Financial Analysis of the Airlines Qantas and Virgin Australia (2015 to 2017)

Table of Contents

1 Executive Summa

2 Introducti

3 Financial Analy
3.1: PROFITABILI
3.2: EFFICIEN
3.3: LIQUID
3.4: GEARI
3.5: HORIZONTAL ANALYS
3.6: VERTICAL ANALY
3.7: Comparative analy

4 Business Performance of Qantas (2015-2016-2017)

5 Conclusi

6 Recommendation

7 List of Reference

8 Appendix - Sample Calculation Annexures
Annexure 1: Profitability
Annexure 2: Efficiency
Annexure 3: Liquidity
Annexure 4: Gearing

ListofTables

Table 1: Qantas and Virgin Australia brief introduction

Table 2: Profitability of Qantas

Table 3: Profitability of Virgin Australia

Table 4: Efficiency of Qantas

Table 5: Efficiency of Virgin Australia

Table 6: Liquidity of Qantas

Table 7: Liquidity of Virgin Australia

Table 8: Gearing of Qantas

Table 9: Gearing of Virgin Australia

Table 10: Qantas Balance sheet Horizontal Analysis

Table 11: Virgin Australia Balance sheet Horizontal Analysis

Table 12: Qantas Income statement Horizontal Analysis

Table 13: Virgin Australia Income statement Horizontal Analysis

Table 14: Qantas Balance sheet Vertical analysis

Table 15: Virgin Australia Balance sheet Vertical analysis

Table 16: Summary Table of Qantas and Virgin Australia for Comparative Analysis

1 Executive Summary

Qantas and Virgin Australia have been Australia’s leading airlines and prime competitors in the regional market. An analyses of the airlines’ financial performance in the period 2015, 2016 and 2017 is presented in this report.

The report begins with a short introduction into the dynamics of the airlines under review. A background knowledge of these carriers is important for studying the financial impact on them.

The basis of financial analysis is discussed thereafter where the 6 key financial analysis parameters (profitability, efficiency, liquidity, gearing, horizontal analysis and vertical analysis) are introduced, explained and summarized separately for each airline. Qantas fulfilled all criteria for a stable airline except in gearing and liquidity analysis whereas Virgin Australia fell short in profitability and efficiency.

A comparative analysis is provided where the performance of both Qantas and Virgin Australia is closely studied. A business performance review specific to Qantas is presented with focus on both financial and non financial aspects.

A conclusion is provided which details out the major findings which are a by-product of the analysis.

Lastly, few recommendations are provided based on the summarized conclusion which are of financial and non-financial nature.

Qantas was found to be highly profitable in this review period. Virgin Australia meanwhile suffered significant losses and was in recovery stage at the end of the analysis period.

2 Introduction

Air travel has evolved in leaps and bounds over the past few decades and a lot of its success is owed to periodic advancements in technology eventually making it the safest mode of transport available to us. However, unfortunate safety related incidents and accidents have occurred over the recent past and hence, safety has attained the highest priority among all airlines. In spite of all the concerns, Australian airlines have attained high safety ratings from AirineRatings.com which is a global ratings website. With more than 400 airlines under the website’s radar, Australian airlines have outshone their global competitors to the effect that the country’s 2 major carriers Qantas and Virgin Australia have attained rankings in the Top 20 safest airlines of 2018.

About Qantas

Qantas (the world’s second oldest airline) was founded in Queensland in 1921 and has been in continuous operation since then, longer than any other airline. Qantas has particularly stood out among its competitors where experts have attributed its remarkable safety record, despite being 60 years old and hence rich in experience in countering challenges. They have a key and profitable partnership with Emirates which allows them to codeshare flights to Europe from Emirates’ home base in Dubai.

About Virgin Australia

Virgin Australia, relatively nascent at 18 years old is proving to be a tough competitor, especially in the regional market with its relatively young fleet. Virgin Australia is a part of an alliance with Etihad Airways called Etihad Airways Partners. This alliance has helped them mimic the relation between Qantas and Emirates to a certain effect.

