Analysis of Financial Report

Qantas Airways Limited

Table of Contents
Introduction...................................................................................................................... 3
Background...................................................................................................................... 3
Overall observations of Qantas........................................................................................ 4
Overall observations in relation to Virgin.........................................................................7
Observations in respect to a longer term Qantas history.................................................7
Further Analysis............................................................................................................... 8
On Time Performance................................................................................................... 8
Debt.............................................................................................................................. 8
Profitability.................................................................................................................... 8
Gross Profit Margin........................................................................................................ 9
Return on assets........................................................................................................... 9
Debt performance......................................................................................................... 9
Current ratio................................................................................................................. 9
Price/Earnings ratio....................................................................................................... 9
Investments................................................................................................................... 10
Overall assessment........................................................................................................ 11
References..................................................................................................................... 12
Table of comparison values............................................................................................ 13

Introduction
Qantas performance in the financial year ending June 2014, was another year with a
net loss for the company. This analysis looks at what that means to shareholders of the
company, and what they can expect for the future.
To help us consider their position we have looked beyond just this financial year by also
looking at the two preceding years, and for a long range perspective, at their position
15 years ago in the financial year (FY) ending in 2000.
To gain further perspective, we also looked at Virgin Airlines. Virgin is the most similar
competitor to Qantas, making it the most relevant comparator. There are differences
however as the Qantas Group consists of two airlines brands, Qantas and Jetstar as well
as its subsidiary businesses including other airlines and businesses. Virgin is a
subsidiary of the parent Virgin company and therefore there are some structural
differences of which we need to be careful of in direct comparisons.

Background
Qantas has operated in Australia since 1920 providing both a domestic and
international flight service. Its competition therefore is both local and international,
however arguably, its greatest competitor is Virgin Airways, who entered the market 15
years ago and who operates similar routes within Australia.
Its $2.8 billion record loss in June 2014 is, the carrier argues, due to the rising cost of
fuel, difficulties faced with unions and it claims, outdated legislation as Australias
national airlines which it believes hinders its financial options and adds additional cost
to its business (Grimson, 2014).
The Qantas annual report also cites that the effect of increased competition in the
Australian market, as well as its substantial investment into restructuring have been
significant contributors to the loss, the latter, referred to as their Transformation
Program, they strongly consider as their path forward to future profitable success.

Overall observations of Qantas

The most immediate observation of Qantas is its net loss of the FY. Within the groups
that make up Qantas we see mixed performance with some running profit, but
obviously, given the net position, that most are running at a loss. Importantly in that
regard, it is not just one line of business suffering loss, and those incurring losses are
the primary operating businesses of domestic and international passenger transport.
In regards to passenger transport we see a slight increase in passenger numbers per
year, but flat revenue indicates prices have dropped, lower cost services have been
generating the passenger traffic more than the higher cost services such as
international flights, or a mix of both. We see this in terms of degradation of the
international line of business margins, which can most likely be attributed to increased
international carrier competition.
One of the biggest influencers on the Qantas balance sheet is the write down of value
of the asset fleet. This has been significantly impacted by the variation in the foreign
exchange value of the Australian dollar ($AUD). Many of the aircraft in the Qantas fleet
were purchased at a time when the $AUD was low compared to the $USD and other
currencies - around the $0.70 figure. In June 2014, with the $AUD just under parity with
the United States dollar ($USD), the saleable value of the fleet is less than its
depreciated value from the purchased cost and therefore the reduced value on books of
over $2.2 billion.
The annual report also discusses the increase in fuel price as a significant cause of the
lack of profitability. According to IndexMundi data (diagram 1) however, the graph
below for the highlighted reporting period shows the fuel price is more the 10 per cent
less than in previous periods which seems to contradict Qantass statement. The
offset that does exist to support the Qantas statements is that in comparison to the
previous reporting periods, the dollar has declined (diagram 2) and therefore $1AUD
does buy less than previously and so we do see an increase in overall increased fuel
cost.

Diagram 1: Fuel price from July 2013 June 2014

Source: http://www.indexmundi.com/commodities/?commodity=jet-fuel&months=60

Diagram 2: $AU tracked against $US from July 2013 June 2014
Source: http://www.ozforex.com.au/forex-tools/my-fx-dashboard

The most significant occurrence of which to take note however is that of the costs of
the transformation programme, and of this we see the significance of four different
aspects.
1.

Reduction in employees. This reduces the overall operating cost of the company,

but comes with a short term cost of paying redundancies and related costs of workforce
reduction.
2.

Reduction in maintenance facilities. This again reduces operating costs by

having fewer facilities to maintain with their related costs. This is obviously hand in
hand with the employee reduction but also means a reduction in leases, tooling, and all
of the infrastructure that goes in to aircraft maintenance. Similar to employee
reduction, this long term cost saving, comes at some short term cost to effect the
transition such as paying out costs on breaking leases, loss of value of tooling and
equipment disposals, etc.
3.

