Quantas Human Resource Department - Case Study Example

AN ASSESEMENT OF QUANTAS AIRWAY FINACIAL PERFORMANCE Executive Summary Quantas is an Australian iconic airline. It is a recognized global leader in safety, premium long haul travel, customer service and innovation. In Australia it is an unrivaled carrier of choice for premium leisure and corporate travel for both domenstic and international destinations. This is a financial analysis of Quantas Airways with a focus on Quantas human resource department. The analysis was done through financial ratios to assess the financial performance of the company. This paper also discusses the cost drivers of the human resource department and the role of HR in enabling the company to attain financial stability. This paper also gives a conclusion based on the financial analysis and enumerates the recommendations to Quantas Airways management particularly the human resource department. Table of Contents Executive Summary ii Abstract iv Organizational Overview 1 Financial Performance Indicators 1 Role of HR Department 6 Application of Performance Measures 8 Conclusion 10 Recommendation 10 REFERENCES 14 Abstract Quantas Airways is a multibillion firm which operates 4700 flights each week to 72 destinations in Australia and in the World. It is ranked as a leader in the airline industrial in domestic on-time performance by January 2009. Financial analysis is a compact, focused report which helps management’s critical decision making by lending itself to analyzing a company’s profitability, solvency as well as financial stability. It helps the management to make different decisions on segregating priority businesses, present funding acquirements, mergers and acquisition activities. Financial analysis of quantum airways revealed that, the company is not financially stable. This was found out by interpretation of the financial ratios. This results in the need to improve the financial status of the company which the HR department play a major role. Organizational Overview Quantas Airways is a multibillion firm which operates 4700 flights each week to 72 destinations in Australia and in the World (Quantas Airways, 2010). It is ranked as a leader in the airline industrial in domestic on-time performance by January 2009. It has got customers both domestic and international. The company is differentiated from its competitors by its act of diversifying the premium and low fare Airlines of Quantas and Jetstar of whom with both domestic and international network. Quantas Airline business demographic is best understood by the company’s customer base. Quantas international customer base is 55% while Quantas domestic make up 27% of the total customer base. Jetstars has both domestic and international customers each being 9% of the total customer base (Quantas Airways, 2010). Financial Performance Indicators According to Pandey (2001) financial analysis is a compact, focused report which helps management’s critical decision making by lending itself to analyzing a company’s profitability, solvency as well as financial stability. It helps the management to make different decisions on segregating priority businesses, present funding acquirements, mergers and acquisition activities (Pandey, 2001). Pandey explains that a ratio is used as a benchmark for evaluating the financial position and performance of a firm. Gitman and McDaniel (2008) defines ratio analysis is the calculation and interpretation of financial ratios using data taken from firm’s financial statements in order to assess its conditions and performance. Gitman and McDaniel explain that they highlight potential problems but do not prove that they exist. They help managers monitor firm’s performance from period to period to understand operations better and identify trouble spots. Mohammed (2008) note that the level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. In its context a financial ratio can give a financial analyst an excellent picture of a company's situation and the trends that are developing. Financial ratios can be divided into liquidity, activity, debt, profitability, and market ratios depending on the type of information they provide. Liquidity, activity, and debt ratios primarily measure risk. Profitability ratios measure return. Market ratios capture both risk and return (Stickney, Brown & Wahlen, 2007). Revsine et al. (2005), state that the liquidity of a firm is measured by its ability to satisfy its short-term obligations as they come due. It refers also to the solvency of the firm's overall financial position and the ease with which it can pay its obligation as they fall due. These ratios are viewed as good leading indicators of cash flow problems. The two basic measures of liquidity are the current ratio and the quick (acid-test) ratio. Gitman and McDaniel (2008) explain that current ratio is a ratio of total assets to total assets. They recommend a current ratio of 2 as recommended for firms to be financially healthy. The current ratio of Quantas airways has never been more than one. This means that the company is not very healthy financially however the fact that the ratio is positive is an indication that the company does not have liquidity problems. The increased of this ratio from 0.74 in 2008 to 0.89 in 2009 shows an improved liquidity status. The quick/acid-test ratio is similar to the current ratio except that it excludes inventory, which is generally the least liquid current asset (Gitman & McDaniel, 2008). It measures the ability of the firm to measure the ability of the firm to pay its current obligation without selling inventory. A quick ratio of at least one is recommended according to Gitman and McDaniel. Quantum Airways have for the last five years had a quick ratio of at least 0.57 it decreased in 2008 but rose in 2009. This shows that the liquidity of quanta Airways has increased. Revsine et al. (2007) note that quick ratio provides a better measure of overall liquidity only when a firm's inventory cannot be easily converted into cash, however, if