An Analysis of Qantas Airways' Financial Performance and Valuation

The assignment discusses the financial performance of Qantas, an Australian airline company, and advises investors to abstain from investing in its shares due to potential significant loss. The company has managed to reduce operating expenses in 2016, resulting in positive operating income. However, increased operating expenses in 2013 led to negative operating income. Cash reserves are sufficient, but inventory levels have fallen in 2016 compared to 2013. The debt burden remains the same, and equity funds are not significant. Overall, the analysis suggests that Qantas is not a good investment opportunity.

Running head: BUSINESS ANALYSIS AND VALUATION
Business Analysis and Valuation
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1BUSINESS ANALYSIS AND VALUATION
Executive Summary:
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. 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.

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Table of Contents
1. Introduction:................................................................................................................................3
2a. Porter’s five forces framework of Qantas Airways:..................................................................3
2b. SWOT evaluation of Qantas’s competitive strategy:................................................................4
2c. Corporate strategy of Qantas across its domestic and international divisions since 1992 and
change in strategy in response to market changes:..........................................................................6
2d. Accounting policy choices that the auditors and accountants need to observe closely in case
of Qantas:.........................................................................................................................................7
2e. Financial performance and financial position of Qantas at the end of 2013:............................9
2f. Financial performance and financial position of Qantas at the end of 2016:...........................11
2g. Differences and similarities in findings between the above two parts and recommendations to
the investors:..................................................................................................................................13
3. Conclusion:................................................................................................................................13
References:....................................................................................................................................14

3BUSINESS ANALYSIS AND VALUATION
1. Introduction:
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.
2a. Porter’s five forces framework of Qantas Airways:
The Porter’s five forces framework influencing the Australian airline industry and
especially, the performance of Qantas is depicted as follows:
Bargaining power of the buyers:
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).
Bargaining power of the suppliers:

4BUSINESS ANALYSIS AND VALUATION
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.
Threat of substitutes:
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).
Threat of competition:
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).
Threat of new entry:
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.
2b. SWOT evaluation of Qantas’s competitive strategy:
The SWOT analysis of the competitive strategy of Qantas has been discussed briefly as
follows:

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Strengths:
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.
Weaknesses:
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.
Opportunities:
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).
Threats:
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.

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2c. Corporate strategy of Qantas across its domestic and international divisions since 1992
and change in strategy in response to market changes:
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.

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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.
2d. Accounting policy choices that the auditors and accountants need to observe closely in
case of Qantas:
The two significant accounting policy choices that the auditors need to observe closely
for Qantas Airways in the airline industry comprise of the following:
Aircraft acquisition cost:
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

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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.
Depreciation related to individual components:
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.

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2e. Financial performance and financial position of Qantas at the end of 2013:
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).

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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.

11BUSINESS ANALYSIS AND VALUATION
2f. Financial performance and financial position of Qantas at the end of 2016:
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.

12BUSINESS ANALYSIS AND VALUATION
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.

13BUSINESS ANALYSIS AND VALUATION
2g. Differences and similarities in findings between the above two parts and
recommendations to the investors:
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.
3. 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.

14BUSINESS ANALYSIS AND VALUATION
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15BUSINESS ANALYSIS AND VALUATION
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