Discuss about the Reporting regulatory environments and earnings.
The current report is based on the understanding of the financial performance for Qantas Airlines and American Airlines Group. The study is based on the analysis of the ratios, trend analysis and vertical analysis of American Airlines Group and Qantas Airlines. Additionally, the report will be placing focus on the future directions of the organization and the industry as well. The report will evaluate the position of the organization inside the industry and emphasis will be placed on the recent stock performance and future anticipation. An analysis of the short term and long term credit decision. Additionally, the decisions will be placed on investment and employment related areas.
Qantas airlines is regarded as the flag carrier of Australia and it is regarded as the largest airline company by its size, international flights and overseas destinations (Investor.qantas.com 2018). The company is considered as the third oldest airlines in the world after KLM and Avianca. Having been founded during the year 1920 Qantas airlines commenced its passenger flight operations in the year 1935. Qantas Airlines is based in the suburbs of Sydney having its main hub at Sydney Airport.
American Airlines Group is considered as the American publicly traded airline company that has its headquarters in the Fort Worth Texas. The company was merged with the US Airways groups and US airways groups’ parent company (American Airlines 2018). The airline group after merger formed the largest airline that operated in the world having more than 6700 daily flights to 336 locations in 56 nations across the world. American Airline Group generated around $40 billion revenue from operations with over 100,000 employees.
Considering the future performance of Qantas the company has undertaken a strong ambitious turnaround plan at the Qantas group. The foundation was regarded as the strong cause of future investment. The company is aiming to plan the pipeline of projects which aims in improving the experience of its customers along with the return to shareholders (Investor.qantas.com 2018). The company will be upgrading the Airbus A 380 with the plans of installing the Nex 1 generation seats from the year 2019 onwards. The plan help in future performance of the organization with overall economic improvement through smarter use of the overall growth in premium seating.
The company is also accelerating the roll out of inflight Wi-Fi of its domestic A330 and 737 aircraft. Following the successful trail it represents that a positive customer feedback with potential increase productivity would help in gaining flight planning and management disruption (American Airlines 2018). Additionally the company is launching Dreamliner aircraft that will help in opening unique routes of Perth to London direct under the lower operating costs. All the identified improvements are dedicated to contribute the future of Qantas Airlines margin advantage in the vital markets since they are central in driving the future financial performance of the organization.
On the other hand, changes in the business model by American Airline group are designed to increase a revenue. American Airlines Group has of late instituted to change the business model in future to increase the revenues and offset the costs. The measures would include implementing premium economy service, basic economy service and other lower costs fares improve the American Airlines loyalty program. Separate charging of services which was previously included in the price of ticket and increasing other pre-existing fees is some of the future initiative that is undertaken by American Airlines Group to increase the future revenue and profits.
Considering the financial standings within the industry the company has reported an Underlying profit before tax of $1,401 million over the twelve month operations with a fall of $131 million from the financial result of 2015/16. Additionally, Qantas has also reported a statutory profit after tax of $853 million after a fall of $176 million from the figures reported in the previous year of 2016 (Scott 2015). The company’s lower profit is large attributable to the decrease in the revenue by one percent since the competitive pressure in the international markets have resulted in all of business revenue.
The airline industry is subjected to extensive amount of fees charged by the government which negatively impacts the revenue and profitability. As evident American Airline Industry have realised a net income of around $2.7 billion during the year 2016 in comparison to net income of $7.6 billion during the year 2015. This included as special $3 billion non-cash benefits since the company has reversed the valuation allowance on the deferred tax assets (Schaltegger and Burritt 2017). The American Airlines Industry has realised a pre-tax income of around $4.3 billion and $4.6 billion during the year 2016 and 2015 individually. The 2016 pre-tax profit for American Airlines Group under the GAAP excludes the pre-tax net special transactions that are impacted by the fall in the revenue yields because of the lower yield salaries.
Recently the shares of Qantas increased significantly with the company reporting a second highest profit after its 97 years of operations since its domestic operations reported an increased earnings and easing of overseas competition. The airline industry share price experienced a sloppy start and swinging from 3.8 per cent to fall at 3.6 per cent gain. The shares of Qantas increased by 3.1 per cent (Williams 2014). Qantas is anticipated to witness an overall increase in the capacity by approximately 3 per cent during the first half of 2018 financial year. This is because the international capacity is anticipated to increase by 5 per cent following the operation in new Asian routes. Additionally, Qantas announced dividend of A$ 0.07 which is line with the previous year when the company reinstated the dividend in 2017 (Warren and Jones 2018). Qantas is regarded as the best performer on the Bloomberg Asia Pacific Airline index since the overall index is up by 23.1% for the financial year 2017.
