Accounting - Qantas Airways Final Report

M. Babur Farrukh

Accounting for Managerial Decision Making

EXECUTIVE SUMMARY Qantas Airways is an Australian based Airline and is a subset of Qantas Group. It is a publiclisted company in the ASX (Australian Securities Exchange). Our research was on the overall performance of Qantas airline, the biggest airline company in Australia. It covers the history, size and marketing strategies of Qantas Airline. The major focus of our research was on the accounting information, which was collected and analyzed to examine if the company is actually doing well, examined the financial analysis of Qantas airline as well as gathering any other relevant information to support us in the evaluation of the company. We explored the profitability, efficiency, gearing liquidity and investment ratio of the company, and realized that, although, Qantas has being in existence for a long time and seem to be a successful firm from the outside they are unable to even pay dividends to shareholders. It is also amazing when we observe that Qantas liquidity too was low, but then they have much asset recorded as property, plant, and equipment. In spite of all this, growth has been recorded in the gross profit and net profit in recent years.

The existing Shareholders have been advised to hold on to their shares as profit is expected to increase in the coming financials years. Potential shareholders are recommended to venture into Qantas shares now that the price is relatively low as more profit and strong return to investment are expected.

Report Originality All work is original, unless stated otherwise through the Swinburne Harvard Referencing System

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M. Babur Farrukh

Accounting for Managerial Decision Making

Contents 1.

2.

COMPANY PROFILE ................................................................................................................. 3 1.1.

HISTORY .............................................................................................................................. 3

1.2.

BUSINESS AND INVESTMENTS...................................................................................... 3

1.3.

FLIGHTS AND ROUTES .................................................................................................... 3

1.4.

FLEET ................................................................................................................................... 4

1.5.

CORPORATE SOCIAL RESPONSIBILITIES ................................................................ 4

QANTAS STRATEGIES ............................................................................................................. 5 2.1. SWOT ANALYSIS .................................................................................................................... 5 2.2. PORTER’S FIVE FORCES ...................................................................................................... 6

3.

RATIOS ......................................................................................................................................... 7 3.1 PROFITABILITY RATIOS (%) .............................................................................................. 7

4.

3.2.

FINANCIAL GEARING RATIO ........................................................................................ 8

3.3.

EFFICIENCY ........................................................................................................................ 9

3.4.

LIQUIDITY RATIO / SOLVENCY RATIO ..................................................................... 9

3.5.

INVESTMENT RATIO ...................................................................................................... 10

COMPANY PERFOMANCE .................................................................................................... 12 4.1 GROSS PROFIT MAGRIN VS. RETURN ON INVESTMENT ........................................ 12 4.2 LIQUDITY ............................................................................................................................... 12 4.3 RETURN ON IVESTMENT ................................................................................................... 14

5. PEER ANALYSIS........................................................................................................................... 15 5.1 NET PROFIT MARGIN: ........................................................................................................ 15 5.2 RETURN ON EQUITY (ROE): ............................................................................................. 16 6. FUTURE EXPECTATION ............................................................................................................ 17 7. RECOMMENDATIONS AND CONCLUSION .......................................................................... 17 REFERENCE:..................................................................................................................................... 18

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M. Babur Farrukh

1.

Accounting for Managerial Decision Making

COMPANY PROFILE

1.1. HISTORY Qantas is the world's second oldest airline. Founded in the Queensland outback in 1920, it is Australia’s largest domestic and international airline and is recognized as one of the world's leading long distance carriers, having pioneered services from Australia to North America and Europe. Qantas today employs approximately 32,500 people and offers services across a network spanning 182 destinations in 44 countries (including those covered by code share partners) in Australia, Asia and the Pacific, the Americas, Europe, the Middle East and Africa.

