Qantas Airways is an Australian based airline and is a subset of the Qantas Group. It is a public-listed company in the ASX (Australian Securities Exchange).
The purpose of this research is to provide information of the Qantas Group focusing on its profitability, efficiency and liquidity for the last 3 years. This research paper also examines the financial analysis and provides other relevant information to support in the evaluation of the company. 1 Company Profile
1.1 History
Qantas is the world’s second oldest airline. It was founded in the Queensland outback in 1920 and has been in continuous operation since that date. Qantas is Australia’s largest domestic and international airline and is recognised as one of the world’s leading long distance carriers. The name comes from the initial letters of the words in the original registered title – Queensland and Northern Territory Aerial Services Limited. 1.2 Qantas Group Strategy
Safety remains Qantas’ first operational priority and they are committed to maintaining the position as the leading Australian domestic carrier and one of the world’s premier sustainable long-haul airlines through the dual airline brands – Qantas and Jetstar. Qantas aim to maintain customer loyalty by delivering exceptional experiences through these dual brands, in conjunction with Qantas Frequent Flyer. The operating strategy is complimented with a prudent approach to capital management as they seek to deliver sustainable, long terms return to the shareholders. The Qantas Group strategic priorities are illustrated below. 4
The Essay on Qantas Airlines
Introduction Qantas Airlines, initially known as Queensland and Northern Territory Aerial Services Limited (QANTAS), was founded by two former war pilots, Wilmot Hudson Fysh and Paul McGinness, in 1920 at Queensland, Australia. Qantas is the flag carrier airline for Australia and it is the second oldest airlines in the world. Qantas Airlines headquarters is located in Mascot, Sydney, New South ...
1.3 Qantas Overview
Qantas is Australia’s largest full service airline carrying 28 million passengers in 2011/2013 on 5,050 flights per week in Australia, New Zealand, Asia, North and South America, Africa and Europe. It is a founding member of the oneworld alliance. Qantas is a single integrated airlines providing airline transportation through its two Qantas brands – Qantas and QantasLink Main Markets
Qantas’ main markets are domestic and international traffic to and from Australia. Qantas, a wholly-owned group of subsidiaries including QantasLink and Network Aviation, services 57 metropolitan and regional regular passenger transport destinations across Australia and Port Moresby in Papua New Guinea, as well as 19 dedicated fly-in-fly-out charter destinations. 2011/2012 Passenger Distribution Passenger Revenue
Australia domestic 78% 51%
International 22% 49%
Customers
Qantas carries business and leisure passengers
Product
Qantas offers passengers a premium network product on its extensive domestic and international network and through it oneworld membership, accessing 24 bilateral codeshare agreements (excluding Jetstar and Jetstar Asia with whom Qantas also has codeshare agreements), over 870 destination and 550 lounges. Passengers also have the opportunity to earn and redeem frequent flyer points across its global network. Qantas is focused on both business and leisure travellers by offering a one or two class product on domestic routes and a two, three or four class product for international services. 5
1.4 Jetstar Overview
Jetstar commences operations in May 2004. It is the Qantas Group’s low fares airline and the largest low cost carrier in the Asia Pacific region. Jetstar comprises of Jetstar Domestic, Jetstar International and holdings in Singapore-based Jetstar Asia, Vietnam-based Jetstar Pacific and Jetstar Japan. In 2011/2012, its operations carried 18.7 million passengers to over 50 destinations in Australia, New Zealand, Asia and the Asia Pacific. Jetstar also recently announced its intention to invest in a new airline, Jetstar Hong Kong, with China Eastern Airlines in 2013. Main Markets
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Jetstar’s main markets are domestic and international traffic to and from Australia. Pan-Asian expansion has strengthened through Jetstar Asia, Jetstar Pacific and Jetstar Japan. New Zealand operations encompass both trans-Tasman and domestic New Zealand markets. 2011/2012 Passenger Distribution Passenger Revenue
Australia domestic 57% 51%
International 43% 49%
Customers
Jetstar focused on providing consistently low fares to predominantly leisure travellers. Product
Jetstar offers domestic and international passengers a value based product with the flexibility to select additional operations in relation to seating, entertainment, catering, baggage and premium seating on long haul. Jetstar’s continual focus on leading online technology has enabled more innovative ways to book, check-in and board. 6
1.5 Fleet
Qantas Group operates fleets comprises of Boeing 737-800, A330-200, A380-800 Boeing 787 Dreamliner, Bombardier Q400 and Boeing 717. Over the next 10 years, the Qantas Group has committed capital investment worth US$23 billion in more fuel efficient, next generation aircrafts such as A380-800, Boeing 787 Dreamliner and Airbus A320 neo. 1.6 Corporate and Social Responsibilities
The Qantas Foundation was established as a charitable trust in 2008. It forms part of the Qantas Group’s commitment to operating in a sustainable and socially responsible manner. The Qantas Foundation focus on two key areas: Initiative that provide an immediate experience for those in need (Changing lives) Experiences and opportunities that empower the next generation of Australians to make a difference in community (Empowering change) To deliver this vision, the Qantas Group leverage off the diverse resources of the Qantas Group – from their employees, diverse network of suppliers and partnerships, and the use of their own airline. Another initiative that the Qantas Group took on is aiming for a world class performance by protecting the environment for the generations. They aim to reduce their carbon footprint through several proven measures such as: Aircraft weight reduction initiatives
