The current report aims to evaluate the financial and overall business performance of Qantas Airways, the leading organisation in the airline industry of Australia. In order to evaluate the business performance of the organisation, Porter’s five forces framework and SWOT analysis are used along with assessment of its corporate strategies. For dissecting the financial performance of the organisation, the choices of accounting policy, which need close observation, are discussed in the report as well. In addition, the financial performance and financial position of the organisation by comparing the items in the annual reports for the years 2013 and 2016 have been demonstrated in the study. Finally, the report sheds light on providing recommendations to the potential investors of whether to purchase or sell the shares of Qantas.
The Porter’s five forces framework influencing the Australian airline industry and especially, the performance of Qantas is depicted as follows:
The buyers have greater bargaining power in the Australian airline industry, as they have various alternatives to choose from like air travelling services of premium class, air travelling services of low cost and others. However, other service providers are inherent in the market that enhances the purchasing power of the buyers (Abhayawansa, Aleksanyan and Bahtsevanoglou 2015).
The suppliers have lower bargaining power in the airline sector of Australia, as greater number of suppliers is offering identical services. In relation to the power of Qantas, it is lower due to the other main industrial airlines like Virgin Airlines.
The threat of substitute is lower in case of the airline industry as well as for Qantas Airways, since the air-travelling mode is the quickest way to avail travelling services at greater distances. This is because it is not possible to cover the same distance through water or road transport. As a result, there is lower threat of substitute in the market (Ao and Collins 2015).
This is critical in relation to the Australian airline industry, since the existing situation denotes that Qantas is engaged in direct competition with Virgin Airlines in the domestic market. In other words, there is intensity in competition, which has resulted in operational loss for the airline organisations (Bodie 2013).
This threat is relatively lower in the Australian airline industry due to the reason that newer players need huge infrastructural investments to set up an airline organisation, which would be complex to perform.
The SWOT analysis of the competitive strategy of Qantas has been discussed briefly as follows:
The primary strength of Qantas is its reputation in the Australian airline industry, since it is the flagship airline organisation in Australia. Moreover, it is the leader in the industry, since it occupies a market share of around 65% (Cornell and Gokhale 2016). The brand image of the organisation is developed, since it provides on-time quality air-travelling services to the passengers.
The primary weakness of Qantas Airways is primarily in terms of the falling level of performance of the organisation, instead of being the market leader. Such weakness further indicates that the airline management is not highly effective, which has lead to the falling strategy of the organisation.
The primary opportunity available to the organisation is primarily the capability of the airline in further tapping the growth opportunities inherent in the industry. The sole main action that Qantas Airways needs is primarily in relation to the modification of strategies in accomplishing the opportunities for growth (Damodaran 2016).
As far as the threats are concerned, the primary threat to Qantas is the increasing level of competition particularly from Virgin Airlines in the local market.
It has been observed that there was deregulation of the domestic airline industry of Australia in 1990. In 1991, there had been announcement on the part of the Australian government, in which it would sell 100% of the Australian Airlines and 49% of Qantas Airways. However, in 1992, the Australian government has overhauled the policy of aviation that includes the closure to the artificial impediment between the global and domestic air services of Australia (DeFusco et al. 2015). This has paved the path for Qantas Airways in re-entering the domestic market after remaining absent for above 40 years along with participating in the bidding for Australian Airlines.
The Australian government had accepted the bid of Qantas for the Australian Airlines along with determining the need for full privatisation of Qantas Group. Qantas has purchased the Australian Airlines, since the government had accepted its bid, which has helped in full privatisation of the airline. The purchase price was $400 million, which had occurred in September 1992 and the two airlines had merged under the brand Qantas in October 1993 (Grant 2016). The privatisation of the organisation had initiated with a trade sale and the government had chosen British Airways as the effective bidder.
The purchase was completed on the part of British Airways for $665 million, which constitutes of 25% of Qantas in March 1993. This has completed the privatisation and the shares of Qantas were listed on the Australian Stock Exchange on 31 July 1995 (Jenkins and Williamson 2015). 18.25% of the stake of British Airways had sold its stake in September 2004.
Since 2000, the organisation lies in the middle of cost leadership strategy and a differentiation strategy. However, its strategy had been successful marginally during that period primarily due to the domestic market, as the domestic passengers constitute of 65% to 75% of the overall passenger base. In order to differentiate between the brand name and standards of safety, an issue took place in November 2010 where Airbus A380 had encountered engine failure. Thus, it was forced to make an emergency landing (Konchitchki and Patatoukas 2013). This has resulted in eventual grounding of the overall A380 fleet. Moreover, the competitive strategy of Qantas has been marginally successful; however, not sustainable. This is because the standards of safety could be imitated easily and there is no holding of brand name to the foreign passengers.
