Qantas Financial Analysis Report

1 Table of Contents

2 A Company Overview........................................................................................................4

2.1 Business model............................................................................................................5

2.1.1 Full service carrier (FSC) and low cost carrier (LCC) models............................5

2.2 Social and economic environment...............................................................................6

2.2.1 Porter five forces analysis....................................................................................6

2.2.2 SWOT Analysis...................................................................................................7

3 Financial Analysis - Qantas...............................................................................................8

3.1 Horizontal Analysis.....................................................................................................8

3.1.1 Income Statement.................................................................................................8

3.1.2 Statement of Financial Position.........................................................................10

3.1.3 Income Statement...............................................................................................11

4 Financial Analysis – Virgin Australia..............................................................................13

4.1 Horizontal Analysis...................................................................................................13



4.2 Vertical Analysis.......................................................................................................16



5 Comparison between Qantas and Virgin..........................................................................19

5.1 Horizontal Analysis...................................................................................................19



5.2 Vertical Analysis.......................................................................................................21



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6 Key Ratios........................................................................................................................23

6.1 Return and Profitability.............................................................................................23

6.1.1 Net Profit Margin...............................................................................................23

6.1.2 Return on Equity................................................................................................24

6.1.3 EBITDAR Margin..............................................................................................24

6.2 Risk Ratios.................................................................................................................25

6.2.1 Current Ratio/Working Capital Ratio................................................................25

6.2.2 Quick Ratio........................................................................................................25

6.2.3 Debt to Equity Ratio...........................................................................................26

7 Other Relevant Information.............................................................................................27

8 Conclusion and Recommendations..................................................................................28

9 References........................................................................................................................29

A Appendix..........................................................................................................................30

A.1 Details of Qantas Group’s Acquisitions and Milestones...........................................30

A.2 Financial Statements – Qantas...................................................................................32

A.2.1 Income Statement...............................................................................................32

A.2.2 Statement of Financial Position.........................................................................33

A.3 Financial Statements – Virgin Australia....................................................................34

A.3.1 Income Statement...............................................................................................34

A.3.2 Statement of Financial Position.........................................................................35

A.4 Formulas and Calculations........................................................................................36

A.4.1 Horizontal Analysis............................................................................................36

A.4.2 Vertical Analysis................................................................................................36

A.4.3 Net Profit Margin...............................................................................................36

A.4.4 Return on Equity................................................................................................36

A.4.5 EBITDAR Margin..............................................................................................37

A.4.6 Current Ratio......................................................................................................38

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A.4.7 Quick Ratio........................................................................................................38

A.4.8 Debt to Equity....................................................................................................38

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2 A Company Overview

Founded in the Queensland outback in 1920, Qantas has grown to be Australia's largest

domestic and international airline. Registered originally as the Queensland and Northern

Territory Aerial Services Limited (QANTAS), Qantas is widely regarded as the world's

leading long distance airline and one of the strongest brands in Australia. Qantas have built

its sup-groups below: QantasLink, Q Catering, Qantas Freight, Express Ground Handling,

Qantas Holiday and Jetstar.

QantasLink

QantasLink operates over 2000 flights each week to 56 metropolitan, regional and

international destinations across Australia and to Port Moresby in Papua New Guinea.

Q Catering

Qantas Catering Group Limited is a wholly owned subsidiary that operates two catering

businesses - Q Catering and Snap Fresh. Q Catering has catering centres in four Australian

ports - Sydney, Melbourne, Brisbane and Perth.

Qantas Freight

Focused on providing excellence in airfreight services, Qantas Freight Enterprises is

Australia's largest independent airfreight services business employing over 1,300 people in

Australia and across the world.4

Qan

tas

Gro

up

Qantas Link

Q Catering

Qantas Freight

Express Ground Handling

Quantas Holiday

Jetstar

Qantas Freight operates a network of 21 specialist cargo handling terminals in 15 major

gateway ports across Australia and in a dedicated terminal in Los Angeles. These terminals

handle freight for Qantas and Jetstar, as well as many other major carriers.

Express Ground Handling

A wholly owned subsidiary of Qantas Airways within the Qantas Airports and Catering

Group, provides comprehensive ground handling services to Jetstar and several regional

airlines.

Qantas Holiday

Part of the Jetset Travelworld Group wholesale suite, is one of Australia's leading travel

wholesalers. Qantas Holidays markets an extensive range of competitively priced products

and services covering the Qantas network, including partner airlines and codeshare services,

as well as packages for other airlines under the Viva! Holidays brand. In addition to

destination specific promotions, Qantas Holidays sells packages to a number of special events

in Australia, such as popular stage shows and sporting events.

Jetstar

The Jetstar Group is a value based, low fares network of airlines operating in the leisure and

value based markets offering all day, every day low fares.

2.1 Business model

2.1.1 Full service carrier (FSC) and low cost carrier (LCC) models

Using their dual complementary airlines, Qantas and Jetstar, the Group focuses on its main

business as transportation of passengers and is committed to maintaining their leading

position in operating long-haul international, and short-haul domestic and regional services.

There are two business models in the airline industry, namely the FSC and LCC models. FSC

model is essentially based on a differentiation strategy that bears much heavier overheads,

while LCC model based on the cost minimisation strategy by significantly cutting costs

through reducing their overheads (Alamdari and Fagan, 2005). Qantas airline (both domestic

and international) is operating based on the FSC model, while Jetstar is operating based on

LCC model as a direct competitor to the low cost Virgin Blue in Australia (Hunter, 2006).

Qantas Group also possesses a broader portfolio of businesses and investments, including

Qantas Loyalty and Qantas Freight, which creates assorted revenue streams and generates

more values for customers and investors as a result (Details please see Appendix A.1).

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2.2 Social and economic environment

2.2.1 Porter five forces analysis

• Industry Competitors

Qantas observes severe competition from Virgin Australia domestically and a number of low

cost airlines internationally such as China Southern Airline and Malaysia airline. Qantas must

always revitalise its product offerings in order to be competitive and sustainable amongst

other players.

• Threat of new entrants

Extremely high fixed initial costs along with government regulatory requirements increase

the entry threshold for the air transportation industry. Therefore, the high barriers of entry and

the dominant powers of existing large players significantly reduce the number of new

entrants.

• Threat of substitute products or services

Other forms of transportation like railways, buses, ships and personal transportation are direct

substitutes for those who are not concerned about travelling fast. Indirect substitutes such as

teleconferencing, online chatting and VoIP (Voice over IP) will increase the threat of

substitutes as they save time and money for customers who are travelling.

• Bargaining power of customers

Buyers for Qantas consist of business travellers, leisure travellers, budget travellers, travel

agents, and many others. The expectations of the customer have grown over time as they

demand more value for every dollar spent. In addition, technology development also allows

firms and individuals to communicate with ease which strengthens the bargaining power of

customers.

• Bargaining power of suppliers

The aircraft suppliers for Qantas are the only two largest aircraft manufacturers: Boeing and

Airbus. Fuel will be supplied by companies like Shell and BP. Hotels and catering service are

also provided to the customers as well as crew members in different destination of its

operations. In order to lower the cost, Qantas need to maintain a fairly good communication

with its suppliers to achieve the competitive edge.

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2.2.2 SWOT Analysis

Qantas' strong dominance in Australian domestic market enables it to take advantage of the

local expertise to gain access to key markets as well as enhancing the quality of its services.

However, increased competition from the growing numbers of low cost and low fare airlines

could impact the group's market share especially in the Asian region.

FIGURE 2.2.2-1 SWAT ANALYSIS OF QANTAS

Based on the above SWOT analysis, it can be inferred that the strengths of Qantas make it a

well respected airline which infuses public confidence. Furthermore, its brand name gives

good selling prospects. However, due to the attribute of aviation industries, there are a lot of

challenges that contributes to the uncertainty of the financial performances.

