Financial Situations of Virgin Australia and Qantas Company - Case Study Example

Accounting for Decision Making xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Executive Summary The report explores the financial situations of Virgin Australia and Qantas Company, with the aim of determining which company has been successful in 20101 and 2011. It explores the companies’ profitability, financial stability and efficiency- long term and short term. It also notes the limitation of the report. The report concludes that Qantas Company and Australia Virgin are in a healthy competition. However, Qantas is at a better financial position. Therefore, recommended to the potential investors. Table of Contents Table of Contents 3 1.0 Introduction 4 2.0 Financial Analysis 5 2.1 Profitability 5 2.2 Efficiency 6 2.3 Financial stability 8 3.0 Limitations 9 4.0 Recommendations and Conclusion 9 5.0 References 10 Appendices 12 Appendix 1 Return on equity and equity per share 12 Appendix 2 Borrowing per share and earnings per share 13 Appendix 3 Liquidity 14 1.0 Introduction Qantas Airways limited was founded in 1920 and it has tremendously grown to be Australia’s largest airline. Not only has it grown domestically but also internationally. Indeed, it prides itself as the leading airline in long distance flights and the strongest selling brand in Australia. Indeed, it has continued to excel in its safety, maintenance and engineering, customer services and operational reliability. It core business is the transport of customers using two airline brands, Jestar and Qantas. The company also specializes in operating subsidiary business such as operating other airlines. The company operates at regional, domestic and international level (Qantas 2008). The Virgin Australia Holdings Ltd was formerly known as Virgin Blue Holdings Limited. It was established to provide low-cost carrier for domestic and international flights. However, it was later branded itself as “Virgin Australia”. It was established in 2000 and the headquarters are at Bowen Hills in Australia. Under the domestic operations, it uses fleet of Airbus 33, Boeing 737 aircraft, Embraer 190 and 170 in the country. The international operations part does operate using Boeing 737 aircraft and Boeing 777. It comprises of Abu Dhabi, Trans-Tasman, Trans-Pacific and Pacific Island flying (Virgin Blue 2008). This report evaluates the performance and interprets financial ratios, that is provide ratio analysis of financial statements over a period of two years, that is, 2010 through 2011 of the two companies. The report analysis profitability, efficiency and financial stability for both companies. A comparison on the financial ratio will be done and reasons will be given for changes over years. 2.0 Financial Analysis 2.1 Profitability Virgin Blue Holdings Limited in the given financial year, 2010-2011, it reported a loss in both years. There was a decline in the gross profit margin in 2011 when compared with 2010. In addition, the net profit margin also decreased in 2011. This decreased may be attributed to foreign exchange loss due to the rising of the dollar that was unrealized. There was also a decline in the return on assets but an increase in the percentage of asset turnover. The Qantas Airways limited had an excellent profit margin in both years. Indeed, return on equity the gross profit margin, net profit margin asset turnover and return turnover reported a rise in 2011 as compared to 2010. There is a significant different between profitability in both companies. In both years, the Qantas Airways Ltd has higher profitability compared to Virgins Australia Holding Ltd. As Qantas Airways reported a increase in its profit in 2011 from 2010, Virgins Australia Holdings reported a decrease in 2011. Indeed, each company has a different level of profitability. There are various reasons why these ratios have changed over the years. For instance, Qantas Airways can attribute its profit rise due to significant number of operation in the international flights. Undeniably, the company has continued to pride itself as the Australia largest airline. It has created a niche in its domestic hubs. Its strong presence in Canberra and Cairns airport has exposed it to more customers and thus, more profits. In 2011, it was been noted that the company progress has continued to attract higher yielding government and corporate customers leading to improved profitability compared to 2010. The rise in its profits in 2011 is said to be achieved through overcoming operational and external challenges experienced during the year. The company was able to respond to these challenges. This was despite the severity and frequency of events in this year as compared to the previous years. The events had created an unfavorable impact on Qantas. Due to the increase of the net profit margin, the company has created a strong brand name raising the profit even further. On the other hand, there are various reasons for the decline in the profits as reported in Virgin Blue Ltd. The fact that the company did not announce any dividends in 2011, it resulted to investors responding negatively to this, lending to a fall in the share. The last dividend to be given was in 2008. In addition, the lack of an obvious outlook statement had a negative effect on the share price. The company experienced more debt problem in 2011 as compared to 2010; this also said to have contributed to the drop in the profits of the company. In the prior years, the ROE was reported to be a high percentage of 25% and a loss of 37%. Equity per share increased from 60c to 90c in every share over the 2004/2005 period (Aulenbach 2007). However, it has now dropped to 42 per share (appendix 1). In addition, results in earning per share were also volatile. Numerous causes of these volatile have been registered and include reduced demand, computer glitches, high oil costs, airport charges and increase in labor cost. This was registered in the last five years. However, 2011 was a good year as compared to 2009 which had recorded a loss of $160m (appendix 2). As both companies are in a competitive market, there are various reasons that have resulted to differences in profitability. This is despite the fact that both companies are controlled by the same regulations. One reasons for the differences is that Qantas Airways was earlier developed and therefore, had been able to capture a potential market in the industry as compared to the Virgin Australia Holdings Ltd. Basically, the Australian industry was dominated by two carriers: Ansett and Qantas. 