Principles of Financial Markets Rex Airlines and Qantas - Solution

Question: Describe about the Principles of Financial Markets for Airlines and Qantas. Answer: Introduction This report is based on the top-down and bottom up analysis of Rex Airlines and Qantas. The top down analysis stands for the analysis of industry, company and economy analysis. The economic analysis focuses on various types of economic factors such as inflation, GDP, exchange rate and currency value of the Australia their impact on the profitability of Qantas and regional express (i.e. Rex) (Lasher, 2013). This all factors help to predict the sales and profit for the both companies. The bottom-up analysis covers the financial performance analysis of Rex Airlines and Qantas. The analysis of financial performance of both the companies will be done on basis of ratio analyses technique. Industry profile Companys history and mission statement: Rex Airlines: Regional express was found in the year 2002. The company is headquartered at in Mascot, New South Wales. Rex Airlines came into existence, when Australia-wide Airlines Consortium acquired Kendell Airlines and Hazelton Airlines. These companies were merged and converted into a new airline company, which is known as Regional express (Regional Express, 2016). The Rex provides the facility of air transportation in various countries. The total sales of Rex Airlines in the year 2016 are recorded as 258,063($000). Regional expresss has more than 1500 weekly flights across the 58 destination of globe. The mission statement of the company is We are committed that we provide our customers with safe and reliable air transportation with heartfelt hospitality. As a regional carrier, we constantly strive to keep fares low through our commitment to simplicity, effectiveness, and good value. We treat our customers as individuals and will respond to all their comments and complaints. Qantas airlines: Qantas Airlines was founded in the year 1920. Its first aircraft was Avro 504k. It is the largest airline company (in both domestic and international facilities) of the Australia. Qantas Airlines is headquartered at Winton city of Australia. Qantas Airlines was nationalized in the 1947 by the Australian government after that its first services were started outside the Australia the British empire to Tokyo (QANTAS, 2016). The total number of employee working at Qantas is around 32,500. It provides the air travel services across 44 nations with total number of 182 destinations in the world. Along with this, the company provides facility of air transportation in various countries. Shareholders of Australia own Qantass 51% shares. The total sales of Qantas in the year 2016 were $15,784,000. The mission statement of Qantas Airlines is We are Australias leading airline company and we want to be the best airline in the world. Our goal is to fulfill every customers expectations every time. F urthermore, we consistent invest capital in our business and will always-great efforts to provide qualitative services. Industry analysis: Porters Five Forces Analysis of the Airlines Industry of Australia: Porters Five Force Analysis model is very helpful in measuring industrys strength, opportunity and weakness. This model is helpful in understanding structure of airline industry of Australia. Porters five forces can be used to measure that which service and products can maximize profit and generate sales in the market. It also helps to understand about strength, weakness and financial position of competitors in the market. On the basis of SWOT Analysis an airline company can design and implement an effective strategy in the market to get competitive advantage over competitors. Bargaining power of buyers: The bargaining power of buyers will be high in a market, if the customers or buyers have many alternatives to fulfill their need. In contrast to this, if the customers would not have any options instead of single option in market for fulfilling their need then bargaining power will be low in market. Airline industry of Australia is very competitive and every company competes for the same customers and tries to make them switch through low cost of air travel tickets and other facility of transportation. There are many choices available for the customers in the Australian airlines industry. Along with this, it can be said that the buyer power is very high in Australian airline industry. Moreover, some airline companies are focusing on the low cost air travel, while other companies are focusing on the facilities and features. Bargaining power of suppliers: Main factors which measure the bargaining power of suppliers are switching cost, fuel, and labor, suppliers, substitute and supplier concentration. There are mainly two suppliers in airline industry of Australia including Boing and the Airbus. Along with this, fuel price is fluctuated according to global market and economical factors. Therefore, airlines do not have more alternative option to choose. Due to this reason company depends on supplier. So, it can be said that the bargaining power of suppliers is high in the airline industry of Australia. Threat of Entry and exit: The cost of entry is very high in