QANTAS AIRWAYS LTD ANNUAL FINANCIAL ANALYSIS
1. Executive Summary
Qantas Airways Ltd is a transportation company that was established in Winton, Queensland 1920. It operates through two airlines, full-service carrier (Qantas) and low-cost carrier (Jetstar), and in three services including domestic, regional and international service (Bloomber.com n.d.). The company has a general Chief Executive Officer, Alan Joyce, with each airline and service being separately headed by different CEOs.
The table below presents its current executive and auditors.
This paper aims to analysis the 2018 and partly 2017 financial report of Qantas Ltd. The paper will further provide a brief definition of corporate governance and the responsibility of key corporate governance figures as well as providing sources of short-term finance and recommendation for the best company for investment between Qantas Airways Ltd and Oz Spirits Ltd.
| Name | Position |
| Leigh Clifford AO | Chairman |
| Alan Joyce | CEO |
| Tino La Spina | CFO |
| Andrew David | CEO (Qantas Domestic) |
| Gareth Evans | CEO (Jetstar Group) |
| Alison Webster | CEO (Qantas International) |
| Olivia Wirth | CEO (Qantas Loyalty) |
| Maxime Brenner | Member (audit committee) |
| Richard Goodmanson | B.O.D |
| Richard Goyder | Member (audit committee) |
| Jacqueline Hey | Member (audit committee) |
| Belinda Hutchinson AM | B.OD |
2. Corporate Governance
Corporate governance is the term that is used to describe policies, procedures, customs, laws and regulations, and institutions that direct the manner through which corporations and organizations administer, act and control their activities (Khan 2011). The main aim of corporate governance is to help an organization achieve its objectives by managing stakeholder relationship including the shareholders and the directors. Additionally, it also manages individual accountability issues through various mechanisms and thus reducing principal-agent challenges in a corporation.
Effective corporate governance is of high significance to an organization as it helps it create an efficient business environment that is of importance to the nature through which a firm gains competitive advantage in competitive financial markets. It is as well important to well-established economies and in enhancing entrepreneurial success. Companies can achieve corporate governance by maintaining the balance between control and ownership, and also in the stockholder’s interest. This creates a positive working environment between the stakeholders and the managers as well as reducing agency related challenges in the organization.
The board of directors, the management and shareholders are the key figures in corporate governance, with the responsibilities of the board of directors being governance, particularly appointing chief executive officers, ensuring the firm is accountable to government agencies and investors and also overseeing the financial well-being of the corporation (Business Roundtable 2016). The management of a company, headed by the CEO frequently informs the board of directors on the well-being of a firm. It sets, manages and executes the plans and strategies of an organization. These include planning, risk control and management, and financial recording (Business Roundtable 2016). The shareholders on the other hand ensure the company has an effective governance set-up and also hire auditors and directors (Oecd 2016).
3. Qantas Ltd. Environmental Sustainability Plan
Qantas Ltd is determined to reduce its emissions to the environment to improve environmental sustainability (Qantas.com n.d.). The corporation has designed a sustainable aviation plan through various initiatives, which include environmental protection against pollution, combating climatic risks, carbon balancing, and sustainable insights, which aims to reduce its waste and carbon emission to the environment by 50% in 45 years (2050 from 2005).
| Target (By/from 2020) | Delivery Strategy | Progress (Financial Year 2019) |
| The company targets a 1.5% growth in annual fuel efficiency consumption. | The company plans to achieve this target by maintaining a fuel efficiency standard achievable through modernization of its fleets and other operational activities. It should have replaced B747s by B787-9s by 2020. | The firm has seen a 9.7% improvement as of 2009. |
| Even out its net international aviation discharges via carbon neutral industry growth. | The firm plans to achieve this target by maintaining fuel efficiency, through Carbon offsetting and biofuels applicable in the aviation industry. It has designed a scheme (ICAO CORSIA) to help reach the target. | This environmental sustainability plan should commence in 2020. It has though reported its international discharges. |
| Cut electricity consumption by 35%. | Investment in new and advanced technologies as well as improvement in energy, water, and waste operation activities. | 33.3% achieved so far. |
| Reduce water intake by 20%. | By the financial year 2019, it has achieved approximately 18.2%. | |
| Lower waste-to-landfill by 30%. | The company has reduced its waste-to-landfill by 36%, 6% more than its target for 2020. |
Source: Qantas.com, (n.d).
