Financial Analysis of Qantas Airways Ltd.

The report has carried out analysis of the financial performance of Qantas Airways Ltd. The financial performance is carried out with the use of ratio analysis, CAPM model and calculation of cost of debt and cost of equity. The report has also discussed the dividend policy of the airline as well to demonstrate its ability to provide return to shareholders.

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HI5002
Finance for Business

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Executive Summary
The report has carried out analysis of the financial performance of Qantas Airways Ltd.
The financial performance is carried out with the use of ratio analysis, CAPM model and
calculation of cost of debt and cost of equity. The report has also discussed the dividend policy
of the airline as well to demonstrate its ability to provide return to shareholders. Lastly, the letter
of recommendations has suggested the investors to wait and analyze the future performance of
the airline. The airline has made strong announcements in relation to its future growth and
therefore investors need to wait and analyze the impact of potential growth opportunities son its
financial outcomes.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
1. Description of the Company........................................................................................................4
2. Ownership-Governance Structure of Qantas Airlines.................................................................5
3: Calculation of fundamental ratio of Qantas Airlines...................................................................6
4: Share Price Movement OF Qantas Airways and All Ordinaries in last two years (1 Jan, 2016
to 31 Dec, 2017)..............................................................................................................................9
5. Research carries out in context of Financial or Business Publications.....................................13
6: Use of Capital assets pricing model to find out the required rate of return of Qantas Airways14
7: Application of Weighted Average cost of capital.....................................................................15
8: Discussion on the capital structure of the company..................................................................16
9: Dividend Policy of Qantas Airways..........................................................................................17
10: Recommendation Letter..........................................................................................................17
References......................................................................................................................................19

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Introduction
The report is developed for the purpose of facilitating the decision-making process of
investors seeking to invest in a company listed on ASX. The company selected in this regards is
Qantas Airways Ltd. The financial analysis is carried out for proving an insight into the present
and future growth prospects of the company. This will help in developing a solid base to the
investors for guiding their decision-making process related to investment. The financial
performance is carried out with the help of performance ratios that assesses the liquidity,
solvency, and profitability and market conditions of the company. Also, the report has calculated
the weighted verge cost of capital for analyzing the capital structure effectiveness of the
company. The debt ratios will provide an analysis relating to the use of debt by the company for
financing its business operations. The impact of market volatility on the price of its securities is
determined by the use of beta factor with the use of CAPM model. Also, the dividend policy of
the company is described to gain an analysis of its capability to create value for the shareholders.
At last, the letter of recommendations is developed for client to facilitate the investment related
decisions in support of the overall analysis carried out.
1. Description of the Company
Qantas Airways, a flag carrier and largest airline of Australia established in the year 1920
and operates both domestic and international airline. It is involved in carrying out both the
operations including domestic and international air transportation services. The airline after its
establishment has grown into one of the major long distance airline and recognized brands within
Australia. The airline has developed its reputation by gaining excellence in safety, operational
reliability, engineering, and maintenance and customer service. The main business operations of
the airline includes providing world class transportation services with its two brands, that are,
Qantas and Jetstar. It also carries out subsidiary businesses that include operations in specialist
markets such as Q Catering. The airline provides employment to about 30,000 people and the
majority of them constitute the local workforce. The company aims to achieve the position of
best airline in the world by carrying out its operations in a sustainable manner. The business
strategy of the company is to accomplish its aims and objectives by placing emphasis on safety,

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sustainable operations, strong reputation and environmental responsibility (Qantas Airways Ltd,
2018).
2. Ownership-Governance Structure of Qantas Airlines
i. Major Shareholders
The major shareholders of the airline having more than 5% and 20% of the shareholdings
are HSBC Custody Nominees Ltd (40.21%), JP Morgan Nominees Australia Limited (17.93%)
and Citicorp Nominees Pty Ltd (9.19%). The airline is classified as a non-family company as its
shareholders does not have any role in its ownership and governance structure.
ii. Major People Involved in Firm Governance
The Chairman
Leigh Clifford is the chairman of the company appointed in the year 2007 and is
responsible for over-viewing the roles and responsibilities of the Board.
The Board Members