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Strength1. Strong support of Australian Government2. One of the top and largest airlines operating in Australia3. Has been one of the historical airline operators in the world4. Has over 40 destinations domestically and internationally5. Good brand building exercises through advertising and sponsorship

Weakness1. Heavy concentration around the Australia region2. Costly and ineffective employee training schedule

Opportunity1. Due to the monopolistic nature of Qantas, it reduces the chance of other airlines gaining more market share in Australia2. More potential international destinations in Asia3. Collaboration with international airlines

Threats1. Increasing fuel prices 2. Rising Labor Costs2. Increasing Competition in Australian Market from new start ups

3 Financial Analysis - Qantas

3.1 Horizontal Analysis

3.1.1 Income Statement

TABLE 3.1.1-1 HORIZONTAL ANALYSIS - INCOME STATEMENT QANTAS

2010 2011 2012 2013 2014 GraphRevenue and Other Income

Net passenger revenue -5.7% 10.1% 13.1% 0.4% -3.2%Net freight revenue 7.5% 2.6% 7.2% 3.5% 2.1%Other -7.8% -0.1% -40.5% 8.2% -10.7%

Revenue and Other Income -5.4% 8.1% 5.6% 1.1% -3.5%Expenditure

Manpower and staff related -7.6% 8.5% 2.1% 1.9% -3.4%Fuel -8.9% 10.5% 16.3% -1.6% 7.4%Aircraft operating variable -5.6% 3.5% 7.7% 2.7% 2.6%Depreciation and amortisation -13.7% 4.2% 10.8% 4.8% -1.9%Impairment of specific assets 236.5%Impairment of cash generating unitNon-cancellable aircraft operating lease rentals 16.7% 7.8% -3.0% -4.4% -1.0%Share of net loss/(profit) of associates and jointly controlled entitles

-73.3% -650.0% -86.4% -1400.0% 69.2%

Other 2.3% 6.1% 16.2% -16.0% 1.8%Expenditure -5.8% 6.9% 10.0% -1.2% 21.8%Statutory profit/(loss) before income tax expense and net finance costs

24.6% 72.3% -139.7% -214.5% -2005.1%

Finance income -12.6% 6.1% -5.7% -39.8% -24.8%Finance costs 11.8% 19.1% 17.0% -17.1% -3.4%

Net finance costs 240.9% 50.7% 55.8% 6.3% 9.1%Statutory profit/(loss) before income tax expense -1.7% 81.5% -208.0% -103.2% -36245.5%Income tax (expense)/benefit 6.9% 19.4% -241.9% -108.6% -12688.9%Statutory profit/(loss) for the year -5.7% 114.7% -198.0% -100.8% -142250.0%

In 2009-2014 timeframe, Qantas has experienced a low rate of growth in Revenue and Other

Income of 1.2% on average per year. Its highest figure was reached in 2013 when it was

$15,902m. However in 2014 Annual Report it declined to $15,352m (-3.2% YoY 2013-

2014). Revenue and Other Income are highly affected for a decline in Other (-10.2% YoY

average 2009-2014) and a low rate of growth in Net passenger revenue (2.9% YoY average

2009-2014). Other account includes Frequently Flyer marketing revenue (-38%) and Contract

work revenue (-48%).

Qantas’ Expenditure has an average rate of growth of 6.3%. Fuel Expense, as one of the most

important expenditures in airline companies, has grown for most of the years (4.8% YoY

average 2009-2014). In 2014 this company did an impairment review that had a high impact

in the Income Statement, this program cost the company $2,849m in expense.

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The growth of Revenue and Other Income between 2009 and 2014 was 5.5%. Yet,

Expenditure has grown 33.3% in the same period. As a result the Statutory profit shows a

declining trend. In 2014 Qantas attained the highest losses among the years analysed in this

report.

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3.1.2 Statement of Financial Position

TABLE 3.1.2-2 HORIZONTAL ANALYSIS-STATEMENT OF FINANCIAL POSITION

QANTAS

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2010 2011 2012 2013 2014 GraphCurrent Assets

Cash and cash equivalents 2.4% -5.6% -2.8% -16.7% 6.1%Receivables 3.2% -5.6% 8.2% 29.3% -16.7%Other financial assets -58.5% 36.5% -72.3% 104.5% -4.4%Inventories 27.6% 16.6% 1.1% -3.2% -12.9%Assets classified as held for sale 250.0% -78.0% 265.0% -42.5% 219.0%Other -13.3% 2.8% -70.3% -9.1% 1.8%

Total current assets -2.2% -3.3% -8.4% -4.0% -0.6%Non-Current Assets

Receivables -22.0% 3.9% 11.6% -63.1% -9.2%Other financial assets -70.3% -31.4% -75.7% 58.8% 25.9%Investments accounted for using the equity method

-2.3% 25.9% -4.0% -58.4% -24.7%

Property, plant and equipment 3.0% 9.1% 3.6% -2.2% -24.1%Intangible assets 0.6% -11.2% 2.9% 17.0% 3.8%Other -36.4% -57.1% 666.7% 504.3% 482.7%

Total non-current assets 0.0% 8.1% 3.3% -4.1% -17.8%Total assets -0.7% 4.8% 0.1% -4.1% -13.5%Current Liabilities

Payables -4.5% -0.7% 7.3% -1.1% 0.4%Revenue received in advance 1.9% -3.2% 3.8% -4.3% 11.8%Interest-bearing liabilities 1.0% -8.4% 93.9% -25.4% 44.9%Other financial liabilities -62.2% 64.0% -7.1% -76.7% 111.6%Provisions -11.6% 1.8% 92.8% -5.0% 4.9%Liabilities classified as held for sale -100.0% -100.0%

Total current liabilities -7.0% -0.1% 19.1% -10.5% 13.2%Non-Current Liabilities

Revenue received in advance -13.4% 4.1% 2.3% 4.4% -0.3%Interest-bearing liabilities 3.8% 6.6% -0.4% -3.4% 0.5%Other financial liabilities -13.8% 113.4% -54.6% -75.9% 22.2%Provisions 5.1% 15.5% 13.8% -40.9% -6.9%Deferred tax liabilities 17.8% 7.3% -39.5% 34.7% -100.0%

Total non-current liabilities 1.6% 10.2% -5.7% -5.6% -8.2%Total liabilities -2.5% 5.6% 4.8% -7.9% 1.8%Equity

Issued capital 0.0% 0.0% 0.0% -0.8% -1.3%Treasury shares -6.9% 33.3% -41.7% 2.4% -62.8%Reserves 1457.1% -22.0% -57.6% 255.6% -163.3%Retained earnings 10.7% 21.6% -47.3% 42.6% -258.1%

Equity attributable to the members of Qantas

3.8% 3.5% -11.1% 6.8% -51.0%

Non-controlling interests -4.5% -90.5% 0.0% 25.0% -20.0%Total equity 3.7% 2.8% -11.1% 6.8% -50.9%

Qantas’ assets have declined from $20,049m in 2009 to $17,318m in 2014 (-13.6%). This

event occurred due to the decrease in Property, Plant and Equipment (PPE) (-13.6%) and

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Cash and cash equivalent (-17%). Major decrease in PPE account occurred in 2014 due to the

impairment review.

Liabilities have increased 1.2% from $14,284m in 2009 to $14,452m in 2014. An increase of

11.8% during 2014 in Revenue received in advance had a high impact in Qantas’ liabilities.

From 2009 to 2013, Qantas’ equity had no relatively large changes with an average of

$5,841m. However, in 2014, this company had recorded a high statutory loss that resulted a

50.9% decline in company’s equity.

Vertical Analysis


TABLE 3.1.3-3 VERTICAL ANALYSIS - INCOME STATEMENT QANTAS

2010 2011 2012 2013 2014 GraphRevenue and Other Income

Net passenger revenue -5.7% 10.1% 13.1% 0.4% -3.2%Net freight revenue 7.5% 2.6% 7.2% 3.5% 2.1%Other -7.8% -0.1% -40.5% 8.2% -10.7%

Revenue and Other Income -5.4% 8.1% 5.6% 1.1% -3.5%Expenditure

Manpower and staff related -7.6% 8.5% 2.1% 1.9% -3.4%Fuel -8.9% 10.5% 16.3% -1.6% 7.4%Aircraft operating variable -5.6% 3.5% 7.7% 2.7% 2.6%Depreciation and amortisation -13.7% 4.2% 10.8% 4.8% -1.9%Impairment of specific assets 236.5%Impairment of cash generating unitNon-cancellable aircraft operating lease rentals 16.7% 7.8% -3.0% -4.4% -1.0%Share of net loss/(profit) of associates and jointly controlled entitles

-73.3% -650.0% -86.4% -1400.0% 69.2%

Other 2.3% 6.1% 16.2% -16.0% 1.8%Expenditure -5.8% 6.9% 10.0% -1.2% 21.8%Statutory profit/(loss) before income tax expense and net finance costs

24.6% 72.3% -139.7% -214.5% -2005.1%

Finance income -12.6% 6.1% -5.7% -39.8% -24.8%Finance costs 11.8% 19.1% 17.0% -17.1% -3.4%

Net finance costs 240.9% 50.7% 55.8% 6.3% 9.1%Statutory profit/(loss) before income tax expense -1.7% 81.5% -208.0% -103.2% -36245.5%Income tax (expense)/benefit 6.9% 19.4% -241.9% -108.6% -12688.9%Statutory profit/(loss) for the year -5.7% 114.7% -198.0% -100.8% -142250.0%

Net passenger revenue has always been the major source of income for Qantas while Fuel

expense has been one of the largest components among expenditures. In 2014 Fuel consisted

29.1% of Revenue.

