Business Evaluation and Analysis Oz Assignments

Business Evaluation and Analysis oz Assignments

Business Evaluation and Analysis Oz Assignments

Introduction

Qantas airlines group, the mother institution to Qantas, Qantaslink and Jetstar brands, is the largest transporter in Australia and definitely, the most premium service in the continent. Qantas which stands for Queensland and Northern Territory Aerial Services was established in 1920 and offers a generic air travel across the domestic and international markets. It enjoys definite competitive edge in the domestic market and some edge in the global scenario but recently with Middle Eastern airliners and other major pioneers rising up to the competition in Qantas’s service zone, they are in need of analysing the situation to turn it towards their benefit. 

a) Analyse the competitive forces facing Qantas, using the ‘five forces’ framework

The Five Forces model developed by Porter helps organisations to assess the prevalent competition in the market and understand the position of the company in question with the help of the tools prescribed in the framework (Wecket al. 2013). These are:

1.Supplier Power: This tool determines how easily the suppliers can drive the prices up in regard to the organisation in question. This depends on the number of suppliers that are available to the company in each area of input, the salience of the raw materials that they supply the amount of control that is exercised by these suppliers, their overall strength and the total cost incurred on changing supplier preferences. The tool dictates that the supplier power is especially high when there are fewer suppliers and hence, fewer options available to the company (Fleisher and Bensoussan, 2015). The preeminent sustainable fuel supplier of Qantas is SkyNRG and as a member of the Sustainable Aviation Fuel Users Group or SAFUG, Qantas is entitled to use biofuel in accordance to a range of criteria which is not fulfilled by most of the conventional fuel suppliers of Australia. SkyNRG therefore, exercises dominant control of Qantas and subsidiary brands.

2.Buyer Power: This tool determines how easily the buyers can bring down the prices based on overall and exclusive demand. Similarly as before, the number of buyers in the market and the impact of each individual buyer on the overall brand reputation and value determine the totality of buyer power i.e. if a business debacle can cause them to imminently switch from the service of the concerned company to that of another competitor. If the buyer number is few and they are opinionated and not particularly loyal, then the buyer power is substantial and they can dictate business terms (Vasighet al. 2014). Australian buyers are not particularly spoilt for choices when it comes to airline travel. So, considering the airline industry in particular, Qantas enjoys a reasonably powerless clientele. However, considering the entire transport industry full of feasible choices, the buyers are probably in a position to dominate the competitive position of Qantas.

3.Competitive Rivalry: The number of competitors and their capability in the market determines the position of this tool (Bodieet al. 2014). Qantas serves two divisions of the market, domestic air travel and international air travel. In the domestic market, Compass Airlines, Impulse Airlines and Virgin Blue have developed fair market share. The number being high, however, the only significant expansion of market control has been exercised by Virgin which has limited the growth of Qantas to some extent. Internationally, there is much pressure from the Asian and European markets where the competitors like Emirates and Singapore Airlines have expanded quickly and efficiently thereby limiting margins and hence growth (Sarina and Wright, 2015, p.690).

4.Threat of substitution: This tool will determine the amount of uncertainty that exist within the loyalty of the customer. It addresses the different ways in which the existing customers can find an alternative to the service that is provided by the organisation. For example, the core industry of Qantas is transport and the requirement can be offset by the customers in a number of ways (Merkert and Pearson, 2015, p.262). The weakness of power results when there are easy, abundant and viable alternatives to the core competencies represented by the organisation. Australia has very limited scope of domestic long-distance correspondence due to the poor availability of fast trains and efficient railway systems. There have been a number of proposals regarding High-speed rail but it has never been developed in reality. Therefore, client dependence on air travel is high and the alternatives of the service are few.

4.Threat of New Entry: The competitive edge is also heavily dependent on the situation of the market i.e. whether it allows new players to enter the market and how much it costs and what time it requires for the same. Australian economy has significant barriers for the entry of new airlines in the market and hence, it has long been a locked market for the airline industry. There have been three or four airlines ruling the market and since there have been acquisitions in order, Qantas and Virgin almost make up the entire share of the airline market in Australia. There is very limited scope and hence Qantas does not face any immediate threat from potential new entries (AshwiniNandet al. 2013, p.906).

Business Evaluation and Analysis oz Assignments

b) Conduct a SWOT evaluation of Qantas’ competitive strategy.

