Paste your essay in here…COMPANY HISTORY
Queensland and Northern Territory Aerial Services Ltd. (from which the name ‘Qantas’ was derived), is the oldest Australian airline in the English-speaking world. On 16 November 1920, Qantas Ltd. was formed by 3 men with a vision that aviation would bring great benefits to the people of western Queensland. They were – Sir Hudson Fysh, Paul McGinness and Sir Fergus McMaster. There was another man – Arthur Baird who established the reputation for engineering excellence that Qantas has not lost. Together these 4 men made Qantas Airways the success that it is today. (“The Men Who Established Qantas”, n.d.)
The first ever passenger of Qantas was an 84-year-old pioneer named Alexander Kennedy, who agreed join the provisional board and was given ticket No. 1. The flight was on 2 November 1922. (“The Plane, The Place and The Passenger”, n.d.). In 1924 a four-passenger DH50 with an enclosed cabin was introduced in Qantas. For the first time the passengers did not need to wear helmets and goggles. In 1935, Qantas was also the first ever airlines company to venture overseas from Brisbane to Singapore that took 4 days to complete.
Over the years, Qantas has grown and changed according to its surrounding world. It grew from about 6500 employees in 1959 to over 28,000 employees in 2015 and carries over 49 million passengers every year over 84 destinations in 6 continents. (Herald Sun, 2017)
BOARD OF DIRECTORS
The Board of Directors of Qantas is a 11-member committee that comprises of a majority of independent Non-Executive Directors. Together with the Executive Director (Group CEO), the committee has widespread experience and diverse perspectives. Since they mainly independent, they bring accountability and judgement to all the deliberations made by the board to ensure maximum benefits to the shareholders, suppliers, customers, employees, government regulators and the members of the Qantas Community. The Board comprises of 4 women and 7 men. There is an Audit Committee at Qantas that assist the Board in fulfilling its corporate governance responsibilities in regard to financial reporting, audit and risk management.
One of the Non-Executive Directors, Corinne Namblard, was part of an investigation into the corruption scandal surrounding the world’s oldest surviving bank in Italy, shortly after which she resigned.
ENVIRONMENTAL CONCERNS AND CSR
Qantas’ commitment is to minimise the impact that they have on the environment at every step – in the air and on the ground. For this they have an 800+ strong group of ‘Green Team’ staff. In order to reduce their impact, they have set many goals like increasing fuel efficiency, reducing emissions by 50% by 2050, 35% reduction in electricity consumption and 20% reduction in water consumption. The people at Qantas are guided by a simple philosophy – ‘Measure, Reduce, Offset and Influence’. Qantas is renewing their fleet with the industry’s most advanced aircrafts, they are engaging their employees in fuel optimisation and they are the leaders in the research of a commercially viable biofuel market. They are also engaging all their customers, employees and the community with the world’s largest airline carbon offset program that supports growth of sustainable tourism in Australia. (“Our Planet”, n.d.)
COMPETITIVE ADVANTAGE
Qantas is the domestic market leader in Australia. It dominates the total passenger volume on different routes and the “winning airline” on each route. (Peter Davenport, 2017). Qantas and JetStar (a wholly owned subsidiary of Qantas) together have the highest-margin carriers operating in Australia and generates over 80% of its revenues through domestic operations. The customers of Qantas are loyal to the company, and with the partnership of the company with Emirates, they have more flight options in order to have the best flying experience and service. Lastly, Qantas is known for its reputation for Operational and Safety Excellence which makes it a highly trusted brand in the market. (Qantas Investor Day, 2017)
PESTLE ANALYSIS
• Political – An unstable political environment would have an unfavourable effect on relations of countries with each other which would in turn affect the people travelling to and fro. On the other hand, a stable political environment will help airlines build good partnerships that would lead to high profits in the long run. Various parts of the world are faced with issues in their operations. Therefore, 13 of the major airline companies in the world came together to form the ‘One World’ alliance to help bring better service to the country – Qantas was one of them.
• Economical – In the last few years, the world economy has become very volatile. Economic environment plays a major role in affecting the tourism and travel industry. Qantas needs to focus over strategies that will help it overcome and difficulties due to the major changes in the economy.
• Social – Qantas operates in over 40 counties with over 1000 destinations across the world. More than 40 million passengers are accommodated in flights annually. Due to this Qantas is faced with different cultural preferences of customers. Also, factors such as changing trends among customers, introduction of new trends and different likes and dislikes of people affects the operations of Qantas. They need to be prepared for all of these factors and have a customised customer service for better brand loyalty.
• Technological – Using innovative technology is very important in the aviation industry. New aircrafts with different improvements are released every year by Airbus and Boeing. Currently, the manufacturing trend is based on more fuel-efficient airplanes to take in the environmental damage. Fuel is also one of the major factors that affects the profits of any airline company in the industry. It makes up for the largest percentage in the operating expenses.
• Legal – Different countries have different legal requirements in this sector and any kind of penalties are very high. However, Qantas has always shown obedience to the legal requirements for its business operations.
• Environmental – The aviation industry has always been criticized for its impact on the environment. The growth of the industry over the years has led to some serious issues about carbon emissions, and the noise pollution. But, the long-term strategies set by the company aims to minimise any kind of impact it has on the environment so as to become a green company.
