Financial Performance Analysis of Australian Airline Companies

This report conducts a financial analysis of two major Australian airline companies, Qantas Group and Virgin Australia Holdings Limited. It begins with an introduction to financial analysis, its tools, and a brief overview of both companies. The core of the report involves a detailed ratio analysis, incl...Read More

RUNNING HEAD: BUSINESS FINANCE
Financial analysis

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Executive summary
This report provides a brief overview of the financial performance and position of two major
airlines companies. The entities are operating in Australia and are named as Qantas Group
and Virgin Australia Holdings Limited. The first part of the report provides an introduction
about financial analysis and its tools and techniques. Along with this, it explains the brief
financial overview and background of both the companies. The second part deals with
analysis of fundamental ratios of Qantas and Virgin Australia which cover all the financial
aspects.
In third part of the report, a comparison is been done between the two companies and their
financial performance is measured against each other. The last part deals with eth
recommendation which provides decision regarding the better performing organization
followed by a conclusion.

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Contents
Introduction...........................................................................................................................................3
Background and overview.....................................................................................................................3
Qantas Group.....................................................................................................................................3
Virgin Australia Holdings Limited....................................................................................................4
Ratio analysis........................................................................................................................................5
Analysis of fundamental ratios..............................................................................................................6
Liquidity ratios..................................................................................................................................6
Financial Leverage ratios...................................................................................................................7
Efficiency ratios.................................................................................................................................9
Profitability ratios............................................................................................................................10
Market value ratios..........................................................................................................................11
Comparison between 2 companies.......................................................................................................12
Recommendation.................................................................................................................................14
Conclusion...........................................................................................................................................14
References...........................................................................................................................................16
Appendices..........................................................................................................................................19
Appendix 1......................................................................................................................................19
Appendix 2......................................................................................................................................19
Appendix 3......................................................................................................................................19
Appendix 4......................................................................................................................................20
Appendix 5......................................................................................................................................20

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Introduction
Financial analysis is basically a process of evaluating and measuring the profitability and
feasibility of a business. The analysis includes critical examination of annual reports prepared
by the companies. The information included in those reports is evaluated by using several
techniques. These tools and techniques are used in conducting overall financial analysis of an
organization (Lee, Lee and Lee, 2009). The most commonly used methods horizontal and
vertical analysis, ratio analysis, cash flow analysis, trend analysis and many more. Results of
these analysis are then compared with the industry averages to check the financial position of
a company (Bragg, 2012).
In this report, all the fundamental ratios are calculated for analysing the position of two
companies named as Qantas Group and Virgin Australia Airlines Holding Limited. Both
these companies are operating in Australia and within the same industry. Different category
of ratios are been calculated such as profitability, solvency, liquidity and efficiency ratios on
the basis of their financial data.
Background and overview
Qantas Group
It is an Australia based second oldest airline company which was founded in 1920. The
company was originally registered as Queensland and Northern Territory Aerial Services
Limited (QANTAS). It deals in providing transportation services to the Australians. Today, it
is the largest domestic and international airline in Australia and leading long distance airline
in the world. The main hub of the company is situated in Sydney named as Sydney airport.
There are many other subsidiaries also which provides regional and domestic services. They
include Jetstar airways, Jetconnect, Qantas freight and many more (Qantas 2018).

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The company is listed on Australian Securities Exchange and is traded with a symbol ASX:
QAN. Talking about its financial performance last year, the company reported an underlying
profit of $1,401 billion before tax. It is said that this was second highest performance in
Qantas 97 years’ history. Also domestically, Qantas and Jester had an EBIT of $865 million
last year which makes the two the most profitable airlines in Australia.
Furthermore, the company has strengthen its capital structure during the year fiscal year
2016-17. It focuses on reducing the debt, as a result of which net debt fell by $434 million to
$5.2 billion as compared to prior years. As of now, more than 60% of Group’s fleet is debt
free, making its capital structure the optimal one. In addition to this, the group has also
distributed $627 million to its shareholders as returns and declared a dividend of 7 cents per
share. Overall its performance has improved in 2017 (Qantas. 2017).
Virgin Australia Holdings Limited
The company is the second largest airline of Australia after QANTAS and was formerly
known as Virgin Blue Airlines. Founded in 1999, Virgin Australia started its business in 2000
and is now focused on following the principles of quality, innovation and money. It is a
leader in Australia’s aviation market and believes providing quality services to its customers.
The company offers its services over 29 cities and has its main hubs in Melbourne, Brisbane
and Sydney.
The company is listed on Australian Securities Exchange, having a ticker as ASX: VAH. As
per the recent annual report of VAH and its CEO statement, the company has maintained a
clear focus on improving its financial performance and providing safe travel experience to its
customers. As per the CEO, Virgin Australia has enhanced its cash flow, debt and leverage
positions. However, company’s profits were highly impacted by the subdued training
conditions and fleet simplification. VAH had a positive free cash flow of $34.3 million and

