Read the case studies of Qantas in the prescribed textbook of this unit Palepu, K. G., P. M. Healy, V. Bernard, S. Wright, M. Bradbury, P. Lee, Business Analysis and Valuation Using Financial Statements: Text and Cases, 2nd ed .Asia Pacific Edition, Cengage Learning, 2015:
Answers
1a. Qantas Airlines, one of the leading among the airline industry is affected by the five forces of Porter that are analyzed and discussed as follows:
Porter 5 Forces
Bargaining Power of Buyers
In the airline industry, the power of the bargaining among the buyers is too high. The reason of the same is because the industry provides various options of selecting from among the categories of the services like the premium class, low or economic classes and other range of services in the air travelling. A wide variety of the providers of such services are present that leads to an increment in the purchasing power of the buyers.
Bargaining Power of Suppliers
There are a variety of suppliers that offers similar type and categories of the services and thus the same leads to the reduction in the bargaining powers of the suppliers. In the case of the Qantas Airlines, the bargaining power of the suppliers is low as the other airlines of the industry like Virgin Airlines are under the operation.
Threat of Substitute
The threat is substitution is lower in the cases of the airline industries as the travelling mode by air is the most easy and fastest way of travelling and the services cannot be provided by other ways of transport that include the road or water transport systems. Hence, for the given reason, the substitution rate is lower for the Qantas Airlines (Emery 2012).
Rivalry among Existing Firms
It is a crucial part among the five forces as the rivalry and intense competitions can harm and make the company suffer huge losses. Similarly, Qantas is facing direct competition with the Virgin Airlines in the domestic markets that are resulting in heavy losses.
Threat of New Entry
The new players will require heavy investments in the adoption of the services of the airline industry. The airline industry is the most expensive and considers a lot of investment in the infrastructure that cannot be set up without facing difficulties. Therefore, the threat for the new entrants is too low for the Qantas Airlines (Homsombat et al. 2014).
b) SWOT Analysis
The analysis of the company’s strengths, weakness, opportunities and threats is discussed as below:
Strengths
- Qantas has brand value and recognition that is premium in nature and known as the flagship airline company.
- Qantas has a record of zero accidents and also the share of market is around 65%.
- Qantas has good connectivity, provides excellent services and facilities and also is the best towards the provision of the facilities of the operational class.
Weakness
- Despite of being a market leader, Qantas has been facing decline in the level of performances.
- There has been an increase in the cost of operations and occurrence of disputes among the major unions of Australia.
- The management is inefficient as the strategy of the company have been failing over the years (Oum et al. 2012).
Opportunities
- There must be modifications and alterations in the strategies for the growth and development of the overall company.
- Qantas can focus on the expansion of its operations into both the international and the domestic routes.
- Qantas can increase the provisions of the loyalty bonus and online promotions for consumers. The same can lead to the increase in the number of travels undertaken.
Threats
- Increment in the costs of fuel and energy and enormous instability in the market.
- Occurrence of the economic crisis globally and deteriorating of the Australian Dollar against the other currencies.
- The competition in the prices that are reducing the margins of operations.
The above reflects that the strengths and the opportunities are too high that can be controlled and managed to get an effective structure of the whole group of Qantas (Tribe 2015).
c) Corporate Strategy
Qantas Group had undertaken a wide number of strategies since the year 1992, to offset the disagreeable consequences and results of the challenges that the Australian Airline industry faces. There was a proposal of the establishment of a carrier with lower cost and fare by the executives of the Virgin Express for competing against the rivals of the Virgin Blue. After getting the news, the Qantas Group took steps in the adoption of the two brands that were towards the targeting of the various market groups (Lucarelli 2014). Hence, the model of the Qantas’ Jetstar has remained the most low cost carrier that met up with the demands of the oligopoly market of Australia.
The Qantas Airline has a group of competent employees and staff that are used in an effective and efficient manner by the management of the company. They help in the provision of the quality and superior services towards the clients and customers. As per the research study done, it was found that 42% of the customers utilizing the services were satisfied and contended with the offered services. It is the effect of the strategic steps that led to the creation of an outstanding brand reputation of the company. The objectives are realized and the managers take steps in realizing the aims and goals by providing proper and effective training to the employees and staffs for meeting up with the higher standards of the expectations of the customers (Ashwini Nand et al. 2013). They are highly motivated towards delivering the quality and valuable services.
The Qantas Airlines had expanded its agencies of travel across the markets under the target that lead to the capability of marketing and promoting the inclusive packages with the airfares. The same provided the company with additional advantages over the competitors as none of them had come across some plan and implementation programs. The company had also diversified the business portfolio unlike its competitors and thus, the same is responsible towards the reduction and prevention of the threats and risks present in the environment of the company. Thus, the company must undertake effective control and the management of the costs and operations that will lead to the profits and effectiveness in the strategy of the company (Heshmati and Kim 2016).
Though, it has the best quality and services towards the customers, the company has been facing huge losses and decline in the sustainability as it has been losing the revenue at an approx rate of $87 per second. The company must work towards the market attractiveness and in shaping the causes and reasons of major and sharp decline and turning down of the number of the passengers and the customers using the services of the air travelling industry. Thus, the current state of the market effectiveness is not efficient and must be put under proper control and management.
d) The accounting policies that must be closely watched by the auditors and the analysts of the company are:
- The cost of acquisition or the initial cost of recognition of the airline industry
- The accounting of the assets of the aircrafts
The policies are chosen because they are among the significant policies that must be checked and controlled by the company and its management.