2.2 Efficiency Essentially, efficiency measures the basic intensity with which a company uses the assets to generate revenues and the effectiveness of purchasing, production, financing decisions and product pricing. Efficiency ratio analyzes the way a company uses its liabilities and assets internally (Zimmerman 2010). From the ratio given, in both companies, there is increase in the asset turnover indicating a rise in the generation of revenue. Qantas Airways was efficient in utilizing the resources it had to generate the needed income. In essence, the higher companies total asset earnings, the more efficient that have been used (Chen 2012). In the ratio given, the Virgin Australia Holdings company indicated a higher percentage in the asset turnovers as compared to the Qantas Airways. This indicates that the company had effectiveness in utilizing the assets to generate sales. In addition, there was a negative in the working capital thus; Qantas was unable to maintain the short-term liabilities. Therefore, with this current asset, it was a clear indication that the company the performance of the company was not liquid. The rise in asset turnover in the Virgin Australia Blue in 2011 may be seen as a result of their expansion of their fleet. The company has reduced the risk of operating with a single fleet has been reduces. Therefore, this increases the reliability that is brought about by the improved design and management. Indeed, the Virgin Australia Blue Ltd is said to have the smallest fleet but with the youngest fleet age while Qantas has the oldest and largest fleet. This indicates that there is need for Qantas to have a major investment in the replacement of the aircraft while the Virgin Australia Blue has a good market value as it continues to boast modern efficiency and technology which is seen to be favorable in the competitive industry sector. However, Virgin blue is still struggling to gain access to the sector as compared to the Qantas Company which has already established in the sector. It is important to note that real danger for Virgin Blue is presented by the fact that there is lack of protection against non-competitive behavior. This may be as a result of Qantas expansion of Jetstar. This indicates that the financial efficiency of Virgin Australia may be at risk if this the company does not create other ways of establishing itself in the market. One way that the company has established to counter this effect is by lowering its fare. In fact the company prides itself in low-fare reputation. However, there are some issues that are seen to affect this reputation which needs to be addressed. These issues include rising in fuel cost which has resulted to the company adding a surcharge to the ticket prices and Jetstar has continued to implement competitive strategy on different routes. 2.3 Financial stability According to the data given, the debt asset ratio for both countries did not report a great difference in both years. Virgin Australia Holdings Ltd reported a 75.90% in 2010 and a slight decrease to 75.89% while Qantas Airways reported a slight increase between 2010 and 2011, 69.93% to 70.50%. The Virgin Australia Holdings reported a higher debt asset ratio than Qantas Airways. It is important to note that a debt ratio asset explains less about airline earning performance and growth prospects. However, it is an important tool for gauging the strength of a balance sheet, thus the financial stability. As such, the strength of balance sheet is vital for investors. It determines if a company has the strong financial position to withstand tough period. Therefore, one cannot dispute the fact that debt ratios are important in assessing the financial health of a company (Norton & Porter 2010). The debt equity ratio also differs in both companies. The Virgin Australia Company reported a high percentage ratio of Debt equity ratio as compared to Qantas Airways. This ratio measures the company’s financial leverage and stability. It clearly indicates a company proportion of debt and equity that the company is using in financing its assets. In other analysis, it was observed that both companies have comparatively high equity to debt ratio. This is observed to be a cheaper way to finance the growth of the company though at an increased risk. In the current ratio both companies reported a relatively high percentage. However, the Qantas Company had a slightly higher percentage compared to Virgin Australia. In both companies there was a decline in 2011. From the ratio given, it may be concluded that Qantas Company had safe investment and in cash indicating financial stability while the financial stability of Virgin Australia may be described to be weak signifying a probability that the company may not be able to pay its bill on time. Therefore, Qantas was able to satisfy its short term obligations (appendix 3). 3.0 Limitations There were various limitations that are associated with this report. The method used to study the report was limited by time constraints, ethical approval, gathering of resources and lack of practical experience. 4.0 Recommendations and Conclusion The Qantas Company is better option for investment for both short and long term. This is attributed to the fact that company is financial healthy. This is evidence from the profit margin ratio. The profit ratio indicates how much profit the company is earning. The net profit also indicated that the company was doing well financially. This high ratio indicated that the company was effective in its cost control. Essentially, it tells an investor how well the operations and management of Qantas are performing to augment their returns on investment and profit. Based on the ratio and analysis Qantas revenue has continued to increase. The five year strategies plans that have been laid are aimed at increasing the revenue and cutting down on the costs. Therefore, returns on shareholder are bound to increase. Essentially, with this future forecast, the recent improvement and growth recorded in the 2 years, the existing shareholders are recommended to continue investing as the profits are expected to increase in the subsequent financial years. Potential investors are advised to venture into the company when the prices are relatively low as more strong return on investment and profit are expected. The investor should also consider the limitation of the report in making decisions on investing. 5.0 References Aulenbach, S. 2007, Business deconstructed- Qantas Airways Limited. Sydney: GRIN Verlag Chen, J. 2012, Advances in hospitality and leisure. New York: Emarald Group Publishing Norton, C. & Porter, G. 2010, Financial accounting: the impact on decision makers. London: CengageBrain Qantas. 2008, Annual Report. Retrieved May 3, 2009 from http://qantas.republicast3.com/Republicasts/Qantas%20Annual%20Report%202008/Qantas%20Annual%20Report%202008.pdf Virgin Blue. 2008, Preliminary Final Report. Retrieved May 3, 2009 from http://www.virginblue.com.au/cms/groups/pr/documents/internetcontent/p_005430.pdf Zimmerman, J. 2010, Accounting for decision making and control. New York: McGraw-Hill Appendices Appendix 1 Return on equity and equity per share Appendix 2 Borrowing per share and earnings per share Appendix 3 Liquidity Read More