1.2. BUSINESS AND INVESTMENTS The Qantas Group’s main business is the transportation of passengers using two complementary airline brands – Qantas and Jetstar. Qantas is divided into three closely related groups, Commercial, Customer and Marketing, and Operations. The Commercial group includes sales and distribution, commercial planning, Qantas Link and alliances. Customer and Marketing includes customer experience, cabin crew, inflight services and marketing. The Operations group comprises engineering, airports, catering, flight operations, operations planning and control and Qantas Aviation Services. Jetstar, the Group’s low fares airline also manages the Jetstar Asia operations based in Singapore. In addition to the airline brands, the Qantas Group operates Qantas Frequent Flyer and Qantas Freight. 1.3. FLIGHTS AND ROUTES Domestically, Qantas, Qantas Link and Jetstar operate around 5,600 flights a week serving 59 city and regional destinations in all states and mainland territories (Qantas – nearly 2,400; Qantas Link – nearly 2,000; Jetstar – around 1,200). Jetstar also operates 160 domestic flights a week in New Zealand. Internationally, Qantas and Jetstar operate more than 970 flights each week (Qantas – 630; Jetstar – 340). The Group’s network comprises 182 destinations in 44 countries, including Australia and those served by codeshare partner airlines.

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M. Babur Farrukh

Accounting for Managerial Decision Making

1.4. FLEET At 1 September 2010, the Qantas Group operated a fleet of 252 aircraft, comprising Boeing 747s, 767s, 737s and 717s, Airbus A380s, A330s and A320s, Bombardier Dash 8s and Bombardier Q400s.

1.5. CORPORATE 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 foundation also aims to consolidate and expand on some of the Qantas Groups existing charitable and community endeavors. One such program under the foundation was the Be-Green program for want of having a sustainability program that touched its many diverse business units and job functions. An education program was created to align elected eco ambassadors in developing a localized set of actions that were relevant to their division. Tactics focused on immediate actions such as paper reduction targets for offices, energy reduction for airports and fuel reductions for flight operations. Others environment social responsibilities that Qantas is involving, are reducing the impact of carbon emissions on the environment, sponsors sports and events like Australia Rugby union, Football federation Australia and formula 1.Qantas also support the disables and have health foundations like Cancer foundation and royal institute for the deaf and blinds.

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M. Babur Farrukh

Accounting for Managerial Decision Making

2. QANTAS STRATEGIES 

Qantas has announced the strategies of its 5 year strategic plan. These changes are expected to strip tens of millions of dollars of operating costs from Qantas. These include Cutting :1000 jobs from its 36000 workforce (including pilots, engineers and cabin crew)



Shifting its base closer to Asia by creating a new premium airline based in with a new name, new aircraft and new looks. Also Qantas plans to launch a new Jetstar Japan as a new low cost carrier together with Japan Airlines and Mitsubishi. These aircraft purchases are expected to increase debt by about $600 million over the next 9 years.



Changing its fleet plan by buying lots of the fuel efficient Airbus A320's to support its growth which will increase its gearing



Seeking more strategic alliances, the ACCC has already given Qantas a provisional go-ahead for its joint business agreement with American Airlines. Qantas will also restructure the joint services agreement with British Airways and explore opportunities with Malaysian Airlines. 2.1. SWOT ANALYSIS Strength

Weakness

• Along with its subsidiaries served destinies, a

•Children traveling unaccompanied are not allowed to

number of international flights include almost all the

sit along with male travelers, which compel the men to

continents like Africa, Oceania, Asia, Europe and the

feel sex discriminated as females can equally be

Americas.

suspected for child abuse (Morrison and Winston

• Airway team has always been working for providing

1997).

every possible route that is extending day by day. Shows their goodwill gestures at the time of emergency in their own region or for their own people settled abroad in the course of evacuation charter. Opportunity

Threat

• Leases have been announced for new aircraft fleet to

• Strong response to global fuel price increase, by

cater more passengers, employment opportunities,

approximately half doubling the ticket on nearly 10%

services efficiencies and extending flying business.

increase in fuel prices that has recently been noticed.