PORTER 5 FORCES
• Bargaining Power of Suppliers – The suppliers in the aviation industry have the most power. There are only 2 major suppliers of aircrafts – Aibus and Boeing. As a result, Qantas has to follow the terms dictated by the suppliers.
• Bargaining Power of Buyers – There are countless options for a passenger to go with as there are a number of airline companies offering the same or similar services. As a result, the bargaining power of buyers is very high – they dictate the terms.
• Threat from substitutes – There are substitutes to airlines like cars, buses, cruises, trains. But they can never replace the importance of airlines as most of the routes covered by airplanes are not accessible by road or water. And if they are, then they are time consuming and tiresome. Therefore, the threat from substitutes is moderate to low.
• Threat from new entrants – It takes a lot of investment and funds to get into the airline industry, so it would be tough for new companies to come in. However, the airline industry is a competitive field and therefore has entrants coming up time and again. Qantas is a well-known airline and also one of the oldest. As a result, for any company to rise up to their level would be a task. Thus, the treat from new entrants for Qantas is moderate to low.
• Intensity of Rivalry – The rivalry among different airlines is very high as there are numerous flights operating in the same route in the day. Yes, Qantas is known to be a market leader, but that doesn’t change the fact that it faces intense competition from its rival companies. One of the major factors that comes in play here is the price rivalry – to price their services the lowest in order to gain more customers.
HISTORICAL ANALYSIS
Profitability Analysis
Net profit margin is calculated to estimate the profit for every dollar that a company earns as their revenue. A higher net profit margin indicated that the pricing of the products is optimum, and they are good at exercising good cost control. The net profit margin for Qantas in 2018 is 6.66 % which is higher than the industry average of 4.2%. This means that for every $1 of revenue that they have they earn a net profit of $0.0574.
EBIT is an indicator of profit, which is calculated by deducting the operating expenses from the operating revenues. Qantas has a margin of 10.69% which is way higher than the industry average of 7.5%. This means that 10.69 % of the revenues of Qantas makes up the EBIT.
ROA is a measure to see how efficiently are the firm’s assets being managed, and also the ability of the management team to control expenses. The ROA for Qantas is 5.464 %. It has grown from 5.029% which shows that slowly, but steadily, Qantas is increasing its efficiency.
ROE shows the return that the shareholders get on every unit that they have invested in the company. The ROE for Qantas is 26.137% which is a very good number in order to attract new investors.
Efficiency Analysis
The TATO of Qantas has increased from 81.690% to 82.51% showing that the company is slowly trying to increase the efficiency of their assets and inventories, i.e., the aircrafts.
The working capital efficiency of Qantas is also rising from 3.49% to 3.79%, which shows that the company is increasing the sales to net working capital ratio.
Solvency Analysis
We usually use the current ratio to measure the solvency of a company. In the case of Qantas the current ratio is 0.4889%. Qantas has still not reached the minimum requirement of 1:1 which is probably due to lower sales and high expenditures. It has increased from the 2017 value, but still not reached the benchmark. The quick ratio of Qantas is 0.44% which is also below the minimum required rate of 0.5%. However, it has increased from 0.39% in the previous years and should likely go over the minimum rate in the next couple of years.
ANALYST ADJUSTMENTS
After adjusting all the one off expenses the profitability ratios change. The changes are as follows –
• Net Profit Margin changed from 6.66% to 12.253%
• ROE changed from 26.137% to 48.086%
• EBIT Margin changed from 10.69% to 16.283%
• ROA changed from 6.495% to 10.054%
VALUATION
FCFF & Valuation
G(RR*ROC) -6.74% 0.61% -1.07% -1.44% 3.39%
FCFF -1675.4 644.6 1307.1 1182 526.1
ROC -18.44% 5.02% 7.81% 6.21% 6.50%
Reinvestment Rate 36.55% 12.13% -13.65% -23.25% 52.22%
2019 2020 2021 2022 2023 Terminal Value
FCFF Forecast 527.0548 528.0112 528.9695 529.9294 530.8912 13981.98
Discounted FCFF 509.8938 494.1868 478.9636 464.2094 12299.1
Enterprise Value 14246.35
Cash 1694
Equity 11192.35 Share Price 6.65
Debt 4748
No. of Shares 1683
WACC 3.37%
(1+WACC) 103.37%
Price of share (Actual) 5.89
TA 18647
TE 3959
TL 14688
Outstanding Shares 1683
A growth rate of -1.05% shows that the firm is having a very slow negative year on year growth.
Reinvestment rate is important for investors as this means the rate which you get if money from one fixed income investment such as a bod is taken out and put into another. A RR of 12.80% is a good amount to attract various investors.
ROC shows the potential for value addition for the shareholders within the company taking the capita into consideration. In this case a ROC of 1.4% isn’t a big number, but this number shows that the potential is there, and the rate is stable
From the above valuation we can see that the share price that we calculated is $6.19 whereas the actual share price is $5.89. This shows that the market is slightly undervalued and will rise to this level in the future. Therefore, it is recommended to buy the shares of the company.