A Financial Analysis And Accounting Practices Of Qantas Airlines

Porter Five Forces Analysis of Qantas Airlines

Qantas airline is one of the largest airline companies in Australia and has also grown internationally in the recent times. It started its operations in 1920, and today it operates more then 5000 flights. It is one of the strongest trade names in Australia and in times to come it will grow and expand overseas also. A brief analysis on the financials of the company and the overall strategy evaluation is given below.

a.The Porter five forces analysis of the Qantas airlines is as follow-

• Bargaining Power of the Suppliers-  The suppliers have the highest bargaining power because they have the option to choose from a variety of airlines that is operating in the market. They can go for any premium services that are offered at low prices. Hence this puts a lot of pressure on the profitability of Qantas. It makes it more prone to consumer discretion(Abbott & Kantor, 2017).
• Bargaining Power of the Suppliers- There are large number of supplier in the airline industry that offer raw material to these companies. The suppliers are often in a dominant position because the companies depend on them for the raw material that they offer. The bargaining power of the suppliers have a negative impact on the profitability of the company in the form of increased prices and low revenues.
• Threat of substitute- The threat of substitute is lower in air form of transport. People mostly prefer travelling from air as it takes less time and helps in travelling longer distance. Thus, for Qantas the threat of substitute is very low(Alexander, 2016).But with large scale development, other modes of transport have also developed and people are often choosing the same because they are relatively cheaper. This is a factor that the company needs to consider.
• Rivalry among existing firm-  In the international air transport market, the company is having rivals in the form of Emirates, Virgin Australia and Air Asia. The competition is so severe that it sometimes causes the company loss of operations. In the domestic front also the company faces severe competition from many renowned airlines and needs to be actively functioning to curb the same.
• Threat of new entry- In case of airline industry, there is a lower threat of new entrants, given to the fast that it requires huge amount of investment to start operations in this field. So smaller companies are unable to afford the same(Birt, et al., 2017). There are high barriers exsisting to enter this industry and thus the new entrants need to financially very strong to prevail in the market.

Strengths- The Qantas airline is one of the largest operating airlines that has operations in many countries. The major strengths of the company are-

• It is present in many international and domestic sector.
• It is one of the largest and the oldest operating airline sector.
• It has one of the largest brand building exercise through advertising and sponsoring.
• It offers variety of services like lounge, low cost flying programs etc.

Weakness – The major weakness includes incidences like price fixing and sabotage that have destroyed the brand value of the company affecting its public image. The overall presence of the company internationally is limited in comparison to other companies. The company has to develop its network to make sure that it is delivering services in the international front also.

Opportunities – The company has great opportunity is widen its network by acquiring other small companies that operate in this sector. The company can also have international tie-ups for wide coverage and better growth. This will help in the overall growth and development of the company and help it in getting an upper hand in comparison to other companies (Burke & Clark, 2016).

Threats – The major threats are from the suppliers in the form of increased fuel prices. The overall labor charges have also increased. The presence of other international airlines is also affecting the growth of the company. The customers are always looking for such companies that can provide them premium services at cheaper prices. Thus the company needs to deal both with the suppliers and satisfy the deamnds of the consumers.

c.The core competitive strategy for Qantas since 1992, across its domestic and international market was to grow and expand its network.  The company merged with the Australian Airlines in 1992, that helped it bringing down its economies of scale and improving its overall revenue and business. The company also aimed at eliminating competition by acquiring smaller units that operated in remote places. This helped the company in improving its position and recovering its losses (Chariri, 2017). Qantas aimed at the domestic end in improving its brand value by using the tools of advertising and promotion. It aimed at providing premium services at lower cost and making use of the economies of scale. It also tried to effectively improve its suppliers position by renovating its cost cutting model, and getting the raw material at cheaper prices (Dichev, 2017). This is how the company aimed at improving its business position both internationally and on the domestic front.