the airline industry, because the huge capital is required to enter in the airline industry and whenever if they want to exit from this industry, they have to tolerate high losses from their airline business. Along with this, it can be said that entry and exit both are barriers in airline industry. And its cost is very high to buying and hiring aircraft including with safety, customer services and security. These all make this industry one of the most expensive industries. Existing airlines companies can run their business without any fear of threat of new entrants. The threat of substitute: The threat of substitute is limited in international airline traveling in Australia. Mainly the threats of substitute towards airline companies of Australia come from bus transport, car and train transport that are determiner of money, preferences and time of the traveler. People use these substitutes for domestic tours, but cannot use to travel out of country. It can be said that the flying is a normal traveling phenomenon in the Australia. The substitutes train, buses and cars do not affect on airlines industry at international level. The rivalry among existing competitors: An Airlines industry has to face competition within the airline industry in Australia just because of the reason of lowing cost carriers, strict rules and regulations of the industry wherein safety becomes the high priority. Along with this, demand side is lesser than supply side. Therefore competitive company has to do unique things to get the competitive advantages and to attract the customers. Due to high competition, an airline firm has to reduce their cost and provides best services with safety and security. Company analysis: Company analysis presents the strengths and weakness of the organization. It is also the analysis of the companys internal environment. The regional expresss brand image and market share is good in the Australia. Apart from this, regional express is capable to reduce the cost of the services according to customers level of demand. It is expanding its business through the determining of new profitable routes for air travel. Qantas also has strong and trustworthy name in airline industry of Australia. It is the second largest old company in airline industry of Australia (QANTAS, 2016). It has alliance with one world alliance. Qantas has latest aircrafts in its air travel vehicles like Boeing 787 dream-liner and A380. Furthermore, it has an excellent brand image in the market. Regional express airline has some weaknesses that affect the performance of the company. The regional express is not capable to maintain operating cost such as jet fuel prices and airport cost that adversely affects the profitability of the company. However, Qantas is capable to maintain operating cost, weather it is jet fuel prices or airport cost (Michael and petty, 2016). Along with this, Qantas is dependent on the business and first class customers for profits, while Rex is not dependent only first class customers for profit. Qantas profit and sales revenues are higher than regional express. Bottom Up Analysis of Rex and Qantas: Name of ratio Qantas (2016) $ m REX(2016)$ m Industry average Efficiency Ratio: inventory turnover ratio= cost of goods sold/ average inventory at cost 20.09726444 21.82763905 cost of goods sold 6,612,000 384,603 average inventory 329000 17620 Sale revenue to capital employed = sales revenue / capital employed 1.631084014 4.458971922 sales revenue 15,784,000 258,063 capital employed 9677000 57875 trade receivable turnover ratio=average trade receivable/ revenue *365 48.41273442 11.34618291 18.465 average trade rec. 877000 8,022 cost of sale 6,612,000 258,063 Capital structure ratio: Debt to equity ratio = total liabilities / total equity * 100 413.2104455 45.34 183.76 Total liabilities 13,450,000 84,814 Total equity 3,255,000 187,053 solvency ratio = total liabilities/ total assets* 100 0.80 0.31 Total liabilities 13,450,000 84,814 Total assets 16,705,000 271,867 Investment analysis ratio: Earnings per share= net income available to shareholder/weighted average share outstanding*100 0.49399904 4.406299852 39.53 net income available to shareholder 1,029,000 9,557 weighted average share outstanding 2,083,000 216,894 Price earnings ratio= MPS/EPS 4.693877551 4.222222222 5.94% Market price per share 2.3 0.76 Earning price per share 0.49 0.18 liquidity ratio: current ratio = Current assets / current liabilities 0.492031873 1.034249385 Current Assets 3458000 60,516 0.59 Current Liabilities 7028000 58,512 Quick ratio = current assets - inventories/ current liabilities 0.444223108 0.311320755 0.54 Current Assets 3458000 60,516 Current Liabilities 7028000 58,512 Inventory 336,000 42,300 Profitability ratio: Net profit margin= net profit / revenue * 100 6.51926001 3.703359257 5.35% Net profit 1,029,000 9,557 Revenue 15,784,000 258,063 Operating profit margin ratio = Operating profit / revenue * 100 7.773694881 10.87137637 Operating profit 1,227,000 28,055 Revenue 15,784,000 258,063 Gross profit margin = gross profit/ revenue * 100 58.10947795 35.29641987 Gross profit 9,172,000 91,087 Revenue 15,784,000 258,063 Efficiency ratio: Owners of the company invest capital