Efficient ground power units in lieu of jet fuel driven auxiliary power units Using GPS-based navigation technology to improve operational efficiency Investing in a fuel efficient fleet such as Airbus A380 and Boeing 787 Facilitating a sustainable aviation fuel industry in Australia On ground, together with their partners, innovative projects and partnerships were set to achieve this goal. One example is the Clean Up Australia campaign; started since 1996, the Qantas Group have been a key corporate partner for the Clean Up Australia Foundation. Key Successes
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1. Maintained a downward trend on electricity, water and waste-to-landfill consumption since 2006, despite operational growth. 2. Reduced environment impact between 2005 and 2011:
Reduced electricity consumption by 8%
Reduced water consumption by 19%
Reduced waste-to-landfill by 21%
3. Maintained a downward trend on jet fuel emission intensity 7
2. Key Strategies
The Qantas Group has a broad portfolio and a clearly defined strategy with the following core goals: Build on the Group’s domestic businesses through a clear focus on the customer Strengthened Jetstar’s presence across Asia to capture the full benefits of the region’s low-cost leisure travel boom. Continue to expand Qantas Frequent Flyer by adding new partners and increasing ways for members to earn and spend points. Some of the changes seen were introducing a new tablet-based in-flight entertainment system called Q Streaming that received outstanding feedback from passengers. New order for 10 Fokker 100 aircraft were placed to extend Qantas’ reach into Western Australia’s mining centres as part of the Group’s fly-in-fly-out strategy. Jetstar’s focus in the domestic market remained on building up capacity on core leisure routes with modern fleet such as the A320 aircraft, adding almost 16,000 extra seats during the year. Qantas Group also expanded alliance with American airlines, attracting consumers from the America regions. 8
2.1 SWOT Analysis on the Qantas Group
STRENGTH
Strong partnership with other alliance through its oneworld membership; accessing 24 bilateral codeshare agreements over 870 destination and 550 lounges. Passengers also have the opportunity to earn and redeem frequent flyer points across its global network which attracts consumer to choose the Qantas Airways over other airlines. Operate and fly in to many destinations such as Australia (Domestic), New Zealand, Asia, North and South America, Africa and Europe making Qantas Airways the ideal airline to consumers. WEAKNESS
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... days. DEBTOR DAYS A ratio used to work out how many days on average it takes a company ... airways (BA) as one of the largest airline companies flying to over 220 destinations and is ... - Liquidity - Ratios CURRENT RATIO: The current ratio indicates the extent to which current asset are available to ... 18. 25% Qantas stake. 2. 2 Profitability Ratios The Return on Capital Employed (ROCE) ratio, compares the ...
Qantas do not have many direct routes and depend heavily on its other airline partners. For example to get across to destinations such as Europe, the Middle East and North Africa, consumers have to transit at Dubai and change airlines to the Emirates to get to their final destination. This turns away consumers who prefer to fly in direct to the country. OPPORTUNITY
Qantas’ subsidiary – Jetstar announced its intention to invest in a new airline; Jetstar Hong Kong, in partnership with China Eastern Airlines this year. This expands the flying business into the Chinese market. THREAT
The global fuel price increase affects the airline industry. With higher fuel prices, the airline’s operating cost increases. To compensate, airline raise ticket prices to generate more revenue which in turn, turn away consumers and force them to look at other airline that provides competitive or even lower prices. Introduction of more low cost carriers from established airlines such as Scoot, a subsidiary airline of the Singapore Airline. 9
3. Ratios
3.1 Profitability Ratio (%)
Profitability ratio is used to measure a company’s ability to generate revenue in relation to sales, assets and equity (i.e. often the sum of monies invested).
It also shows how effective the company is being managed to stay profitable. Some commonly used profitability ratios include return on equity, return on investment, return on total assets, gross and net profit margins and return on capital employed. Profitability ratios provide investors guidance in their assessment of the company’s financial health and performance. For example, return on investment indicates whether the company is generating enough profits for its shareholders. Net profit margin declined by 0.52% in 2012 while an increase of 0.53% occurred in 2011 as seen in Table 1. It is slightly lower than the industry averages of 1.737% by 0.377%. The decline in net profit margin may be attributed to rising fuel costs, fall in freight, tours and travel revenue. In 2012, Qantas incurred restructuring costs of AUD376 million compared to nil in 2011, which is in relation to their initiative to reduce costs and improve business in the international segment. The other ratios such as Return on assets (ROA) and return on equity also declined to 2.12% and 3.38% respectively in 2012.