Statement of Financial Position

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TABLE 3.1.3-4 VERTICAL ANALYSIS-STATEMENT OF FINANCIAL POSITION QANTAS

2009 2010 2011 2012 2013 2014 GraphCurrent Assets

Cash and cash equivalents 18.0% 18.6% 16.8% 16.3% 14.1% 17.3%Receivables 5.3% 5.5% 4.9% 5.3% 7.2% 6.9%Other financial assets 2.8% 1.2% 1.5% 0.4% 0.9% 1.0%Inventories 1.2% 1.6% 1.8% 1.8% 1.8% 1.8%Assets classified as held for sale 0.1% 0.5% 0.1% 0.3% 0.2% 0.8%Other 2.3% 2.0% 2.0% 0.6% 0.5% 0.6%

Total current assets 29.8% 29.3% 27.0% 24.7% 24.8% 28.5%Non-Current Assets

Receivables 2.6% 2.0% 2.0% 2.3% 0.9% 0.9%Other financial assets 1.7% 0.5% 0.3% 0.1% 0.1% 0.2%Investments accounted for using the equity method

1.9% 1.9% 2.3% 2.2% 0.9% 0.8%

Property, plant and equipment 60.6% 62.9% 65.5% 67.7% 69.0% 60.6%Intangible assets 3.3% 3.4% 2.8% 2.9% 3.6% 4.3%Other 0.1% 0.0% 0.0% 0.1% 0.7% 4.7%

Total non-current assets 70.2% 70.7% 73.0% 75.3% 75.2% 71.5%Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Current Liabilities

Payables 9.1% 8.8% 8.3% 8.9% 9.2% 10.7%Revenue received in advance 15.5% 15.9% 14.7% 15.2% 15.2% 19.7%Interest-bearing liabilities 3.1% 3.2% 2.8% 5.4% 4.2% 7.0%Other financial liabilities 3.2% 1.2% 1.9% 1.8% 0.4% 1.1%Provisions 2.5% 2.3% 2.2% 4.2% 4.2% 5.1%Liabilities classified as held for sale 0.0% 0.0% 0.0% 0.1% 0.0% 0.0%

Total current liabilities 33.5% 31.3% 29.9% 35.6% 33.2% 43.5%Non-Current Liabilities

Revenue received in advance 6.1% 5.4% 5.3% 5.4% 5.9% 6.8%Interest-bearing liabilities 24.6% 25.7% 26.1% 26.0% 26.2% 30.4%Other financial liabilities 1.3% 1.2% 2.4% 1.1% 0.3% 0.4%Provisions 2.7% 2.8% 3.1% 3.5% 2.2% 2.3%Deferred tax liabilities 3.0% 3.6% 3.7% 2.2% 3.1% 0.0%

Total non-current liabilities 37.8% 38.6% 40.6% 38.3% 37.7% 40.0%Total liabilities 71.2% 70.0% 70.5% 73.8% 70.8% 83.5%Equity

Issued capital 23.6% 23.8% 22.7% 22.6% 23.4% 26.7%Treasury shares -0.3% -0.3% -0.3% -0.2% -0.2% -0.1%Reserves 0.0% 0.5% 0.4% 0.2% 0.6% -0.5%Retained earnings 5.2% 5.8% 6.7% 3.5% 5.3% -9.6%


28.5% 29.8% 29.5% 26.2% 29.1% 16.5%

Non-controlling interests 0.2% 0.2% 0.0% 0.0% 0.0% 0.0%Total equity 28.8% 30.0% 29.5% 26.2% 29.2% 16.5%

PPE has been the largest assets in Qantas’ Statement of Financial Position as they ranged

between 60.6% and 69% of the total assets. In addition, the company always tends to have a

significant proportion of assets in Cash and cash equivalents, this account ranged on average

16.9% in the past 6 years.

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Qantas has used Bank Loans as its long term financing source. Interest-bearing liabilities

account is on average 36.2% of the Total Liabilities. Revenue received in advance is an

important source of short financing for this company.

4 Financial Analysis – Virgin Australia



TABLE 4.1.1-5 HORIZONTAL ANALYSIS INCOME STATEMENT VIRGIN

2010 2011 2012 2013 2014 GraphRevenue and income

Revenue 14.5% 9.8% 19.7% 1.9% 7.5%Other income -85.3% -51.0% 116.0% 211.1% -2.4%Net foreign exchange gains 3825.0% -78.3%Share of net profits of associate accounted for using the equity method

50.0% -66.7% 0.0% -50.0% -100.0%

Revenue and income 13.1% 9.7% 19.8% 2.6% 7.1%Operating expenditure

Aircraft operating lease expenses 33.8% -2.4% 12.6% 18.6% 11.3%Airport charges, navigation and station operations 10.4% 4.2% 8.6% 6.1% 11.6%Contract and other maintenance expenses -3.3% 16.3% 18.2% 2.0% -0.5%Commissions and other marketing and reservations expenses

6.8% 24.1% 13.7% -7.0% 28.9%

Fuel and oil 4.4% 15.8% 15.2% 7.9% 7.4%Labour and staff related expenses 7.5% 16.0% 13.4% 16.0% 6.7%Impairment lossOther expenses from ordinary activities 29.8% 24.8% 88.7% 14.0% 10.7%Depreciation and amortisation 10.9% 10.8% 9.3% 10.2% -1.6%Inefffective cash flow hedges and non-designeted derivatives (gains)/losses

-94.3% 581.1% -37.4% -228.1% -282.5%

Net operating expenses 3.3% 14.7% 16.1% 6.9% 13.7%Statutory profit/(loss) before income tax expense and net finance costs

-155.8% -151.5% -243.6% -247.8% 281.9%

Finance income 4.1% 30.3% 1.1% -45.2% -33.5%Finance costs -7.3% 0.5% -9.6% -7.2% 69.3%

Net finance costs -12.1% -14.2% -17.6% 27.7% 109.9%Statutory profit/(loss) before income tax expense -115.2% -376.4% -128.7% -650.0% 223.6%Income tax benefit/(expense) -119.6% -307.7% -116.3% -1272.7% 149.0%Statutory profit/(loss) for the year -113.3% -418.3% -133.6% -529.8% 262.9%

The financial statements of Virgin Australia showed that there has been an increase in

Revenue and Income over the years. In 2014 the Revenue hits $4,307m, which is 63% higher

than it was in 2009. The average rate of growth for the timeframe is 10.5%.

Virgin’s Expenditure has also increased for the past 6 years. Fuel Expense increased

moderately as the crude oil price rose over the years (10.1% YoY average 2009-2014).

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Given that Virgin is a large sized public corporation, it has rather volatile statutory profits (or

losses) during the last 6 years and there is no clear trend. However, in 2014 Virgin reached

the highest level of losses ($356m).

