Qantas Finance Case Study Flashcards
Strategic role of financial management
To enable Qantas to plan, implement and monitor financial strategies in order to achieve its objectives of profitability, growth, efficiency, liquidity and solvency
Objectives of financial management Profitability Growth Efficiency Liquidity Solvency
Profitability:
- Profitability in the airline industry is relatively poor as it is capital intensive, highly competitive and variable costs can be difficult to control
- In 2014, Qantas reported a loss of $646 million due to struggling international and domestic operations along with high fuel prices
- In 2015, this swung around to a $975 million profit
- This kept growing, with 2016 being $1.53 billion, 2017 $1.4 billion and 2018 $1.57 billion
- In 2019, this dropped to $1.3 billion as a result of a $614 million increase in fuel costs
Growth:
- In 2014 and 2020 Qantas had to rein in costs and curtail growth plans in Asia, which it has since reversed and is expanding largely in Asia
Efficiency:
- New and more efficient aircraft, new IT systems, restructuring, better aircraft utilisation and faster maintenance turnover have seen an increase in efficiency at the business
Liquidity:
- Like most airlines, Qantas operates on a negative work capital position
- Qantas has facilities in place to draw cash when needed to pay creditors, such as a $300 million standby facility
Solvency:
- Like most airlines, Qantas has high gearing and low solvency, which has increased due to falling profitability
Interdependence with other KBFs
Operations
Human Resources
Marketing
Operations:
- Requires funds, for example Qantas has budgeted billions to spend on fleet renewal
- Budgets and cost controls are required by each operational department
HR:
- Qantas spends over $275 million a year on staff training
- Staffing is Qantas’s biggest expense
Marketing:
- Finance is dependent on marketing to generate funds through sales
- Marketing strategies like new lounges, check-in facilities and carriers into Asia are expensive and require funding
- Budgets are used for each business segment (Qantas, Jetstar, freight) and is a major part of the marketing plan
- Financial criteria like sales, market share and profitability analysis is used to judge marketing strategies
Internal source of finance Retained profits External sources of finance Equity Ordinary shares Private equity
Qantas use both retained profits and shares sold through the ASX in order to fund the business
Large profits have allowed Qantas to retain further profits and pay larger dividends to shareholders
Qantas’s last equity raising was in 2009 when it raised $500 million in a new issue of shares to combat the GFC’s effects
External sources of finance Debt - short-term: - Overdraft - Commercial bills - Factoring Debt - long-term: - Mortgage - Debentures - Unsecured notes - Leasing
- Qantas’s debt portfolio totalled $4.7 billion in 2019 through both short and long term debt
- Qantas have been taking advantage of low interest rates and a higher credit rating meaning the business saves millions in interest payments
Financial institutions
- Banks
- Investment banks
- Finance companies (NBFIs)
- Superannuation funds
- Unit trusts
- ASX
Qantas uses financial intermediaries to invest their surplus funds and obtain finance, particularly from banks and investment banks
Influence of government
ASIC
Company taxation
Monetary and fiscal policy affects Qantas’s financial decision making
ASIC enforces and administers the Corporations Act
Qantas pay 30% of their earnings to the government as company tax; not having to for a period due to carry forward losses
Global market influences
Economic outlook
Availability of funds
Interest rates
The 2009 GFC caused rapid revenue declines, leading to an 88% fall in net profit
Qantas responded by cutting flying capacity, deferring and cancelling new plane orders, restructuring, raising capital and replacing Qantas with Jetstar on some routes
Planning and implementing
- Financial needs
- Budgets
- Record systems
- Financial risks
- Financial controls
Qantas develop their needs, such as purchasing fleet, before budgeting, maintaining accounting records and establishing financial controls
Planning and implementing
- Debt and equity financing (+ and -)
- Matching the terms and source of finance to business purpose
Debt positives:
- No change in ownership structure for Qantas
- Interest payments are a tax deduction for Qantas
- Debt can be varied to suit Qantas’s changing circumstances
Debt negatives:
- Involves greater risk
- Qantas must pay interest on borrowings
Equity positives:
- Involves less risk; doesn’t add to debt levels
- No interest payments
Equity negatives:
- Dividends are not tax deductible
- Shareholders have voting rights, potentially diluting ownership
Monitoring and controlling
- Cash flow statement
- Income statement
- Balance sheet
See document
Financial ratios Liquidity – Current ratio Gearing – Debt to equity ratio Profitability Gross profit ratio Net profit ratio Return on equity ratio Efficiency Expense ratio Accounts receivables turnover ratio Comparative ratio analysis Over different time periods Against standards With similar businesses