inventory is liquid, the current ratio is a preferred measure of overall liquidity (Stickney et al., 2007). Activity ratios measure the speed with which various accounts are converted into sales or cash-inflows or outflows (Hermanson, Loeb & Winkle, 1989). Inventory turnover and total asset turnover are the two activity ratios. They commonly measures the activity, or liquidity, of a firm's inventory. Gitman and McDaniel (2008) point out that, the resulting turnover is meaningful only when it is compared with that of other firms in the same industry or to the firm's past inventory turnover. Inventory turnover can be easily converted into an average age of inventory by dividing it into 360-the assumed number of days in a year (Hermanson et al., 1989). Inventory turnover is a ratio of the cost of goods sold and inventory. Quantas Airlines has an inventory turnover with an increasing trend. This is an indication of financial health. The total asset turnover indicates the efficiency with which the firm uses its assets to generate sales (Gitman & McDaniel, 2008). Generally, the higher a firm's total asset turnover, the more efficiently its assets have been used. This measure is probably of greatest interest to management, because it indicates whether the firm's operations have been financially efficient (Stickney et al., 2007). It is a ratio of sales to the total assets. According to Revsine at al. (2005), the debt position of a firm indicates the amount of other people's money being used to generate profits. The debt ratio measures the proportion of total assets financed by the firm's creditors. It’s the total liabilities over the total assets. The higher this ratio, the greater the amount of other people's money being used to generate profits. Debt-equity ratio indicates what proportion of equity and debt that the company is using to finance its assets. Sometimes investors only use long term debt instead of total liabilities for a more stringent test (Gitman & McDaniel, 2008). According to Gitman (2008), the more debt a firm uses in relation to its total assets, the greater its financial leverage. Financial leverage is the magnification of risk and return introduced through the use of fixed-cost financing, such as debt and preferred stock. The more fixed-cost debt a firm uses, the greater will be its expected risk and return. Gitman and McDaniel (2008) explain that a firm’s profitability can be related to sales, equity and stock value. Profitability ratios measure how well a firm uses its resources to generate profit and how efficient it is being managed. Gitman and McDaniel explain that net profit margin, return on equity (ROE) and Earnings per share are measures of profitability. The net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted (Gitman & McDaniel, 2008). They point out hat the higher the firm net profit margin, the better. They also note that a ‘good’ profit margin differs slightly from the industry. The earnings per share (EPS) according to Gitman and McDaniel (2008) is the net income of the common stockholders per weighted average shares outstanding. Pandey (2001) notes that EPS is popular in measuring the position of a company’s earnings allocated to each outstanding share of common stock. According to Pandey (2001), the return on total assets (ROA), often called the return on investment (ROI), measures the overall effectiveness of management in generating profits with its available assets. Quantas has a decreasing ROI with the 2009 ratio of 1.52% being the least over the years. Pandey (2008) explains that return on common equity (ROE) measures the return earned on the common stockholders' investment in the firm. Generally, the higher the returns, the better off are the owners Gitman & McDaniel, 2008). Quantas Airways had the lowest ROE (2.52%) ever. This is bad sign for the company. It is a sign of financial problem. Market ratios relate the firm's market value, as measured by its current share price, to certain accounting values (pandey, 2001). Pandey adds that these ratios give insight into how well investors in the market place feel the firm are doing in terms of risk and return. Ideally there are two popular market ratios namely; Price Earnings ratio, and Market Book ratio (Gibson, 2004). The price/earnings (P/E) ratio is commonly used to assess the owners' appraisal of share value. The P/E ratio measures the amount that investors are willing to pay for each dollar of firm's earnings. The level of the price/earnings ratio indicates the degree of confidence that investors have in the firm's future performance (Hermanson et al., 1989). The higher the P/E ratio, the greater is investor confidence. The market/book (M/B) ratio provides an assessment of how investors view the firm's performance. It relates the market value of firm's shares to their book- strict accounting-value. To calculate the firm's M/B ratio, we first need to find the book value per share of common stock (Gibson, 2004). From the analysis of Quantas Airways it can be concluded that the company is not very healthy financially. The liquidity ratios show signs of financial problems in the future if the trend does not change this will lead to company instability. The company financing strategies which is mostly debt is costing the company a lot hence reducing the return on invested capital and the general company profitability. The acquisitions of Jetset Travel world Group and Jetstat Asia could explain the status cost performance indicators. Also the company has a lot of debt financing which results to high gearing with the dividend reinvestment plan of 2009 being taken by the company. Role of HR Department Quantas Airways has eleven management team with an executive managing director, Alan Joyce. It employs around 35000 employees per year. In 2009 full time employees were 33966 with 42% being women. These work force speak 55 different languages and represent 92 nationalities. To ensure efficiency, the HR department seeks to ensure that all people are equipped, empowered, and