Hotel Finance and Revenue Analysis: A Study of Qantas and Virgin Australia

This report analyses the financial performance of Qantas and Virgin Australia using ratio analysis and revenue management techniques. It provides recommendations for increasing revenue targets.

Running head: HOTEL FINANCE AND REVENUE
Hotel finance and revenue
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Table of Contents
Introduction................................................................................................................................2
Ratio analysis.............................................................................................................................2
Revenue management................................................................................................................9
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

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Introduction
The main objective of the report is to analyse and interpret the financial performance
of two airlines from Australia that is Virgin Australia and Qantas Airlines. The analysis and
interpretation will be based on various ratio calculations like profitability ratio, liquidity ratio
and efficiency ratio. Finally, based on the analysis some recommendation will be provided
for increasing the revenue target.
Qantas Airline was established in the year 1920 in Queensland and became the largest
international and domestic airline in Australia. They are well known for excellence in
operational reliability, safety, maintenance, engineering and the service provided to the
customers. Main business of the company is to provide transportation service to the
customers through 2 complementary brands of airlines that is, Jetstar and Qantas. The
company also operate subsidiary business that includes other airlines and the businesses
under specialist markets like Q Catering (Flights | Qantas AU, 2018). It operates
international, domestic and regional services and employs more than 30,000 employees out of
which near about 93% are based in Australia. On the other hand, Virgin Australia entered
into the aviation market of Australia in the year 2000 and brought the real competition in the
market’s leisure sector. The main objective of the company is to revolutionise the air travel
through all the market segments. The objectives will be achieved through delivering seamless
experience all over the international and domestic market in addition to retaining same level
of excellent services (Virgin Australia | Home, 2018).
Ratio analysis
Formula Qantas Airline Virgin Airline
2016 2015 2014 2016 2015 2014
Current assets/Current liabilities 0.49 0.68 0.66 0.62 0.69 0.64

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Current assets less
inventories/current liabilities 0.44 0.63 0.61 0.60 0.67 0.62
Net sales/Average account
receivables 18.47 14.68 11.66 16.06 15.44 15.37
365/account receivable turnover 19.76 24.87 31.31 22.73 23.64 23.75
Total liabilities/shareholder's
equity 4.12 4.09 5.04 5.72 4.66 3.45
EBIT/interest expenses 5.79 3.00 -13.01 -1.42 -0.53 -3.16
Net profit/Total assets 0.06 0.03 -0.16 -0.04 -0.02 -0.08
Net profit/Total equity 0.32 0.16 -0.99 -0.25 -0.09 -0.34
Given in the annual report (in
cents) 49.4 25.4 -128.5 -7.4 -3.2 -11.4
Curent ratio
Quick ratio
Accounts receivable turnover
No.of days sales in receivables
Debt to equity ratio
No.of times interest earned
Return on assets
Return on Equity
Earning per share (cents)
-140.00
-120.00
-100.00
-80.00
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
Qantas Airline 2016
Qantas Airline 2015
Qantas Airline 2014
Virgin Airline 2016
Virgin Airline 2015
Virgin Airline 2014
Ratio analysis is the quantitative analysis with regard to the information included in
the financial statement of the company. It is used for evaluating different aspects of the
financial as well as operating performances like liquidity, efficiency, solvency and
profitability (Grant, 2016). Most of the investors are familiar with various key ratios like
current ratio, debt-equity ratio, return on equity ratio and return on asset ratio. Ratio analysis
can be segregated into various groups like –

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Liquidity Ratio – it measures the ability of the company to pay off the short-term obligations
as they become due and are met through the quick assets or current assets. Various ratios
through which the liquidity of the company is measured are the current ratio and quick ratio.
 Current ratio – it is the liquidity ratio that computes the ability of the company for
paying off the long term and short term obligations. To measure the ability current
ratio tales into consideration the total current assets of the company against the total
current liabilities (Heikal, Khaddafi & Ummah, 2014). It is calculated through
dividing the current assets by current liabilities. It is called current ratio as as it
incorporates all the current liabilities and current assets. Generally the ratio less than
1 represent that the current assets of the company are lower than its current
liabilities. Looking into the annual report of Qantas airline and Virgin Australia
airline and the calculation from the above table that the current ratio of Qantas
airline reduced from 0.66 to 0.49 and for Virgin Australia it is reduced from 0.64 to
0.62 over the years from 2014 to 2016. Therefore, it presents that the financial health
of both the companies are not good (Hevert, 2013). However, it does not mean that
the company will become bankrupt and various ways are there for the company to
access finance if it has realistic expectation regarding the future earnings to pay-off
the borrowings. Further, these ratios of below 1 will be acceptable to the investors if
the companies are able for negotiating long term credit periods with the suppliers
and at the same time offering lower credit terms to the customers. These companies
will be able to maintain the minimum levels of the inventory under the balance sheet
if the operations are carried out efficiently.
 Quick ratio – the quick ratio that is also known as the acid-test ratio measure the
efficiency of the company to meet its short-term financial obligations. It is calculated
through dividing the current assets of the company reducing the inventories of the

