Finance – Qantas Case studies - aceh.b-cdn.net



Finance – Qantas Case studiesLink the syllabus points below to examples of business case studies;role of financial management Strategic role of financial managementThe strategic role of financial management at Qantas has enable the business to achieve strategic goals of liquidity, profitability, efficiency, growth, solvency and return on capital.Objectives of financial managementLiquidity: On the surface Qantas’ low liquidity rate indicates an inability to meet its short-term debts. However, like most airlines it operates on a negative work capital position. Qantas holds very little cash reserves and uses the cash received (often in advance) to pay for long them debts, thus reducing interest costs. Qantas has facilities in place (e.g a standby facility of $300 million and issues of short-term notes) to draw cash when needed to pay creditors. Qantas controls the outflow and inflow of its money, in order to make sure it has money to pay off debts if they arise. Profitability: Profitability in the airline industry is relatively poor on average. The airline industry is both capital/money intensive and highly competitive. Variable costs, like fuel and labour, constitute a disproportional share of costs and can be difficult to control. 2014: Qantas’ struggling international operations, high fuel prices and weaknesses in the domestic market pushed the airline into a tight spot in 2014. Qantas reported a loss of $646 million. However in 2015 Qantas reported a massive turn around of $1.6 million to post a profit of $975 million. 2016: In 2016 Qantas’ profit had increased a further 57% and a record of $1.53 billion in profitability.2017: Qantas backed this up with a $1.4 billion profit 2018: Qantas reported its highest ever profit of $1.57 billion 2019: Qantas reported a $1.3 billion profit. While Qantas’ earning were 17% lower, this was as result of a external factor outside the airlines control, in particular a $614 million increase in fuel costs. Qantas profit were even more impressive as Virgin Aus lost $315 million for the same period, other airline like Etihad lost nearly $7.3 billion in 3 years. These profitability results confirm the success of Qantas’ recent financial strategies, as it is now one of the most profitable airlines in the world. Qantas cancel all international flights until March 2021 Loss of profitability and liquidity Qantas discounting all Boeing 747 models Loss of profitability and solvency Efficiency: Qantas’ efficiency has increased in recent years. An increasing RSF and shows that its financial strategies have been successful, and the airline is now using more assets more effectively. This has been driven by the introduction of new and more efficient aircraft, new IT systems, restructuring, better aircraft utilisation and faster more efficient maintenance turnaround times. Qantas use its staff to ensure efficiency of communication within the business. Growth: In 2014 and 2020 Qantas had to rein in costs and curtail its growth plans especially in Asia. Routes were cut and orders for new planes deferred. In recent years Qantas has turned around its operations and is now expanding with new routes, new planes and increased capacity largely in Asia. Solvency: Airlines like Qantas are usually highly geared and have low solvency. Qantas’ gearing increased largely due to its profitability falling. +Interdependence with other key business functionsMarketing: Finance depends on marketing to generate funds. Marketing depends on finance to fund its new marketing strategies like Qantas’ new lounges, new check in facilities (self serve), new carriers flying into Asia are expensive and need to be funded. Qanats’ marketing plan includes a major financial dimension. Human Resources: Finance depends on HR to keep staff well trained, effectively managed and used efficiently as this is essential to maintain Qantas profitability and productivity. HR depends on Finance to fund effective HR strategies like training, development and wages. Qantas spends in excess of $275 million q year on training staff because it is just so important for a airline business.Operations: Finance depends on operations to help raise profitability with its new products and services and also control budgets and costs are required by each operational department. Operations depends on Finance to fund Qanats’ fleet renewal program and other requirements involving operations. In the short-term Qantas liquidity may drop, but Profit and growth of Qantas will increase in the long term.influences on financial management Internal sources of financeQanats uses retained profits as a source of internal finance as they invest back onto the (Qantas) business. As of recently high profitability Qantas has been able to retain more profit recently. External sources of financeQantas intends to buy more Boeing or Airbus planes by the end of 2020 to renew its domestic fleet which is estimated to cost more than $5 billion. Qanats has already started to replace older planes with new Dreamliner’s in 2020 and has 99 Airbus A321 aircrafts oreder for Jetstar.Qantas can find funds for this in external sources of finance such as Debt both long and short and Equity finance Debt Finance: Qantas uses mostly debt both long and short term and in 2019 had a debt portfolio totalled $4.7 billion. Qantas has recently taken advantage of the low interest rates and a higher credit rating saving it millions of dollars in interest payments. Equity Finance: Qantas uses equity finance through the selling of shares on the ASX. Qantas’ last equity raising was in 2009 when it raised $500 million in an issue of new shares to combat the effects of the global financial crisis. Pays off its dividends with its high profitability.Financial institutionsQantas taps into financial institutions/intermediaries to invest their surplus funds and obtain finance particularly from banks and investment Influence of governmentThe government influence