Experiential Learning - Qantas Airways Limited - Admission/Application Essay Example

Number: Paper: Table of Contents Table of Contents 2 Executive Summary 3 Findings 4 Corporate Governance 4 Chief Executive Officer (CEO) 4 Board of Directors 4 Conflicts between Qantas and its stakeholders 5 Financial markets 6 Societal Constraints 9 Risk and return 11 Estimating Historical risk parameters 11 Estimating Default Risk and Cost of Debt 14 Earnings and cash flow 15 Financing sources 17 Dividend policy 17 Discussion 18 Conclusion 19 Summary/Recommendation 20 20 References 21 Appendix 22 Executive Summary The main aim of the case study is to analyze the overall performance of an Australian public listed company, Qantas Airways Limited. It is the largest international and domestic airline that is originally registered as Queensland and Northern Territory Aerial Limited (QANTAS). The company is listed under Australian stock Exchange and the shares are traded in the financial market of Australia. Qantas is referred as the leading long distance airlines in Australia and plays an important role in economic growth of the country. The airlines company has built its reputation by achieving excellence in operational reliability, safety, maintenance, engineering and customer service. Its main business is transportation of passengers with the help of two airline brand Jestar and Qantas. The company also operates in subsidiaries that include specialist markets and airline businesses. The subsidiaries comprise Qantas Frequent Flyers and Qantas Freight Enterprises. Qantas employs more than 33,000 employees within which about 93% lives in Australia. The company is nicknamed “The Flying Kangaroo”, which is reflected in the brand logo. It has captured about 65% market share nationally and 18.7% of international market share. The following report gives emphasis on the performance of the company with respect to corporate governance and many other issues. The risk and return of the company is valued with the help of different frameworks. The cash flow and earnings of the company are examined in order to understand its financial stability. The financing structure is also evaluated in order to understand whether the company is at risk by measuring its debt to equity balance. The dividend payout ratio is calculated to know whether the company offers higher dividend to the investors or not. Findings Corporate Governance Chief Executive Officer (CEO) Qantas Airways Limited was founded in 1920 by Huson, Paul McGinness, Arthur Baird and Fergus McMaster (Qantas Airways Limited ABN., 2014a). This group of founders travelled millions of miles to collect fund for the new venture, where Sir Samuel agreed to finance the venture. With the help of a number of financiers, the founders had successfully served the Australian market with the best airways. The management and ownership of the company are different (Qantas Airways Limited ABN., 2014a). Chief Executive Officer (CEO), Alan Joyce is also Managing Director (MD) of the company. He had served the airlines for the past ten years as CEO, during which he had succeeded to establish uninterrupted operation of airways in Australia and Asia. He has served the company in key positions for 15 years before he became CEO in 2003. His present role is to supervise the actions of every individual in the company and examine the key issues which can create risky situation for its operation (Qantas Airways Limited ABN, 2014b). Board of Directors The Board of Directors of Qantas Airways Limited includes Maxine Brenner, Leigh Clifford, Jacqueline Hey, Garry Hounsell, William Meaney, Paul Rayner, Barabara Ward, Richard Goodmanson and executive teams. Leigh Clifford is appointed as the Chairman of the company on November 2007. Maxine Brenner, Rochard Goodsmason, Jacqueline Hey, William Meaney, Paul Rayner, Barbara Ward and Gary Hounsell play the role of Independent Non-Executive Director in the company (Qantas Airways Limited ABN, 2014c). Qantas Board of Directors has the responsibility to ensure that the airlines major have an ideal corporate governance framework. The framework assures the shareholders that their investment is protected by the company’s commitment and regulations of Security Exchange Commission (SEC). The Board follows the rules and regulations issued by Australian Securities Exchange (ASX) in order to protect the shareholder’s value. Following the principles of ASX, Qantas reveals its primary documents related to corporate governance and information pertaining to commitments of the group. Qantas Group follows all the regulations and laws that are applicable for conducting business by maintaining highest levels of integrity and ethics. Qantas Group Business Practices Document highlights its business practices and values. It also depicts the standards that should be maintained by the employees and stakeholders (Qantas Airways Limited ABN, 2014d). Conflicts between Qantas and its stakeholders Though Qantas Airways Limited has become prominent over the past few decades, it has also encountered a number of challenges. These challenges mainly originated from industrial dispute, where the trade unions fought for their right to get adequate pay. In 2001, the dispute between Qantas and its workers aroused due to the new Enterprise Bargaining Agreement. The agreement declared that there will be 18 months wage freeze and profit will not be shared (Bamber, 2011). Majority of the unions accepted the terms and condition of the agreement, but the employees in manufacturing union could not accept it as their pay was destined to rise by 4% - 6% (Bamber, 2011). The dispute between the employees and company continued, until in 2002, Qantas agreed to raise the salary