• To promote easy access to businessmen, around the world, a club has been organized for uninterrupted and luxurious travel with priority check in and certain business related and personal facilities. Subscription can be made which range from one to several years (George, 1982).

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M. Babur Farrukh

Accounting for Managerial Decision Making

2.2. PORTER’S FIVE FORCES

Threat of new entrants: -The Jetstar by Qantas may pre-empt the entry of another low-cost competitor in Australia

Bargaining power of customers: -Low switching costs. The Jetstar price could be a factor for leisure travellers while business travellers may look into Qantas airlines.

Competitive Rivalry: Lopsided two airline structure, open skies and multiple designations has created fierce competition among local competition on the domestic front (Qantas / Virgin Blue). -Barriers of exit are high. A lot of money and effort would need to be invested to start-up the venture.

Bargaining power of suppliers: -The supplier has a low bargaining power as there are other suppliers competing for business. Coupled with slow / unstable economic conditions buyers have a stronger bargaining power.

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Threat of substitutes: -The price customers are willing to pay for a product depends, in part, on the availability of substitute products. The absence of close of close substitutes for a product, as in the airline industry means that consumers are comparatively insensitive to substitutes pricing.

M. Babur Farrukh 3.

Accounting for Managerial Decision Making

RATIOS

3.1 PROFITABILITY RATIOS (%) Profitability ratios show how well a company is able to perform and return profits to the business. In order to gain insight to Qantas Airways Company’s performance, to determine profit relative to sales, total assets and net worth, our analyzing were based the Ratios, which is categorized under Return on ordinary shareholders’ funds (ROSF), Return on Total Assets (ROA), Return on capital employed (ROCE), Net Profit Margin and Gross Profit Margin. According to the ratios, it indicates that Qantas is bouncing back to more profitability in year 2010 and 2011 which shows the company is better prepared to handle down trends brought on by adverse conditions of the global financial meltdown during year 2007 – 2009, which had great impact on the revenue.

Profitability 2007

2008

2009

2010

2011

4.01%

3.77%

0.71%

0.86%

1.26%

8.56%

8.19%

1.66%

1.95%

2.89%

10.70%

8.44%

2.15%

2.82%

3.86%

Gross profit margin

7.34%

7.21%

1.57%

2.27%

1.76%

Net profit Margin

5.18%

4.71%

0.98%

1.24%

1.76%

Return on Equity

12.68%

12.94%

2.48%

2.89%

4.26%

Year/ Ratio Return on total assets (ROA) Return on ordinary shareholders' funds(ROSF) Return on capital Employed (ROCE)

Profitabilty 12

Return on ordinary shareholders' funds(ROSF)

10

Return on total assets (ROA)

8 6

Return on capital Employed (ROCE)

4

Gross profit margin

2 Net profit Margin

0 2007

2008

2009

2010

2011

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M. Babur Farrukh

Accounting for Managerial Decision Making

3.2. FINANCIAL GEARING RATIO The gearing ratio is the proportion of a company's debt to its equity, where a high gearing ratio represents a high proportion of debt to equity, and a low gearing ratio represents a low proportion of debt to equity.

Gearing 2007

2008

2009

2010

2011

3.16476

3.43513

3.47771

3.32887

3.39099

Interest Cover Ratio

74.718

-24.8904

10.409

4.16

3.9646

NET Gearing ratios

27.6303

27.2193

32.7147

33.6733

41.2128

Year/ Ratio Financial leverage

The interest cover ratio as at 2007 was at the high end which was 75% nevertheless in the year 2008, Qantas airline was not able pay up the interest which was at the deficit. Higher interest ratio returned in the year 2009 and went low again in the year 2010 to 2011. The financial leverage throughout the 5 years were on the average level but the net gearing ratio keep increasing from 2009 to 2011, this indicate that this indicates that the airline has used more debt than the amount invested by its owners.