The two significant accounting policy choices that the auditors need to observe closely for Qantas Airways in the airline industry comprise of the following:
As commented by Ohlson (2017), the airline sector is capital-intensive and accounting related to aircraft assets has considerable effect on the financial outcomes of airlines. The aircrafts have greater cost and they have long lives containing several individual components. The aircraft orders are made many years in advance of price delivery that might take into account complex mechanisms to discount the list price that comprise of credits. The payments to aircraft manufacturers might take into account the payments pertaining to options, deposits, rights of purchase and payments of progress. Such advance payments could lead to considerable financing costs. In case of Qantas Airways, the transactions are denominated typically in AUD and they could be exposed to non-Australian airlines to currency risk.
Due to these reasons, there is complexity in the accounting related to aircraft acquisition. According to “IAS 16 Property, Plant and Equipment”, there is depiction of clear principles of accounting; however, the application of these principles to the assets associated with assets often require the airline judgement. The judgements associated with residual value and useful economic life needs to be revisited each period of reporting. The greater value related to aircraft assets conducted on the statement of financial position along with earnings volatility in the sector has exposed airlines historically to the impairments of potential assets. This develops further complexity in accounting and it needs judgement to project the recoverable asset value.
In the words of Palepu, Healy and Peek (2013), the accounting standards need an asset to be depreciated systematically over useful life to residual value and the estimates of life and value are reviewed at the end of the annual reporting period. In case of Qantas Airways, such accounting estimates might have considerable effect on the depreciation amount realised in the income statement. Every component of aircraft needs to be classified along with separate depreciation utilising the particular useful life and residual value (Trugman 2016). The airline organisations mainly use the method of straight-line depreciation as the pattern related to future economic benefits.
Figure 1: Financial position of Qantas at the end of 2013
(Source: Investor.qantas.com 2017)
According to the above table, it could be evaluated that the sales revenue of the organisation in 2013 has been more than double in contrast to the overall cost of sales. This is primarily due to the fact that the airline has been engaged in offering both premium and affordable quality of services to all segments of customers. However, the organisation has experienced a sharp increase in its operating expenses due to the rise in marketing costs along with research and development expenses. Due to this, Qantas has suffered heavy losses in the financial year 2013 (Schmeisser et al. 2014).
Figure 2: Financial performance of Qantas at the end of 2013
(Source: Investor.qantas.com 2017)
Based on the above table, it could be evaluated that the organisation has sufficient amount of cash base, as it has focused on increasing its base of retained earnings. In addition, it has kept sufficient amount of inventory so as to meet the increasing demand of the customers during peak seasons (Sekaran and Bougie 2016). However, the organisation has experienced increased debt burden, since the overall liabilities are more than the total stockholders’ equity. This is because the organisation has failed to raise adequate funds through equity, which has resulted in decline in its solvency position.
Figure 3: Financial position of Qantas at the end of 2016
(Source: Investor.qantas.com 2017)
According to the above table, it could be evaluated that the sales revenue of the organisation in 2015 has been nearly 2.5 times in contrast to the overall cost of sales. This is primarily due to the fact that the airline has been engaged in offering both premium and affordable quality of services to all segments of customers. In addition, the organisation has managed to reduce its operating expenses, which has helped in increasing its overall operating income. Due to this, Qantas has earned a stable profit in the financial year 2016.
Figure 4: Financial performance of Qantas at the end of 2016
(Source: Investor.qantas.com 2017)
Based on the above table, it could be evaluated that the organisation has sufficient amount of cash base, as it has focused on increasing its base of retained earnings. The inventory base is lower possibly due to the falling demand in the Australian market (Song 2016). However, the organisation has experienced increased debt burden, since the overall liabilities are more than the total stockholders’ equity. This is because the organisation has failed to raise adequate funds through equity, which has resulted in decline in its solvency position.
Based on the above evaluation, it could be stated that Qantas Airways has experienced increased sales revenue in 2016 compared to that of 2013. However, the organisation has managed to reduce its operating expense in 2016, which has helped in positive operating income. In 2013, increased operating expenses have resulted in negative operating income. From the balance sheet statement of the organisation, the amount of cash is sufficient in both the years; however, there is fall in inventory in 2016 in contrast to 20 13. In addition, the debt burden of the organisation has remained the same in the two years and funds raised through equity are not considerable. Hence, it is advisable to the investors to abstain from investing in the shares of Qantas, as it might result in significant loss in future.
Conclusion:
From the above discussion, it has been found that the suppliers have lower bargaining power in the airline sector of Australia, as greater number of suppliers is offering identical services. In relation to the power of Qantas, it is lower due to the other main industrial airlines like Virgin Airlines. The airline sector is capital-intensive and accounting related to aircraft assets has considerable effect on the financial outcomes of airlines. The aircrafts have greater cost and they have long lives containing several individual components. The debt burden of the organisation has remained the same in the two years and funds raised through equity are not considerable. Hence, it is advisable to the investors to abstain from investing in the shares of Qantas, as it might result in significant loss in future.
References:
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