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company by the current liabilities. Through the quick ratio of the company is similar
to the current ratio, the quick ratio provides more precise analysis of the ability of
company for paying off the current obligations (Jones & Kulish, 2013). Looking into
the quick ratio of both the companies it is identified that the quick ratio of Qantas
airline are reduced from 0.61 to 0.44 and for Virgin Australia it is reduced from 0.62
to 0.60 over the years from 2014 to 2016.
Therefore, taking into consideration both the liquidity ratios, it is observed that the
liquidity position of Virgin Australia airline is better as compared to Qantas airline. However,
the liquidity ratios assumed that the company will liquidate the current assets for paying the
current liabilities that is not realistic always taking into consideration the thing that the
company is required to maintain the same level of working capital for the operation
management.
Solvency ratios – it is also called as he financial leverage ratio and it compares the debt levels
of the company with the earnings, equity and assets for evaluating whether the company can
sustain in the market for long-term period through paying off its long term borrowings and
interests on that (Sunder, 2016). Various solvency ratios include interest coverage ratio or
number of times interest earned and debt to equity ratio.
 Number of times interest earned – it is used for determining the efficiency of the
company to pay off their interest expenses on the outstanding borrowings. It is
calculated through dividing the operating profit of the company by the interest
expenses for the period (Brooks, 2015). The lower ratio represents that the company
is burdened with debt expenses. While the interest coverage ratio of the company is 2
or lower than that the ability of the company to meet the interest expenses can be
questionable. It measures the times that the company can pay the outstanding

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borrowings using the earnings of the company. It is considered as the margin of
safety for the creditors of the company that can run into the financial difficulty for the
company. The ability of paying off the debt obligations is major factor for
determining the solvency of the company and it is a crucial statistic for the
shareholders and potential investors (Drehmann & Nikolaou, 2013). Looking into the
calculation table it is found that the Interest coverage ratio of Virgin airline for all the
three years are in negative as the company was not able to earn any positive operating
income throughout all 3 years. On the other hand, the interest coverage ratio for
Qantas airline improved in 2016 as compared to the year 2014 and 2015.
 Debt to equity ratio – the debt to equity ratio is calculated through dividing the total
liabilities of the company by the shareholder’s equity. It is used for measuring the
financial leverage of the company. This ratio indicates the amount of debt used by the
company to finance the assets as compared to the amount of equity. If the company
use higher amount of debts for increasing finance for its operations the company can
generate higher level of earnings as compared to the amount that would have been
earned if it did not opt for outside finance (Nobes, 2014). It can be identified from the
annual report and calculation table that the debt to equity ratio of both companies is
quite high. It represents that the total liabilities of both the companies are
significantly high as compared to the total equities of the company. However, the
debt to equity ratio of Qantas airline is better as compared to Virgin Australia as its
debt to equity ratio is slightly lower than Virgin Australia.
Profitability ratio – it measures the company’s ability to ear the profit and create return for its
shareholders. While the solvency ratios and liquidity ratios states the company’s financial
position the profitability ratio and efficiency ratio states the financial performance of the

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company. Major profitability ratios are the return on assets, return on equity and earnings per
share.
 Return on assets – this ratio is the calculation of net income as compared to the total
assets of the business during the financial year. It is used to measure the efficiency of
business through using the assets for generating net income. It indicates the cents
earned with each dollar of the asset. Therefore, the higher return indicates that the
business is more profitable. However, this ratio shall be used to compare the
companies under same industry. Increasing of ROA indicates that profitability for the
company is improving (Luez & Wysocki, 2016). Looking into the ROA of both the
companies it is found that the ROA for Qantas airline for the year 2014 was in
negative as the net income of the company was negative. However, for 2015 and 2016
the ROA of the company is in positive. However, the ratio is significantly low for
Qantas airline. On the other hand, for Virgin Australia ROA, for all the three years are
in negative as the net income of the company for all the 3 years are in negative.
 Return on equity - this ratio is the calculation of net income as compared to the total
shareholder’s equity of the business during the financial year. It is used to measure the
profitability on shareholder’s investment. It is the important measure for the
company’s profitability. Higher ratio represent that the company is efficient for
creating income on the shareholder’s investment. When the capital is raised through
debt for reducing the share capital the ROE will increase even if the income is
constant (Kettunen, 2017). Looking into the ROE of both the companies it is observed
that ROE of Qantas airline for the year 2014 was in negative as the net income of the
company was negative. However, for 2015 and 2016 the ROE of the company is in
positive. On the other hand, for Virgin Australia, ROA for all the three years are in
negative as the net income of the company for all the 3 years are in negative.