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Name of Board Members Job Position
Leigh Clifford Chairman and independent non-executive
director
Alan Joyce Chief Executive Officer
Maxine Brenner Independent non-executive director
Richard Goodmanson Independent non-executive director
Richard Goyder Independent non-executive director
Jacqueline Hey Independent non-executive director
Belinda Hutchinson Independent non-executive director
Michael L’Estrange Independent non-executive director
William Meaney Independent non-executive director
Paul Rayner Independent non-executive director
Todd Sampson Independent non-executive director
Barbara Ward Independent non-executive director
CEO
Alan Joycee is appointed as the Chief Executive Officer of the airline since the year
2008.
The major shareholders of the company do not have any role in the ownership and
governance structure. Therefore, it can be said that the company is a non-family company as the
shareholders does not have role in the decision-making and this improves the transparency and
reliability of the business outcomes (Qantas Annual Report 2017, 2017).
3: Calculation of fundamental ratio of Qantas Airlines
In order to calculate the financial ratios of Qantas Airways for last two years, the annual
report of year 2017 has been taken from the investors section of company to extract the financial
date for year 2016 and 2017.

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Financial data and fundamental ratio of Qantas Airways has been presented in the below table:
Financial Data used to calculate the financial ratio
Qantas Airways
Amount in $ million
Financial Items 2016 2017
Current Assets
$
3,458.00
$
3,119.00
Current Liabilities
$
7,028.00
$
7,095.00
Inventories
$
336.00
$
351.00
Quick Assets
$
3,122.00
$
2,768.00
Long Term Debt
$
6,422.00
$
6,589.00
Shareholders' Equity
$
3,255.00
$
3,537.00
Total Assets
$
16,705.00
$
17,221.00
Interest Paid
$
284.00
$
235.00
EBIT
$
1,640.00
$
1,559.00
Account Receivable
$
795.00
$
784.00
Net Profit
$
1,029.00
$
852.00
Net Revenue (Credit Sales)
$
15,784.00
$
15,680.00
Weighted Average number
of ordinary shares (in
2083.00 1853.00

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millions)
Cost of Goods Sold
$
6,612.00
$
6,475.00
Dividend paid
$
-
$
254.00
(Source: Annual Report 2017: Qantas Airways)
Financial Ratios Formulas 2016 2017
Short term solvency
Current ratio
Current Assets/Current
Liabilities 0.49 0.44
Quick ratio
Quick Assets/Current
Liabilities 0.44 0.39
Long term solvency
Debt Ratio Long Term Debt/Total Assets 0.38 0.38
Debt to Equity Ratio
Long Term Debt/ Shareholders
Equity 1.97 1.86
Times interest earned
ratio EBIT/Interest Expenses 2.06 6.63
Asset utilization
Inventory Turnover
Ratio Cost of Goods Sold/Inventory 19.68 18.45
Total Asset turnover
ratio Net Revenue/Total assets 0.94 0.91
Account Receivable
Turnover ratio
Credit Sales/Account
Receivable 19.85 20.00
Profitability Ratios
Net Margin Ratio Net profit/Net Revenue 6.52% 5.43%
Return on total assets Net profit/Total Assets 6.16% 4.95%

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Return on ordinary
shareholders’ equity Net profit/Shareholder's Equity 31.61% 24.09%
Market Value Ratios
Earnings Per Share
Net profit/weighted average
number of shares
$
0.49
$
0.46
Dividend Per Share
Dividend/weighted average
number of shares (Lumby and
Jones, 2007)
$
-
$
0.14
(Sources: Annual Report 2017: Qantas Airways and Morning Star 2017: Qantas Airways)
4: Share Price Movement OF Qantas Airways and All Ordinaries in last two years (1 Jan,
2016 to 31 Dec, 2017)
Chart showing the price movement of Qantas Airways against the price movement of All
Ordinaries during the last two years
Monthly data from 1 Jan 2016 to 31 Dec 2017
Date Qantas Airways All Ordinaries
Monthly Share Price Index Price Scale to 100
1 31/01/2016 3.57 4947.90 49.48
2 29/02/2016 3.77 5151.80 51.52
3 31/03/2016 2.98 5316.00 53.16
4 30/04/2016 2.85 5447.80 54.48
5 31/05/2016 2.61 5310.40 53.10
6 30/06/2016 2.92 5644.00 56.44
7 31/07/2016 3.00 5529.40 55.29
8 31/08/2016 2.89 5525.20 55.25
9 30/09/2016 2.92 5402.40 54.02
1
0 31/10/2016 3.15 5502.40 55.02
1 30/11/2016 3.18 5719.10 57.19