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an increase of $272.3 million in its total cash balance. Along with this, Virgin Australia
reduces its overall net debt by $839 million, out of which debt repayments were worth $260
million.
The company reported a loss before tax of $3.7 million but its regional and domestic
performance has improved last year. However, profitability of VAH international had
improved due to the growth in yield and unit revenues. But the reverse was noticed in the
domestic operations of Tigerair Australia where the performance and profitability got
impacted by Bali operations (Virgin Australia. 2017).
Ratio analysis
Among the various financial analysis techniques, the most commonly used is ratio analysis. It
the most appropriate tool used for conducting financial analysis. The ratios helps investors to
understand the financial data of a company easily and to observe the trends prevailing in
financial performance of an organization (Warren and Jones, 2018).
There are various types of ratios that are included in ratio analysis and are calculated for
different purposes. They are been distributed in categories which reflects different financial
aspects of a company. With help of such ratios, the financial position of a company can be
easily comparable within the industry. The main benefit of ratio analysis is that it provides a
snapshot of overall position of the entity (Fraser, Ormiston and Fraser, 2010). For
shareholders and owners, ratios are very important as by correctly interpreting them, they can
easily understand the viability of their investment in that particular company and can also
identify the amount of return which a company is capable of offering (Bragg, 2012).
The categories include liquidity ratios, efficiency and profitability ratio and capital structure
ratios. Along with this, another financial metric known as market value ratios are also
determined to know about the current stock performance of a company. They are generally

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comprises of Earning per Share, Dividend per share, price-earnings ratio and many others.
(Tracy, 2012).
Analysis of fundamental ratios
The performance and position of two airlines companies operating in Australia is been
measured on the basis of such fundamental ratios (Gibson, 2011). These ratios evaluate the
position on the basis of following aspects:
 Short term solvency
 Long term solvency
 Asset utilization
 Profitability ratios
 Market value ratios
Liquidity ratios
These ratios calculate the financial health of a company by measuring their capability of
paying their current liabilities with their current and quick assets. They represent the liquidity
position of a company (Godwin and Alderman, 2012). The two types of liquidity ratios are:
 Current ratio: It measures the financial health of a company by critically evaluating
its potentiality of using its current assets in paying off its current liabilities.
 Quick ratio: it uses company’s quick assets against company’s current liabilities. it
measures the capability of an organization in paying off its short term debt with its
most liquid assets. The ideal ratio is 1:1 (Higgins, 2012).
Qantas Airlines
Referring to Appendix 1, it can be said that the current ratio of Qantas has been reduced over
the period of past three years. In 2015, its CR was 0.68 which decreased to 0.44 in 2017. The

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reason behind this reduction was the decreased amount of cash balance and increased
inventory level. Furthermore the ratio was also less than the ideal ratio of 2:1. This implies
that company does not have enough current assets to pay its current liabilities.
The same can be seen in the quick ratio of Qantas airlines. It has also been reduced to a great
extent over the period of past three years. In 2015, Qantas reported a QR of 0.63 which falls
to 0.39 in 2017. Reason being, most of the cash was hold by inventories and receivables of
the company. So, overall it can be said that company does not have a stable liquidity position.
Virgin Australia
As per the calculation mentioned in Appendix 1, the current ratio of Virgin Australia has
risen over the past three years. In 2015, the ratio was 0.69 which increases to 0.76 in 2017.
This means company has improved its liquidity position in the last three years. This can be
seen from the increased cash balance and low inventory levels.
The same trend follows in case of Virgin’s quick ratio. It has also increased from 0.67 to 0.74
during the years 2015-17. Reason being the same that company’s most liquid assets has
increased as compare to its current liabilities. So, it can be said that the liquidity position of
Virgin Australia has improved from the past three years.
Financial Leverage ratios
These ratios define the overall capital structure of the company and their long term solvency.
It measures the degree of financial leverage taken by an organization and the amount of risk,
it is exposed to (Jenter and Lewellen, 2015). These ratios generally include the following
 Debt-equity ratio: It is the most company used financial metric which reflects the
financial risk taken by a company. It shows the portion of company’s assets that are
financed through debt and the ones which are financed through equity. Basically it