Considering the stock performance of the American Airlines Group the shares of the American Airlines have increased by 3 percent with the US airline index stood 2.5 per cent. Evidences from the stock performance suggest that American airlines anticipates its total revenue per available seat mile during the quarter have increased by 5 to 6 per cent in comparison to the previous year guidance of 2.5-45 percent (Robson, Young and Power 2017). The twelve month forecast for the American Airlines Group have the median target of around 61.00 with as high as estimated value of 105 and lower estimate of around 49.00. The median estimation represents a 17.62% increase from the past share price of 51.86.
Considering the list competitors for Qantas a summary of competitions faced by the company is stated below;
Fragport AG: This regarded as the leading players among the international airport business with over 90 years of experience in aviation expertise.
Virgin America: Another competition faced by the company is from the Virgin America with an employee strength of 2900 and estimated revenue of around $1.5 billion.
American Airlines Group on the other hand faces competition from the below listed airline operating company are as follows;
Air Canada: American Airlines Group faces competition from the Air Canada since the company provides cheap airline tickets and last minute deals (Henderson et al. 2015). The company has an estimated revenue of around 10 billion revenues.
Air Astana Airlines: Another competitor for American Airlines is the Air Astana Airlines having an estimated revenue of around $10 billion with 4,700 employees.
On analysing the ratios a reference to the GAAP and IFRS measures of financial analysis is made. The analysis uses the financial measures that is obtained from the consolidated financial report of American Airlines Group which is not presented in accordance to the GAAP measures to understanding and assess the operating performance for period to period comparison (Macve 2015). The analysis considers that under IFRS a better financial information can be provided to the investors and others. The IFRS measures might not be considered comparable to the similarity titled under GAAP measures but it should be considered as the substitute or the superior to measure the performance of liquidity prepared in accordance with the GAAP.
On analysing the accounts payable ratio for American Airlines Group it is noticed that the ratio stood stable over the three year period with accounts payable increasing marginally to 23.3 in 2017. The Qantas Airlines on the other hand reported a similar stable trend in accounts payable for the three year period with the ratio standing 7.2 in 2017 (Trotman, Carson and Gibbins 2015). Both the companies has sufficient amount of cash flow to meets its both short and long term debt obligations.
The accounts receivable for American Airlines Group during the three year span does not reflect much of the variation (Carlon et al. 2015). This represents that company has been collecting its receivables as and when they become due. While the Qantas Airlines reported a rising trend of accounts receivable turnover of with figures standing 14.68 in 2015 and subsequently increased to 20.38 representing that there may be delay in collection from the debtors.
The inventory turnover for American Airlines Group has improved over the three year trend as figures in 2015 stood 40.56 while in 2017 the figures has improved to 31.1 representing that the company is converting its inventory in less span of time (Kahng 2016). Qantas on the other hand reported a higher span in conversion of inventory as in 2017 the inventory turnover figures stood 8.72.
The cash flow ratios is considered where the cash ratio for American Airlines Group stood 0.50 in 2016 and declined to 0.36 in 2017. Similarly the cash flow yield for American Airlines Group stood strongly with 2.72 in 2017. Other cash flow measuring parameters such as cash flow to sales and cash flow to assets stood 0.11 and 0.09 respectively for American Airlines Group in 2017 (Hoyle, Schaefer and Doupnik 2015). Qantas on the other hand reported a cash ratio of 0.31 in 2016 which marginally declined to 0.26 in 2017. The cash flow yield for Qantas Airlines during 2016 stood strong with 2.74 and 3.17 in 2016 and 2017 respectively. The cash flow to sales and cash flow to assets stood relatively lower for Qantas in 2017 as the figures stood 0.16 and 0.15 relatively.
The fixed asset turnover for American Airlines Group stood 1.37 in 2016 while in 2017 it stood 1.29. The total asset turnover for American Airlines Group over the three year trend reflected marginal increase as the figures reported stood 0.82 representing that the assets has been effectively utilised to generate revenue (Beck et al. 2017). Qantas fixed asset turnover over the five year trend stood relatively strong as the figures in 2017 stood 1.34. The total asset turnover for the company stood 0.94 in 2017. Preceding from the above discussion it can be stated that company that company has reported an effective utilization of its assets.