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TABLE 4.1.2-6 HORIZONTAL ANALYSIS-STATEMENT OF FINANCIAL POSITION VIRGIN

2010 2011 2012 2013 2014 GraphCurrent Assets

Cash and cash equivalents 71.2% -10.2% 9.7% -27.7% 35.0%Trade and other receivables 15.4% 41.4% 1.7% 26.9% 17.7%Inventories 192.2% 100.0% 21.1%Derivative financial instruments 210.1% -79.9% -91.9% 16033.3% -82.1%Other financial assets 414.5% -55.1% 128.3%Other current assets 225.0% 15.4% 56.7%Current tax assets -100.0% 275.0% -100.0%Assets classified as held for sale

Total current assets 62.3% -4.3% 10.8% -6.7% 25.8%Non-current assets

Trade and other receivables -100.0% -77.5% 1211.1%Derivative financial instruments -100.0% 16700.0% -88.1%Other financial assets 19.2% -21.6% 141.3% 23.3% 25.8%Investments accounted for using the equity method

9.0% 2.7% 2.7% 1.3% -33.3%

Deferred tax assets 757.1% 33.3% -100.0%Property, plant and equipment 4.1% -0.4% 2.5% 9.0% -11.8%Intangible assets 4.3% 52.2% 24.5% 215.4% 13.7%Other non-current assets 193.8% -0.5% 63.6%

Total non-current assets 4.5% 0.4% 5.7% 16.6% -3.4%Total assets 15.0% -0.8% 7.0% 10.6% 2.9%Current liabilities

Trade and other receivables 20.5% 22.3% 27.7% 14.8% 6.9%Interest-bearing liabilities 7.8% -9.6% 11.7% 47.0% -3.6%Derivative financial instruments -60.6% 30.7% -20.8% -100.0%Provisions 9.7% 18.9% 11.3% 13.0% -2.4%Unearned revenue 25.0% 13.6% -1.1% 6.4% 9.7%Other current liabilities -72.7%

Total current liabilities 12.9% 12.1% 8.9% 13.6% 5.9%Non-current liabilities

Trade and other payable -100.0% -26.3% 135.7% 12.1%Interest-bearing liabilities -0.6% -8.1% 0.5% 6.8% 4.9%Derivative financial instruments -77.0% -50.6% 300.0% -43.3% -60.2%Provisions 17.4% -50.7% 104.1% 69.7% 20.3%Other non-current liabilities -45.5% -100.0% -5.8%Deferred tax liabilities 592.0% -90.8% 731.3% -73.7% -100.0%

Total non-current liabilities -0.1% -11.1% 4.7% 7.6% 4.9%Total liabilities 5.3% -0.8% 6.8% 10.7% 5.4%Equity

Share capital 55.1% 0.1% 0.0% 25.5% 44.4%Reserves -111.2% 468.8% -26.6% 77.0% -53.1%Retained profits 1.7% -23.5% 40.9% -31.6% -167.7%

Total equity 61.7% -0.8% 7.6% 10.5% -4.8%

16

Virgin’s Total Assets have increased from $3,367m in 2009 to $4,679m in 2014 (39%). This

remarkable increase is mainly due to the growth in Cash and cash equivalents (15.6%

average increase YoY), as well as the growth in Trade and other receivables (20.6% average

increase YoY).

Total Liabilities have increased 30.2% in the last 6 years, despite that the non-current

liabilities have remained stable (average rate of growth 1.2%). On the other hand, the current

liabilities increased from $1,159m in 2009 to $1,921m in 2014. This large increase is due to

the fact that Virgin refinanced a collateralised pool of aircrafts and entered into new bank

loans in the recent years.

4.2 Vertical Analysis


TABLE 4.2.1-7 VERTICAL ANALYSIS INCOME STATEMENT VIRGIN

2009 2010 2011 2012 2013 2014 GraphRevenue and income

Revenue 98.7% 99.8% 99.9% 99.8% 99.2% 99.5%Other income 1.3% 0.2% 0.1% 0.1% 0.4% 0.4%Net foreign exchange gains 0.0% 0.0% 0.0% 0.0% 0.4% 0.1%Share of net profits of associate accounted for using the equity method

0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Revenue and income 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Operating expenditure

Aircraft operating lease expenses 5.4% 6.3% 5.6% 5.3% 6.1% 6.4%Airport charges, navigation and station operations 20.3% 19.8% 18.8% 17.1% 17.7% 18.4%Contract and other maintenance expenses 5.3% 4.5% 4.8% 4.8% 4.7% 4.4%Commissions and other marketing and reservations expenses

6.9% 6.5% 7.4% 7.0% 6.4% 7.7%

Fuel and oil 28.4% 26.2% 27.7% 26.6% 28.0% 28.1%Labour and staff related expenses 22.6% 21.5% 22.7% 21.5% 24.3% 24.2%Impairment loss 0.0% 0.0% 0.0% 0.0% 0.0% 1.3%Other expenses from ordinary activities 4.3% 4.9% 5.6% 8.8% 9.7% 10.1%Depreciation and amortisation 7.0% 6.8% 6.9% 6.3% 6.8% 6.2%Inefffective cash flow hedges and non-designeted derivatives (gains)/losses

6.0% 0.3% 1.9% 1.0% -1.2% 2.1%

Net operating expenses 106.2% 97.0% 101.4% 98.3% 102.5% 108.8%Statutory profit/(loss) before income tax expense and net finance costs

-6.2% 3.0% -1.4% 1.7% -2.5% -8.8%

Finance income 1.0% 0.9% 1.1% 0.9% 0.5% 0.3%Finance costs -3.4% -2.8% -2.6% -1.9% -1.8% -2.8%

Net finance costs -2.4% -1.9% -1.5% -1.0% -1.3% -2.5%Statutory profit/(loss) before income tax expense -8.6% 1.2% -2.9% 0.7% -3.7% -11.2%Income tax benefit/(expense) 2.5% -0.4% 0.8% -0.1% 1.3% 3.0%Statutory profit/(loss) for the year -6.1% 0.7% -2.1% 0.6% -2.4% -8.3%

Virgin’s relative Income statement compositions have not changed much in the past 6 years.

As expected, Fuel and Labour expenses have the highest proportion in Virgin’s Expenditure.

On average, 27.5% of the revenue is spent in Fuel expense and 22.8% is spent in Labour and

staff expense.17


TABLE 4.2.2-8 VERTICAL ANALYSIS-STATEMENT OF FINANCIAL POSITION VIRGIN

2009 2010 2011 2012 2013 2014 GraphCurrent Assets

Cash and cash equivalents 14.1% 21.0% 19.0% 19.5% 12.8% 16.8%Trade and other receivables 3.6% 3.6% 5.2% 4.9% 5.7% 6.5%Inventories 0.0% 0.0% 0.1% 0.4% 0.7% 0.8%Derivative financial instruments 0.4% 1.0% 0.2% 0.0% 2.1% 0.4%Other financial assets 0.0% 0.0% 0.1% 0.7% 0.3% 0.6%Other current assets 0.0% 0.0% 0.0% 0.1% 0.1% 0.1%Current tax assets 0.1% 0.0% 0.0% 0.0% 0.0% 0.0%Assets classified as held for sale 0.0% 0.0% 0.0% 0.0% 0.0% 1.3%

Total current assets 18.2% 25.6% 24.7% 25.6% 21.6% 26.4%Non-current assets

Trade and other receivables 0.0% 0.0% 0.0% 0.2% 0.0% 0.5%Derivative financial instruments 0.1% 0.0% 0.0% 0.0% 0.4% 0.0%Other financial assets 1.5% 1.5% 1.2% 2.7% 3.0% 3.7%Investments accounted for using the equity method

0.2% 0.2% 0.2% 0.2% 0.2% 0.1%

Deferred tax assets 0.0% 0.2% 0.2% 0.0% 0.0% 3.1%Property, plant and equipment 78.6% 71.1% 71.4% 68.4% 67.4% 57.8%Intangible assets 1.5% 1.4% 2.1% 2.5% 7.0% 7.7%Other non-current assets 0.0% 0.0% 0.2% 0.5% 0.4% 0.7%

Total non-current assets 81.8% 74.4% 75.3% 74.4% 78.4% 73.6%Total assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Current liabilities

Trade and other receivables 8.0% 8.4% 10.3% 12.3% 12.8% 13.3%Interest-bearing liabilities 6.9% 6.5% 5.9% 6.2% 8.2% 7.7%Derivative financial instruments 2.6% 0.9% 1.2% 0.9% 0.0% 0.3%Provisions 2.2% 2.1% 2.6% 2.7% 2.7% 2.6%Unearned revenue 14.6% 15.9% 18.2% 16.8% 16.2% 17.3%Other current liabilities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total current liabilities 34.4% 33.8% 38.2% 38.9% 39.9% 41.0%Non-current liabilities

Trade and other payable 0.0% 0.0% 0.1% 0.1% 0.1% 0.2%Interest-bearing liabilities 45.9% 39.7% 36.8% 34.6% 33.3% 34.0%Derivative financial instruments 1.1% 0.2% 0.1% 0.4% 0.2% 0.1%Provisions 1.3% 1.3% 0.6% 1.2% 1.9% 2.2%Other non-current liabilities 0.0% 0.0% 0.0% 0.0% 0.2% 0.1%Deferred tax liabilities 0.1% 0.9% 0.1% 0.6% 0.2% 0.0%

Total non-current liabilities 48.4% 42.1% 37.7% 36.9% 35.9% 36.6%Total liabilities 82.9% 75.9% 75.9% 75.7% 75.8% 77.6%Equity

Share capital 12.1% 16.3% 16.5% 15.4% 17.5% 24.5%Reserves -3.4% 0.3% 1.9% 1.3% 2.1% 0.9%Retained profits 8.4% 7.4% 5.7% 7.5% 4.7% -3.1%

Total equity 17.1% 24.1% 24.1% 24.3% 24.2% 22.4%

18

PPE as the most important assets in Virgin’ Statement of Financial Position, decreased from

78.6% in 2009 to 57.8% in 2014. Yet, Virgin increased the proportion of assets in Cash and

cash equivalents in 2014, this account had an average of 17.2% in the past 6 years.