of the former by 6%. The pay hike of the employees resolved the dispute, which in turn pleased the stakeholders of the company (Bamber, 2011). During the annual general meeting in 2011, the shareholders of Qantas highlighted the misconduct of the present management and indicated the huge pay rise of CEO, Alan Joyce. This was weird to everyone as the share price had fallen drastically during the same period of time. Dispute between the shareholders and the company affected the aviation industry to a great extent. However, to control the situation Fair Work Australia (FWA) gave 21 days to company to negotiate with the unions. The trade unions comprise three groups of workforce such as licensed engineers, baggage handlers and international pilots. It is observed that opinions and claims of the individual are different but one common aspect of three groups is concern regarding employment security and income. They were in search of such an agreement that would highlight the solution for the disputes. The company and trade union did not settle the situation through negotiation. Instead FWA stated that Qantas has to rebuild its relation with the stakeholders in order to achieve the renowned position in the aviation industry (Bamber, 2011). Financial markets Qantas Airways Limited trades in Australian stock market under the rules and regulation of ASX. The shareholders receive information regarding the performance of the share price from its website and also from trading forums. The shareholders are not only interested in the share price performance of the company but they are also concerned with its profit and asset base. During the annual general meetings, the shareholders come up with their grievances and changes that are required in the structure of the company (Qantas Airways Limited ABN, 2014f). The recommendations of the shareholders are taken into account since they possess significant share in the business. There are many analysts who follow Qantas because of its success. The list of names of the analysts is provided below: Figure 1: Analysts of Qantas (Source: Qantas Airways Limited ABN, 2014e) The trading volume and share price performance of Qantas over a period of 5 years (2009- 2014) is depicted in the following graph: Figure 2: Share price performance of Qantas (Source: Yahoo Finance, 2014a) From the graph, the performance of the company share can be evaluated, which indicated that the share price has drastically fallen after the industrial dispute of 2011. The industrial dispute affected the shareholders as they lost confidence in the performance of the company. The employees of Qantas including pilots and ground staffs went into indefinite period of strike, which affected the passengers. Thus, the passengers and shareholders lost trust on the company operation and shifted to other options. The sales of tickets decreased along with the revenue, which affected the share price to a great extent. The graph also highlighted that the volume of share trading, encountered a sharp decline after the dispute. The condition did not improve to date as the worker did not receive pay hike whereas the salary of CEO increased drastically. Societal Constraints Qantas Airways Limited has undertaken a number of projects or programs for strengthening the environment and its people. Qantas through these programs have maintained its position in the society as a responsible corporate citizen and have also contributed towards the development of the Australian economy. The programs or projects are as follows: CEO CookOff: The initiative is undertaken by Qantas and OzHarvest to raise fund for the latter in order to spread awareness pertaining to food security in Australia. In this event, 200 CEOs and 40 celebrity chefs are invited to cook for 1000 vulnerable citizens in Australia (Qantas Airways Limited ABN, 2014fg). Make-A-Wish Australia: It is a national charity created by the company, which have 1,100 volunteers in 57 branches worldwide. The main goal of the charity is to support young people and children who have encountered life threatening medical condition of Australians (Qantas Airways Limited ABN, 2014fg). The Qantas Foundation: It was established in 2008 in form of a charitable trust, which is responsible for operating in a sustainable manner and protect the environment and community. It creates life changing experiences mainly for next generation in Australia. It focuses on two key areas: support network of partners and suppliers and make opportunities for next generation so that they can make their career in the airline industry (Qantas Airways Limited ABN, 2014h). Apart from the above mentioned programs, the company has also undertaken a number of programs. This programs aims at depicting the fact that Qantas Airways Limited is a responsible citizen in Australia. Risk and return Estimating Historical risk parameters Regression between stock return of Qantas and market index (ASX 200): The monthly data historical prices of Qantas are obtained in order to calculate the rate of return for the last five years from 2009-2013 (Yahoo Finance, 2014b). Qantas Airways Limited is registered under Australian Stock Exchange (ASX) under ASX 200 index. The market index data is obtained with respect to airline industry and regression is run to examine the relation between the two data (ASX Limited, 2014). The result obtained from the regression is provided in the following econometric model: Y = α + β X Where, Y = dependent variable (return of Qantas) X = independent variable (return of ASX 200) Y = -3.218 + 1.687 ASX200 From the above equation it can be portrayed that there is a significant relation between the return of Qantas and ASX 200. Thus, it can be portrayed that the stock