlands is regarded as the first mark of business expansion in the continental Europe, which houses some of the largest corporate travel markets while the acquisition in the Malaysia stated the first expansion in terms of the geographical territories for numerous years (Dumitru and Jinga 2015). The business has been performing successfully ever since the acquisition of the providing FLT with the platform for speedy future growth in the important student and youth demographic both domestically and internationally.

People Centric Business approach:

People forms the most vital part of the business as the company considers its workforce to be valuable in discharge of its business functions (Wetherly and Otter 2014). Accordingly the business strategy of Flight Centre Travel Group represents that the company invest constantly in the professional learning and development initiatives and personally with help of business like amenities.

Network growth:

With the help of its workforce, the company has been able to successfully expand its business network organically and with the help of strategic acquisition that have helped in diversifying the sales of the company. The company introduced BYOjet, an online business that specializes itself in the ultra low cost airfares. Corporate travel business in Mexico have become the part of the Flight Centre Travel Group since they have turned into the international travel solution network (Palepu, Healy and Peek 2013). In addition to this, numerous brands have significantly attained growth with the help of FX specialist travel, Business travel and Niche corporate brands have contributed to growth significantly.

Flight Centre Travel Group has recorded a successful solid sales and attendance growth at its nationwide expo schemes and in numerous key markets of Australia. In spite of the trading climate Flight Centre Travel Group has been able to represent strong corporate performance that generally assisted the company in transforming the business structure through overseas expansion (Wahlen, Baginski and Bradshaw 2014). In addition to this, securing the presence of continental Europe with the help of FCM Netherlands acquisition the organization has been able to recently expand into the new markets with the first launch of leisure store opening in Dawson Street of Dublin.

The segmented result have stated that Mexico business and TTV increased modestly in the local currency. The Flight Centre Travel Group also introduced FX business was introduced in the USA and now it has two stores in Manhattan. The segmented result have highlighted the successful business strategy as the south African segment have attained a strong growth and profit with the help of higher sales (Wild and Staden 2013). This is because the company has topped the revenue for the very first time. On the other hands, segments in New Zealand and Canada have contributed for the first time with more than a sum of $AU 1billion in TTV. The Canadian segment has contributed to the profit by strong demonstration of corporate travel results and closure of some of the loss making leisure business in the late financial year of 2015.

Considering the risk associated with the profit making structure of the business is the rising cost of oil and gas segment that have considerably created an impact on the business performance (Jenkins and Williamson 2015). This poses a major threat to the business performance of Flight Centre Travel Group since the corporate demand for travel have has been considerably impacted due to the loss of some of the regional corporate accounts, investment in new and emerging businesses have yielded lower amount of yields prices in India. On the other hand, the liberty leisure and GOGO segment of wholesale business have resulted bottom line outcomes and failed to meet the expectations. This has led to a decline of $24.7 million write down of $12.0 million in USA segmet and $12.7 million in the other segment.

In terms of the BOS participants that have invested in the 10% interest in their business entitlement of business profit as the return to investment (Batkovsky, Batkovsky and Klochkov 2016). The executive of Flight Centre Travel Group is exposed to the business risk since neither the Flight Centre Travel nor any of the group companies provides the guarantees to the return beyond the face value. On the other hand the company faces the credit risk from the cash and cash equivalents and financial assets investment is not appropriately managed under the treasury policy. It is noteworthy to denote that restrictions are set on the credit rating, type of security, counterparty exposure and maturity (Hill, Jones and Schilling 2014). The company considers the maximum risk through the credit risk of the value of financial assets along with the carrying amount of cash and cash equivalent as the above stated disclosure. 

The financial performance of Flight Centre Travel Group represented a total cash and investment portfolio of $1.52 billion during the year 2016 and comprised of the sum $506.7 million in the cash and general funds of the organization. In addition to this, overall amount of debt of the company declined to 79.8 million (Raubenheimer and Stammen, 2016). This represents that the financial performance of Flight Centre Travel Group has improved with superior net debt position. The financial performance of Flight Centre Travel Group states that it retains to gain a significant amount of cash reserves to allow it to fund growth initiatives with the help of multiple channel of networks to capitalize the opportunities that originates and buffer from the impact of the future economic downturns (Pettersson and Sorensen 2016).

In addition to this, the company reported an improved business performance of enhanced connectivity to provide customers that prefer to book online to LCC airfares and ancillary products, which ultimately helps in delivering new streams of revenue (Drnevich, and Croson 2013). The company plans to increase the leisure travel brands along with the standalone branch to deliver new streams of revenue. In order to improve the performance of the company, Flight Centre Travel Group aims to increase the sale of leisure travel as the mark of the business expansion by emphasizing on the package holidays for attaining growth in the Australian market.

 There are six steps involved in the framework of accounting analysis and these are briefly evaluated in the context of Flight Centre Travel Group as follows:

Identification Of Principal Accounting Policies:

According to the annual report of the organization, the financial report has been prepared according to the Australian Accounting Standards and interpretations issued on the part of the Australian Accounting Standards Board and the Corporations Act 2001. The organization has adopted AASB 9 from 1^st January 2016 for enabling hedge accounting in its Flight Centre Global Product business (Fctgl.com 2017). In addition, it has adopted a new impairment model for its financial assets with a three-stage approach. This includes 12 month expected credit losses, lifetime expected credit losses and lifetime expected credit losses (impaired).