Virgin uses Bank Loans as its long term financing source. Interest-bearing liabilities account

is on average 36.2% of the Total Liabilities. Revenue received in advance is an important

source of short financing for this company.

19

5 Comparison between Qantas and Virgin



TABLE 5.1.1-9 COMPARISON HORIZONTAL ANALYSIS INCOME STATEMENT

2010 2011 2012 2013 2014 GraphTotal Revenue

Qantas -5.4% 8.1% 5.6% 1.1% -3.5%Virgin Australia 13.1% 9.7% 19.8% 2.6% 7.1%

Operating ExpensesQantas -5.8% 6.9% 10.0% -1.2% 21.8%Virgin Australia 3.3% 14.7% 16.1% 6.9% 13.7%

Fuel ExpenseQantas -8.9% 10.5% 16.3% -1.6% 7.4%Virgin Australia 4.4% 15.8% 15.2% 7.9% 7.4%

Labour ExpenseQantas -7.6% 8.5% 2.1% 1.9% -3.4%Virgin Australia 7.5% 16.0% 13.4% 16.0% 6.7%

Gross ProfitQantas 24.6% 72.3% -139.7% -214.5% -2005.1%Virgin Australia -155.8% -151.5% -243.6% -247.8% 281.9%

Net profit after taxQantas -5.7% 114.7% -198.0% -100.8% -142250.0%Virgin Australia -113.3% -418.3% -133.6% -529.8% 262.9%

Being in the aviation industry, Qantas and Virgin have both suffered the same problems such

as rising Fuel price, in the past years. Both companies have positive rates of growth in the

timeframe of 2009-2014. However Virgin has a higher average than Qantas (10.5% and 1.2%

respectively). Total Expense for both companies increased, nevertheless, Virgin has a higher

average in Total Expenditure as well as in Fuel Expense and Labour Expense. This could be

explained by Virgin’s increasing Revenue.

20


TABLE 5.1.2-10 COMPARISON HORIZONTAL ANALYSIS STATEMENT OF FINANCIAL

POSITION

2010 2011 2012 2013 2014 GraphProperty, plant and equipment

Qantas 3.0% 9.1% 3.6% -2.2% -24.1%Virgin Australia 4.1% -0.4% 2.5% 9.0% -11.8%

Total assetsQantas -0.7% 4.8% 0.1% -4.1% -13.5%Virgin Australia 15.0% -0.8% 7.0% 10.6% 2.9%

Revenue received in advanceQantas 1.9% -3.2% 3.8% -4.3% 11.8%Virgin Australia 25.0% 13.6% -1.1% 6.4% 9.7%

Interest-bearing liabilitiesQantas 3.8% 6.6% -0.4% -3.4% 0.5%Virgin Australia -0.6% -8.1% 0.5% 6.8% 4.9%

Total liabilitiesQantas -2.5% 5.6% 4.8% -7.9% 1.8%Virgin Australia 5.3% -0.8% 6.8% 10.7% 5.4%

EquityQantas 3.7% 2.8% -11.1% 6.8% -50.9%Virgin Australia 61.7% -0.8% 7.6% 10.5% -4.8%

In 2014, both companies performed an impairment review and it had a considerate impact in

PPE, with Qantas’ account decreased by 24.1% while Virgin’s declined by 11.8%. From the

numbers above it shows that Qantas and Virgin both use Revenue received in advance as a

short-term financing source. The comparison of the Statement of Financial Position reflects

that both companies experienced similar challenges in the past years.

21

5.2 Vertical Analysis


TABLE 5.2.1-11 COMPARISON VERTICAL ANALYSIS INCOME STATEMENT

2009 2010 2011 2012 2013 2014 GraphTotal Revenue

Qantas 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Virgin Australia 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Operating ExpensesQantas 98.6% 98.2% 97.1% 101.1% 98.8% 124.6%Virgin Australia 106.2% 97.0% 101.4% 98.3% 102.5% 108.8%

Fuel ExpenseQantas 24.8% 23.8% 24.4% 26.8% 26.1% 29.1%Virgin Australia 28.4% 26.2% 27.7% 26.6% 28.0% 28.1%

Labour ExpenseQantas 25.3% 24.7% 24.8% 24.0% 24.2% 24.2%Virgin Australia 22.6% 21.5% 22.7% 21.5% 24.3% 24.2%

Gross ProfitQantas 1.4% 1.8% 2.9% -1.1% 1.2% -24.6%Virgin Australia -6.2% 3.0% -1.4% 1.7% -2.5% -8.8%

Net profit after taxQantas 0.8% 0.8% 1.7% -1.6% 0.0% -18.5%Virgin Australia -6.1% 0.7% -2.1% 0.6% -2.4% -8.3%

Qantas and Virgin Australia have different market share proportions and the Vertical

Analysis comparison shows how close their performances are. On average, 50.3% of the

Income was expended in Fuel and Labour salaries (the difference between companies is non-

existent). Both companies have an increasing trend in the ratio of Operating

Expenses/Revenue, this is due to the increasing competition in the Australian Market.

22


TABLE 5.2.2-12 COMPARISON VERTICAL ANALYSIS STATEMENT OF FINANCIAL POSITION

2009 2010 2011 2012 2013 2014 GraphProperty, plant and equipment

Qantas 60.6% 62.9% 65.5% 67.7% 69.0% 60.6%Virgin Australia 78.6% 71.1% 71.4% 68.4% 67.4% 57.8%

Total assetsQantas 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Virgin Australia 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Revenue received in advanceQantas 15.5% 15.9% 14.7% 15.2% 15.2% 19.7%Virgin Australia 14.6% 15.9% 18.2% 16.8% 16.2% 17.3%

Interest-bearing liabilitiesQantas 24.6% 25.7% 26.1% 26.0% 26.2% 30.4%Virgin Australia 45.9% 39.7% 36.8% 34.6% 33.3% 34.0%

Total liabilitiesQantas 71.2% 70.0% 70.5% 73.8% 70.8% 83.5%Virgin Australia 82.9% 75.9% 75.9% 75.7% 75.8% 77.6%

EquityQantas 28.8% 30.0% 29.5% 26.2% 29.2% 16.5%Virgin Australia 17.1% 24.1% 24.1% 24.3% 24.2% 22.4%

The proportions in the Statement of Financial Position are pretty similar for both companies,

on average PPE is close to 65% of the Assets while Liabilities represent 75% of the credit-

side.

23

6 Key Ratios

Scarcity of resources is the primary drive for investors to determine the best alternative in

investing and various analysis can be performed by calculating the ratios, to measure the

return and risk of an investment.

6.1 Return and Profitability

This report will use the Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE),

and EBITDAR margin to measure the profitability of Qantas and Virgin.

6.1.1 Net Profit Margin

Companies with good market position will have high Net Profit Margin and these companies

usually have a good cost control and small number of debt.

TABLE 6.1.1-13 NET PROFIT MARGIN COMPARISON

2009 2010 2011 2012 2013 2014 GraphQantas 0.85% 0.84% 1.67% -1.55% 0.01% -18.52%Virgin Australia -6.07% 0.71% -2.07% 0.58% -2.44% -8.26%

The figures above demonstrate that the performance of Qantas has declined from year to

year. Based on CSI Market (www.csimarket.com) the average Net Profit Margin of 25 airline

companies in 2014 is 2.82%, which is above Qantas. Such a relatively low figure suggests

that the airline has high operating costs and the company operates in a highly competitive

market.