Gearing 80 60 40 20 0 2007

2008

2009

2010

2011

-20 -40 Financial leverage

Interest Cover Ration

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NET Gearing ratios

M. Babur Farrukh

Accounting for Managerial Decision Making

3.3. EFFICIENCY Efficiency ratios are used to analyze how well a company uses its assets and liabilities internally. From the ratio analysis, Qantas was quite efficient in utilizing its resources to generate income. Generally, the higher a firm’s total asset turnover, the more efficient its assets have been used, thus Qantas asset turn over period decline from 2009 to 2011 after increment in the year 2008, indicates that the company experience low turnover in utilizing it asset to generate sales. PPE turnovers as well steadily decline from the year 2009 to 2011, this indicate the company effectiveness in using the investment in fixed assets to generate revenues declines at this years. However, the negative working capital all through the year shows that Qantas is currently unable to meet its short-term liabilities with its current assets which indicate that Qantas is performing is not liquid.

Efficiency

2007

2008

2009

2010

2011

Asset turnover period(days)

282

292

265

252

261

PPE Turnover

1.23

1.28

1.20

1.10

1.09

-17.432

-7.9231

-19.455

-33.672

-25.074

Year/ Ratio

Working Capital Turnover

3.4. LIQUIDITY RATIO / SOLVENCY RATIO Liquidity Ratio is the ability of an entity to earn profit, pay its debts and ability of a corporation to meet its long-term fixed expenses, which is to accomplish long-term expansion and growth. The better a company's solvency, the better it is financially. Liquidity Year/ Ratio Current Ratio

2007

2008

2009

2010

2011

0.86624

0.73859

0.88859

0.93447

0.90473

Acid Test Ratio

0.83851

0.71023

0.85136

0.88335

0.84507

Cash Flow Operation Ratio

0.36184

0.27991

0.16816

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0.20942 0.27137

M. Babur Farrukh

Accounting for Managerial Decision Making

The Current Ratios shows Qantas Airways had a higher current ratio during the fiscal year 2009, 2010, and year 2011 respectively, ranging from 0.89, 0.93 and 0.90, this shows Qantas Airways had more liquidity during this years and was able to satisfy its short-term obligations. Quick ratio as well shown higher ratio in fiscal year 2007, 2010 and 2011 shows Qantas Airways had higher liquidity, and lower ratio during year 2008 shows a lower liquidity while the Operating Cash Flow Ratio at Qantas Airways is less than 1.0 throughout its fiscal years from 2007 – 2011.

Liquidity 1 0.8 0.6 0.4 0.2 0 2007

2008 Current Ratio

2009

2010

Acid Test Ratio

2011

Cash Flow Operation Ratio

3.5. INVESTMENT RATIO A ratio that helps to determine whether an investment in a particular entity is likely to be profitable and safe, from the ratio derived from Qantas, it shows that dividend per share increased drastically at 2008 but later went down at 2009, dividend pay-out ratio and dividend yield ratio picked up to high level at 2008 and later went down at 2009 as well. Unfortunately, for the year 2010 to 2011, Qantas has not been able to maintain a dividend payment. Investment 2007

2008

2009

Dividend per share

6.69199

16.9651

Dividend payout ratio

37.8898

Dividend yield ratio Earnings per share Operating cash flow per share Price earnings ratio

2010

2011

2.50482

-

-

89.5013

81.8182

-

-

7.97

1.78

-

-

24.69091

30.15966

4.431599

5.069519

7.193472

0.52902

0.543722

0.241704

0.279572

0.363324

0.23

0.1

0.45

0.43

0.26

1.71

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M. Babur Farrukh

Accounting for Managerial Decision Making

100 90 80 70 60

Dividend per share

50

Dividend payout ratio

40

Dividend yield ratio

30 20 10 0 2007

2008

2009

2010

2011

As well its seen that that the company earning per share as Fiscal year 2007 to 2008 were high but depreciated drastically at 2009 till 2011, that indicate less or minimal profit were generated for each share in existence for the fiscal years. Also the price earnings Ratio was high 2009 till 2010 before it fell at 2011, this indicate that the company were more valued at the stock market at 2009 till 2011.

