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Company peromance evaluation and monitoring is important from the perspective of many different stakeholders. There are various methods to analyse the companies.This report carries out the top down and bottom up analysis of the Rex (Regional Express) and Virgin Australia. The Top-down analysis discusses about the economic, industry, and company analysis. The economic analysis includes the different kind of economic indicators such as interest rate, inflation, GDP, and value of the currency that affect the profitability of Rex and Virgin Australia. In industry and company analysis the internal and external factors are discussed that affect the performance of both companies.
The bottom-up analysis of Rex and Virgin Australia presents the financial performance of the Rex and Virgin Australia through the analysis of different ratios such as liquidity, profitability, efficiency, capital structure, and market performance ratio. These ratios are used to determine the performance and profitability of the compan y
The Rex (Regional Express) is Australia's largest regional airline company. It was established in the year 2002, when Australian airlines acquired Kendell and Hazelton airlines. The Rex operates its business in different countries for the providing the facility of transportation. The total revenue of Rex in the year 2016 is 261,906 ($000). The mission statement of the company is “We are committed to providing our customers with safe and reliable air transportation with heartfelt hospitality. As a regional carrier, we constantly strive to keep fares low through our commitment to simplicity, efficiency, and good value. We are committed to treating our customers as individuals and will respond to all their comments and complaints” (Regional Express, 2016).
Virgin Australia was launched in the year 2000, as Virgin blue. The Virgin Australia is the second largest airline company in Australia. The company provides its services in 29 Australian cities and the revenue of the company in year 2015 is AU$4.7 billion. The mission statement of Virgin Australia is “our mission to become Australia’s favorite airline group by building on our loyal customer base” (Virgin Australia, 2015).
Top-down analysis is a tool of the macro analysis of the organization that includes the economy analysis, sector analysis, and company analysis. This analysis helps the investors in selection of stock portfolio, which described below:
Economy analysis: Economic analysis is a systematic approach that includes the external factors of the economy, which affects the performance of the organization. Along with this, economic factors are inflation rate, interest rate, the value of currency, and GDP.
Inflation rate: Inflation rate is an important factor of an economy that indicates a rate at which price of goods and services are rising and the power of the currency is decreasing. The rate of inflation in Australia was 1% and 1.5% in the year 2016 and 2015 respectively. This shows that in the year 2016 the rate of inflation is lower in comparison to year 2015 (Trading Economics, 2016). Through this, Australia airline service industry can take the benefit of low inflation rate such as airline companies Rex and Virgin Australia purchases more airline product and services for their development.
Interest rate: the Interest rate is a rate that a borrower paid to the lender for the use of lenders funds. The current rate of interest in Australia is 1.5% in the year 2016 and 2% in the year 2015, which is decreases in year 2016 (Reserve Bank Australia, 2016). So, airlines companies can achieve the benefit of the low-interest rate by the using funds in its operations.
Current value of $AUD: the current value of 1$ AUD is equal to 0.7514 USD, which depicts that the value of Australian dollar is less in comparison to US dollar. This has the both positive and negative impact on the whole Australia airline industry (X rates, 2016). Due to decrease in the exchange rate, the profit of both the companies Rex and Virgin Australia is going down because exchange rate affects the price of fuel, which has a greater impact on both companies’ airfares.
Current GDP: Gross domestic product is a quantitative measurement tool that measures the total economic activities of a country. The current GDP rate of Australia is 3.1% in year 2016 that is higher in comparison to year 2015. This higher GDP rate shows that the economic activities of Australia are increases (Scutt, 2016). Along with this, the Australian service industry has 68% contribution in its GDP. The revenue of Rex and virgin Australia is increasing that has greater impact on the Australian GDP and disposable income. Due to this, the demand of Rex and Virgin Australia’s air travel are increasing rapidly.
Porter’s Five Forces Analysis of the Airlines Industry in the Australia
It helps to determine the industry’s strength and weakness. It represents the industry structure of an organization. This porter’s five forces are used to determine that which products, service, and business give profit to the company. It too helps to understand about competitive market, position and strength or weakness about themselves, while strength or weakness of competitor.
Bargaining power of buyers: The bargaining power of buyers will be high if the buyers have the alternative option and if buyers don’t have many options to chose then bargaining power will low. The Two type of buyers travels in the flights. First, those travel individually. Moreover, these type of buyers’ purchases ticket due to many reasons that can be business related or personal (Moreno et al, 2015). They purchase the tickets from the specific airlines. Second types of buyers buy tickets through the travel agency or online portals.
Organization keeps low switching cost system just because many buyers choose the flight based on distance, area, and cost at the time. Every airline has a niche, few airlines concentrate on cost, while others focus on the facilities and features. Buyers always get information and detail that what are provided during traveling in the flight and focus on safety and cost.
