Qantas/Virgin Blue Overview and Contents

Qantas/Virgin Blue

Overview and Contents of the Annual Report

USE ONLY THE 2008 CONSOLIDATED FIGURES

What date is the end of the financial year? State Day, Month and Year

How many passengers did Qantas Ltd. carry in the year?

million

How many members make up the Board of Directors?

Who is the Chief Executive officer of Qantas Ltd.

Geoff Dixon

What were the earnings per share (to the nearest cent) in 2008?

cents

What is the name of the lead auditor from the firm of external auditors for Qantas Ltd.

Martin Sheppard

Does Qantas Ltd. have a carbon off-set program in place ?

Does the report contain a statement of significant accounting policies?

How much is Profit before tax?

What is the figure for Total assets?

19700.1

What is the figure for current income tax payable?

What is the figure for Net Cash Flows from Investing Activities

(1322.6)

Which item appearing both the Balance Sheet and Statement of Cash Flows is the same?

Cash & Equivalents

75,78

How many ordinary shares are on issue as at the end of the financial year?

1929.1

Does Qantas include a report by business segments?

Yes

90-91

How much was the total profit for Qantas Holidays for the year?

29.9

91

b) Qantas is the national airline of Australia. They have been in operation since 1920 with a pair of WWI surplus biplanes and soon added a scheduled mail service. The company expanded during the post-war period and established a position as the dominant airline in Australia (Qantas 2008 Annual Report). Today, with one of the airline industry's most recognizable brand names, Qantas is considered to be a "legacy" carrier. In the airline industry, these are the older companies with a traditional airline business model. The company operates 224 aircraft, servicing 146 destinations in 36 countries. They fly 6720 flights per week, carry 38.6 million passengers (Ibid) and have 33, 670 employees (MSN Moneycentral, 2009). In 2008 Qantas recorded a $969 million profit on revenues of $16.191 billion. Qantas operates several different divisions, including Qantas Holidays, Jetstar and ancillary businesses.

Virgin Blue is part of the Virgin Group, and was founded in 2000 as a low-cost competitor to Qantas. The company's service offering has proved popular, and the fleet now stands at 69 aircraft. Virgin Blue is #2 in the Australia based on fleet size and number of passengers flown. Virgin Blue mainly competes in the domestic and vacation markets, but has recently moved to challenge Qantas on the key U.S. route with its V Australia subsidiary (Creedy, 2009). The routes from Australia to the west coast of North America have long been a cash cow for Qantas, insulating them from downturns elsewhere (Smith, 2007).

In light of the intense competition between these two airlines, this financial analysis will attempt to glean some insight into the respective financial situation of these firms, with the intent of determining which firm has been more successful of late.

c) Profitability

Both airlines saw reduced profitability in 2008. Qantas saw its net margin reduced from 5.18% to 4.71%; Virgin Blue saw its margin reduced from 9.98% to 4.21%. It is difficult to ascertain the cause of the Qantas numbers. The income statement (2008 Annual Report, p. 74) shows that net profit/net revenue = 5.98% for 2008 and 4.46% for 2007. The improvement in the net margin for Qantas is attributable to expenditure reductions. These were incremental, meaning that there were no significant undertakings, but the operating margin was improved from 6.83% in 2007 to 8.48% in 2008. In real number terms, this improvement accounted for over 100% of the bottom line improvement. The numbers provided for Virgin Blue are correct. Most of the decrease in profitability can be attributed to increases in costs that are not matched by increases in revenues. Operating expenditures increased 18.3% while revenues only increased 8.4% (2008 Virgin Blue Preliminary Statement). Virgin Blue has been building out capacity for essentially its entire existence. For the most part, revenues have followed this capacity quickly, in particular through the middle part of the last decade. In their public statement, Virgin Blue cited high fuel prices (Oliver, 2008), and they did increase significantly, but so did labour costs, indicating a general increase in capacity, that was unmatched by an increase in revenue.

Efficiency

Qantas was able to record efficiency gains last year. This is in part a function of the company's ability to reduce costs and thereby improve their profitability. Asset and liability gains were incremental to the revenue gains, so the improved efficiency stems mainly from the increase in profit. The steep reduction in revenue at Virgin Blue resulted in a reduction in their efficiency ratios. Given that the company continued to expand in size with only a minor expansion in revenue, their efficiency suffered. 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 economic downturn. Whereas Virgin Blue's business suffered in 2008, Qantas was able to reduce costs, improve profitability and reduce its long-term debt. As a consequence, Qantas now stands as having the better financial position of the two firms. Virgin Blue, being a young airline, is prone to more wild fluctuations in operating effectiveness, a consequence of its relative inexperience.