The organization has adopted historical cost convention, as modified through revaluation of FVOCI financial assets, contingent considerations and derivative financial instruments. The organization is involved in rounding off amounts to the closest thousand dollars in accordance with the Australian Securities and Investments Commission’s Instrument 2016/191.

Assessing accounting flexibility:

The accounting flexibility could be evaluated with the help of the resulting information content. In case, the managers have minimal flexibility in selecting the policies of accounting and estimates associated with their major success factors, the accounting data are probable to be less informative for gaining an understanding of the firm’s economics (Doumpos and Cohen 2014). However, these are the quality of choices, which the organization could have selected from the available list of options. In the case of Flight Centre Travel Group, it has been observed that the organization has adopted strict accounting policies in accordance with AASB and IFRS. The managers of the organization do not have the authority to undertake flexibility in selecting the policies of accounting and estimates. The top-level management of the organization has formulated the accounting policies and related estimates and the accounting managers are needed to abide by its norms and regulations. Hence, it could be stated the accounting information of the organization is highly informative and the readers could gain an understanding of its overall economics (Eberlein et al. 2014).

Evaluating Accounting Strategy:

As commented by Palepu, Healy and Peek (2013), when the managers find flexibility in accounting, they could utilize the same to communicate the economic situation of the firm or to prevent the actual performance. One of the major needs in assessing the accounting strategy of the organization is the ability of the organization to deal with the industrial norms. For instance, the organization has won its appeal in the competition related to law test case initiated against it on the part of ACCC related to the alleged breaches of the Trade Practices Act 1974. The ACC has been ordered to pay the legal cost of the organization for the beginning case as well as during the subsequent appeal. The organization has been paid $11,000,000 in penalties, which has been disclosed in the financial statements of the organization. In addition, the management does not have sufficient amount of incentives to manipulate and no changes have been made in the accounting policies and estimates in this year.

Evaluating the Quality of Disclosure:

The quality of disclosure of an organization could be evaluated by the amount of disclosures, note 1 of the accounting policies along with its existing performance (Schaltegger and Zvezdov 2015). The first note in case of Flight Centre Travel Group deals with the basis of preparation of the financial statements in accordance with AASB and IFRS. The disclosures are made in terms of financial assets related to impairment along with the principles of consolidation. These principles take into account take into account the detailed summary of subsidiaries, joint agreements, changes in interest of ownership, share trust along with the translation of foreign currency. Furthermore, the organization has prepared income statement, balance sheet statement, cash flow statement and statement of changes in equity, which has helped in depicting its current financial performance and position in the Australian market.

Identifying Potential Red Flags (Information Distortion):

This indicator clearly signifies that an analyst needs to investigate various items closely or collect additional information on them. This takes into account the unqualified audit reports, undescribed accounting changes, undescribed transactions increasing profit, related party transactions and unexpected big write-offs (Tudor et al. 2013). According to the auditor of the organization, which is Ernst & Young, the organization has conducted write-downs related to the US business, which have not met the intended expectations. However, according to the report of the auditor, no specific changes in accounting have been made in the financial year 2016 and the estimates have conformed to the prevailing norms and standards in the nation. No related party transactions have been found in the annual report of the organization, which states that the organization has no potential red flags at this moment to carry on with its operations in the Australian market (Wood et al. 2014).

Undoing any Accounting Distortions:

As laid out by Zeff (2016), if any problem is detected in the above-depicted step, it is necessary for the organization to avoid any distortions in accounting. However, after analyzing the above step in the context of Flight Centre Travel Group, it could be stated that no major accounting distortion has been noticed in the auditor’s report of the organization. The only problem detected is the write-down associated with the business operations of US, since it has failed to meet the expectations of the management of the organization. In this case, there are two possible ways of fixing this particular distortion. These include passing journal entries or altering the financial ratios based on the data obtained from the financial statements of the organization. However, it is to be borne in mind that passing journal entries is not possible in case of impairment, since it would have direct impact on the ratios. In this case, Flight Centre could use any of the two options available by utilizing the footnotes of the financial statements and the cash flow statement of the organization.

Conclusion

The conclusion has been possible by analysing the various factors and the information that has been gathered from the various authentic sources for Flight Centre Travel Group. The paper concludes that the success and the growth of the organization is dependent on their capability for acclimatizing with the shift of the consumers due to changes in their tastes and preferences as well as transformations in the patterns in the technology at the same time. In order to stay competitive in the market by competing with the new challenges, Flight Centre Travel Group requires transforming their organization from being a travelling agent to become a travelling retailer so that they can concentrate primarily on enhancing and upholding their unique brands along with their distinctive services.

Flight Centre Group has been one of the cyclical organizational dependence that relies on the on the prices of the airfare along with the macroeconomic situations that are favourable in nature which includes the exchange rates, inflation, GDP, interest rate and unemployment. Flight Centre Travel Group requires implementing anticipating sustainable equity returns of 30% that is lower than the accord and a 3-year aggregate of 34%. By looking at the present performance of Flight Centre Travel Group, it provides a recurring nature of returns as well as the economic and the competitive threats that are faced by the organization. The organization therefore requires implementing low needed returns in order to get the correction of the valuation in the coming accounting years.

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