Business Deconstructed - QANTAS AIRWAYS LIMITED

Table of Content

1. Introduction
1.1. Company profile Qantas Airways Limited
1.2. Qantas’ stakeholders
1.3. Legal form
1.3.1. Limited Liability
1.3.2. Corporate Personality
1.3.3. Lifting the Corporate Veil
1.3.4. Corporate Governance

2. Financial analysis and proposing strategy
2.1. Financial analysis
2.1.1 Fig.1: Financial analysis information
2.2. SWOT- Analysis
2.3. Strategy Development

3. Implementation of Strategy
3.1 Budgeting
3.2. Balanced Scorecard
3.2.1 The learning and Growth Perspective
3.1.2 The Business Process Perspective
3.1.3 The Customer Perspective
3.1.4 The Financial Perspective

4. Conclusion

5. Bibliography
5.1 Books
5.2 Articles
5.3 Websites
5.4 Others

6. Appendices

Appendix I: Income Statement and consolidated Balance Sheet of Qantas

Appendix II: Subsidiary Companies*

Appendix III: Qantas’ Top Competitors

1. Introduction

1.1. Company profile Qantas Airways Limited

The Group's principal activities are operating international and domestic air transportation services, providing freight services, selling international and domestic holiday tours and associated support activities including information technology, catering, ground handling and engineering and maintenance. (http://www.qantas.com.au)

Qantas flies to more than 142 destinations in about 40 countries. Besides Qantas the company's operations include an Australian regional carrier, QantasLink, and a low-fare carrier, Jetstar. Overall, the company's fleet includes about 219 aircraft. Qantas is part of the Oneworld global marketing and code-sharing alliance, which is led by British Airways and American Airlines. A proposed purchase of Qantas by an investment group led by Macquarie Bank and TPG failed to win shareholder approval in 2007. (http://www.qantas.com.au)

1.2. Qantas’ stakeholders

Stakeholders are all groups and individuals who have an interest in the company being analysed. In order to focus on these groups which have the power to influence, corporate level activities have to be identified first. This can include large shareholders, governments and trade unions. The power and interest of those stakeholder groups have an impact on the process by which strategy develops at the corporate level and in each individual business.(Williamson et al, 2004, pg. 9)

Qantas’ stakeholders are its shareholders, employees, customers, business partners and the community, indirect stakeholders include academics, the media, governments and non- governmental organisations. They all have a major influence on the business, its strategy and therefore its performance.

According to the Institute of Chartered Accountants in England and Wales “the objective of financial statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions”.(Institute of Chartered Accountants in England and Wales, 2002/2003, pg. 22) Furthermore, it says that this objective can usually be met by concentrating only on the information needs of present and potential investors which are the defining class of user. That is the reason why I will focus on present and potential stakeholders in the main part of this assignment.

1.3. Legal form

A limited company is a corporation whose liability is limited by law. There are three main types of limited companies:

private company limited by guarantee
public limited company (PLC)
private company limited by shares (Ltd.)

Qantas is a private company limited by shares.

"Limited by shares" means that the liability of the shareholders to the creditors of the

company is limited to the capital originally invested. A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost. (Bové & Thill, 2005, pg. 96)

A limited company may be "private" or "public". The distinction between private and public companies is that public companies can generally invite the public to contribute to the organization’s share capital and private companies cannot. Which means that plc’s are listed in Stock Exchanges and publicly traded.(Bové & Thill, 2005, pg. 96)

1.3.1. Limited Liability

According to Ellison “limited liability means that where a company is unable to pay its debts its shareholders’ legal liability to contribute to the payment of debts is limited to the amount, if any unpaid on their shares.”(Ellison & Harrison, 1999, pg. 158-159) Meaning that it is only the shareholders whose liability is limited. The company on the other hand is fully liable for its debts and may be brought to an end in case that they are unable to ever pay the debts.

1.3.2. Corporate Personality

Qantas “is a corporate body, an artificial person recognised by the law, with an identity separate from the members who compose it.”(Ellison & Harrison, 1999, pg. 158) The concept of corporate personality means that due to this status of being a legal entity and artificial person, the organisation has some of the powers and responsibilities which a natural person has. This means that Qantas can sign contracts, buy, own and transfer property, conduct its business, sue and also be sued.(Bové & Thill, 2005, pg. 95-96)

1.3.3. Lifting the Corporate Veil

This important concept of company law mainly bases on the concept of limited liability and prevents the members of an organisation “from escaping liability by hiding behind the company.”(Ellison & Harrison, 1999, pg. 161)

Courts are enabled by law to “disregard the separate legal personality of a company because it was formed or used to facilitate the evasion of legal obligations.”(Ellison & Harrison, 1999, pg. 161) This is regarded as lifting the veil of incorporation, meaning that the court is capable of looking behind the corporate and formal personality of the company to the owners which compose it.