The earnings per share for American Airlines Group has been disappointing as there has been a declining trend in the EPS. The figures reported for American Airlines Group in 2015 stood $11.39 which significantly fell as low as $3.92 in 2017 (Gordon and Hsu 2017). Similarly for Qantas too reflected a weaker earnings per share of $0.49 and 0.46 in 2016 and 2017 respectively.
The shareholders return is measured through dividend pay-out ratio. The dividend pay-out ratio for American Airlines Group stood 10.19% in 2017 representing that the company is able to provide sufficient return to the shareholders (Evans et al. 2014). The dividend pay-out ratio for Qantas stood strong over the last couple of years as the company reported a strong dividend pay-out of 23.13 and 23.16% respectively in 2016 and 2017.
To measure the profitability net margin and operating margin is considered. The net margin for American Airlines Group in 2016 stood 6.66% while in 2017 it declined to 4.55%. The operating margin for the company stood 13.15% in 2016 which also fell to 9.31% in 2017. Qantas reported a somewhat tumultuous operating margin as the ratio stood 10.14 in 2016 and 8.53% in 2018 (Abdallah 2016). The net profit margin in 2016 stood 6.35% which declined to 5.31% in 2017. The debt ratio for the firm stood stable in 2016 and 2017 as the ratio stood 0.92 for American Airlines Group. Qantas reported a lower debt ratio of 0.74 in 2017.
Overall the profitability margin for both the company has stood relatively lower and stable debt conditions and somewhat fluctuating receivable turnover for Qantas. While American Airlines Group too reflected a declining trend in profitability with stable debt and solvency conditions.
The short term credit decision for American Airlines Group considered stable as the company has maintained sufficient working capital and has been able to pay its short term debt obligations with relatively strong cash flow. The long term credit decision though reflects a tumultuous situation as the EPS has represented a declining trend.
The investment decision in American Airlines Group can be considered viable despite the volatile airline industry as the company revenue per seat has increase to 6% on average basis. Though current share performance appears to be relatively low but with new market discovery an investment decision in American Airlines Group can be considered viable. Investing in Qantas may appear more viable as the pay-out ratio has been relatively stronger.
The employment decision in American Airlines Group does not appear viable as the company has been struggling of late to hold and retain its employees. From the financial standpoint the declining profit can be considered as the one of the future hindrance in the employee retention.
On the probable situation of being the CEO for both the firms exploring the Asian market with lower air fares would help in increasing market share and increased revenue for both the American Airlines Group and Qantas Airlines.
Conclusion:
Conclusively, the airline industry appears to be highly competitive. The findings from the analysis suggest that entering the Asian market with cheaper airline fares can help in covering the expenditure of higher fuel costs. Both the American Airlines Group and Qantas Airlines would be able offset the rising administrative expenses with increased profitability and wider consumer base in the Asian markets.
Reference List:
Abdallah, W.M., 2016. The conversion from US-GAAP to IFRS and transfer pricing.
American Airlines. (2018). Investor Relations | American Airlines. [online] Available at: https://americanairlines.gcs-web.com/ [Accessed 27 Mar. 2018].
Beck, A.K., Behn, B.K., Lionzo, A. and Rossignoli, F., 2017. Firm Equity Investment Decisions and US GAAP and IFRS Consolidation Control Guidelines: An Empirical Analysis. Journal of International Accounting Research, 16(1), pp.37-57.
Carlon, S., McAlpine-Mladenovic, R., Palm, C., Mitrione, L., Kirk, N. and Wong, L., 2015. Financial Accounting: Reporting, Analysis and Decision Making. John Wiley and Sons Australia.
Evans, M.E., Houston, R.W., Peters, M.F. and Pratt, J.H., 2014. Reporting regulatory environments and earnings management: US and non-US firms using US GAAP or IFRS. The Accounting Review, 90(5), pp.1969-1994.
Gordon, E.A. and Hsu, H.T., 2017. Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under US GAAP and IFRS. The Accounting Review, 93(1), pp.187-211.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Investor.qantas.com. (2018). Qantas Investors | Investor Centre. [online] Available at: https://investor.qantas.com/investors/?page=annual-reports [Accessed 27 Mar. 2018].
Kahng, L., 2016. Perspectives on the Relationship Between Financial and Tax Accounting. In Controversies in Tax Law(pp. 105-122). Routledge.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social and organizational practice: exploring the work of financial reporting. Accounting, Organizations and Society, 56, pp.35-37.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Trotman, K., Carson, E. and Gibbins, M., 2015. Financial accounting: an integrated approach. Cengage Australia.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
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