encouraged to contribute to the company’s performance to their fullest potential. This the company does by developing capabilities of the leaders (Quantas Airways, 2009). This is by providing them with the necessary tools and equipments and assigning them roles in the company. This is one of the cost drivers. Embracing technology to boost leaders’ capabilities is one way of improving leader’s capability. This is a cost as the employees are provided with tools and equipment and to collaborate with other people both customers and employees, networking and/or internet connectivity is a necessity. This is a cost to the company. a cost to the company. Another way in which the HR department seek to empower it employees is by building cohesive corporate culture that engages employees and creates lasting improvement of the organization. The company also creates a stable basis for succession (Quantas, 2010). This means training the staff on what the company values and expects of every employee. To reduce the cost of recruiting and employee turnover, the company must attract qualified employees, develop, motivate and retain them. This means that the company must be willing to incur training cost and cost of rewarding the employees to be able to accomplish this. This leads to the next objective of open and timely communication done to build and align human resources with the group strategy. To attain this, a cost is incurred by the company. Research is an expensive process. Increasing skills and embracing diversity comes in as a cost too. Application of Performance Measures Managers can employ measures of performance as tools to satisfy diverse purposes such as analysis, organizing future activities, linking different units and generating information (Latour, 1987). Analysis could be used either to make comparisons between different time periods or discussions about real-world achievements or it can be used for examining past activities in order to support or refute the past actions and learn from the mistakes. According to Otely (2007),organizing future activities can be used because performance measures are a product of bottom-up information processing, that is, the data is collected from activities, computerized, registered and presented in various forms, then it is up to the managers to evaluate the information and decide on the future actions to be taken. Decisions made by managers are communicated to the operators, this time the information flow becomes top-down. Performance measures are used also for evaluation of different organizational units. This means that the information obtained may serve to link various units for constructing ideas about the functions of other units in relation to their own; and on occasions the information may be used in order to compare one unit with another (Halloway et al., 1995). Finally, performance measures are used for generating information. In this case visual displays of the measures in form of charts, tables, graphs and diagrams have an important role in the development of knowledge. The displays can be viewed as products of measurement processes in which information from different organizational units can be accumulated, summarized, and channeled to various managerial levels (Otely, 2007). Based on the objectives and programs have offered by Quantas Airways, it is one of the organizations that one would want to work in. the employees are given an opportunity to develop and are empowered to contribute maximally to the organization’s performance. This means that the department is able to attain its efficiency. However, Hr is faced with a challenge to meet the needs of all the stakeholders. Manthis and Jackson (2008) explain that turnover is related to job satisfaction and organization’s commitment. It occurs when employees leave an organization and have to be replaced. Therefore, companies should match reward and the services offered by the employees. Manthis and Jackson explain that they are beneficial to both the company and the employees. It enables the company to get the best from their employees while enabling the employees to give the best contribution to the company. Quanta Airlines should review its rewards and consequently match them to the services and qualifications of the employees while observing the minimum government requirements. Through this the company will avoid industrial action as witnessed in the past. Rothwell (2010, p.6) defines succession planning as “the process that helps stabilize the tenure of personnel”. Rothwell explains that it is designed to ensure effective and performance of an organization. It is critical to an organization therefore Quantas should plan for its succession. Exit interviews and feedback process is necessary. Employee involvement and open management, which is a characteristic of Quantas Airways, should be embraced. Governance policy has it role as it defines ‘the dos and don’t dos’ of an organization. Training and developing of employees is also guided by company policies. Conclusion From the analysis of Quantas Airways financial status and the human resource department, it can be concluded that it has the best human resources in terms of Skills. The organization’s culture is an enabling one and if the other performance drivers related to the employees are dealt with the company can revive from its ailing financial status. Another conclusion hat can be drawn from this analysis is that Quantas is a differentiated company and has a competitive edge. It’s a trusted brand and that makes it a market leader as this translates to increased customer preference hence sales revenues. Based on this it can be concluded that the financial status of the company is not as a result of low sales but the operational and investment activities resulting in high costs. Recommendation From the analysis above, the following recommendations are made i. The company activities that take up huge amounts of money should be checked. One of the activities which contribute big costs is the human resources. With