Bargaining power of suppliers: Airline industry is affected by various elements such as fuel, aircraft, and labor. The price of Fuel fluctuates according to the global market and geopolitical factors. Along with this, labor affects the bargaining power of supplier due to the reason of employees and unionism (Halpern and Graham, 2013). Third, manufacturers play a vital role in bargaining power because airline depends on the manufacturers of aircraft such as biggies, Airbus, and Boeing. This is the reason of the power of suppliers, high and low power depends on these elements.
Entry and exit barriers: The airline industry required a huge capital to enter in the market and whenever airlines have to exit from the market, they have to bear high losses. It can be said that enter and exit both are barriers for the airline industry. For entering into the industry needs huge capital with sophisticated knowledge and experience. It is too difficult to exit the industry because of investing huge capital. Existing airline can drive its business with low level rather than exit, when the assets are specialized.
The threat of substitute: There are no substitute threats for the airline industry in the Australia. Furthermore, consumers do not journey by the bus or train. It means that flying is a normal travelling phenomenon for the Australian consumers. The substitutes train and bus don’t impact on airlines industry.
Rivalry among competitor: Airlines industry has many competitors in the Australia. Because, low cost carriers, strict regulation of the industry wherein safety becomes high priority, which leads to high operating expenses. Apart from this, supply side is more than demand side in airline industry. Competitors have to do different things to get competitive advantage (Farabi, 2012). Due to competition, an airlines company has declined their cost and provides unique services, which are never provided by other airlines.
Company analysis is the analysis of the organization’s internal environment, which describes the strengths and weakness of the organization. The Rex has the strong brand image and market share in Australia through the implementing CSR activities. Along with this, the management team of Rex Airline is also able in reducing the cost of the company and expanding its business through the identifying new routes where company can provide its services. Another, strengths of the Rex is its parent company Australian Airline pilot academy that provides an in house supply of pilots to company (Virgin Australia, 2015). Apart from this, Virgin Australia also has the good brand image because it operates its business at global level and company is on first rank in service delivery on time. This increases the market share and profitability of company. Furthermore, Virgin provides high quality services to its customers at low prices that make company different from its competitor’s brands.
On the other hand, Rex Airlines has the some weaknesses that affect the performance of the company. The history of Australian airline industry is negative that force Rex and Virgin to deliver discounted services. The Rex airlines are not able in maintaining its operating costs such as airport cost and jet fuel prices that increase the cost and affects the profitability of company (Regional Express, 2014). But Virgin airlines focus on its operating costs that increase the brand image and profitability of Virgin in Australia. Moreover, the cost of employee’s turnover is respectively high in Virgin Australia in comparison of Rex Airline.
Name of ratio
(Rex) Regional express (2016) $ m
current ratio = Current assets / current liabilities
Quick ratio = current assets - inventories/ current liabilities
Gross profit margin = gross profit/ revenue * 100
Net profit margin= net profit / revenue * 100
Operating profit margin ratio = Operating profit / revenue * 100
Trade receivable turnover ratio=average trade receivable/ revenue *365
average trade rec.
cost of sale
Sale revenue to capital employed = sales revenue / capital employed
Capital structure ratio:
Debt to equity ratio = total liabilities / total equity * 100
Capital Gearing ratio = long term debt / capital employed * 100
Long term debt
Market Performance ratio:
Earnings per share= net income available to shareholder/weighted average share outstanding*100
net income available to shareholder
weighted average share outstanding
Price earnings ratio= MPS/EPS
Market price per share
Earning price per share
Liquidity ratio helps in measuring the capacity of company for paying its debt.
Current ratio: Current ratio indicates the relationship between company’s current assets and current liabilities. Along with this, it also measures the liquidity of the company for paying its short term and long term obligations (Gibson, 2012). As above table the current ratio of Rex and Virgin Australia is 1.03 and .616 for year 2016. It states that the current ratio of the Rex is higher than Virgin Australia, which shows that the ability of Rex is high to meet its short term obligations.
Quick ratio: Quick ratio indicates the liquidity position of the company to meet its short term liabilities. The quick ratio of Rex is .311 and quick ratio of Virgin Australia is .599 respectively in year 2016. It shows that the quick ratio of virgin Australia is higher than Rex (Morningstar, 2016); it indicates that the liquidity position of Virgin Australia is good to meet its short term liabilities.
Profitability ratio measures the efficiency of the company to create the profit from its operation activities. Here, two type of ratio are calculated for determining the profitability of Rex and Virgin Australia, which are as below:
Gross profit margin ratio: Gross profit margin ratio indicates the ability of company to meet its future liabilities. On the basis of above table the gross profit ratio of Rex and virgin Australia is 35.29 and 79.56 respectively in year 2016. Here, the ratio of the virgin Australia is higher than the Rex, which indicates that Virgin is highly able to meet its future liabilities (Lasher, 2013). Therefore, Virgin performs its regular activities smoothly to meet future responsibilities more effectively.