in various assets for generating the sales and profit in market (Charles, 2012). Efficiency ratio indicates the effectiveness of the assets that which assets can give more profit and sales. This ratio also measures the efficient utilization of assets in the organization. Inventory turnover ratio: This ratio shows the degree of efficiency of an organization in terms of management of inventories as compared to cost of goods sold within a specific time (Gibson, 2012). The inventory turnover ratio of the Qantas is 20.09726444 and regional express is 21.87. Rexs inventory turnover ratio is higher than Qantas, therefore it can be said that inventory of Rex are more effectively managed than Qantas. So, the inventory of Rex Airlines will take less time than Qantas to give profit and generate sales. Trade receivable turnover ratio: It measures the efficiency of a company in terms of collection of its credit sales or due payment of sales. In other words, this ratio shows the effectiveness of an organization in the collection from debtors. A high trade receivables turnover ratio is good for the company, because high ratio shows that a company collects credits sales in a very short time (Martin and Alvarez, 2011). The trade receivable turnover ratio of Qantas is 48.11, which is high than trade receivable ratio of Rex (i.e. 11.34) in year 2016. The trade receivable ratio of Qantas is higher than Rex, so it can be said that Rex is collected its credit sales sooner than Qantas. Sale revenue to capital employed: The sales to capital employed ratio shows the capability of the organization in making profit and generating sales by well utilization of assets. A High ratio indicates that assets are well utilized to make profits and sales (Drake and Fabozzi, 2012). The revenue to capital employed ratio of Qantas is 1.63 and the same ratio of regional express is 4.45 in the year 2016. The sales revenue to capital employed ratio of Rex is higher than qantas. So, it can be said that assets of Qantas are utilized in better than Rex to make profit and sales. Capital Structure Ratio: Capital structure ratios are used to judge evaluate creditworthiness of the company. This ratio provides the information about debt and equity elements in overall capital of company (Lasher, 2013). Capital structure ratios are also used by organizations while taking decisions related to payment of interest and dividends. Debt to Equity Ratio: Debt-to-equity ratio is calculated to know about an organizations financial leverage. This ratio plays important role in the company for analyzing the long-term paying capacity. It shows the solvency of the debts in the company (Charles, 2012). High ratio is not good for the company. Furthermore, it indicates the financial risk in the organization. The debt equity ratio of Qantas is 413.2104455, which is very high than debt to equity ratio of Rex (i.e. 45.342). On basis of this, it can be interpreted that Qantas has greater financial risk than Rex in the eyes of banks and other financial institutions (Regional express, 2016). Solvency or debt to total assets ratio: This ratio is used to know about the long-term solvency of company. It measures the part of total assets, which are provided by creditors of the company (Drake and Fabozzi, 2012). On the basis of above the table, the solvency ratio of the Qantas and Rex is 0.80 and 0.30 respectively. The Qantas solvency ratio is higher than Rex. Therefore, it can be said that, the percentage of total assets that are financed by creditors is higher in Qantas, which shows higher debt obligations to company. This can affect the profit position of company negatively. Investment Analysis Ratios: These ratios help to measure the financial perform of business entities in terms of revenue generation and profitability. By using this ratio, an investor can compare different investment opportunities in capital market. Earnings per Share (i.e. EPS) Ratio: The EPS ratio is used to measure the profitability in the company from the standpoint of owners. The higher value of EPS indicates that companys ability to offer potentially higher dividends to shareholders (Peterson and Frank, 2012). The Earning per share ratio of the Rex is 4.406299852, which is very high than Qantas (i.e. 0.49399904). It indicates that Rex can raise investment capital more than Qantas due to attractiveness of its shares in market. Investors face lower risk in investing capital of Rex than Qantas airline. Price Earnings Ratio or P-E ratio: P-E ratio is used to know the fair value of the share market. This ratio is also used widely by investors in stock selection for investment purpose in capital market. It is calculated by dividing market price per share from earning per share. It is also helpful to companies to measure the amount that its investors are ready to pay for each of its stock. Higher value of P-E ratio shows the higher profitability in the company. On the basis of above table, P-E ratio of the Qantas is 4.69, which is slightly high than P-E ratio of Rex (viz. 4.22). On basis of this, it can be said that the company stock of both Qantas and Rex are attractive for investors. But investors are ready to pay slightly more for the shares