Qantas financial decision making through economic policies like Monetary Policy and Fiscal Policy and through the ASIC which enforces the CCA.ACCC takes Qantas to task refunds for its flights cancelled by COVID-19 Qantas also pays company tax to the government on profit it earns. Alan Joyce was a big supporter of the Coalition’s (Liberal) proposed company tax cuts from 30% to 25% and lobbied hard to get them up to no avail.Global market influencesQantas must respond to challenges in the global economic outlook, availability of funds and intertest rates. In 2009 the GFC caused rapid revenue declines especially in international markets leading to an 88% fall in net profit. Qantas responded by cutting flying capacity, deferring and cancelling orders and restructuring.The recent Coronavirus (COVID-19) pandemic of 2020 has seen a significant drop in demand for Qantas’ services. As the impact of the threat of the Coronavirus becomes more apparent for the globe, people are becoming afraid to travel particularly internationally. The threat of countries closing their borders to airline travellers exists. Countries like mainland China, which is one of Qantas’ major flight routes, recently closed their borders and put in place restrictions to limit tourists from entering the country.Qantas on 10 March 2020 announced to the ASX its response to the Coronavirus with an intention to further cut its international flying, reducing capacity by almost 25% for the next six months. Qantas announced rather than exiting routes it will use smaller aircraft and reduce the frequency of flights. Domestic capacity reductions will also be put in place. In addition to cutting capacity Qantas also announced several cost reductions measures, for example for the remainder of the financial year, a cut in remuneration to Qantas Executives with the CEO to take no further salary. The recent material drop in fuel prices has provided Qantas with a substantial cost benefit. Processes of financial managementPlanning and implementingDetermining financial needs like purchasing new planes Developing budgets Maintain record systems (accounting)Identifying financial controls (policies)Monitoring and controllingThe financial statements of Qantas summaries its financial transactions. They are required by law, must be published and are used by management to make decisions. These statements include the:Income statement (figure 17)Balance sheet (figure 19)Cash Flow Statement (figure 18)Financial ratiosFinancial ratios assist businesses to assess their performance and if they are meeting their financial objectives. They allow comparisons to be made over time, with industry averages and benchmarks and with competitors.Profitability Ratios: Net Profit Ratio: (Net profit/sales) x 100%YearNet Profit Ratio (%)2014-4.2020156.2020169.5020178.7020189.1020197.20Return on Owners Equity: (Net profit/Owner’s equity) x 100%YearReturn on Owners Equity (%)2014-22.50201528.00201647.00201740.00201840.00201938.00Profitability ratios are important measures as they show the ability of a business to generate a financial return from their activities. Qantas’ net profit ratio, which determines how much net profit is in each dollar of sales has decreased since 2018 from 9.1% to 7.2% in 2019. A declining net profit ratio is a cause for concern for Qantas, as they are now making less net profit for every dollar of sales. Profitability performance determined by the ratio may influence Qantas to develop new strategies and review their sales revenue and cost structure to allow them to have a satisfactory level of profit. Qantas’ return on owners’ equity ratio, which shows the amount of capital return earned by the owners invested funds has also decreased since 2018 from 40% to 38% in 2019. A high figure is desirable but the trend in the ratio is of greater importance for interpreting the reasons for the result. A figure of over 20% is generally considered a good return and Qantas’ results have been above this since 2015. Both ratios show us that Qantas’ profitability has improved significantly since 2014. The trend in both ratios has been down from the 2018 results and given recent global events impacting the financial performance of Qantas, the business will need closely monitor the action taken to mitigate the further decline in these profitability ratios. Liquidity Ratio:Current Ratio: (Current Assets/Current Liabilities)YearCurrent Ratio20140.66:120150.68:120160.49:120170.44:120180.48:120190.49:1The current ratio measures how easily a business can meet its current liabilities or short-term debts. Qantas’ Current ratio has increased for the past 3 years from 0.44:1 in 2017 to 0.49:1 in 2019. This means for every 0.49 cents of current assets, there is a dollar of current liabilities. This trend is favourable as it indicates an improvement in Qantas’ liquidity and ability to service its short-term debt. A ratio of 2:1 is generally accepted as an ideal ratio across all industries. Ratios such as this do vary between industries and for the airline industry Qantas’ ratio is considered acceptable.Solvency Ratio:Debt to Equity ratio: Airline Ratio not traditional One (Total Liabilities/Total Equity) x 100%YearDebt to Equity Ratio (%)201418420151392016136201712520181102019134Debt to Equity ratio measures the financial long-term stability of a business and the relationship between the level of debt and equity. Qantas’ debt to equity ratio has increased since 2018 from 110% to 134% in 2019, this means for every 1 dollar of equity there is 1.34 of liabilities. It is generally considered ideal for a business to have less than 100% debt to equity ratio. The airline industry uses a more complex ratio to calculate debt to equity and higher ratios typically over 100% result, given this Qantas’ current ratio is acceptable. As Qantas’ ratio decreased this means that they are financially less stable in 2019 compared to 2018. This may be the case because Qantas may have used some debts to help expand