Net profit margin ratio: Net profit ratio measures the net income of the company by managing its expenses. The net profit of company can increase through the cutting down cost and generating more profit. Above table indicates that the net profit ratio of Rex and Virgin Australia for year 2016 is 3.70 and 5.23 respectively. It shows that the ratio of Rex is low in comparison of Virgin (Rex, 2016). For the increasing the ratio company should maintain its expenses and reduces its operations cost.
Operating profit margin ratio: Operating profit ratio helps the company in determine its pricing strategy. The high operating profit ratio indicates that the strong financial position of company from the cutting down its operating expenses (Drake and Fabozzi, 2012). In the above table operating profit margin ratio of Rex is higher than Virgin Australia. It shows that pricing strategy of Virgin is not effective and company is not able to maintain its operating cost. Apart from this, Rex can increase its operating profit by the cutting down its operating expenses.
Efficiency Ratio: Company invests capital in various assets to get profit and generate sales. This ratio measures the efficiency of the assets (Gibson, 2012). Furthermore, efficiency ratio shows the ability of organization to convert its assets into profit.
Trade Receivable turnover ratio: This ratio shows the portion of credit sale which are not collected. On the basis of above table, the trade receivable turnover ratio of Rex is 11.34618291and virgin Australia is 18.52. From this analysis, it can be said that virgin Australia’s efficiency to collect payment is better than regional express.
Sales revenue to capital employed: Sale revenue to capital employee ratio of regional express is 11.34 and virgin Australia is 18.54. This revenue represents the efficiency of the company in generating profit and sales from assets. High sale revenue ratio is more effective than the low sale revenue ratio (Morningstar, 2016). The sales revenue to capita employed of regional express is less than the virgin Australia; it is showing that that Virgin Australia is more capable to make profit and sales as compared to Regional Express.
Capital Structure Ratio: Capital structure ration calculates for measuring the long-term paying capacity and financial position of the company. These ratios are calculated to know the paying capacity, when company gives regular interests and dividends.
Debt to equity ratio: This ratio plays a vital role in the company to know about paying capacity to long term loan and get more loan. Debt to equity ratio of regional express is 145.3422 whereas the virgin Australia is 662.5863771. Furthermore, this ratio measures the financial risk of the organization. Financial risk of the virgin Australia is more than regional express because, its ratio is higher than regional express.
Capital gearing ratio: The capital-gearing ratio of regional express is 51.16 and virgin is 64.372. Apart from this, it indicates the proportion of fixed cost and the equity capital. If organization has, high gearing ratio than it would be good for the organization because, it shows that organization has incurred low cost (Rex, 2016). It can be said that capital-gearing ratio of regional express is not better than virgin Australia.
Market performance ratio: Market performance ratio measures the market performance of the company and it also describes the earning of shareholders by investment activity. Along with this, for analyzing the market performance of Rex and Virgin Australia, earning per share and price earnings ratio is discussed as below:
Earnings per share ratio: Earning per share ratio measures the market performance and profitability of the organization. It also shows the net income of the shareholders that is earned per share (Madura, 2011). From the above analysis can be determined that the earning per share ratio of Virgin is higher in comparison of Rex, which is 7.36 and 4.40 respectively in year 2016. It means the profitability of virgin is excellent that influence the investors towards the company.
Price earnings ratio: Price earnings ratio describes the relationship between earning per share and price earnings ratio. The price earnings ratio of Rex and Virgin for the year 2016 is 4.22 and 3.42 respectively (Rex, 2016). It shows that the price earnings ratio of Rex is higher than the Virgin, which helps the Rex in determining the future market price of shares.
On the basis of above report, it can be concluded that Economic factor of the Australia affects the financial performance of both companies. Decrease in the inflation rate increases the profitability of both airlines company. Apart from this, the rate of interest in Australia is decreases that affect the profitability of company and due to decrease in the value of $AUD the profit of both the company is decreasing. The virgin and Rex has good brand image in market due to using cost effective strategy and implementing CSR activities. On the other hand, on the basis of Bottom up analysis it is analyzed that Profitability and efficiency ratio of the Virgin Australia is higher in comparison of Rex. This indicates that the financial position of Virgin is better than Rex.
Rex and Virgin Australia should try to maintain flexibility in their operating activities that can reduce the cost of company. Along with this, company should change its strategy according to change in the government policies, rules and regulations such as change in interest rate, inflation rate, GDP, and value of $AUD. This can increases the profitability of both the companies by the reducing their cost. From the above analysis it is found that the profitability of Rex is lower so it should focus on cutting down its expenses. Further, company should collect its debt from the market quickly that will improve its liquidity position.
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Scutt, D. (2016) Australian economic growth is roaring. [Online]. Available at: https://www.businessinsider.com.au/australia-q1-gdp-report-2016-6 (Accessed on 15 September 2016).
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