of Qantas. Liquidity Ratio: These ratios play very import role to analyze the short-term financial position of the company. Liquidity ratio helps to measure companies ability to meet its short term financial debts. Furthermore, it shows that how well a company utilizes its working capital. Current Ratio: Current ratio calculates short term paying capacity or reflects the ability of the company to meet short-term debts when debts are due. Higher current ratio is good from the stand point of creditors but from the stand point of the management is not good (Martin, and Alvarez, 2011). The current ratio is 0.49 of the Qantas and 1.03 for Rex Airlines. Current ratio of Rex Airlines is higher than Qantas, therefore, it can be said that regional express paying capacity to meet short-term obligation is better as compared to Qantas. But, still it is below standard current ratio of 2. Quick ratio: Quick ratio also indicates the ability of the company to instant pay obligation. It shows the liquidity position of the company. It is the relationship between the quick assets and current liabilities (Charles, 2012). The standard quick ratio is 1, which depicts the liquidity position of company good. The quick ratio of Qantas and Rex is 0.44 and 0.31 respectively. On the basis of quick ratio, it can be said the instant paying capacity of both organizations is not good. But if comparison is made between both companies, then Qantass liquid paying capacity is better to meet short term obligation as compared to Rex. Profitability Ratio: Generally, the profitability ratios reflect ability of companies to earn profit by utilization of available resources (Michael and petty, 2016). Profitability depends of sales, use of financial resources and cost of goods sold. So, it also indicates managerial efficiency of the company. Net Profit Ratio: The net profit ratio shows the efficiency and overall profitability of the organization. A high value of net profitability ratio reflects adequate return to the companys owners (Peterson, and Frank, 2012). On the basis of above table, the net profit ratio of Qantas and Rex is 6.51 and 3.70 respectively. On basis of this, it can be said that profitability of Qantas is more adequate as compared to Rex. Operating Profit Ratio: This ratio is used to measure efficiency of company to manage the operating expenses. The higher operating ratio is better for the company (Tracy, 2012). It shows the companys ability to cut its operating expenses. Operating profit ratio of Qantas and Rex for 2016 is 7.70 and 10.87 respectively. It shows that Rex is more able to cut down its operating expenses as compared to Qantas. Gross Profit Margin: Gross profit margin ratio is used to measure a companys financial position. It also reflects the trading efficiency and profit earning of a company (Charles, 2012). On the basis of above table, the gross profit margin of Rex and Qantas for 2016 is 35.58 and 58.10 respectively. On basis of this, profit-earning efficiency of Qantas is higher than Rex. Recommendations: Both Rex Airlines and Qantas should monitor operating activities to reduce their business cost. Along with this, companies should make strategy according to the economic factors and government rules/regulation. It can be said from the above analysis the profitability of Qantas is better than Rex. Along with this its liquidity is also higher than Rex. Therefore, Rex should focus on cost control techniques to improve its profitability. Rex has collected its due payment in a short time in compare to Qantas. Therefore, Qantas needs to collect its due payment as soon as possible. For this purpose, Qantas may opt for debt factoring technique. Qantas has financed more assets through use of debt capital in comparison to equity, which has increased companys debt obligations. Company needs to improve its capital structure by more focus on equity capital than bank loans. This way, the profit earning capability of organization can be improved. Conclusion On the basis of above analysis, it can be concluded there are different economic factors that affect the profitability of airline companies such as inflation, exchange rate, interest rates, and GDP of Australia. Increasing and decreasing of these factors affect the profit and loss of the company. Rise in inflation leads to increase in cost of business of the company. Similarly, change in rate of interest of Australian government affects the companys ability to avail cheap bank loan. From the analysis of financial statements of Rex and Qantas airlines, it is identified that net profitability position of Qantas is better than Rex. Besides this, on basis of calculation of efficiency and liquidity ratio, it can be analyzed that ability to meet short term debt obligation of Qantas is better. References Morning star (2016). Qantaas airways limited. [Online]. Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=QANregion=ausculture=en-US (accessed: 18 sep. 2016). Morning star (2016) REGIONAL EXPRESS HOLDING LIMITED. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=REXregion=ausculture=en-US (Accessed: 18 sep. 2016). QANTAS (2016) the Qantas Story. [Online]. 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