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represents the portion of total debt to total equity of the firm (Kimmel, Weygandt and
Kieso, 2010).
 Interest coverage ratio: It is another financial leverage ratio which evaluates
company’s liability to pay its interest payments with its earnings before interest and
tax. It is also known as time interest earned ratio which shows the proportionate
amount of earnings used for making interest payments (Penman, et. al., 2017).
Qantas Airlines
According to the calculation made in Appendix 2, it can be said that Qantas airlines’ D/E
ratio has decreased in year 2017 as compare to 2016, in which the ratio was highest in the
span of three years. This reduction was due to the huge increase in shareholders’ equity and a
minor change in company’s total debt. The change in equity was much higher than the
change in total liabilities. This improves company’s debt equity ratio and make it less risky.
The same trend is been noticed in the ICR of Qantas airlines. It has increased from 4.05 times
in 2015 to 7.25 times. A high ICR is more favourable and having an increased ratio of 7.25
times means that Qantas has enough earnings to pay its interest cost 7 times.
Virgin Australia
Referring to Appendix 2, the D/E ratio of the company is reduced in 2017 which is a good
sign. Reason being, company is now more focused on raising funds from equity rather than
going for outside debt. It will anyway enhance its profitability situation also. As a result of
this, Virgin has shown an increase in its owner’s equity and fall in total liabilities. However,
the ratio was highest in 2016 and a significant reduction is been there in the recent past year.
As far as interest coverage ratio is concerned, the company has a negative ICR because of
negative EBIT. This implies that Virgin does not have enough earnings to set off its interest
or finance costs. It have to work on increasing its earnings.

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Efficiency ratios
These ratios comprises of the factors which measures the efficiency of an organization to
perform its activities. They help in assessing the efficiency of a company in utilizing its
assets. In other words, these ratios shows the efficient management of company’s assets in
order to generate more revenue. (Jindal and Jain, 2017). They are as follows:
 Inventory turnover ratio: This ratio measures the efficiency of a company in
converting its inventory into cash. It shows how quickly an organization generate
revenue from its inventory level. A high ITR is more desirable than the lower one
(Krantz and Johnson, 2014).
 Debtor turnover ratio: It is another ratio that reflects the efficient collection of
receivables done by an entity. A high DTR is desirable as it shows the timely
collection of accounts receivables.
 Asset turnover ratio: It measures the value of company’s sales that are generated from
its assets. In other words, it evaluates the efficiency of the company in making
revenue from its assets (Saleem and Rehman, 2011).
 Day sales outstanding: it is also known as day receivables which identifies the number
of days taken by an organization in collecting its debtors.
 Day inventory outstanding: this ratio measures the number of days a company hold its
inventory before selling it (Warren, Reeve and Duchac, 2011)
Qantas Airlines
By looking at Appendix 3, it can be said that ITR of Qantas has reduced from 49.24 times to
46.75 times. This implies that less revenue is generated last year from company’s inventory.
The asset turnover ratio remains the same at 0.95 for two years. Reason being, a minor
change in company’s total revenue.

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Taking about debtor turnover, the ratio has been increased in 18.47 times to 20.34 times. This
implies that company collects its accounts receivables effectively and efficiently. Decrease in
amount of total debtors increases the ratio. Along with this, its day sales outstanding has
reduced by 2 days and day inventory outstanding remains almost same. This make the
company more efficient.
Virgin Australia
The company’s ITR has been reduced from 120.99 times to 114.32 times due to the
significant increase in its inventory level. In addition to this, its asset turnover ratio has also
shown a decrease from 0.85 to 0.81. However, a reverse trend was there in receivables
turnover. It has been increased from 16.07 to 16.23 over the past years. This implies that the
efficiency of the company is improved in collecting cash from its debtors and also its day
sales outstanding has been reduced. Furthermore it has maintained it inventory days in past
three years.
Profitability ratios
These financial metrics measures the overall profitability of an organization. Having the
knowledge about profitability one of the main objective of taking ratio analysis. Following
are the profitability ratios:
 Net profit margin: It measure the amount of net profit earned by a company as a
percentage of total revenue. It reflects overall profitability of an organization (Salunke
and Bagad, 2009).
 Return on equity: This ratio shows the amount of return provided to the shareholders
on their investment. Generally, investors prefer those companies which offer high
returns to its shareholders.