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1
1
2 31/12/2016 3.25 5675.00 56.75
1
3 31/01/2017 3.58 5761.00 57.61
1
4 28/02/2017 3.71 5903.80 59.04
1
5 31/03/2017 4.14 5947.60 59.48
1
6 30/04/2017 4.89 5761.30 57.61
1
7 31/05/2017 5.58 5764.00 57.64
1
8 30/06/2017 5.19 5773.90 57.74
1
9 31/07/2017 5.58 5776.30 57.76
2
0 31/08/2017 5.69 5744.90 57.45
2
1 30/09/2017 6.08 5976.40 59.76
2
2 31/10/2017 5.60 6057.20 60.57
2
3 30/11/2017 4.98 6167.30 61.67
2
4 31/12/2017 5.21 6146.50 61.47
(Source: Yahoo Finance, 2018: Qantas Airways and Yahoo Finance, 2018: All Ordinaries)

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01/01/2016
01/02/2016
01/03/2016
01/04/2016
01/05/2016
01/06/2016
01/07/2016
01/08/2016
01/09/2016
01/10/2016
01/11/2016
01/12/2016
01/01/2017
01/02/2017
01/03/2017
01/04/2017
01/05/2017
01/06/2017
01/07/2017
01/08/2017
01/09/2017
01/10/2017
01/11/2017
01/12/2017
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
Price Movement of Quantas Airways and All
Ordinaries
All Ordinaries
Quantas Airways
Date (Monthly)
Share Price
(Madura, 2014)
Report based on the comparison in the movement in stock price (Qantas Airways) and Index
prices (All Ordinaries)
On the basis of above it can be clearly said that there share price moves in the same
direction as the price of index moves. In short it can be said that there is positive correlation
between share price (Qantas Airways) and index price (All Ordinaries). In order to find out the
exact correlation between shares price of Qantas Airways and Index price of All Ordinaries help
of excel has been taken and it has been found that there is positive correlation of 0.64 between
them. It means when the price of index move by $ 1 than price of Qantas move by $ 0.64. So, in
short it can be understood that when index rises the price of Qantas will also rise and when the
price of index fall the price of Qantas will also falls (Moles and Kidwekk, 2011).
In order to find volatility between the All Ordinaries and Qantas Airways it is important
to compute the standard deviation and coefficient of variation of stock as well as of index. Below

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table shows the calculation of standard deviation and coefficient of variation of both Qantas
Airways and All Ordinaries.
Test of Volatility
Monthly
Qantas
Airways
All
Ordinaries
Date Stock Return
Index
Return
31/01/2016 5.44% 4.12%
29/02/2016 -20.88% 3.19%
31/03/2016 -4.35% 2.48%
30/04/2016 -8.44% -2.52%
31/05/2016 12.06% 6.28%
30/06/2016 2.53% -2.03%
31/07/2016 -3.70% -0.08%
31/08/2016 1.06% -2.22%
30/09/2016 7.84% 1.85%
31/10/2016 0.91% 3.94%
30/11/2016 2.40% -0.77%
31/12/2016 9.97% 1.52%
31/01/2017 3.73% 2.48%
28/02/2017 11.53% 0.74%
31/03/2017 18.16% -3.13%
30/04/2017 14.17% 0.05%
31/05/2017 -6.99% 0.17%
30/06/2017 7.52% 0.04%
31/07/2017 1.92% -0.54%
31/08/2017 6.81% 4.03%
30/09/2017 -7.80% 1.35%
31/10/2017 -11.11% 1.82%
30/11/2017 4.56% -0.34%