35 30 25

Earnings per share

20 Operating cash flow per share

15

Price earning ratio

10 5 0 2007

2008

2009

2010

2011

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M. Babur Farrukh 4.

Accounting for Managerial Decision Making

COMPANY PERFOMANCE

4.1 GROSS PROFIT MAGRIN VS. RETURN ON INVESTMENT The gross profit margin ratio indicates Qantas Airway’s financial health; this shows investors how much gross profit every AUD of revenue a company is earning. Compared with company average, there was a slight fall at the year 2008, then a sharp decline in the gross profit at 2009 till 2011 though it tried to pick up at 2009, The decline that started at 2009 was caused by lost in revenue / sale and Expenses, which was attributed to higher fuel prices, rising costs and falling demand as the global economy slows. Yet, the company was still able to declare profit. As at years 2011, Qantas, international business reported a full-year loss of a$200 million, Yet, Qantas Group made underlying profit before tax of a$552 million for the financial year ending June 30, a rise of 46% on the previous 12 months. Natural disasters and “major weather events” cost the airline A$224 million, including severe flooding and cyclones in Queensland, the Christchurch earthquake, the earthquake and tsunami in Japan and the Chilean volcanic ash cloud. With the lost at the international business wing of the company, economy meltdown and the natural disaster, Qantas were still able to declare profit Net Profit margin of the company also follows the same trend, as it recorded the lowestnet profit at the year 2009 due to decline in revenue due to economy meltdown, and rise in expenses due to fuel cost, however in the year 2010, the net profit margin started to picking up till 2011. The Return on investment using our ROE and ROA we could see that the returns fell drastically at 2009 from Net profit of 7.4 million of the previous year to 1.4million against 5.7 billion of Equity invested thought the ROE increase by 2% at the end of the 2011 fiscal year which shows better performance As higher the ratios shown in year 2010 and 2011, the more effective the company is at cost control. Compared with company control in previous 2 years, it tells investors how well the management and operations of Qantas are performing to increase their profit and returns on investment.

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M. Babur Farrukh

Accounting for Managerial Decision Making

4.2 LIQUDITY In order to gain insight to Qantas Company stability, long-term growth and investment potential, I will be discussing the Liquidity ratios which is categorized under Current Ratio, Quick/Acid test Ratio, and Cash flow from operation Ratio. The Current Ratios shows Qantas Airways had a higher current ratio during the fiscal year 2009, 2010, and year 2011 respectively, ranging from 0.89, 0.93 and 0.90, this shows Qantas Airways had more liquidity during this years and was able to satisfy its short term obligations. Quick ratio also reflects the company's financial strength or weakness, higher ratio shown in fiscal year 2007, 2010 and 2011 shows Qantas Airways had higher liquidity, and lower ratio during year 2008 shows a lower liquidity. The operating cash flow ratio is one of the most important cash flow ratios. Cash flow is an indication of how money moves into and out of the company and how you pay your bills. Operating cash flow relates to cash flows that a company accrues from operations to its current debt. It measures how liquidity a firm is in the short run since it relates to current debt and cash flows from operations. Since the Operating Cash Flow Ratio at Qantas Airways is less than 1.0 throughout its fiscal years from 2007 - 2011, This means that the company has generated less cash in the years to pay off its short terms debts and this means Qantas need to raise money to meet up with the liability and this can be seen at working capital turnover as well, where the current liability is high then the high current asset.