1.Strengths

1.Qantas is the pioneer of Australian airlines in both the domestic and international airline sectors. As such, it enjoys a considerable backing from the Australian commonwealth government that is not provided to the competitors (Dey, 2016).

2.Qantas enjoys a position of monopoly in the Australian market. With the collapse of Ansett Australia, which used to be the main domestic competitor, Qantas revived as much as 90% of the domestic market share.

3.Qantas is spearheaded by a large fleet which has been under augmentation since its very inception. Therefore, the size of Qantas Airlines, both in numbers and revenues generated, seems to be a huge strength for the company as of today (Dey, 2016).

4.Qantas is one of the oldest and most reliable brands in international air travel. Customers prefer Qantas airlines to other competitors in terms of its high reliability.

5.Qantas serves more than 20 international and a large number of domestic destinations. Further, it delivers connecting flights from the major connecting airports of the world (Terziovski, 2014, p.252).

2.Weaknesses

1.Qantas is concentrated entirely around the Australian and Asian continents and competitors have limited growth in Europe and the Americas.

2.Qantas suffers from frequent employee issues which lead to inefficient decision making in the management level.

3.Opportunities

1.Australian market has not been the typical opportunistic pool for new entry of the international airlines. Therefore, the market has not been tapped majorly by competitors. Therefore, a huge opportunity for Qantas exists to seal the client base in Australia so as to prevent entry by gaining a major share of the market (Yunna and Yisheng, 2014, p.801).

2.As more and more destinations, especially in Asia, are being converted to connecting hubs, Qantas possesses the opportunity to tap into these airports as major carriers.

3.Qantas has the opportunity to develop partnership with carriers around the world to serve more remote destinations and thereby occupy some amount of the market share in places yet served by it.

4.Threats

1.Worldwide aviation fuel prices are on the rise. Qantas has pledged to drive its air services on sustainable fuel which poses a lot of pressure on cost.

2.Labour costs are rising monotonically. Cost of staff is a big threat when it comes to overall costs incurred by Qantas (E. Dobbs, 2014, p.36).

3.There is considerable pressure form the start-ups in Australia as also from the Southeast Airlines.
c) What has been Qantas’s corporate strategy across its domestic and international divisions since 1992?

How has that strategy changed in response to market changes?

Economic environment: The performance of Qantas has been seriously affected by the global financial crisis. In order to ameliorate the inclement financial conditions, Qantas had announced that it would cut down around 1750 different jobs. The rise in the prices of aviation fuels has driven Qantas to pull up the airfares and thereby participate in hedging initiatives to mitigate the risks attached to the supply crisis. This shows that the corporate strategy of Qantas is highly responsive to the economic performance (Forsyth and Seetaram, 2016, p.143).

Social Environment: Qantas has faced substantial environmental and social issues as it generates 955 of its pollutant carbon footprint from its flying operations (Nolan et al. 2014, p.130). Qantas has pledged to reduce its emissions profile by as much as 50% before 2050 which indicates that the social strategies are proactive is dealing with changing market scenarios. Also, Qantas has embraced the regulations of SAFUG to use standardised biofuel thereby improving its environmental and social values.

Technological environment: Airline is ardently related to, and therefore highly dependent on, technological advancements. Qantas believes sincerely in forward thinking and it has paved the way for innovation. Qantas encourages its employees to develop and apply new and novel ideas and implement them positively in their work. In 2006, Qantas pioneered the way for the successful implementation of the Global Landing System to land its aircraft. The operations at Qantas are extremely responsive to the technological trends of the sector (Yin et al. 2015, p.220).

d) Identify any two accounting policy choices that you think should be closely watched by the auditors and analysts for a company in the airline industry.

The two accounting policy choices selected for critical analysis and careful evaluation by the auditors in the airlines industry are listed as follows:

1.Revenue recognition: Air traffic liability is the ticket sales which have not yet been recognised as revenue. Considering the customer patterns and historical sales, the trend shows that the liability can pose genuine problems in accounting the financial performance of the airline companies. Qantas therefore follows a crisp policy of revenue recognition. Income recognition procedure and policy has seen changes over the years to account for the change in currency structures, depreciation etc. to account for international travel sales and revenue recognition.

2.Property and Equipment: In airline, the estimation of asset lives and residual values of the aircrafts, other machinery recognition etc. is of prime importance and is considered key judgments. These assets must be accounted for, to identify and mitigate possible impairment and to identify depreciation of asset values. Accounting also serves to estimate the cash flows in the future generated by an asset or a group thereof (Jiang, 2013, p.22). 

e) Evaluate Qantas’s financial performance and financial position at the end of 2013.