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Standard Deviation or
Volatility 0.091 0.024
Average Mean 2.06% 0.97%
Coefficient of variation 4.43 2.46
Standard deviation helps to measure the volatility of any stock but it standard deviation
alone cannot provide best estimation for measuring the volatility. So it is important to compute
the coefficient of variation as it helps to measure the volatility in the stock returns. If coefficient
of variation of any stock is more than 1 it means that stock is highly volatile. On the other hand if
any stock has coefficient of variation less than 1 it means it is relatively less volatile. Looking at
the above table it can be said that there exists very high volatility in both stock returns and index
returns as coefficient of variation of both is greater than 1 (Reilly and Brown, 2011).
5. Research carries out in context of Financial or Business Publications
Expansion of Business Services
Qantas at present is emphasizing mainly on strengthening its international network for
adequately meeting the needs and demands of customers. The changes are made to make the best
use of fleet and appropriately meeting the demand of the customers by placing right aircraft at
right route and right time.
Launching of New Technology Platform
Qantas has launched a new technology platform for improving the customer service by
delivering them efficient services such as airline retailing, booking and servicing capabilities and
thus providing them high quality services. The quality distribution platform adopted by the
airline aims to enhance the functionality and efficiency of indirect agent channels and thus
facilitating the trade partners to easily sell the products and service provided to Qantas.
Establishment of New Pilot Academy
The Qantas group has also made announcement in relation to the selection of its location
for establishment of its new pilot academy. The academy is aimed to be established in the year

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2019 for meeting the needs of skilled aviators and thereby improving the quality of products and
services delivered by the airline to the customers.
Qantas emphasizing on introduction of more entertainment services
Qantas is also making major announcements in relation to expanding its entertainment
offering for providing more relax to the customers during the flight time. In this context, the
airline has also signed up the contract with the Apple Music and Audible and also extended its
partnership with Stan for providing free access to customer for viewing televisions, movies,
songs and digital audio books.
Launching of Special Fares
Qantas is working in collaboration with the West Australian government for launching of
special weekend fares. The strategy of the airline is specifically meant for improving the number
of travelers to Broome. This will increase the customer base of the company and thus leading the
airline to realize the economies of scale and meeting effectively the demand from leisure
travelers (Qantas: News Room, 2018).
6: Use of Capital assets pricing model to find out the required rate of return of Qantas
Airways
Estimation of Beta
Beta has been taken from the published source (Reuters) and it is estimated at 0.82
(Reuters, 2018)
Calculation of required rate of return using the CAPM model
Formula used in CAPM model is: Beta * Market risk + Risk free rate of return
Applying this formula we get required rate of return as under:
Required Rate of Return of Qantas
Airways
Risk Free rate of Return (Given) 4%
Market risk premium (Given) 6%

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Beta of company (Reuters) 0.82
Required Rate of Return
8.92
%
Evaluation of Qantas Airways to known whether is good for the conservative investment
The conservative investment refers to the strategy where investors invest only in those
stocks or securities that helps in preservation of the capital and also helps to minimize the overall
risk. Some of major examples of the conservative investment are government bonds, corporate
bonds, blue chip securities, and large cap stocks. Blue chip securities are those shares that
provide regular returns to their shareholders in form dividends and increase in share price over
the time period. As Qantas has ability to provide better returns and has capability to pay the
dividends it can be regarded as the conservative investment for long duration of time (Ross, Jaffe
and Kakani, 2008).
7: Application of Weighted Average cost of capital
Calculation of WACC
Formula used in WACC is as follows:
While estimating the WACC there is need to keep in mind the following points:
 Qantas Airways has only used only two sources of capital i.e. debt and equity to finance
the assets of the company
 The value of equity has been taken at market capitalization rate given on Reuters i.e. $
10,784.19 (Reuters, 2018)