The dynamics of these Middle Eastern carriers also affect the Australian carriers by the virtue of their symbiotic relationship.

The following fact sheet provides a brief introduction to these airlines:

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Table 1: Qantas and Virgin Australia brief introduction

This report aims to present a financial analysis of these airlines over the years 2015,2016 and 2017. The source for the figures is purely audited financial reports. The auditor for both these airlines is the Dutch firm KPMG. Both financial statements are presented as year ending 30th June for every year.

3 Financial Analysis

The four ratios, profitability, efficiency, liquidity and gearing offer the best approach for financial analysis of an entity. Coupled with horizontal and vertical analyses of the firms’ balance sheets and income statements, the company’s entire financial standing can be surmised.

All figures and values are taken from the audited reports of Qantas and Virgin Australia for the years 2015, 2016 and 2017 unless otherwise referenced. (Virgin Australia audited annual report 2015), (Virgin Australia audited annual report 2016), (Virgin Australia audited annual report 2017) and (Qantas audited financial report 2015), (Qantas audited financial report 2016) (Qantas audited financial report 2017)

3.1 PROFITABILITY

Profitability of an entity, simply put, is the ability of that entity to earn profit. Profitability differs from profit as it is a measure of efficiency for success of the business. Whereas, a business is said to be in profit only if it pays all the expenses relating to the revenue generated by it.

Profitability can be determined with the help of profitability ratios. Common ratios used to analyze profitability are:

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This ratio helps in determining the return on investment of shareholder funds. Mapping profit against share capital will be helpful for shareholders to invest in more shares or vice-versa.

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Share Capital+Reserves+Non-current liabilities

This ratio is helpful in determining the return on all capital employed by the airline. This helps the airline in making cautious future decisions with investing additional capital with respect to their profit.

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Sales Revenue Profit margin ratios are useful in determining the percentage profit gained with respect to the sales revenue after deduction of all expenses.

A sample calculation for the above ratios is provided in Annexure 1.

Analysis from Profitability results:

As per Qantas figures of 2015,2016 and 2017, the following was noted:

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Table 2: Profitability of Qantas

From the above table, it is clear that Qantas had dramatic returns on their ordinary shareholder funds over 2015 and 2016, however, there was a drop in their return in 2017. This drop in return is not to be deemed significant as it is still more than 13% higher with respect to 2015.

A similar trend of great surge and then a drop can be observed in Return on capital employed (ROCE) for the years 2015,2016 and 2017.

As per the available figures, it was observed that Gross profit margin and the net profit margin were identical. There is minor deviation between the values of ROCE and the profit margins.

This common trend clearly showcases that Qantas has had a profitable outing in 2016 as compared to 2015 and 2017. Although the returns have been lower and thereby the profitability, Qantas still had a strong financial performance in 2017.

As per Virgin Australia figures of 2015,2016 and 2017, the following was noted:

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Table 3: Profitability of Virgin Australia

From above, it can be seen that the company is facing significant losses. They had a very poor year in 2016 with respect to return on ordinary shareholder funds. Their return on capital employed was the lowest in the past 3 years in 2016. Due to the net loss, the profit margin calculations are irrelevant.

Summary:

New partnerships in 2016 such as the one with Airbnb had helped Qantas’ consumers reach new avenues. Australia is a tourist heavy sector and Qantas’ global reach has boosted the company’s financials and profits manifold. Virgin Australia has also expanded locally, but it has not translated into profits for them. As seen from 2017, they are gradually moving towards profitability but it does not mask their poor financial performance in 2016 and 2017. Based only on its profitability, Qantas is definitely far ahead of its regional rival.

3.2 EFFICIENCY

Efficiency of an airline can be defined as the airline’s ability to effectively face liabilities with judicious use of their resources and assets. (Efficiency ratio, Investopedia)

The efficiency ratios relevant to the airline industry are:

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This ratio will be helpful in understanding whether the airline had managed to attain enough revenue with respects to all its investments and reserves.