More specifically, the high operating costs were also due to the high debt to equity ratio,

leading to high spending on loans. Furthermore, the company's ability to control spending on

fuel is very limited. On top of that, operating in a competitive market makes it very difficult

for Qantas to raise flight fares.

In 2012, Qantas had a negative Net Profit Margin because of the restructuring of the

organization. It was problematic to work with the industrial union action, which forced the

company to stop operating its fleet. In 2014 the company had its assets restructured, which

led to assets impairment and added significant costs in its 2014 financial statements.

Overall, the performance of Qantas is better than Virgin Australian. The reason may be that

its brand name is stronger than Virgin’s, leading to a greater market share, and that Qantas

can manage its operating costs better than the competitor.

24

25

6.1.2 Return on Equity

Return on equity (ROE) shows the rate return on the capital invested by shareholders.

TABLE 6.1.2-14 RETURN ON EQUITY COMPARISON

2010 2011 2012 2013 2014 GraphQantas 2.48% 5.34% -5.22% 0.04% -61.38%Virgin Australia 4.10% -10.71% 3.60% -13.73% -36.62%

Based on data taken from Capital IQ & Bloomberg summarized by Aswath Damodaran,

published at Damodaran Online, the industry average ROE currently is 3%. For Qantas the

ratio is far below the average and it means that investors would lose 61 cents for every dollar

invested.

As mentioned earlier, the restructuring of its assets resulted in large costs. However, these

costs can be a sign that the company is changing for the better. Despite that, the figures

suggest that both Qantas & Virgin’s ROE performance are getting worse and it could be a

sign that the business is not profitable.

6.1.3 EBITDAR Margin

EBITDAR measures how much actual return earned by the company from sales before the

deduction of interest, tax, depreciation, amortization and airplane lease expense. This ratio

will measure the performances of the companies regardless of differences in interest

expenses, tax burden and lease expenses.

TABLE 6.1.3-15 EBITDAR MARGIN COMPARISON

2009 2010 2011 2012 2013 2014 GraphQantas 14% 14% 15% 11% 15% 10%Virgin Australia 6% 16% 11% 13% 10% 5%

As above stated, both companies showed a decreasing trend. It could suggest that the airline

industry is an unfavourable industry. However Qantas shows a more stable EBITDAR than

the competitor. That is an indicator that their management has a better understanding in daily

operation and maintaining their operational expenses.

26

6.2 Risk Ratios

6.2.1 Current Ratio/Working Capital Ratio

TABLE 6.2.1-16 CURRENT RATIO COMPARISON


Since 2010, Qantas has had better ability to fulfil all the current liabilities. In 2014 the current

ratio for Qantas is 66%, which means their current assets only cover 66% their current

liabilities. For most companies this ratio target is 120%-170% but in air transportation

industry the average current ratio is about 70% (www.csimarket.com). Qantas and Virgin

both outperform the industry average from 2012.

Current liabilities generally arise from procurement of current assets such as inventories

which if sold would result in current assets such as accounts receivable or cash. Therefore,

current assets would at least be able to meet current liabilities (100% ratio). In an air

transportation service company like Qantas, current liabilities are also included as part of

long-term liabilities in the form of rent payable maturities of less than one year, which is

quite large and does not directly contribute to improving the current assets of the company.

Overall, companies need at least above the average ratio to be consider as a less risk company

for investing.

6.2.2 Quick Ratio

The quick ratio measures the company ability to cover all the current liabilities by its current

assets minus inventory. Transportation companies do not necessarily pile up their inventory

since they get the revenue from providing services to customers.

For the cash ratio, a high value indicates that too much capital is being tied up in the business,

whilst the acid test or quick ratio indicates the company’s ability to repay immediate

commitments using cash or near-cash. It excludes inventory in order to show the immediate

solvency of the company.

TABLE 6.2.2-17 QUICK RATIO COMPARISON


27

The average quick ratio for the transportation industry is around 40%, which is lower than

both Qantas and Virgin. Qantas and Virgin both have a good ratio but Virgin’s is better. Both

companies’ current assets are mostly cash equivalents and accounts receivable that can be

used instantly to fulfil their current liabilities.

6.2.3 Debt to Equity Ratio

As a firm's debt-to-equity ratio increases, it becomes more risky. This is because if the

company is less likely to meet its debt obligations, it will lead to higher chances of

bankruptcy.

TABLE 6.2.3-18 DEBT TO EQUITY RATIO COMPARISON


Airline companies are technological and capital intensive companies with high DER. The

ratio of Qantas is larger, which indicates higher risk for the company, compared to Virgin

Australia. Qantas has a total debt of 5 times larger than its shareholders’ equity, and for

Virgin, 3.5 times.

There are two benchmarks that can be used for comparison. Based on the calculations of

Aswath Damodaran, the average ratio of 142 firms in this industry is 303%. Another

reference that can be used is based on CSI Market, which is 142%. Both companies have

higher risk than the industry average.

28

7 Other Relevant Information

To support Qantas' goal of delivering continuous return to investors, a well structured

administration system is crucial. Corporate governance is fundamental in ensuring the

creation, protection and enhancement of shareholder value. The Qantas Board of Directors,

currently consisted of nine Independent Non-Executive and Executive Directors, is

responsible in reviewing strategic direction of Qantas and monitoring application of strategy

by Management, which includes supervision of the integrity of the accounting and corporate

financial reporting systems.

The Board has a series of business principles and group policies, which include areas such as

health, environment, fair trading and safety, to promote ethical and responsible decision

making. For instance, Qantas's Employee Share Trading Policy provides guidelines that

prohibit certain nominated employees from dealing in Qantas shares to protect the Qantas

Group. Crisis management are also emphasized to ensure that Qantas can respond swiftly to,

and recover efficiently from unexpected economic shock.

With aviation sector being a high risk industry, risk management and internal control system

are practiced to support and fulfil corporate governance obligations. Audits and risk

management reviews are reported to the Board through the Audit Committee on quarterly

basis for verification. The other Board Committee responsible for oversight of risk-related

matters is the Safety, Health, Environment and Security Committee. This committee helps to

protect Qantas' reputation as one of the safest and most secure airline company in the world

and also monitor the group's operational safety system (QMS). Along with QMS, several

other policies and system have been implemented to identify and manage risks across the

Group.

According to Skytrax airline rating system, which classifies commercial airlines based on

their quality and service standards, on the scale of 1-5 star, Qantas was generously rewarded

a 4 star for their overall performance. There were some customer reviews about lack of

communication from the company and technical faults, which are inevitable for any airline

company. That being said, majority of the reviews were positive and this displays Qantas'

consistency in maintaining good service quality and product for their customers.

29

8 Conclusion and Recommendations

The 2014 financial year was not a profitable year for Qantas. Despite a cost reduction of

$440m; the statutory loss after tax was $2.8b. From an investor’s perspective, these numbers

seem unappealing.

According to the business analysis and financial analysis in the earlier report, Qantas has had

a low growth of revenue below that of industry average and limited control over expenditures

over the recent years. This may be explained by the competitive nature of the industry and the

larger expenses such as fuel, aircraft leases, staff training and allowances. Qantas also has

relatively large risk ratios. Furthermore, similar performances of Qantas and Virgin may

suggest that the airline business is perhaps not a fruitful industry as an investment.

Nonetheless, investors should not base their decisions solely on the numbers. Qantas poses

advantages such as ‘dual-brand’, which covers both the high-end and low-end of the

Australian domestic market; it is positioned geographically within the Asia-Pacific region

where booming economies attract more international travellers. It also receives support by the

general Australian population as it is regarded to be the national flagship carrier. In addition,

the management of Qantas is aware of the industry challenges and has set in place clear

strategies and recovery plans for the future.

In conclusion, Qantas does have attributes that would attract certain investors depending on

their investment goals and strategies. However for the value investors, investing in an airline

company such as Qantas may not be the best decision for the reasons mentioned in this

report.