Liquidity 1 0.8 0.6 0.4 0.2 0 2007

2008

Current Ratio

2009

Acid Test Ratio

13

2010

2011

Cash Flow Operation Ratio

M. Babur Farrukh

Accounting for Managerial Decision Making

4.3 RETURN ON IVESTMENT Based on the dividend payout ratio information between 2007 and 2008, there was an increment in dividend payout value from 37 to 89.but for 2008 and 2009 there was a tremendous decrease in payout ratio, declining from 89 to 81. But 2010 and 2011 they had the worst case of not paying dividends at all, which is because the company return on revenue was low so they cannot afford to pay dividends for these two years. A company’s share price is driven by its long- term economic fundamentals. Stock markets are perfectly capable of seeing the economic reality behind different forms of accounting information. According to the information from the Investment Information, in the case of Qantas airline its share price increase within 2007 and 2008 from 24 per share to 30 per share, but between 2009 and 2011 it fluctuate from 4 per share to 7 per share which was quiet a tremendous decrease. According to our research the major reason of decrease is because of crisis in year 2007 to 2008, which really affect the return on shares.

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M. Babur Farrukh

Accounting for Managerial Decision Making

5. PEER ANALYSIS

5.1 NET PROFIT MARGIN

Comparing Qantas to Air NZ in profit terms, the net profit margin made by the two airlines is almost the same at the start and end of the 5-year period from 2007 to 2011. However, it’s interesting to note that the both countries experienced low turnout profit at 2008 affected air New Zealand more than Qantas but Air NZ recovery was also much better than that of Qantas, clearly showing that Air Newzealand think tanks strategies during a global crisis were much better than that of Qantas’s.

2007

Year/ Company Air Newzealand

2008

4.981378 4.671095

Qantas

5.18077

4.71147

2009

2010

2011

0.45563 2.026693

1.86593

0.98268

1.24165

Net Profit Margin 6 5 4 3 2 1 0 2007

2008

2009 Air New Zeland

15

2010 Qantas

2011

1.7591

M. Babur Farrukh

Accounting for Managerial Decision Making

5.2 RETURN ON EQUITY (ROE): Comparing the Return of Equity from Qantas and Air NZ, using both companies ROE Ratios, both has drastically decrement in the year 2009 due to the Economic meltdown. But improvement has been seen in year 2010 and much growth in 2011 and the average of the growth is faster for Qantas than Air NZ in the last 2 financial Years.

2007

2008

2009

2010

2011

Air New Zealand

12.24%

13.82%

1.30%

5.24%

5.39%

Qantas

12.69%

12.95%

2.50%

2.88%

4.26%

Year/ Company

Return On Equity (ROE) 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2007

2008

2009 Air New Zeland

16

2010 Qantas

2011

M. Babur Farrukh

Accounting for Managerial Decision Making

6. FUTURE EXPECTATION Based on the analysis and the ratios, it is seen that Qantas revenue has started to increase from the 2010 financial year and growth has been recorded in the gross profit and net profit in 2010 and 2011 financial year. According to the new 5 years strategies plans announced by Qantas in august 2011, the strategies are based on cutting cost in other areas to reduce it expenses and increase its revenue, more growth in revenue and profit is going to be seen in the future years which would definitely increase return on investment and reduces more of the current liabilities. Return on shareholder funds is expected to increase. The market share price is expected to appreciate as well, in the years to come.

7. RECOMMENDATIONS AND CONCLUSION With the future forecast, the new strategic plans by Qantas and the recent growth and improvement recorded in the last 2 financial years. The existing Shareholders are advised to hold on to their shares as profit is expected to increase in the coming financials years. Potential share holders are recommended to venture into Qantas shares now that the price is relatively low as more profit and strong return to investment are expected.

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M. Babur Farrukh

Accounting for Managerial Decision Making

REFERENCE: http://www.qantas.com.au http://en.wikipedia.org/wiki/Ansett_Australia http://www.qantas.com.au/infodetail/about/FactFiles.pdf http://www.aspecthuntley.com.au/af/company/announcements?ASXCode=QAN&daterange= all&subtype=03001&subtype=03017&subtype=03011&anntypes=0,1,2

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