Social and environmental performance of a company greatly influences the decision of investors to invest in a company. They basically analyze issues like energy consumption and transition, climatic risks and how they influence investment in the short-term and long-term. It is important to engage potential investors in matters pertaining to its environmental and social performance to meet their anticipations.
4. Qantas Ltd. Ratio calculations
| Ratios | 2018 | 2017 |
| Profitability Analysis | ||
| Profit Margin | 10.47% | 9.90% |
| Return on Assets (ROA) | 9.96% | 9.37% |
| Return on Equity | 26.14% | 25.09% |
| Asset Efficiency | ||
| Asset Turnover | 0.45 times | 0.47 times |
| Capital Structure | ||
| Debt ratio | 78.77% | 79.44% |
| Market Performance | ||
| Earnings per share | 0.56 cents | 0.47 cents |
| Dividend per share | 0.17 cents | 0.14 cents |
| Working capital | ||
| Debtors Days | 20 days | 21 days |
| Liquidity | 0.49 times | 0.44 times |
5. OZ Spirit Ltd Ratios
| Ratios | 2018 | 2017 |
| Profit Margin | 8.10 % | 7.45% |
| Return on Assets (ROA) | 7.50% | 7.33% |
| Return on Equity | 21.50% | 22.70% |
| Asset Efficiency | ||
| Asset Turnover | 0.70 times | 0.67 times |
| Capital Structure | ||
| Debt ratio | 83.50% | 85.60% |
| Market Performance | ||
| Earnings per share | 0.45 cents | 0.41 cents |
| Dividend per share | 6 cents | 5 cents |
| Working capital | ||
| Debtors Days (full days) | 9 days | 12 days |
| Liquidity | 0.91 times | 1.10 times |
6. Reason for Rounding in Financial Reports
Based on the financial report statement of Qantas Ltd., the financial values are rounded to the nearest million dollars pursuant to ASIC Corporation instrument 2016/191. They are rounded in that manner because the figures present financial statement report for a financial year after June 30, 2016.
7. Financing the Business
Businesses can obtain short-term finances from a variety of channels. These include;
a. Trade Credits
These are basically the funds that a business owes its suppliers after purchase of products on a particular date, and paying for them on a later date. The source of funding in many cases does not entail interest charges unless the payment is late.
b. Commercial paper
These are unsecured short-term loan notes, which in many cases mature in about nine months, though they can also be accessible in up to 3 months. They are negotiable, have interest rates, and can be sold on the discount market even they mature.
c. Corporate Bonds
They are long-term bonds offered with the sole purpose of raising debt finance. They have a level of liquidity, which is dependent on the cumulative volume provided by the issuing entity and a level of risk that depends on its terms and the issuing entity. They are also issued based on credit ratings.
d. Government Bonds
Always issued by the government and have lower risks when compared to corporate bonds. They are mainly provided in huge volumes, have a higher liquidity ratio compared to corporate bonds and can be traded in money markets.
e. Certificate of Deposit
This is a source of short-term finance that is offered by banks and at a fixed term and interest rate. They are negotiable and have secondary markets, where entities can trade them on the discount market.
f. Bank Credit
This type of short-term fund is offered by banks to business organizations through loans, discounted bills, overdraft, and even cash credit. The organization that receives the funds can draw it through installments or even at a single time.
8. Benefits of offering credit sales
Business activities are mainly done in competitive settings, with all of them intending to achieve cash sales. It is though not always possible, as competitors can at times offer goods and services to customers on credit and thus gaining competitive advantage. Offering goods and services has positive and negative effects and a business entity must consider both before taking the risk. Stated below are some of the advantages of selling on credit terms.
a. Improve sales
This depends on whether an organization’s competitors are as well as offering goods and services on credit. In case they are not offering credit terms, an organization most definitely will experience an increase in sales (Kappel 2017). This is the opposite when they also offer credit terms.
b. Improving Loyalty of Customer
An organization that sells on credit proves to its consumers that it trusts and respects them. Customer trust is an important business element when a business seeks to build loyalty among its consumers (Kappel 2017). They will reward the trust and respect accorded to them by the company through continued corporation with the firm.
c. Improving Competitive Advantage
Offering goods and services on credit to a firm’s customers helps the firm to remain competitive, particularly when the competitors have already implemented sell on credit strategies (O'Brien 2019). Moreover, customers also favor the opportunity of acquiring services before making payments. This works best when competitors are not selling on credit.
d. Boosting an Organization’s Reputation
Through offering credit sales, customers and even business rivals understand that the firm is financially stable, with access to enough working capital and cash flow (O'Brien 2019). This improves the reputation of the firm within the industry and among its clients.