30

9 References

Qantas Company Information. Retrieved from:

http://www.qantas.com.au/travel/airlines/company/global/en

Qantas Annual Reports. Retrieved from:

http://www.qantas.com.au/travel/airlines/investors-annual-reports/global/en

Virgin Annual Reports. Retrieved from:

http://www.virginaustralia.com/au/en/about-us/company-overview/investor-

information/full-year-results/

Major Airlines Information. Retrieved from:

http://biz.yahoo.com/ic/ll/770tor.html

Airline Industry Ratios I. Retrieved from:

http://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1102

Airline Industry Ratios II. Retrieved from:

http://csimarket.com/Industry/industry_ManagementEffectiveness.php?ind=1102

Glakas, S. 15 Financial Ratios Every Investor Should Use (2011). Retrieved from:

http://www.investinganswers.com/education/ratio-analysis/15-financial-ratios-every-

investor-should-use-3011

ABC News related to Qantas. Retrieved from:

http://www.abc.net.au/news/2012-08-23/qantas-profit-result/4217264, 28/9/2014

Airline Rating. Retrieved from:

http://www.airlinequality.com/

Schmidlin, N. The Art of Company Valuation and Financial Statement Analysis, A

Value Investor’s Guide with Real-life Case Study. Wiley

31

A Appendix

A.1 Details of Qantas Group’s Acquisitions and Milestones

June 1992 Qantas purchased Australian Airlines (domestic carrier)

March 1993 British Airways purchased 25 per cent of Qantas

June 1995 Public Share Offer launched

July 1995 Privatisation of Qantas complete and shares listed on the Australian

Securities Exchange (ASX)

1998 Qantas increased its equity in Air Pacific to 46 per cent

October 2001 $450m share placement

November 2001 Qantas Group acquired Impulse Airlines (domestic carrier)

February 2002 Launch of Snap Fresh (catering facility)

September 2002 $720m JUMBO rights issue and share purchase plan

October 2002 Launch of Australian Airlines (international carrier)

December 2003 Star Track Express acquired by a joint venture between Qantas and

Australia Post

May 2004 Jetstar commenced operations in Australia

September 2004 British Airways sold its stake (18.25 per cent at the time) in Qantas

December 2004 Jetstar Asia, based in Singapore, commenced services

July 2006 Australian Airlines ceased operations (international carrier)

November 2006 Jetstar International commenced operations

September 2007 Qantas Frequent Flyer business segmented from Qantas Group

May 2008 Completed on market buy-back of 91m shares for $506m

July 2008 Qantas Holidays and Jetset Travelworld merged and formed the Jetset

Travelworld Group with Qantas Group as a 58 per cent shareholder. The

Jetset Travelworld Group is listed on the ASX

February 2009 $525m capital raising and share purchase plan

32

April 2009 New ownership structure for Jetstar Asia and Valuair announced 49 per

cent holding for Qantas Group (Newstar Investment)

June 2009 Jetstar replaced Qantas Jetconnect services in the New Zealand

Domestic market

September 2010 Jetset Travelworld Group merged with Stella Travel Services. Qantas

Group has a 29 per cent shareholding of Jetset Travelworld Limited

October 2010 Qantas Group investments in Australian air Express and Star Track

Express transferred to AUX Investments in exchange for a 50 per cent

shareholding in the entity

February 2011 Qantas Group acquired 100 per cent of the Network Aviation Group

August 2011 Qantas Group acquired 100 per cent of Wishlist Holdings

April 2012 Qantas operated Australia’s first commercial flights powered by

sustainable aviation fuel

July 2012 Jetstar Japan commenced operations

November 2012 Qantas Group acquired 100 per cent of Australian air Express and sold

its 50 per cent stake in Star Track Express

December 2012 Commenced on market buy-back of up to $100m

March 2013 Qantas and Emirates partnership commenced

August 2013 Qantas Group announced the sale of its wholly owned subsidiary Qantas

Defence Services (QDS) to Northrop Grumman Australia

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A.2 Financial Statements – Qantas

A.2.1 Income Statement

2009 2010 2011 2012 2013 2014Revenue and Other Income

Net passenger revenue 11,604 10,938 12,042 13,625 13,673 13,242Net freight revenue 764 821 842 903 935 955Other 2,184 2,013 2,010 1,196 1,294 1,155

Revenue and Other Income 14,552 13,772 14,894 15,724 15,902 15,352Expenditure

Manpower and staff related 3,684 3,405 3,695 3,774 3,846 3,717Fuel 3,602 3,283 3,627 4,220 4,154 4,461Aircraft operating variable 2,834 2,675 2,768 2,980 3,061 3,142Depreciation and amortisation 1,390 1,199 1,249 1,384 1,450 1,422Impairment of specific assets 0 0 0 0 115 387Impairment of cash generating unit 0 0 0 0 0 2,849Non-cancellable aircraft operating lease rentals 450 525 566 549 525 520Share of net loss/(profit) of associates and jointly controlled entitles

15 4 -22 -3 39 66

Other 2,374 2,428 2,575 2,993 2,514 2,560Expenditure 14,349 13,519 14,458 15,897 15,704 19,124Statutory profit/(loss) before income tax expense and net finance costs

203 253 436 -173 198 -3,772

Finance income 207 181 192 181 109 82Finance costs -229 -256 -305 -357 -296 -286

Net finance costs -22 -75 -113 -176 -187 -204Statutory profit/(loss) before income tax expense 181 178 323 -349 11 -3,976Income tax (expense)/benefit -58 -62 -74 105 -9 1,133Statutory profit/(loss) for the year 123 116 249 -244 2 -2,843

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A.2.2 Statement of Financial Position

2009 2010 2011 2012 2013 2014Current Assets

Cash and cash equivalents 3,617 3,704 3,496 3,398 2,829 3,001Receivables 1,054 1,088 1,027 1,111 1,436 1,196Other financial assets 561 233 318 88 180 172Inventories 250 319 372 376 364 317Assets classified as held for sale 26 91 20 73 42 134Other 458 397 408 121 110 112

Total current assets 5,966 5,832 5,641 5,167 4,961 4,932Non-Current Assets

Receivables 522 407 423 472 174 158Other financial assets 344 102 70 17 27 34Investments accounted for using the equity method

387 378 476 457 190 143

Property, plant and equipment 12,155 12,516 13,652 14,139 13,827 10,500Intangible assets 664 668 593 610 714 741Other 11 7 3 23 139 810

Total non-current assets 14,083 14,078 15,217 15,718 15,071 12,386Total assets 20,049 19,910 20,858 20,885 20,032 17,318Current Liabilities

Payables 1,833 1,750 1,738 1,865 1,844 1,851Revenue received in advance 3,109 3,167 3,067 3,183 3,047 3,406Interest-bearing liabilities 624 630 577 1,119 835 1,210Other financial liabilities 641 242 397 369 86 182Provisions 507 448 456 879 835 876Liabilities classified as held for sale 0 4 0 12 0 0

Total current liabilities 6,714 6,241 6,235 7,427 6,647 7,525Non-Current Liabilities

Revenue received in advance 1,232 1,067 1,111 1,136 1,186 1,183Interest-bearing liabilities 4,930 5,115 5,454 5,430 5,245 5,273Other financial liabilities 268 231 493 224 54 66Provisions 533 560 647 736 435 405Deferred tax liabilities 607 715 767 464 625 0

Total non-current liabilities 7,570 7,688 8,472 7,990 7,545 6,927Total liabilities 14,284 13,929 14,707 15,417 14,192 14,452Equity

Issued capital 4,729 4,729 4,729 4,729 4,693 4,630Treasury shares -58 -54 -72 -42 -43 -16Reserves 7 109 85 36 128 -81Retained earnings 1,043 1,155 1,405 741 1,057 -1,671


5,721 5,939 6,147 5,464 5,835 2,862

Non-controlling interests 44 42 4 4 5 4Total equity 5,765 5,981 6,151 5,468 5,840 2,866

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A.3 Financial Statements – Virgin Australia

A.3.1 Income Statement

2009 2010 2011 2012 2013 2014Revenue and income

Revenue 2,600 2,976 3,268 3,914 3,988 4,287Other income 35 5 3 5 17 16Net foreign exchange gains 0 0 0 0 16 3Share of net profits of associate accounted for using the equity method

0 1 0 0 0 0

Revenue and income 2,635 2,982 3,271 3,920 4,020 4,307Operating expenditure

Aircraft operating lease expenses 141 189 184 208 246 274Airport charges, navigation and station operations 535 591 616 669 710 792Contract and other maintenance expenses 140 135 158 186 190 189Commissions and other marketing and reservations expenses

183 195 242 276 257 331

Fuel and oil 749 782 906 1,044 1,126 1,209Labour and staff related expenses 595 640 742 841 976 1,041Impairment loss 0 0 0 0 0 57Other expenses from ordinary activities 112 146 182 344 392 434Depreciation and amortisation 184 204 226 247 272 268Inefffective cash flow hedges and non-designeted derivatives (gains)/losses