Over the financial period from 2000-2013, the consolidated return on equity or ROE of Qantas and its subsidiary brands fell from 18.1% in 2000 to 6.5% in 2003. The ROE took a rising trend up to 16.9% at the end of the 2008 fiscal year before it took a big dip for the entire period of the next five years keeping a level of less than 5% for all the years 2008-2012. At the end of 2012, the ROE had dipped to -4.1% which matured to 0.1% in 2013.

The Gross Profit or GP margins declined substantially in this period as well. Due to increased competition from local airline firms,    Qantas was forced to acquire major shares of other firms resulting in an increase of the net operating assets from $4671.3 million in 2000 to an astounding $11854 million in 2013. In response, the 12.3% ROA in 2000 fell down to about 1.1% in 2013. With the increased investments in the leverage, the debt-equity ratio increased from 63.3% in 2000 to a 109.2% in 2013. Asset turnover decreased overall from 1.31 in 2000 to 1.28 in 2013 following marked variations in the interim period.

f) Evaluate Qantas’s financial performance and financial position at the end of latest financial year.

ROE dipped further till the end of 2014 down to about -91.72% and since then, took a sharp monotonic rise to about 31.07% return at the end of June 2016. This is because of the gradual acquisition of market share away from the local corporations and increasing the local share of the airline markets. Gross profit margins have increased further to $15784 million for a net income of 1,029 million AUD. The liquidity performance changed with a greater debt equity ratio of 1.36 and a financial leverage ratio of 5.13.

g) Analyse the differences and similarities in your findings between 2013 financials and June 2016 financials.

In the years 2013-16 the ROE took an overall uptrend from a mere 0.1% to 31.07%. There have been considerable equity investments in the Qantas brand owing to the gradual edge in competition. The social environment and its response to it have attracted a big herd of investors and it needs to be sustained logically.

As evident from the debt-equity ratios, there have been considerable debts owing to a big supplier pressure in the market when it had pledged to provide pollution free travel for the public (Heikalet al. 2014, p.101). Also, the Jet star prices are significantly low to manage the ratios giving back the investors. Qantas needs to compensate for it by increasing fares for premium travel because Jet star is its most popular brand on account of affordability. The gross profit margins will keep improving further if the supply-demand ratio can be maintained in a sustainable way by dynamically allocating the revenues into further market penetration through the development of partnership with central Asian, European as well as Middle Eastern carriers who own the international market share right now (Easton and Mohanan, 2016, p.36.

Conclusion

Qantas being the flag line air carrier of the Australian commonwealth, it has major advantages under its sleeve. Holding a major market share in the face of cutthroat competition from local carriers in the domestic scene, it still needs to improve on its financial stability by reducing expenditure on various aspects like staff, fuel etc. With increasing price of human resources and aviation fuel, this seems increasingly difficult and needs to be done sustainably in order to maintain competitive edge. Also, since the international market is open and swarming with carriers from across the globe, Qantas is in dire need of partnerships by which it can come out of the localised service area around the Oceanic continent. 

Reference List

Books

Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e.McGraw-Hill Education.

Dey, K., 2016. SWOT Analysis of the EasyJet Airline Company.

Fleisher, C.S. and Bensoussan, B.E., 2015. Business and competitive analysis: effective application of new and classic methods. FT Press.

Vasigh, B., Fleming, K. and Humphreys, B., 2014. Foundations of airline finance: Methodology and practice. Routledge.

Weck, M., Eversheim, W. and König, W., 2013. Production Engineering: The Competitive Edge. Elsevier.

Journals

AshwiniNand, A., Singh, P.J. and Power, D., 2013. Testing an integrated model of operations capabilities: an empirical study of Australian airlines. International Journal of Operations & Production Management, 33(7), pp.887-911.

E. Dobbs, M., 2014. Guidelines for applying Porter's five forces framework: a set of industry analysis templates. Competitiveness Review, 24(1), pp.32-45.

Easton, P.D. and Monahan, S.J., 2016. Review of Recent Research on Improving Earnings Forecasts and Evaluating Accounting?based Estimates of the Expected Rate of Return on Equity Capital. Abacus, 52(1), pp.35-58.

Forsyth, P. and Seetaram, N., 2016. The Future of Australian International Aviation: Liberalisation, Competit