their fleet, which in return expands its growth and profitability.Efficiency Ratio:Expense Ratio: (Expenses/Sales) x 100%YearExpenses Ratio (%)2014125201593201690201791201891201992The expense ratio shows the relationship between sales and expenses that the business has made with those sales. Qantas ideally wants their expense ratio to be as low as possible, however airlines usually have high expenses as it is a costly capital industry. Qantas’ expense ratio has slightly increased since 2018 where it was 91% and is now 92% in 2019, this means for every dollar of sales 92 cents are expenses. An increase in this ratio from 2016 where it was 90%, means Qantas’ expenses have increased in greater proportion to their sales, the large increase in 2019 of fuel prices has been a driver of this result as fuel is a major expense to Qantas. Limitations of financial reportsExamples:Qantas attaches comprehensive notes to its financial statements. These help stakeholders better understand the financial reports and give more clarity to Qantas’ financial position.Special circumstances like major weather events and geopolitical tensions may distort the analysis of Qantas’ results. For example, Covid-19, eruption of Bali’s volcano, the trade war between USA and China, Hongkong protest and heavy rain on flights delay have caused major effects on Qantas profitability.Business like Qantas can employ a variety of different accounting procedures. For example, Qantas now using Underlying PBT as its measure of Profitability.Qantas’ financial reports do not give a full picture of their debts as it does not disclose when these debts have to be repaid.It is difficult to value Qantas’ assets as they change over time. Qantas’ long term assets are depreciated over time but the value of these assets may not always reflect their true market value.Ethical issues related to financial reportsQantas has ethical and legal responsibilities in relation to its financial management. Ethical behaviour is safeguarded at Qantas through:Audits which are the professional examination of accounting data. KPMG audits Qantas Professional accounting bodies (Aus. society of CPA’s and institute of chartered accountants) who have a joint code of professional behaviour. ASIC which ensures that Qantas follows the CCA ASX which included in its listing rules disclosure requirements and other regulations with listed companies must comply. Financial management strategies Working capital management (liquidity)control of current assetscontrol of current liabilitiesstrategiesCurrent working capital strategies employed by Qantas include:Controlling current assets i.e cash, accounts receivable and inventories Controlling current liabilities i.e payables, interest bearing liabilities and debtsLeasing aircraft, buildings and plant and equipment. Leasing has freed cash that can be used elsewhere in the business to better help the business. Debt market trends, tax deprecation, deterioration in aircrafts residual rates and the need to provide greater fleet flexibility have increased the attractiveness of leasing. Qantas is one of the few airlines in the world to own its own terminals and has been considering selling and leasing back some of these assets. In 2016 Qantas sold its domestic Sydney Airport Terminal 3 for $185 million and in 2019 sold its domestic Melbourne Airport Terminal 1 for $355 million and leased them both back Profitability managementcost controlsrevenue controlsCost Controls: Qantas has cut its cost by over $8 million in the last 15 years reducing its overall cost base by between 20-25%. Qantas has had to move decisively in response to the massive drop in profitability in 2014 and further cut costs by $452 million in 2019. Qantas has targeted further cuts of $400 million in 2020, but because of the current Covid-19 threat causing Qantas to take major decisions like cancelling all international flights this targeted cost cuts aren’t seemed to hit Qantas objective figure.Recent strategies employed by Qantas to control costs include:Replacing Qantas with Jetstar on some international routesRestructuring management (Cutting 5000 jobs in 2014-2016, and because of Covid-19 cutting a total of 20,000)Fuel hedging Outsourcing more business functions Revenue Controls: Qantas total revenue in 2019 increased by 4.9% Recent strategies employed by Qantas to control revenue include:Partnerships with Emirates, American Airlines and more Setting clear sales objectives and setting up a sales reporting system Fuel surcharges in response to the rapid increase in the price of fuelImproved marketing strategies like new international business class, installing self service kiosks, next generation check ins and new advertising campaigns.Global financial managementexchange ratesinterest ratesmethod of international paymenthedgingderivativesExchange rates: Qantas is exposed to changes in exchange rates because of purchases such as jet fuel, operational expenditure like lease payments and interest repayments and capital expenditure such as purchase of new planes and predominately foreign currency, mostly the US$. The depreciating AUS$ resulted in Qantas to lose $154 million dollars in 2019. Qanats also estimates that its generates about 38% of its revenue in other currencies. Changes in foreign exchange rates also effect travel decisions by Australians. Interest rates:Qantas is exposed to movements in interest rates through its portfolio of corporate debt, leases and cash. Recent cuts in interest rates (both here in foreign currencies) have decreased the interest payments Qantas pays on its borrowing. Hedging/Derivatives:Qantas has a very successful hedging programme outperforming many of its airline competitors.Qantas uses derivatives like forward cover and options to hedge future fuel prices and aircraft purchases. Qantas has hedged 100% of its fuel needs for 2020 with protection in place against adverse movements. ................
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