158 9 61 38 -49 90

Net operating expenses 2,798 2,891 3,318 3,853 4,119 4,684Statutory profit/(loss) before income tax expense and net finance costs

-162 90 -47 67 -99 -378

Finance income 27 28 36 37 20 13Finance costs -91 -84 -84 -76 -71 -120

Net finance costs -64 -56 -48 -40 -51 -106Statutory profit/(loss) before income tax expense -226 34 -95 27 -150 -484Income tax benefit/(expense) 66 -13 27 -4 52 129Statutory profit/(loss) for the year -160 21 -68 23 -98 -356

36

A.3.2 Statement of Financial Position

2009 2010 2011 2012 2013 2014Current Assets

Cash and cash equivalents 3,617 3,704 3,496 3,398 2,829 3,001Receivables 1,054 1,088 1,027 1,111 1,436 1,196Other financial assets 561 233 318 88 180 172Inventories 250 319 372 376 364 317Assets classified as held for sale 26 91 20 73 42 134Other 458 397 408 121 110 112

Total current assets 5,966 5,832 5,641 5,167 4,961 4,932Non-Current Assets

Receivables 522 407 423 472 174 158Other financial assets 344 102 70 17 27 34Investments accounted for using the equity method

387 378 476 457 190 143

Property, plant and equipment 12,155 12,516 13,652 14,139 13,827 10,500Intangible assets 664 668 593 610 714 741Other 11 7 3 23 139 810

Total non-current assets 14,083 14,078 15,217 15,718 15,071 12,386Total assets 20,049 19,910 20,858 20,885 20,032 17,318Current Liabilities

Payables 1,833 1,750 1,738 1,865 1,844 1,851Revenue received in advance 3,109 3,167 3,067 3,183 3,047 3,406Interest-bearing liabilities 624 630 577 1,119 835 1,210Other financial liabilities 641 242 397 369 86 182Provisions 507 448 456 879 835 876Liabilities classified as held for sale 0 4 0 12 0 0

Total current liabilities 6,714 6,241 6,235 7,427 6,647 7,525Non-Current Liabilities

Revenue received in advance 1,232 1,067 1,111 1,136 1,186 1,183Interest-bearing liabilities 4,930 5,115 5,454 5,430 5,245 5,273Other financial liabilities 268 231 493 224 54 66Provisions 533 560 647 736 435 405Deferred tax liabilities 607 715 767 464 625 0

Total non-current liabilities 7,570 7,688 8,472 7,990 7,545 6,927Total liabilities 14,284 13,929 14,707 15,417 14,192 14,452Equity

Issued capital 4,729 4,729 4,729 4,729 4,693 4,630Treasury shares -58 -54 -72 -42 -43 -16Reserves 7 109 85 36 128 -81Retained earnings 1,043 1,155 1,405 741 1,057 -1,671


5,721 5,939 6,147 5,464 5,835 2,862

Non-controlling interests 44 42 4 4 5 4Total equity 5,765 5,981 6,151 5,468 5,840 2,866

37

A.4 Formulas and Calculations

A.4.1 Horizontal Analysis

Change since base period=Current year amount−Base year amountBase year amount

A.4.2 Vertical Analysis

Percentage of base amount= Account amount onanalysisBaseaccount amount

A.4.3 Net Profit Margin

Net Profit Margin= Net ProfitTotal Revenue

Qantas 2009 2010 2011 2012 2013 2014Revenue and Other Income 14,552 13,772 14,894 15,724 15,902 15,352Statutory profit/(loss) for the year 123 116 249 -244 2 -2,843

Net Profit Margin 0.85% 0.84% 1.67% -1.55% 0.01% -18.52%

Virgin Australia 2009 2010 2011 2012 2013 2014Revenue and income 2,635 2,982 3,271 3,920 4,020 4,307Statutory profit/(loss) for the year -160 21 -68 23 -98 -356

Net Profit Margin -6.07% 0.71% -2.07% 0.58% -2.44% -8.26%

A.4.4 Return on Equity

Returnon Equity= ProfitAverage Equity

Qantas 2010 2011 2012 2013 2014Net Profit 116 249 -244 2 -2,843Average Shareholders’ equity 4,673 4,666 4,672 4,669 4,632

ROE 2.48% 5.34% -5.22% 0.04% -61.38%

Virgin Australia 2010 2011 2012 2013 2014Net Profit 21 -68 23 -98 -356Average Shareholders’ equity 520 633 633 714 971

ROE 4.10% -10.71% 3.60% -13.73% -36.62%

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A.4.5 EBITDAR Margin

Revenue- Expenses

ExcludingTaxInterestDepreciationAmortizationRestructuring or rent cost

= EBITDAR

EBITDARMargin=EBITDARRevenue

Qantas 2009 2010 2011 2012 2013 2014Statutory profit/(loss) for the year 123 116 249 -244 2 -2,843Income tax (expense)/benefit -58 -62 -74 105 -9 1,133Finance income 207 181 192 181 109 82Finance costs -229 -256 -305 -357 -296 -286Depreciation and amortisation 1,390 1,199 1,249 1,384 1,450 1,422Non-cancellable aircraft operating lease rentals

450 525 566 549 525 520

Share of net loss/(profit) of associates and jointly controlled

15 4 -22 -3 39 66

Impairment of specific assets 0 0 0 0 115 387Impairment of cash generating unit 0 0 0 0 0 2,849

EBITDAR 2,058 1,981 2,229 1,757 2,327 1,472Total Revenue 14,552 13,772 14,894 15,724 15,902 15,352

EBITDAR Margin 14% 14% 15% 11% 15% 10%

Virgin Australia 2009 2010 2011 2012 2013 2014Statutory profit/(loss) for the year -160 21 -68 23 -98 -356Income tax benefit/(expense) 66 -13 27 -4 52 129Finance income 27 28 36 37 20 13Finance costs -91 -84 -84 -76 -71 -120Aircraft operating lease expenses 141 189 184 208 246 274Impairment loss 0 0 0 0 0 57Depreciation and amortisation 184 204 226 247 272 268

EBITDAR 163 483 364 521 420 221Total Revenue 2,635 2,982 3,271 3,920 4,020 4,307

EBITDAR Margin 6% 16% 11% 13% 10% 5%

39

A.4.6 Current Ratio

Current Ratio= Current AssetsCurrent Liabilities

Qantas 2009 2010 2011 2012 2013 2014Current Liabilities 6,714 6,241 6,235 7,427 6,647 7,525Current Assets 5,966 5,832 5,641 5,167 4,961 4,932

Current Ration 89% 93% 90% 70% 75% 66%

Virgin Australia 2009 2010 2011 2012 2013 2014Current Liabilities 1,159 1,309 1,467 1,597 1,814 1,921Current Assets 612 993 950 1,052 982 1,235

Current Ration 53% 76% 65% 66% 54% 64%

A.4.7 Quick Ratio

Quick Ratio=Current Assets−InventoryCurrent Liabilities

Qantas 2009 2010 2011 2012 2013 2014Current Assets 5,966 5,832 5,641 5,167 4,961 4,932Invetory 250 319 372 376 364 317

Current Assets-Inventory 5,716 5,513 5,269 4,791 4,597 4,615Current Liabilities 6,714 6,241 6,235 7,427 6,647 7,525

Quick Ratio 85% 88% 85% 65% 69% 61%

Virgin Australia 2009 2010 2011 2012 2013 2014Current Assets 612 993 950 1,052 982 1,235Invetory 0 0 5 15 30 36

Current Assets-Inventory 612 993 945 1,037 952 1,199Current Liabilities 1,159 1,309 1,467 1,597 1,814 1,921

Quick Ratio 53% 76% 64% 65% 52% 62%

A.4.8 Debt to Equity

Debt ¿ Equity=Total LiabilitiesTotal Equity

Qantas 2009 2010 2011 2012 2013 2014Total Liabilities 14,284 13,929 14,707 15,417 14,192 14,452Total Equity 5,765 5,981 6,151 5,468 5,840 2,866

DER 248% 233% 239% 282% 243% 504%

Virgin Australia 2009 2010 2011 2012 2013 2014Total Liabilities 2,790 2,939 2,915 3,113 3,446 3,631Total Equity 577 933 926 997 1,101 1,048

DER 483% 315% 315% 312% 313% 346%

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Documents

Qantas Financial Analysis Report