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 The market value of debt is not readily available so book value of debt has been taken i.e.
$4,838.00.
 Cost of equity has been taken as required rate of return calculated in part 6 of this report
 Cost of debt has been provided in the annual report of company and it is subject to tax
rate of 30% (Schlichting, 2013)
Calculation of WACC (Qantas Airways)
Capital Amount Weights
Rate
BT
Rate
AT Weighted Cost
(in million $) Tax Rate 30%
Debt Part $ 4,838.00 30.97% 6.70% 4.69% 1.45%
Equity Part $ 10,784.19 69.03% 8.92% 8.92% 6.16%
Total $ 15,622.19 100.00%
WACC 7.61%
Impact of higher WACC on the upcoming investment projects
In case percentage of WACC is greater than the actual return than it means company is
paying more as it is receiving from any project. WACC implies rate at which company has to
finance assets. In the current scenario the WACC of Qantas Airways is 7.61% and if actual
return from the upcoming projects is lower than 7.61% than it clearly implies that company it
somewhere losing its value. Also there might better source capital available in the market that
has lower WACC to satisfy the return the prospective investments are providing (Zimmerman
and Yahya-Zadeh, 2011).
8: Discussion on the capital structure of the company
Optimal capital structure
Optimum capital structure refers to the balance between the sources of funds i.e. debt and
equity so that overall WACC can be kept low. As per definition of optimum capital structure
company must procure only those funds that has lower cost of capital and can be easily available.
In the case of Qantas Airways the cost of debt seems to be lower than the cost of equity that
indicates company can depend on the debt capital as the major source of finance. The debt ratio
of the company was 0.38 during the last two years that shows major part of assets has been

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financed using the debt as the source of capital. So it can be said that company has been
maintaining preferred optimal capital structure and it has been stable since last two years
(Arnold, 2013).
Adjustment to the gearing ratio
It has been seen that there was increase in gearing ratio as debt capital of the company
has been raised by $419 million. Qantas Airways has buy back the equity share amount to $366
million in year 2017 and also repaid the borrowing of $453 million, to adjust the gearing ratio.
Director’s report does not talk about any adjustment they have made to adjust the gearing ratio
(Brealey, Myers and Marcus, 2007).
9: Dividend Policy of Qantas Airways
Qantas Airways is following the conservative dividend policy to pay the dividend to their
shareholders. Company as paid total dividend of $254 million in year 2017 and but does paid any
dividend in year 2016. Here dividend paid means actual paid in year not declared and paid in the
respective years. Despite of EPS of $0.49 and $0.46 in years 2016 and 2017 respectively,
company has paid dividend of $ 0.14 in year 2017. It means company is saving the earned
amount for their future projects (Qantas Annual Report, 2017).
10: Recommendation Letter
Dear Client,
This is to bring into your knowledge about the financial performance of Qantas Airways
Ltd to facilitate the investments related decision-making process. Qantas Airways is having an
efficient ownership-governance structure by possessing a board team having high skills and
competencies and also carrying out their job functions in an independent manner. The Board
members does not have stake in the shareholders of the airline and therefore it can be categorized
as non-family company. The financial performance of the airline at present cannot be regarded as
growth as there is decline in its major performance ratios in the year 2016 as compared to the
year 2017. The airline’s liquidity position is on a declining trend as reflected from its short-term
solvency ratios. Also, it is using more debt in its capital structure as reflected from its long-term

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solvency ratio’s outcomes. Its efficiency to generate revenue from its asset base has also declined
as reflected from its asset utilization ratio. The profitability ratios have indicated that it is not
having at present a good profitable position and is experiencing a major decline in its net margin,
return on total assets and return on equity ratios. Also, it is not paying good dividend to the
shareholders as reflected from its market ratios. The airline has not paid dividend in the year
2016 and in the year 2017 the dividend payout ratio was significantly less in comparison to the
earning per share. Thus, it can be stated from the overall financial analysis that airline financial
performance is not up to the market and therefore investors are recommended to wait before
investing in the airline. The investors should watch carefully the future growth realized by the
airline before considering their investment related decisions.

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References
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Hill, New York.
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http://financials.morningstar.com/ratios/r.html?t=QUBSF&region=usa&culture=en-US
[Accessed on: 22 May 2018].
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https://www.qantas.com/travel/airlines/media-room/global/en [Accessed on: 22 May 2018].
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annual-reports/2017AnnualReport.pdf [Accessed on: 22 May 2018].
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https://www.reuters.com/finance/stocks/overview/QAN.AX [Accessed on: 22 May 2018].
Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.
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Stock Market. GRIN Verlag.

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Yahoo Finance. 2018. All Ordinaries. [Online]. Available at:
https://finance.yahoo.com/quote/%5EAORD/history?
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[Accessed on: 22 May 2018].
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