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Profitability Year/Ratio 2010 2011 2012 Industry averages
Return on total assets (ROA)
1.76%
2.28%
2.12%
2.630%
Return on equity
2.88%
4.26%
3.38%
5.290%
Net profit margin
1.35%
1.88%
1.36%
1.737%
10
3.2 Efficiency
Efficiency ratios are used to show how well a company uses its assets and liabilities efficiently to be able to earn significant amount of profits. Examples of efficiency ratios include asset turnover, inventory turnover, receivables turnover and payables turnover. Qantas may be considered as efficient in utilizing its resources to generate revenue, with asset turnover showing an increase to 252 days in 2012 compared to 245 days in 2011. Generally the higher a company’s asset turnover, it means the assets have been used more efficiently. From table 2, the number of days taken for creditors to be paid fell to 45.41 days in 2011, however a modest increase of 1.45 days was experienced in 2012. Compared to industry averages, Qantas took a longer time to pay their creditors. On the other hand, number of days debtors took to pay was shortened by 2.09 days in 2012 while there was an improvement of 1.62 days in 2011. However the receivables turnover is a little higher at 19.83 days compared to industry averages of 18.45 days. Inventory turnover shows the frequency a company’s inventory is sold and replaced over a period. A high turnover indicates strong sales while a low turnover may imply poor sales and hence excess inventory. Inventory turnover fell to 9.39 days in 2012 compared to 9.72 days in 2011. However the ratio is higher than industry average of 8.52 days. Table 2
Efficiency Year/days 2010 2011 2012 Industry averages
Days payable
50.43
45.41
46.86
43.90
Days receivable
23.54
21.92
19.83
18.45
Days inventory
9.19
9.72
9.39
8.52
Asset turnover
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234
245
252
284.70
11
3.3 Liquidity
Liquidity ratio measures the company’s ability to pay its short term liabilities when due. It is calculated by dividing cash and other liquid assets by the short term borrowings and current liabilities. This will show the number of times the short term obligations are covered by the cash and liquid assets. The short term obligations are considered fully covered and the company is in good financial health if the value is greater than 1. The higher the liquidity ratio, the higher the capability the company possesses to meet its current liabilities. Examples of liquidity ratio include current ratio and quick ratio. Current ratio for Qantas was 0.90 in 2011 and 0.77 in 2012, near industry average of 0.81. In comparison to Virgin Australia Holdings Ltd whose current ratio is 0.65 in 2011 and 2012 (See table 4), Qantas appears more stable though the values of its current ratio are less than 1 for both years. Quick ratio also known as the acid-test ratio focuses on the most liquid assets, leaving inventory out which may be hard to turn into cash in a timely manner. In the case of Qantas, the quick ratio was 0.71 in 2012, 0.14 drop from 0.85 in 2011, while industry average is 0.75. As compared to Virgin whose quick ratio was 0.61 in 2012, the company seems to be in a stronger position to meet its short term commitments. Table 3
Liquidity Year/Ratio 2010 2011 2012 Industry averages
Current ratio
0.93
0.90
0.77
0.81
Quick ratio
0.88
0.85
0.71
0.75
12
Table 4 – Growth Profitability and Financial Ratios for Virgin Australia Holdings Limited Liquidity/Financial Health 2010-06 2011-06 2012-06
Current Ratio
0.76
0.65
0.65
Quick Ratio
0.75
0.62
0.61
Financial Leverage
4.15
4.15
4.3
Debt/Equity
2.3
3.21
3.96
Source: 2013 Morningstar, Inc.
13
3.4 Gearing Ratio
gearing ratio compares owners’ equity or capital to borrowings. Gearing is a measure of financial leverage showing the extent to which a company’s activities or operations are funded by owners’ funds against borrowed funds. A high gearing ratio indicates that a company is using debt to pay for its operations and may risk inability to meet repayments in an economic downturn. The situation could be made worse where rates move upwards suddenly. Lenders are generally concerned about excessively high gearing ratio that may put their loans at risk for non-repayment. Some examples of gearing ratio are debt equity ratio and net interest cover. For Qantas, the gearing ratio increased to 111.21% in 2012 compared to 98.05% in 2011.
This means the company used debt instead of equity to fund its continuing operations. However, this ratio is lower that industry average of 130.547%. Net interest cover ratio refers to the ease a company pays interest expenses on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. The company’s ability to meet interest payments may be doubtful when the ratio is 1.5 or lower. In Qantas case, the net interest cover ratio dropped sharply to 1.54 in 2012 against 3.96 in 2011. This ratio of 1.54 is close to the threshold of 1.5 and is indicative that Qantas may face cash flow problems and inability to meet interest expenses should rates increase suddenly. Table 5
Gearing Year/days 2010 2011 2012 Industry averages
Net Interest cover ratio
4.16
3.96
1.54
2.35
Gross Gearing (D/E)
95.600%
98.050%
111.210%
130.547%
14
3.5 Investment ratio
A shareholder can analyse the financial information available to determine if the investment in a company is of value and quality. The price/earnings ratio is the best known investment valuation indicators and used widely by investment professionals and investors. Generally the stock with a high price earnings ratio indicates that investors expect higher earnings growth in the future. The price earnings ratio for Qantas was 12.23 in 2012, 15.90 in 2011 and 29.14 in 2010. A sharp decline of 13.24 was recorded in 2011 due to market confidence in this stock prior to 2011. However the industry average is 12.25 which may suggest that investors may be less likely to
