There is evidence of overcapacity, an issue that they have addressed in the interim with service cuts (Associated Press, 2009).
Financial Stability -- Short-Term
Both companies are liquid at present. Qantas, however, has seen the more significant decrease in its liquidity between 2007 and 2008. The company's cash holdings have been reduced significantly, while its "other" liabilities almost tripled. There have been some working capital issues at Qantas, with the firm increasing is turnover in days. Virgin Blue has also seen a reduction in its liquidity and an increase in its receivables turnover in days. For Virgin Blue, cash has declined in the past year, while interest-bearing liabilities increased. This is most likely attributable to a combination of capacity expansion and revenue reduction.
Financial Stability -- Long-Term
As with most airlines, both of these companies are highly leveraged. Qantas was able to bring down their leverage in 2008, as they were able to reduce their level of interest-paying liabilities. This debt reduction was a savvy move in advance of an economic slowdown, as it better positions Qantas in terms of its liabilities. Qantas for the past couple of years has had no difficulty meeting its interest obligations. Virgin Blue is the highly leveraged of the two. Their steep profit reduction last year reduced their ability to meet their interest obligations and increased their debt equity ratio (slow retained earnings growth). There is little evidence to suggest, however, that either firm is in any significant long-term danger.
d) Limitations
There are several limitations to the findings of this report. The economic and competitive environment has changed significantly since these figures were published. Fuel prices have come down substantially but the economy has also weakened. Although Australia is more insulated than many other Western nations from the downturn, the key trans-Pacific routes are threatened by the crisis coming from the United States. These routes are also threatened by increased competition. The effects of Virgin Blue and Delta's entry into this market remain unknown. Another limitation is that the airline industry is highly complex and therefore it is difficult to gain a full understand of the situation based on a ratio analysis, even with supplementary data. This report is therefore intended as an overview only.
Conclusions
Both Qantas and Virgin Blue are healthy companies, but the national carrier appears to be better positioned to withstand...
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