the large number of employees the company should also consider down-sizing or outsourcing. However, lay offs should not be the first option as it can lead to problems with workers unions and it can also adversely affect the motivation of the remaining employees. The costs associated with this is industrial action, if Quantas considers laying off some employees to reduced costs associated with employees numbers and adverse effects on employees’ productivity. ii. The company should also consider reducing its gearing. It should seek to reinvest its income instead of giving dividends to the common stockholders. This will cut cost in terms of interests. The compensation philosophy adopted and the pay structure of an organization form a basic part of decisions on how reward systems are designed. iii. Quantas Airways should adopt a performance oriented philosophy and a pay structure that seeks to tie the reward to performance. It should engage a functional performance management system. Beardwell and Holden (2001) have defined performance management as the strategic and systematic approach of improving performance of employees by developing capabilities of teams and individual contributors continuously through reviews that focus more on the future based on the past performances. This secures employee performance through mutually supportive strategy of reward integration and developmental integration (Beardwell & Holden, 2001). The costs associated with non functional management system is reduced performance which results in demotivated employees, reduced contribution to the organizational goals which eventually leads to losses. It will also result in compromised service quality and reduced customer base. iv. Organizations use different methods to improve performance. Habour (1997) gives some of these methods as process improvement, cycle management process inputs reengineering, continuous quality improvement (CQI) and total quality management (TQM). Further Habour (2003) notes that, there are shifts from using TQM to using total product management, and CQI to Kaizen, Just-in-time delivery system and cycle time. The purpose of using these performance improvement systems is to do more, faster and better. To improve both efficiency and effectiveness, these organizations require having the ability to measure performance. Some of the performance measurement systems are performance metrics focusing on the cycle time or quality yielded (Habour, 1997). These methods are chosen based on suitability to the company, hence Quantas Airways should consider this and select one based on its situation for adoption. The cost associated with low company performance is reduced company profits. This trickles down to company damaged reputation, reduced return on the shareholders’ investment and if not checked can lead to huge debts taken to finance the operations of the company. This finally leads to business failure and bankruptcy. v. The company should also consider reducing its investments in form of acquisitions. Although this is a long-term plan to grow revenue, the company absorbs the acquired company’s losses which might have a huge effect. By taking this step the company will have more money to support the operations of the company and reduced the debt levels of the company. The company should in future carry out extensive analysis of the company before acquisition to ensure the acquired companies are viable and guarantees future business sustainability. The costs associated with the acquisition is the amount paid to the owners of the company in form of acquisition price, and the cost of training the acquired company’s employees on the acceptable corporate culture and the systems of Quantas. This is based on the assumption that the acquired company has a different corporate culture and its policies and procedures differ from that of Quantas limited. Hence there is nee to align the practices, strategies and policies of the newly acquired company. vi. The company should also consider restructuring the organizational capital structure. The company should in future seek to raise capital from equity rather than debt. This is because debt financing is costly in terms of interest paid to the creditors. vii. The company should also seek to do away with the old machines and equipment and only hold those that are efficiently working. The costs associated wit hold assets is high maintenance costs and increased down times which lead to delays. This is costly to the company as it may result in poor company reputation. REFERENCES Beardwell, I., & Holden, L. (2001). Human resource management: a contemporary approach. England: Pearson Education. Gitman, L. J., & McDaniel, C. (2008). The future of business: The essentials. USA: Cengage Learning. Habour, J. L. (1997). The basics of performance measures. New York: Kraus Ltd. Habour, J. L. (2003). The basics of performance measures. New York: Kraus Ltd. Hermanson, P., Loeb, S. C., & Winkle G. L. (1989). Accounting principle (4th ed.). Richard D. Irwin, Inc Latour, B. (1987). Science in Action. Harvard Business Review, 16-17. Manthis, R. L., & Jackson, J. L. (2008). Human resource management (12th ed.). Ohio, USA: Cengage Learning. Mohammed, A.P. (2007). Accounting for manager. (1sted.). Delhi: Vrinda Publications Ltd Otely, D. (1999). Performance management: A framework for management control systems research. Harvard: Harvard University Press. Pandey, I.M. (2001). Financial management. (8th ed.). New Delhi. Vikas. Revsine, L., Collins D. W., & Bruce, W. J. (2005). Financial reporting and analysis (3rd ed.). New Jersey: Prentice- Hall. Rothwel, W. J. (2010). Effective succession planning: Ensuring leadership continuity and building talent from within. USA: AMACOM. Stickney, C.P., Brown, P.R., & Wahlen, J. M. (2007). Financial reporting, financial statement analysis, and valuation: A strategic perspective (6th ed). Thomson south-western. Quantas Airways. (2010). 2009 Annual Report. Retrieved June 4, 2010 from http://annualreport.qantas.com.au/ Read More