Age reduction of the aircraft fleet. While the fleet number has not changed,

Qantas has undertaken a modernisation programme where aging aircraft and engines
removed from the fleet and replaced with new/newer aircraft and engines so as to bring
down the average age of the fleet. There has also been a reduction in the type of
aircraft held in the fleet. These two factors again are related to the reduction in
maintenance facilities in that newer aircraft need less heavy maintenance, and the
reduction in the variety of the fleet facilitates optimisation of the support resources.
Changing old for new aircraft however also comes at a cost as aircraft (and engines)
will have been purchased or leased for quite likely longer periods and therefore the
transition requires short term investment for the long term benefit. This modernisation
of the fleet also comes with two other benefits in ensuring that customer satisfaction,
comfort and in-flight facilities are of the highest achievable standard and not getting
tired or outdated, as well as reduced fuel consumption of newer more efficient engines,
therefore reducing future fuel costs.
The other notable observation we make with Qantas is that there is a clear intention to
protect the cash position, across all the change over a couple of years maintaining a
quite consistent $3B.
So overall while we see flat revenue for the period, we see a decline in financial
position overall due mostly significantly to the restatement of fleet value, and
investment in to the transformation programme.

4.

New and improved airport facilities. The addition and upgrading of lounge

facilities is also a direct investment in terms of ensuring customer satisfaction.

Overall observations in relation to Virgin.

With Qantas, over the three year analysis period, we see a reduction in asset value and
an investment into changing the cost structure, whereas over the same period with
Virgin we see an investment into assets to grow the fleet and increase their asset base,
as well as taking on additional staff for growing future revenue. Both companies have
run at a loss for the financial year, but for different reasons.
Across the same period of 3 financial years, Virgin was exposed to the same market
conditions as Qantas and therefore was exposed to similar forex impacts and fuel prices
- the same factors Qantas has commented that effected its profit margin on operations.
Virgin over the period did see a rise in revenue of 9.9 per cent against flat revenue for
Qantas. This would seem to be a preference for the brand/carrier as much as anything
with Qantas having been quite embattled in the media over the period whereas Virgin
seemed to attract positive favour (Collins, 2014).
With Qantas we saw a very consistent maintenance of the cash position. With Virgin
we see variation in cash but a very consistent maintenance of the debt performance,
keeping the ratio of total liabilities to total assets at a very consistent 0.77. As Virgin
invests in expanding their fleet, they are keeping this at a very consistent value
indicating that they consider this the maximum risk ratio they are willing to allow. The
investments Qantas have made, show a variation in this ratio, most notably in 2014
where it has risen to 0.835 - an increase in risk for Qantas but clearly one intrinsic to
their transformation process to improve their long term outlook. This will have been
adversely impacted by the restatement of the asset value and so we would expect to
see that this as a spike in debt performance and only transitionary.

Observations in respect to a longer term Qantas history.

Apart from a comparison to Virgin in this current timeframe, we have also looked at a
historical perspective of Qantas, going back 15 years to the financial year ending June
2000 where Qantas was achieving some of the highest industry shareholder returns.
In Year 2000, the combined Qantas fleet was 147 aircraft at a value of $12 billion,
compared to June 2014 with a fleet of 300+ aircraft valued at $20 billion in 2013. Both
the fleet and its value have both broadly doubled in those years. In 2000 however
Earnings Before Interest and Tax (EBIT) was considerably higher, even without factoring
inflation over that time, reflecting a considerably higher return on assets ratio and EBIT
margin. Debt performance then was a similar ratio to the current value. We see a
contrasting focus to the current management regime in that cash at that time was
negative despite the overall positive performance, being in stark contrast now to
maintaining a strong positive cash position.

Further Analysis
On Time Performance - Qantas cite their operational performance as leading the
industry. The government Dept of Infrastructure captures this performance for on-time
departures, arrivals, and cancellations equally across all participants, and while Qantas
leads arrivals, is mixed on other statistics so we don't find any compelling advantage in
favour of Qantas in this regard.

Diagram 3: A table detailing the on-time performance for the year ending 31 December, 2014
Source: Department of Infrastructure and http://bitre.gov.au/statistics/aviation/otp_annual.aspx

Diagram 3 above shows that Qantas outperformed Virgin Australia in on-time

performance and looking at historical data, we can see that Qantas has maintain this
performance record over the past five consecutive years. QantasLink and Jetstar
however did not exceed comparative Virgin brands, thus our assessment of a mixed
performance.