prices and return of Qantas have affected the overall performance of rate of return on ASX 200 index. Calculation of risk: Risk of stock of Qantas Airways can be calculated with the help of Capital Asset Pricing Model (CAPM): ra = rrf + βa (rm-rrf) where, ra = rate of return of stock rrf = rate of return of risk free securities (Bloomberg L.P., 2014) βa = estimated risk of the stock rm = rate or return of the market Therefore, β = (ra - rrf ) / (rm-rrf) The value of beta (risk) is calculated and the result is obtained in the following table: From the above table it can be deducted that the company shares have encountered considerable amount of risk, which denotes that the investors of the company have received lower rate of return during the period 2011-2013. The risk has actually originated from the performance of the company, which have declined post 2011 when it encountered an industrial dispute. The risk was bore by the investors as they lost huge part of the investment and hence discontinued to invest in its shares. From Figure 2, it can be stated that investing in the shares of Qantas Airways Limited will not be a wise decision for the investors as the share price have declined over the years from 2009 to 2013 along with the rate of return. The rate of return of the company has underperformed with respect to the ASX 200 index. Thus, it is not a good investment option for the investors and the risk profile is also high. Estimating Default Risk and Cost of Debt The default risk is calculated with the help of ratio analysis. Ratio analysis helps in determining liquidity condition of the company. Liquidity ratio is calculated in order to understand whether Qantas Airways Limited has the ability to pay its short term liability to the creditors and lenders without harming the inventory. Leverage ratio is also calculated and the result of both is provided in the table below (Qantas Airways Limited ABN, 2014i). The financial data for calculating the ratios are obtained from annual reports of the company for the period 2009 to 2013 (Refer to appendix 1 for calculation): Ratios 2013 2012 2011 2010 2009 Liquidity Current ratio 0.66 0.74 0.78 0.90 0.86 Quick ratio 0.61 0.70 0.71 0.84 0.80 Leverage Debt-to-equity 0.90 0.99 1.01 1.07 1.08 From the above table it can be stated that the liquidity position of Qantas has become weaker over the years from 2009-2013 as the value of both current and quick ratio have decreased. This indicates the fact that there are high chances for the lenders of the company to encounter default risk as it can fail to meet the short term payments. The leverage position of the company has been improved over the years with the decrease in dependence on debt. The decrease in debt-to-equity ratio highlights that the debt level has declined over the period. Earnings and cash flow Comparing rate of return and cost of equity of Qantas Airways Limited Figure 3: Cost of equity and rate of return on investment (Source: Author’s creation) The rate of return and cost of equity of Qantas have encountered negative values for a period of time, which highlights the fact that the company is not performing well. The negative cost of equity indicates that the equity investment of investors has yielded low value and thus the rate of return has also declined. Competitive Strength Qantas has encountered a number of challenges in the global market. However, the company has tried relentlessly to combat against the challenges. With the increase in demand for comfortable and secured airlines globally, Qantas experienced rise in competitors, which have the ability to threat the existence of the former. Thus, the business of Qantas was disturbed by the global forces. In such a situation, the company encouraged the middle class people to travel in its airlines by cutting down the cost to a great extent. This has become the main strength of the company. The company focused on formulating four pillars, which are its main strength. These pillars help the company to distinguish from its competitors. The pillars are as follows: Pillar 1: Strengthen air routes to Asia and also increase frequency of flights. Pillar 2: Focus on experience of the passengers or customers Pillar 3: Broadening and deepening of alliances so that it can enter the global gateways Pillar 4: Improve and incorporate disciplined financial management (Qantas Airways Limited ABN. (2014i). There are many weakness of the company compared to its competitors in the airline industry. They are elaborated hence forth. Globalization has affected the company to a great extent, which forced it to take certain strategic decision pertaining to marketing management. The company devised strategies so as to remain competitive in the market; however, all the decisions turned out to be loss making for its international business. Qantas thought of transforming its business into a powerful global company by gaining competitive advantage. It has devised strategies that will ensure cost effective operation in the company for a long time. In 2011, it announced transformation plan for five year; the plan was formulated in order to become the best premium airlines in the world. The plan also aimed at setting high standards for the long haul travel and deliver good returns to the shareholders. This plan restructured the whole business and as a result the management system for the domestic and international arms of the company is separated and there are job cuts. Financing sources From the above discussion in the cost of debt part it is observed that with the passage of time from 2009 to 2013, the company has become dependent on equity financing. Equity financing refers to investment of the shareholders in the shares of the company. The