9. Financial Ratios Analysis
a. Profitability Ratios Analysis
Qantas Ltd experienced an increase in profitability ratios between the years 2017 and 2018. They all exhibited an increase in profit margin, which means that all the companies had an increase in total assets. It is basically understood that increase in profit margins is directly linked to the performance of an organization’s assets, specifically Return on Assets.
b. Asset Efficiency
Oz Spirit Ltd exhibited a marginal increase in assets turnover (0.67 in 2017 to 0.70 in 2018). Qantas on the other hand showed a drop in asset turnover (0.47 in 2017 to 0.45 in 2018). From these figures, the capacity of Qantas to generate sales from its assets dropped when compared to the previous year. This is contrary to Oz spirit which improved by 0.03 in asset sales generation.
c. Capital Structure
For the two financial years compared, the companies show a debt ratio of more than 0.5 or 50%. This means that the assets of all the companies are heavily financed by their debts/liabilities.
d. Market Performance
Both companies were on an earnings per share increase from 2017 to 2018, with Qantas improving from 0.47 to 0.56 and Oz Spirit 0.41 to 0.45. This improvement indicates that both the companies are financially stable and can easily reinvest or offer its stakeholders dividend payments. This is further proved by their increased dividend per share.
e. Working Capital
Qantas has a lower liquidity compared to Oz, which indicates that it heavily relies on its inventory and other assets to settle its short-term debts/liabilities. Oz had a liquidity of 1.10 in 2017, which indicated that it had a lot of cash at hand and therefore must have had issues in collecting its account receivables. From their liquidity, Oz Spirit Ltd is financially healthier than Qantas Ltd.
10. Recommendations to an Investor
This report recommends Oz spirits limited as the best business to invest because of the following reasons;
- From their working capital. The liquidity ratio exhibited by Qantas is lower than that of Oz. This indicates that Qantas will struggle more than Oz in paying its short term obligations. For Qantas to improve its liquidity, it must raise the value of its current assets and lower current liability value and reduce creditor payments.
- From their market performance. In 2018, Oz had a 6 cents dividend per share while Qantas had a 0.17 dividend per share. An investor will make a lot of profit with Oz based on their current dividend per share when compared to investing with Qantas.
- Asset Efficiency. Oz saw an improvement in its asset efficiency through an increased asset turnover of approximately 0.03. This is contrary to Qantas that dropped in its asset turnover. This can mean that Qantas might be having management or production issues while Oz is efficiently utilizing its assets.
- Oz had an approximately 9 debtors days while Qantas had 20 debtor days in 2018. Oz will collect its debts from customers twice before Qantas collects the first debt, and therefore Oz portrays better cash flow management. It can also be argued that the customers of Oz are well placed in terms of financial positioning compared to the clients of Qantas.
11. Conclusion
This report provided an analysis of Qantas financial report 2018 and partly 2017, as well as ratio analysis of Oz spirits Ltd. The two companies are financially stable and have made tremendous financial improvements between 2017 and 2018. Contrary to financial growth, Qantas Ltd has made a significant impact in creating a sustainable environment through its various sustainable environment initiatives. As of now, it has achieved close to 50% of its 2020 target and still on course to 2020. This is a major boost to the Australian Aviation industry as it will help lower aviation-related emissions and thus moving Australia closer to achieving the global goal of a sustainable environment.
Analyzing the financial capability of the two companies, it is evident that Oz Spirit is financially healthier compared to Qantas Airways Ltd. Oz Spirits have the best liquidity, and asset turnover and a higher dividend per share. It also does not over-rely on its inventories to finance its liabilities. This, therefore, means that an investor will highly benefit from Oz in short and long-term investments.
12. Micro-Credential
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Khan, H., 2011. A literature review of corporate governance. In International Conference on E-business, Management and Economics (Vol. 25, pp. 1-5).
O'Brien, L. (2019). THE PROS AND CONS OF EXTENDING CREDIT | AnytimeCollect. [Online] AnytimeCollect. Available at: https://anytimecollect.com/pros-cons-extending-credit/ [Accessed 27 Sep. 2019].
Oecd, 2016. G20/OECD Principles of Corporate Governance. OECD.
Qantas.com, (n.d.). "OUR COMMITMENT TO ENVIRONMENTAL SUSTAINABILITY". [ebook] Qantas Ltd. Available at: https://www.qantas.com/infodetail/about/environment/our-commitment-to-environmental-sustainability.pdf [Accessed 27 Sep. 2019].