1.3.4. Corporate Governance

“Corporate Governance is core to ensuring the creation, protection and enhancement of shareholder value.” (Qantas Annual Report, 2006, pg. 41)

A board of Executive Directors and independent Non-Executive Directors ensure that Qantas management maintains, the highest level of corporate ethics as well as to ensure maximum benefit to stakeholders and shareholders. “The Board endorses the ASX Corporate Governance and Best Practice Recommendations (ASX Principles).” (Qantas Annual Report, 2006, pg.41)

2. Financial analysis and proposing strategy

2.1. Financial analysis

Willamson, et al.(Williamson, et al, 2004, pg. 115) recognised that “the ability to financially analyse a company is central to any strategic investigation (…).” The necessary information can be found in the profit and loss and balance sheet statements. These statements “are particularly important within strategic analysis because they provide the information for the calculation of financial ratios, which enable comparison to be made with other companies in the same industry or sector.”( Williamson, et al, 2004, pg. 115)

The following figures are taken from Qantas’ Consolidated Income Statement and the Balance Sheet which can be found in the annual report. The figures are taken from the Financial Year 2006 and will be compared to the Financial Year 2005 (see Appendix I)

2.1.1 Fig.1: Financial analysis information

Abbildung in dieser Leseprobe nicht enthalten

Source: own analysis from Qantas Annual Report 2006

In order to evaluate the performance of a company a ratio analysis is very helpful.

“A financial ratio is a relationship, at a given point in time, between items on a financial

statement. (…) (This) should be a selective process where the emphasis is on the selection of ratios to identify and illustrate specific strategic issues and trends”.( Williamson, et al, 2004, pg. 117)

- Qantas’ turnover of the year 2006 is $13,646.7 million, this an increase of 8.6% over 2005 in which the turnover was $12,563.9 million.
- The numbers of the total costs also show an increase of 3%. In 2006 total costs were $12,920.9 million compared to $11,549.9 million in 2005.
- The profit enormously decreased by 26.6% from $914.3 million in 2005 to $ 671.2 million in 2006.
- The profit margin in the current year is lower than in the preceding year. In 2006 it is 4.92% compared to 7.28% in 2005.
- In the return on capital employed a significant change can be seen. In 2005 it was 6,84% however, it further decreased to 4.88% in 2006.
- The asset turnover is used as a broad measure of asset efficiency. The asset turnover augmented from 0.94% in 2005 to 0.99% in 2006.
- The current ratio also increased in 2006 to 0.93% from 0.74% in 2005.
- Leverage increased from 2.22% in 2005 to 2.36% in 2006.

After analysing the Consolidated Income Statement and the balance sheet the author recognised a decrease of profit of Qantas by 26.6%. This result was achieved despite the strong cashflow, growth in passenger volumes, capacity growth, strong revenue growth and industry benchmark cost entertainment through Jetstar and is mainly due to the significantly increased jet fuel prices.

2.2. SWOT- Analysis

The SWOT - analysis (Strength Weaknesses Opportunities Threats) “summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategic development.” (Johnson & Scholes, 2005, p. 102)

Strengths:

strong market position: market share of over 30% in world airline market and 65% in Australian market (Qantas Annual Report, 2006)
growing net passenger revenues
flying to over 142 destinations worldwide
modernised 219 aircraft fleet
strong liquidity position: long term debt to equity ratio is only 0.9%

Weaknesses:

dependence on Australia due to its location increase of prices due to increase of jet fuel prices poor inventory management (measured by inventory turnover ratio): the weak turnover ratio of Qantas means that it is blocking the working capital in inventories in form of fuel poor return on average assets, investment and equity (measured by return on average assets, investment and equity): shows weak performance of Qantas’ management, if continued shareholders might lose their trust and confidence in the company, thus its image will be affected negatively.

Opportunities: expansion possibilities for e.g. passenger traffic in Asia Pacific global travel and tourism industry is expected to grow 4.2% per year during the next 10 years (http://www.wttc.org)

Threats:

dependence on oil markets: rising fuel costs
dependence on economic cycle increase of low fare competition Face increase in air traffic control charges as more planes fly in the sky Powerless to prevent introduction of duty for fuel or environmental charges: this would reduce its growth potential as it relies on price stimulation Safety obligations since 9/11: more costs

2.3. Strategy Development

Chandler defined strategy as “the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” (Rosenfeld & Wilson, 1999, pg.224) For Qantas that would mean to:

Increase revenue in 2007 by attracting more customers with advertising, promotion and special offers.

Profit margin: to increase the gap increase selling price or reduce cost price. Is it possible to increase the selling price without losing customers? Is it possible to lower the operating costs in this business?

PROFITABILITY: Improve return on capital employed (ROCE) by selling more or reducing cost price or increasing selling price. The author does not recommend to lower the bottom number by removing assets from the business permanently because this would affect the current ratio in a negative way.

LIQUIDITY: Qantas has a strong liquidity position. Its long term debt to equity ratio is 0.9% and therefore quite low compared to the industry. As a strong liquidity position increases the credibility in the market and helps to execute expansion plans, Qantas should try to further improve this ratio.

STRUCTURE: Long term borrowing/ total assets - current liabilities * 100. Qantas improved its leverage from 22.2% to 23.6%, which is very good compared to the leverage of British Airways which is 76.3.

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