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 Earnings per share – EPS are defined as the attributable net income to each of the
company’s common stock. It is the profitability ratio that indicates the income earned
per share by the company in specific period. It is calculated through dividing the net
income of the company by weighted average number of outstanding shares. While
analysing the company’s profitability the net income amount alone is not much useful
as it is dependent on the size of business (Hill, Jones & Schilling, 2014). Looking into
the EPS of both the companies it is observed that EPS of Qantas airline for the year
2014 was in negative as the net income of the company was negative. However, for
2015 and 2016 the EPS of the company is in positive. On the other hand, for Virgin
Australia, EPS for all the three years are in negative as the net income of the company
for all the 3 years are in negative (Prasetyorini, 2013).
Therefore, taking into consideration all the above mentioned profitability and
efficiency ratios it is recognized that the profitability position of Qantas airline is
considerable better as compared to Virgin Australia as Virgin Australia was not able to earn
positive earning for all the three years under consideration.
Activity ratios – These ratios assesses the operational efficiency of the business. It attempts to
find out the efficiency of the business to convert the inventories in sales and the sales into
cash. In other words, it is the efficiency in using the working capital and fixed assets. Key
activity ratios taken into consideration for the analysis of Qantas airline and Virgin Australia
are account receivable turnover ratio and number of days the sales in receivables.
 Account receivable turnover – it is the ratio of net credit sales of business to the
average accounts receivables during the particular period, generally the accounting
year (Ch, Patel & White, 2015). It measures the efficiency of business in collecting
the credit sales. High ratio represents the favourable condition and lower figure

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represent the inefficiency. It can be identified from the calculation that for 2014 and
2015 the receivable ratio of Virgin Australia is better as compared to Qantas.
However, for the year 2016 the receivable position of Qantas airline is better.
 No. of days sales in receivables – it is used for measuring average number of days the
business takes for collecting the trade receivables after the sales made (Acito, Hogan
& Imdieke, 2015). As it is the time taken to convert the sales into cash, lower days
represent as favourable and the higher days are represented as unfavourable. It can be
identified from the calculation that for 2014 and 2015 the days outstanding of Virgin
Australia is better as compared to Qantas. However, for the year 2016 the receivable
position of Qantas airline is better Čermák, 2015).
Revenue management
As the nature of the airline business is of challenging type and requires continuous
investment for updated and new technologies, the particular area for focussing is the revenue
management (RM). The RM systems are used for determining optimum price for selling the
seat at any given point of the time (Graf & Kimms, 2013). The required information will be
able to make the decision based on various factors. For increasing the revenue –
 The company shall adapt to the conditions of changing market in the real time for the
improves procedure
 Leverage the demand of customers across the revenue streams for increasing the
revenue.
 Improve the forecast accuracy and analyst productivity through enhancing the
decision making procedures (Board & Skrzypacz, 2016).
 Enable the integration of unmatched business planning for enhancing the decision
making.

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Conclusion
It is concluded from the above discussion that if the financial position and financial
performance of Qantas airline and Virgin Australia airline is taken into consideration it can
be identified that Qantas is better investment as compared to Virgin Australia. The reason
behind this is that Virgin Australia was not able to earn positive income for all the three years
under consideration. Further, if the solvency ratios and activity ratios are considered, it is
identified that Interest coverage ratio of Virgin airline for all the three years are in negative as
the company was not able to earn any positive operating income throughout all 3 years. On
the other hand, the interest coverage ratio for Qantas airline improved in 2016 as compared to
the year 2014 and 2015. The debt to equity ratio of Qantas airline is better as compared to
Virgin Australia as its debt to equity ratio is slightly lower than Virgin Australia. All the
profitability ratios of Qantas airline are better as compared to Virgin Australia. Therefore,
Qantas airline is better investment.

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