Debt- In the July 2013-June 2014 period, Qantas requested financial assistance in the
form of a Commonwealth debt from the Government. This was widely criticised by
Virgin who claimed it should also benefit from any government assistance. Qantas
however claims that it is unable to benefit from foreign investment due to the Qantas
Sale Act and therefore entitled to the assistance. The Qantas Sales Act was
subsequently altered this year to allow the company to attract overseas investors on its
international arm.

Profitability - According to the International Air Transport Association, despite falling

costs driven largely by technology innovation, most airlines have failed to return a
profit over their business cycle of 8-10 years (IATA.org). Overall margins across the
entire industry are very poor compared to other industries which led to Richard
Bransons now famous quote, If you want to be a millionaire, start with a billion dollars
and launch a new airline (Greenberg, 2001).
Qantas clearly isn't profitable at present, but neither is its primary competitor, Virgin,
and the effects of exchange rates, fuel prices, and competition are consistently evident
in their effect across the industry. Qantas posted a statutory loss for the year of $2,843
million versus a small profit in the previous financial year of $2 milion. Virgin in the
same period posted a loss of $355.6 million.

Gross Profit Margin The gross profit margin for Qantas is -26 per cent, while
Virgin is -9 per cent. Both figures are negative reflecting a loss from the cost of
operating being higher than its earnings.

Return on assets This indicates how efficient the companys management is at

utilising its assets to generate earnings. To show this factor on a comparative basis in
the industry, we have calculated Return on Assets as EBIT/Total assets. Given the
negative position for the period, RoA is at -2.54% (EBIT of -$440 million/$17.3 billion)
with Virgin similarly at -4 per cent, it therefore reflects poorly of the current state.

Debt performance measuring the extent of its leverage, comparing total

liabilities to total assets, it shows in this financial year with Qantas as 83% ($14.5 billion
total liabilities / $17.3 billino assets) and Virgin as 78%. This shows its financial risk is
high for both airlines, with Qantas at a slightly higher risk, however given the closeness
of these figures, it suggests this is fairly typical currently for the airline industry as
8

would be expected given the high value of assets required for an airline. There is a
spike for Qantas this year with the ratio being at 0.72 and 0.71 in the previous financial
years of 2012 and 2013 respectively.

Current ratio As a measure of the companys liquidity and margin of safety, it

requires management to maintain a high level of control in order to allow for the
inevitable unevenness in the flow of fund through the current assets and current
liability accounts (Anthony, 2011). It is a key figure used by financial institutions to
assess a companys ability to pay its creditors. Qantas has a ratio of 66 per cent with
Virgin at 64 per cent, which appears to be a suitable risk for the airline industry. Current
ratio is calculated by dividing current assets ($4.932 billion) by current liabilities (7.525
billion).

Price/Earnings ratio This ratio involves figures not directly controlled by the
company and is an important ratio for current and future investors (Anthony, 2011). By
looking at the market price per share over the net income per share which is -$1.285.
Therefore shareholders would clearly see this as an unattractive investment in the
short-term.

Investments
In the specified period, Qantas has made significant investments of new fuel efficient
aircraft which have therefore reduced their fuel requirements and high maintenance
activities which should offer financial benefits over the longer term. In addition, these
aircraft feature improved interiors offering extra customer comfort which have been
well received by its customers, reflected in its record high customer satisfaction scores.
It also closed its heavy maintenance facility through outsourcing and the retirement of
older aircraft.
At the same time, Qantas has retired off many of its old aircraft or ended leases
reducing the average fleet age which simplifies the number of varying fleets that need
maintenance support. Typically, these older fleet also suffer from high maintenance
activities which are now eliminated.
9

However its $2.8 billion loss is largely due to its $2.6 billion write-down in the value of
its fleet to reflect what it believes is its true value in todays market and which it says is
due to its decision to split out its international division from its other operations. By
separating this division it can attract foreign investment following changes to the
Qantas Sale Act by the government. The company has said that future depreciation
expenses will be $200 million per year lower. Given it is not planning to sell these
aircraft, this loss, can be termed as a paper loss, with its loss sitting at $646 million.
While this is still the largest loss in Qantas history, it helps to look at its loss in perhaps
a truer light.
Qantas undertook an overall program of improvement, including updating its lounges
on key routes, which again, directed reflected its high customer satisfaction scores. Its
Transformation program is delivering results - $204m in benefits in 2013/2014 (H2). It is
targeting $2b in benefits by end of year 2016/2017. Combined with fuel burn initiatives
and previous transformation, it has delivered $440m in cost reduction in this period.
Conversely, Virgins assets have grown in the same period and so have employee
expenses so it seems they are building and growing the company and its capabilities
with investments in its fleet and staff. We feel they may be doing this in order to up
their competitiveness against Qantas, but given their loss, they may have to also
reduce some of their costs to get their figures back in the black.
Qantas on the other hand is optimising and reducing its fleet and staffing, normally not
a sign of a healthy business, yet in the context of its transformation program, is a
necessary correction enabling it to reap the benefits.
The rivalry between Virgin and Qantas and indeed, given the global environment within
which they operate, with overseas airlines, is highly intense. This competition has
driven pricing decisions leading to seats priced at marginal costs per passenger
resulting in diminishing returns. In addition, air travel is largely seen as a discretionary
spend, which increases price sensitivity.