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 Return on assets: This ratio shows the amount of profit earned by an organization by
properly utilizing its total assets (Nikolai, Bazley and Jones, 2009).
Qantas Airlines
Appendix 4 shows the calculation of all the profitability ratios of Qantas Airlines. Its NPR
has shown an increase of 2% in year 2016 and was reported at 6%. After that the same
reduces to 5% in 2017. Reason being the significant decrease in the amount of net profit.
The same trend follows in the return on equity, initially it rises and then it falls. In 2016, it
was 32% which was just double of the ROE in 2015. However, the same reduces to 24% in
2017. The return on assets also got doubled in 2016 and then reduces in 2017 and was
reported at 5%.
Virgin Australia
The NPR of Virgin was in negative from the past three years. However the ratio reduces as in
2015 it was -2% and in 2017, it was -4%. This is because the company has made losses
during the last three years. The same trend was there in return on assets. It was also negative
with -3% in 2017. Due to the loss, company offered negative return on its equity. However,
the ratio has been reduced in 2017 and reaches to -12% from -9%.
Market value ratios
These ratios measures the company’s stock performance in current market. They help the
investors to decide about the company current financial position and the performance of its
stock (Zainudin, et. al., 2016). They include:
 Earnings per share: It reflected that amount of company’s profit which is allocated to
each outstanding share of common stock.

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 Price earnings ratio: it is also known as price multiple and reflects the willingness of
the inventory to pay for each dollar of earnings. A high P/E ratio shows growth for
company in future (Vogel, 2014).
Qantas Airlines
In Appendix 5, the EPS and P/E ratio is calculated. The EPS of the company has reduced
from 49.40 cents to 46 cents in 2017. It was lowest in 2015 with 25.40 cents. However, the
reverse trend was there in P/E ratio. It has increased in 2017 and was reported at 0.11.
Initially it was 0.06 in 2016.
Virgin Australia
The company has negative EPS and negative P/E ratio due to the losses incurred in last three
years. Generally, negative figures are reported as not applicable. This implies that Virgin’s
stocks has performed badly in last years.
Comparison between 2 companies
Qantas Airlines Virgin Australia
2017 2016 2015 2017 2016 2015
Current ratio 0.44 0.49 0.68 0.76 0.62 0.69
Quick ratio 0.39 0.44 0.63 0.74 0.60 0.67
Debt equity 3.86 4.12 4.09 3.04 5.72 4.66
Interest coverage 5.83 5.79 - 0.66 - 1.42 - 0.53

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3.00
Inventory turnover ratio 46.75 49.24 114.32 120.99
Debtor turnover ratio 20.34 18.47 16.23 16.07
Asset turnover ratio 0.95 0.95 0.81 0.85
Day sales outstanding 17.95 19.76 22 23
Day inventory
outstanding 7.81 7.41 3 3
Net profit margin 5% 6% 4% -4% -4% -2%
Return on equity 24% 32% 16% -12% -25% -9%
Return on assets 5% 6% 3% -3% -4% -2%
EPS 46.00 49.40 25.40 - 2.80 - 7.40 - 3.20
P/E ratio 0.11 0.06 0.15 - 0.10 - 0.03 - 0.14
From the above table, the two airline companies can be easily compared. It is observed that
the current and quick ratio of Virgin Australia is much better than the liquidity ratios of
Qantas Group. They have increased in the last three years which implies that the liquidity
position of Virgin Australia has improved. Talking about the financial leverage, the debt
equity and interest coverage of Qantas is much better than Virgin Australia. Reason being, its
debt equity ratio has reduced over the past three years and also its ICR increases, making
company less risky. On the other hand, Virgin Australia reported negative interest coverage
which reflects that company is not able to pay its interest expenses. However, its debt equity
reduces in year 2017.