In case of the cost of acquisition or the initial cost of recognition of the airline industry, all the cost that have been incurred towards getting the aircrafts into the usable condition needs to be capitalized as per the IAS and other standards. It will include the purchase cost and other adjustments that will make the same a part of the agreements of the purchases. Thus, the auditor and the analysts must take care of the same and also the deductions under the costs of acquisition must be a part of the capitalized costs.
In case of the accounting of the assets of the aircrafts policies under the IAS 16 and other standards, there is a noteworthy impact on the financial results that must be checked by the Auditors. The same must be revisited in every period under reporting by the auditors as there is a requirement of the judgment of the principles of the audit (Daft and Albers 2013).
e) The financial position of the company for the year 2013 is as under:
Income and Expenditures
|
Particulars
|
Amount($M)
|
|
Total Revenue
|
15,902
|
|
Operating expenditure
|
13,684
|
|
Statutory profit/(loss) before tax and net finance costs
|
204
|
|
Finance income
|
109
|
|
Finance costs
|
-296
|
|
Statutory profit/(loss) after tax
|
6
|
The profitability scenario shows that the company has obtained total revenue of $15,902M and operating expenditure of $13,673M that must be controlled as the same is resulting in the decline of the total profits or loss after tax. As per the above data, the finance incomes are too low and inefficient as compared to the costs of finance that is too much i.e. $296M and the same must be reduced to increase the net total profits of the company i.e. too less in the year 2013. The debts are too high that is well reflected by the total finance costs of the company and thus the same must be maintained.
Balance Sheet
|
Particulars
|
Amount($M)
|
|
Current assets
|
5,245
|
|
Current liabilities
|
6,370
|
|
Total equity
|
5,954
|
The liquidity position of the company is too weak as the current assets are too low as compared to the current liabilities. The company must maintain at least a ratio of 1 of liquidity but the company is inefficient as it is maintaining lower than that.
Overall, the financial structure of the company was good in the year 2013.
f) The financial position of the company for the year 2016 is as under:
Income and Expenditures
|
Particulars
|
Amount($M)
|
|
Total Revenue
|
16,200
|
|
Operating expenditure
|
14,557
|
|
Statutory profit/(loss) before tax and net finance costs
|
1424
|
|
Finance income
|
65
|
|
Finance costs
|
-284
|
|
Statutory profit/(loss) after tax
|
1029
|
The profitability scenario shows that the company has obtained total revenue of $16,200M and operating expenditure of $14,557M that has resulted in an overall profit of $1029M. As per the above data, the finance incomes have declined drastically as compared to the costs of finance that is too much i.e. $284M and the same must be reduced to increase the net total profits of the company further. The debts are too high that is well reflected by the total finance costs of the company and thus the same must be maintained. Although, the company has incurred heavy costs of finance, the revenue is satisfactory.
Balance Sheet
|
Particulars
|
Amount($M)
|
|
Current assets
|
3,458
|
|
Current liabilities
|
7,028
|
|
Total equity
|
3,260
|
The liquidity position of the company is too weak as the current assets are too low as compared to the current liabilities. The company must maintain at least a ratio of 1 of liquidity but the company is inefficient as it is maintaining lower than that.
Thus, the company even though having a good profit do not have a stable balance sheet condition that must be controlled and managed after proper check.
g) The similarities of the financial positions between years 2013 and 2016 are as follows:
The finance costs are huge in comparison to the finance incomes that are a result of huge debts and borrowing and the incomes earned from hedging and other instruments. The finance costs of the year 2013 and 2016 were $296M and $284M respectively.
The liquidity ratio is too low and weak i.e. not even not meeting up the benchmarked ratio. Thus, the company is facing the problem of meeting up the current liabilities with the help of the current assets.
The differences of the financial positions between years 2013 and 2016 are as follows:
The net income of the company in 2013 was too low in comparison to 2016 i.e. $6M and $1,029M respectively.
There has been a decrease in the equity in the year 2016 and the reason may be the sale of the shares or no retained earnings left with the company.
Thus, the company has seen a decline in the total revenue and the increment in the total cost of the operations that must be managed and controlled for proper effectiveness of the company.
References
Ashwini Nand, A., Singh, P.J. and Power, D., 2013. Testing an integrated model of operations capabilities: an empirical study of Australian airlines. International Journal of Operations & Production Management, 33(7), pp.887-911.
Daft, J. and Albers, S., 2013. A conceptual framework for measuring airline business model convergence. Journal of Air Transport Management, 28, pp.47-54.
Emery, F., 2012. Futures we are in (Vol. 5). Springer Science & Business Media.
Heshmati, A. and Kim, J., 2016. Summary, Conclusion, and Policy Recommendations. In Efficiency and Competitiveness of International Airlines (pp. 165-181). Springer Singapore.
Homsombat, W., Lei, Z. and Fu, X., 2014. Competitive effects of the airlines-within-airlines strategy–Pricing and route entry patterns. Transportation Research Part E: Logistics and Transportation Review, 63, pp.1-16.
Lucarelli, G., 2014. The corporate strategy of Qantas Airways. A case study.
Oum, T.H. and Yu, C., 2012. Winning airlines: Productivity and cost competitiveness of the world’s major airlines. Springer Science & Business Media.
Tribe, J., 2015. The economics of recreation, leisure and tourism. Routledge.