Core Competitive Strategy of Qantas

In response to the current market changes and the one that had occurred over the year, the company is now aiming at delivering quality services even if they should charge higher prices. This is because competition has become fierce and more and more companies are entering the market. The suppliers are also making use of the dominant position as companies depend on them for supply of fuel (Chiapello, 2017). Thus, this is a bad position for the company on a financial front, as it must deal with excessive competition and make sure to deliver economically. Thus, the competitive strategy of the company is marginally successful but it is not sustainable because on the international front the company has no hold. It needs to revamp its model to grow internationally where the competition is even more fierce (Crosby & Henneberry, 2016).

d.Two of the most critical accounting policies in case of airline companies that auditors must see closely are –

 The most important accounting policy is of revenue recognition. The airline revenue recognition extends from calculating fare for the core passengers to the frequent flyers. The most common accounting method for revenue recognition is that revenue that is received is deferred and is classified as a liability on the balance sheet of the company, until the time the passenger or the freight is uplifted and the revenue is then recognized on the balance sheet. The revenue recognition policy is used to determine when to recognize unavailed revenue that occurs when the tickets are not used. It can have huge impact on the results of the company. Hence the auditors must closely scrutinize the same.

Another important accounting policy that the auditor must check is the valuation of property, plant and equipment. The airline companies take most of the aircrafts  on leases, and hence valuation of the same becomes difficult. It is important that companies must focus on the same, and make sure that impairment of the assets is recorded accordingly and accurate amount is reflected on the balance sheet. Thus, it is important that correct amount estimation of the assets is done, considering the overall impairment cost and cost of the leases and same should be shown on the financial reports of the company.

The reason that these policies can be considered important is because they have significant effect on the financial reports of the company and thus it is important that same must be considered for audit process. The auditors must evaluate the accurate position of the financials of the company and consider these accounting policies briefly. They play an important role in the overall profitability of the company and the return that the shareholders earn.

Accounting Policies for Auditors’ Consideration

e) At the end of 2013, it can be seen that the overall revenue of the company is very less, given to its huge operating expenses that have affected the preofitability of the company. The total assets and liabilities are at a good position, with company having good amount of cash which reflects the liquidity position of the company.If we see the overall ratios, the return on assets are very low, and the return on equity is negligible, given the low profitability of the company. The debt equity ratio ideally should by 2.1 but in this case it is very high which reflects that the company needs to improve the same. But the overall position of the company is not great given that the company is earning nil income and that makes it vulnerable and given that the company is having huge cash balance it must invest the same for further growth and development. The company needs to make more investment and improve the position of its stakeholders by providing them with better returns.

f) At the end of 2017, the latest financial year, it can be seen that net income of the company have improved tremendously, and that has also in turn improved the net earning ratios and the return on equity for the shareholders. The operating income has also increased and is responsible for the growth of the company. As for the net assets and liabilities, there has been a decrease from the prior years, and that is because of the reduction in the overall cash balance of the company. This reflects low liquidity position and the company needs to improve the same. Overall there has been growth in the financial position of the company with respect to its overall asset position and the return that it is providing to the shareholders. The company just needs to work on its liquidity position and provide security to the invetsors(Chariri, 2017).

g) On comparing both the years, it can be seen that there has been huge growth in the overall profit of the company, and this is mainly because the operating income in 2017 is much more in comparison to that in 2013. This has increased the overall return to the shareholders and has improved the return on equity. If we analyse the other ratios it can be said that is improvement in all aspects as it can be seen, the return on assets have grown from 0.8% in 2013 to 5.1% in 2017. Also the return on equity have increased from 0.05 to 25.1%. This shows that the shareholders are getting good returns on their investments and in times to come the company will develop further. This also makes it a good decision to invest in the shares of the company as for now. The only point of concern is that the company is having a low debt equity ratios, which means that the company is funding its growth through debt sources and needs to improve the same. Other ratios like current ratio, assets turnover, accounts receivable ratio etc shows a good picture for the investors and reflects a good position where they can get return for their investments. Since 2013, to 2017 the company has showcase great results with 25 times increase in the overall profit ratio and high returns for the potential investors(Burke & Clark, 2016). Thus it can be said that in times to come, the position of the company will further improve and thus it will be great for the invetsors to buy the shares of the company, and for the potential shareholders they must hold the shares of the company and invest more as there are good possibilities of the profit increasing in the times to come.

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