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When the efficiency of both the companies is compared, it is observed that ITR of Virgin
Australia is way better than that of Qantas. Reason being, the company has maintained low
level of inventories in its business. However, the DTR of Qantas is better than Virgin as in
2017, its ratio was 20.34 as compare to later company’s DTR of 16.23. It means Qantas is
good at collecting its receivables timely. Asset turnover ratio of Qantas is also better than that
of Virgin Australia. However the days of inventory and receivables of Virgin are more than
Qantas, but overall Qantas Airlines is more efficient in utilizing its assets.
As far as profitability is concerned, Qantas Airlines has a way better position than Virgin
Australia. The company shows a decrease in its NPR in 2017 but it has a positive ratio unlike
the latter company. Also its return on equity are reasonable and higher. It has offered 24%
returns in 2017. Its return on assets has also increased during the past three years. Whereas,
the profitability of Virgin Australia was very poor during the past three years. The company
has made losses, because of which it has negative NPR, ROE and ROA. So overall it can be
said that it’s better not to invest in this company. Due to low profitability, the market value
ratios of Virgin were also negative and not applicable. On the other hand, Qantas reported
appositive EPS of 46 cents and P/E ratio of 0.11. This means company stock has performed
better in last three years.
Recommendation
It is recommended that it will be better to choose Qantas Group because it has strong
profitability, efficiency and long term solvency position. Apart from its liquidity, it has
performed well in past three years and much better than Virgin Australia. Unlike it, Qantas
offers positive returns to its shareholders and has increasing and positive P/E Ratio. It is
financially less risky and investors can think of investing in it, if compared with Virgin
Australia. In addition to this, the interest coverage ratio of Qantas is also good which gives

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positive indications to the creditors. Therefore, it will be recommended that investors must go
for investing in the stock of Qantas airlines rather than Virgin Australia.
Conclusion
From the above analysis, it can be said that ratio analysis is the most suitable technique used
for analysing performance of a company from financial perspective. These ratios give greater
insights to the managers, investors and owners regarding financial position of a company.
With help of this, investors can easily decide about their investments and purchase of a
company’s stock. As per the above analysis, it will be concluded that Qantas Airlines is best
option for making investment. The company has improved its financial situation in the last
three years and will be very beneficial for the investors. By investing in it, they will be
getting high and positive returns. Also, Qantas has better profitability position and is able to
meet all its debt.

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References
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Jersy: John Wiley & Sons.
Bragg, S. M. (2012). Financial analysis: a controller's guide. New Jersy: John Wiley &
Sons.
Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage
Learning.
Godwin, N., and Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.
Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.
Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of
Finance, 70(6), pp.2813-2852.
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business decision making. New Jersy: John Wiley & Sons.
Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John
Wiley & Sons.

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Theory and application. Singapore: World Scientific Publishing Co Inc.
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Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for
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Book-To-Price.
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http://investor.qantas.com/annual-report-2017/
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%3D02720744085301042150174417495315135195%7CMCORGID
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Appendices
Appendix 1
Qantas Airlines
Liquidity
ratio
Years
2017 2016 2015
Current ratio 0.44 0.49 0.68
Quick ratio 0.39 0.44 0.63
Virgin Australia
Liquidity ratio Years
2017 2016 2015
Current ratio 0.76 0.62 0.69
Quick ratio 0.74 0.60 0.67
Appendix 2
Qantas Airlines
Financial leverage ratio Years
2017 2016 2015
Debt- equity 3.86 4.12 4.09
Interest coverage ratio 5.83 5.79 3.00
Virgin Australia
Financial leverage ratio Years
2017 2016 2015
Debt- equity 3.04 5.72 4.66
Interest coverage ratio -
0.66
- 1.42 - 0.53
Appendix 3
Qantas Airlines

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Efficiency ratio Years
2017 2016
Inventory turnover ratio 46.75 49.24
Asset turnover ratio 0.95 0.95
Receivable turnover ratio 20.34 18.47
Day inventory
outstanding
7.81 7.41
Days' sales in receivables 18 20
Virgin Australia
Efficiency ratio Years
2017 2016
Inventory turnover ratio 114.32 120.99
Asset turnover ratio 0.81 0.85
Receivable turnover ratio 16.23 16.07
Day inventory
outstanding
3.2 3.0
Days' sales in receivables 22 23
Appendix 4
Qantas Airlines
Profitability
Ratios
Years
2017 201
6
2015
Net profit margin 5% 6% 4%
Return on Assets 5% 6% 3%
Return on Equity 24% 32% 16%
Virgin Australia
Profitability
Ratios
Years
2017 2016 2015
Net profit margin -4% -4% -2%
Return on Assets -3% -4% -2%
Return on Equity -12% -
25%
-9%
Appendix 5
Qantas Airlines