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This ratio is helpful in understanding whether the no. of employees under the airline’s payroll is justified with respect to the revenue. This is an important tool in regulating employee numbers and monitoring employee performance.

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This ratio is helpful in determining how efficient the non-current assets have turned out as mapped against the revenue generated with respect to these assets. The decision to retire/acquire assets can be taken through this analysis.

A sample calculation for the above ratios is provided in Annexure 2.

Analysis from Efficiency results:

As per Qantas figures of 2015,2016 and 2017, the following was noted:

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Table 4: Efficiency of Qantas

From the above table, it is observed that Qantas managed to significantly improve its revenue on capital employed in 2016 from 2015 and has also been somewhat consistent in 2017.

The number of employees on Qantas payroll in 2015, 2016 and 2017 are 31079, 31884 and 32268 respectively. (Qantas Data book 2015, Qantas Data book 2016 and Qantas Data book 2017)

A consistency can also be observed for sales revenue per employee throughout 2015, 2016 and 2017.

Non - current asset for Qantas largely is its fleet of aircraft. With the average life of an aircraft being 25 years, Qantas has managed to generate sufficient revenue with respect to its non -current asset.

As per Virgin Australia figures of 2015,2016 and 2017, the following was noted:

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Table 5: Efficiency of Virgin Australia

From the above table, it can be seen that Virgin Australia managed to up its sales revenue on capital employed by almost 5% in 2016 from 2015. However, it observed a significant drop of around 26% in 2017. This is attributed to the increase in its non-current assets in 2017.

The number of employees on Virgin Australia Group payroll for the years 2015, 2016 and 2017 are 10800, 9500 and 9800 respectively.

Sales revenue per employee increased in 2016 as is evident from the reduction in the number of employees from 2015 in 2016 (further the capital invested in 2016 was $272 million). In 2016 and 2017, the revenue per employee was consistent due to no major change in employee numbers and the revenue.

The non-current asset turnover has been largely consistent for the airline with no major overhauling of its fleet.

Summary:

The efficiency analysis gave a good insight into Qantas and Virgin Australia sales, capital and turnover over the 3 review years. As per the figures, it turned out that Qantas was more efficient than its rival Virgin Australia by virtue of sales revenue on capital employed but the 2 airlines were found to be equally efficient with respect to the revenue per employee and NCA turnover mapping.

3.3 LIQUIDITY

Liquidity can be defined as the ability of a enterprise to adequately use its assets to manage existing liabilities. Liquidity can be determined by analyzing Current Ratio and Acid Test as:

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This ratio is useful in determining balance between the current assets and liabilities of the airline. If the ratio is greater than 1, then the airline can be said to be financially very stable. However, in most cases the ratio seldom exceeds 1 as in the aviation business, these values are difficult to achieve.

A sample calculation for the above has been provided in Annexure 3.

Current ratio differs from Acid test as inventories are included as current assets in the Current ratio analysis. Since the industry in question does not include inventory, the current ratio is ignored.

Analysis from Liquidity results:

As per Qantas figures of 2015,2016 and 2017, the following was noted:

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Table 6: Liquidity of Qantas

As per the above figures, Qantas significantly reduced its assets throughout 2015, 2016 and 2017. This however did not reflect on their liabilities as the figure does not drastically change save from 2015. This further reduced their liquidity capability.

As per Virgin Australia figures of 2015,2016 and 2017, the following was noted:

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Table 7: Liquidity of Virgin Australia

As per the above figures, the acid test result for Virgin Australia has had a consistently high acid test outcome which is evident from their low liability values across the 3 review years.

Summary:

From the liquidity analysis done for the 2 airlines, it was evident that Qantas’ test outcome considerably worsened throughout the 3 years of review. In contrast Virgin Australia performed consistently with high acid test ratio. The airline’s outcome was predominantly due to its low liability values.

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