company has reduced the frequency of borrowing funds and has shifted its source of finance by issuing shares in the capital market (Bamber, 2011). Dividend policy The company has paid out dividend of AUD 6 cents in February 2009. No such dividend payment is observed henceforth, it is depicted in the table provided below: Figure 4: Dividend history (Source: Qantas Airways Limited ABN, 2014j) Discussion Since inception, Qantas Airways Limited has succeeded to capture considerable market share in the Australian airline industry. The overall performance of the company is detailed in the findings part and the most important results are depicted below. The company has encountered growth in business for the past 20 years but it has also experienced a number of challenges from the external and internal forces. These challenges are severe for the company as it changed the outlook of the population in Australia. The stakeholders lost confidence to invest in the company shares. The event that shattered its image is the continuous industrial dispute. The industrial dispute occurred due to the insufficient pay of the workers. They protested against the rise in pay of the CEO. The dispute took a very bad shape when the company and workers denied negotiating. This led to trouble for the passengers as the pilots went into strike. This situation dragged down the financial condition of the company. As a result, the investors lost huge amount of their investment as the company failed to offer higher rate of return. The volume of trade decreased and the company was unable to offer dividend to the investor. The performance of share price of Qantas could not be compared with that of the industry, as the former declined drastically. The sales revenue of the company declined as a result the asset base weakened. The liquidity position weakened, which indicated that the lenders or creditors can encounter default risk. Conclusion It can be concluded that the overall performance of Qantas Airway Limited is not promising over the last five years, though it has experienced success in past. In the corporate governance part of the case study it is observed that the company has encountered problems pertaining to payment of salary of the workers. These disputes had taken bad shape post 2011, which is reflected in the financial condition of the airline. The results from the risk and return part of the case study are quite interesting. The rate of return of the stock of company is lower than that of the market index (ASX 200), which indicated that other companies in the same industry have performed better than Qantas. Earnings and cash flow section of the case study highlighted that the cost of equity and rate of return of the company are considerably low with respect to the industry. Qantas finance its operation through the investment in equity shares and the debt level has decreased over the years. The last section elaborates that the company does not have strong financial position and thus they cannot pay dividend to the investors. Summary/Recommendation Qantas Airways Limited should concentrate in improving its financial condition by resolving the dispute that has shattered the brand image in the global financial market. The company will need to convince its shareholders that it will continue a lucrative business in future so that they become interested in the company shares. The company should offer its passengers additional benefits at a low cost so that it can satisfy them. The overall performance of Qantas can be improved by revising the salary structure so that the workers are satisfied. References ASX Limited. (2014). Historical Market Statistics. Retrieved from http://www.asx.com.au/about/historical-market-statistics.htm Bamber, G., 2011. Saving Qantas is a Matter of Trust. Retrieved from http://www.smh.com.au/federal-politics/political-opinion/saving-qantas-is-a-matter-of-trust-20111107-1n3rx.html Bloomberg L.P. (2014). Australian Government Bonds. Retrieved from http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/ Qantas Airways Limited ABN. (2014a). The Inspiration. Retrieved from http://www.qantas.com.au/travel/airlines/history-inspiration/global/en Qantas Airways Limited ABN. (2014b). Qantas CEO. Retrieved from http://www.qantas.com.au/travel/airlines/qantas-ceo/global/en Qantas Airways Limited ABN. (2014c).Qantas Board of Directors. Retrieved from http://www.qantas.com.au/travel/airlines/board-of-directors/global/en Qantas Airways Limited ABN. (2014d). Corporate Governance. Retrieved from http://www.qantas.com.au/travel/airlines/governance-structure/global/en Qantas Airways Limited ABN. (2014e). Shareholder information. Retrieved from http://www.qantas.com.au/travel/airlines/investors-share-holder/global/en Qantas Airways Limited ABN. (2014f). Annual General Meeting. Retrieved from http://www.qantas.com.au/travel/airlines/investors-annual-meetings/global/en Qantas Airways Limited ABN. (2014fg). Spirit of Community. Retrieved from http://www.qantas.com.au/travel/airlines/community-initiatives/global/en Qantas Airways Limited ABN. (2014h). The Qantas Foundation. Retrieved from http://www.qantas.com.au/travel/airlines/foundation/global/en Qantas Airways Limited ABN. (2014i). Annual Reports. Retrieved from http://www.qantas.com.au/travel/airlines/investors-annual-reports/global/en Qantas Airways Limited ABN. (2014j). Dividend History. http://www.qantas.com.au/travel/airlines/investors-dividend-history/global/en Yahoo Finance. (2014a). Qantas Airways Limited. Retrieved from https://au.finance.yahoo.com/echarts?s=QAN.AX Yahoo Finance. (2014b). Historical Prices. Retrieved from https://in.finance.yahoo.com/q/hp?s=QAN.AX&a=00&b=1&c=2009&d=11&e=31&f=2013&g=m Appendix Read More