Overall assessment
The overall assessment of the Qantas position depends on the evaluation of the Qantas
transformation programme. Standard financial texts would suggest that a company
increasing its assets would be representative of it improving and that a company
reducing its asset value is in decline. However the decline in asset value and increase
in costs due to the transformation programme seems to be an investment into
correcting the financial balance of the company. A point in time analysis as at the time
10

of this 2014 financial report would not paint a favourable picture of Qantas and would
question its future. If the transformation programme is credible, then it is a good
repositioning of the company for future years.
A strong indicator that this is indeed the case is the news in early 2015 that two credit
agencies, Moody's and Standard & Poor, have both lifted their rating assessment of
Qantas.
Qantas shareholders have not enjoyed strong share price for some time and no
dividends. The repositioning occurring is a healthy change and leans back towards a
financial structure more reflective of year 2000 when shareholder value was high.
Shareholders appear satisfied in the companys statement that it will return towards
profit with shares rising strongly following the announcement of its half yearly financial
figures (Colgan, 2014).
As with all reports, financial figures only provide part of the story. Much of Qantas
success in previous years has been down to its reputation for being a high-quality, safe
and reliable service (Fisher et al, 2006). Its transformation program has led to the
company renewing its focus on customer service and satisfaction which led to record
customer satisfaction levels achieved within its Domestic, International, Loyalty and
Jetstar divisions. This high level of customer service and satisfied customers along with
good management are what will help to drive it towards a profit in coming years.

References
Anthony, RN, Hawkins, DF, Merchant, KA 2011, Accounting: Text and Cases, McGrawHill/Irwin, New York, NY
11

Colgan, P 2014 Qantas shares rose 7% after it booked a record $2.8 billion loss,
Business Insider, 28.08.14, seen on 28.07.15,
http://www.businessinsider.com.au/qantas-posts-statutory-loss-of-2-8-billion-2014-8
Collins, B 2014 Junked: Moodys has downgraded Qantas, Business Insider,
09.01.2014, seen on 02.08.15, http://www.businessinsider.com.au/junked-moodys-hasdowngraded-qantas-2014-1>
Fisher, G Hughes, R Griffin, R Pustay, M 2006, International Business: managing in the
Asia-pacific, 3rd edition, Pearson Education Australia, Frenchs Forest.
Grimson, M 2014, Qantas Versus Virgin: The fight for Australias skies, ABC News, seen
26.07.15 http://www.abc.net.au/news/2014-02-26/qantas-versus-virgin-the-battle-foraustralian-skies/5286570
P. Greenberg, Why JetBlue will be different, MSNBC as cited in Gittell and OReilly
(October, 2001) Harvard Business School Press Reprint No. 9-801-354
IATA, Fuel Price Analysis, seen on 01.08.15
https://www.iata.org/publications/economics/fuel-monitor/Pages/price-analysis.aspx

12

Table of comparison values

Qantas
EBIT
Total assets
market price per share
earnings per share
sales
total liabilities
Cash at end of period

2000
$
816,200,000
$
12,007,100,000
$
1.54
$
0.428
$
9,106,800,000
$
9,142,700,000
-$
204,900,000

2012
$
265,000,000
$
21,178,000,000
$
1.10
-$
0.108
$
15,724,000,000
$
15,289,000,000
$
3,398,000,000

2
$
3
$
2
$
1
$
0
$
1
$
1
$
2

0.07

0.01
10.19
1.69%

0.72

3,398.00

2012
$
151,000,000
$
3,995,200,000
$
0.39
$
0.010
$
3,919,500,000
$
3,065,500,000
$
802,600,000

39.00
3.85%

2
-$
3
$
4
$
0
-$
0
$
4
$
3
$
5
0
1
-0

0.77

Return on assets = EBIT / total assets

Price earnings ratio = market price per share/
earnings per share
EBIT margin = EBIT / sales *100
Debt performance = total liabilities/total assets

3.60
8.96%

Cash at end of period = $

0.76
204.90

Virgin
EBIT
Total assets
market price per share
earnings per share
sales
total liabilities
Cash at end of period

6
2

Return on assets = EBIT / total assets

0.04

Price earnings ratio = market price per share/

earnings per share

EBIT margin = EBIT / sales *100

Debt performance = total liabilities/total assets

13

Cash at end of period = $

802.60

14