Current ratio: 2018: 0.48:1 2019: 0.49:1 Debt-to-Equity ratio: 2018: 110% 2019: 134% Net profit ratio: 2018: 9.1% 2019: 7.2% Return on owner’s equity ratio: 2018: 40% 2019: 38% Expense ratio 2018: 91% 2019: 92%
Limitations of financial reports Normalised earnings Capitalising expenses Valuing assets Timing issues Debt repayments Notes to financial statements
Qantas attaches notes to their financial statements in order to provide clarity for shareholders interpreting the information
Natural disasters can distort Qantas’s results such as Cyclone Yasi in NQ, the Christchurch Earthquake and Japanese Tsunami all in 2011
Qantas can employ a variety of accounting procedures, such as now using Underlying PBT as their measure of profitability
Reports do not disclose when debts have to be repaid
Qantas’s assets are hard to value as they change over time
Ethical issues related to financial reports
Qantas ethically conduct their financial management through:
Audits from KPMG, a multinational auditing firm
Professional Accounting Bodies
Accounting Standards which have principles to be followed with financial statements
ASIC enforcing the Corporations Act
ASX regulations
Cash flow management
- Cash flow statements
- Distribution of payments
- Discounts for early payment
- Factoring
Qantas were able to distribute their payments over a longer period of time during the COVID-19 pandemic in order to achieve a positive cash flow in FY21
Working capital management Control of current assets - Cash - Receivables - Inventories Control of current liabilities - Payables - Loans - Overdrafts Strategies - Leasing - Sale and lease back
- Leasing aircraft, buildings and plant and equipment, freeing cash elsewhere in the business
- Debt market trends, tax depreciation, deterioration in aircraft residual rates and the need for greeter fleet flexibility provision have increased the attractiveness of leasing
- Qantas sold Sydney Airport Terminal 3 for $185million in 2016 and lease it back; the business is also considering a similar arrangement for some of its aircraft and selling non-core assets like its freight and frequent flyer business
Profitability management Cost controls: - Fixed and variable - Cost centres - Expense minimisation Revenue controls: - Marketing objectives
Cost controls:
- Qantas has cut costs by over $8 billion in the last 15 years, dropping its cost base by 20-25%
- Between 2014 and 2018, to address the drop in profitability, costs were cut by $463 million, and more cost cuts of $400 million a year have been targeted over the following 3 year period
Strategies to control these include:
- Instead using Jetstar on some routes
- Restructuring and redundancies
- 18 month wage freeze with all major unions
- Reforming employment relations through better rostering, increased tech use, casualisation of employment and securing key workplace agreements
- Using cost centres i.e. Qantas International, Qantas Domestic, Jetstar, Qantas Loyalty, and Corporate
- Fuel hedging
- Fuel conservation (launched app to improve fuel optimisation)
- Fleet restructuring (more efficient new planes)
- Cutting commissions to travel agents
- Outsourcing further
- Entering alliances with other airlines (like American Airlines, China Eastern and Emirates)
- Encouraging more sales over the internet
Revenue controls:
- In 2018, revenue increased by 6%
Strategies include:
- Setting clear objectives and a regular reporting system with cost centres
- International partnerships
- End of capacity war with Virgin Australia domestically
- Targeting different markets like China and Japan with the aggressive growth of Jetstar and Jetstar International
- Fuel surcharges resulting from the increase in fuel prices
- Increasing revenue from other sources like travel, catering and freight to protect from the volatility of the airline industry
- Improved marketing strategies such as new international business class, self service kiosks, next gen check in and a new ad campaign
Global financial management Exchange rates Interest rates Methods of international payment Payment in advance Letter of credit Clean payment Bill of exchange Hedging Derivatives
Exchange rates:
- Qantas generates about 38% of revenue in other currencies (14% in US$)
- Jet fuel, operational expenditure and capital expenditure are all dominated by foreign currency, mainly US$, meaning they’re exposed to fluctuations
A$ Appreciation – Reduces costs, increases likelihood for Australians to travel abroad, reduces likelihood of overseas tourists to come to Australia
A$ Depreciation – Increases costs, reduces likelihood of Australians to travel overseas, increases likelihood of overseas tourists travelling to Australia
Interest rates:
- Qantas is exposed to interest rate changes both domestically and internationally
Hedging/Derivatives: Qantas uses FEC and options to hedge future fuel purchases, interest payments and capital expenditure payments
- 73% of fuel needs for 2019 were hedged, mainly in the form of options
- This increased to 100% for 2020
- Swaps is also used by Qantas
- Natural hedging is used by borrowing in net surplus currencies
