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Airlines industry is a system of transport and part of the Aviation industry. It affected by different type of internal and external factor. This Report discusses top down and bottom down analysis. The Top down analysis discusses about different type of economic indicator such as GDP, Inflation, Interest rate, Exchange rate, and personal disposable income and their effect on profitability of Qantas and Virgin. The bottom up analysis presents the financial performance of Qantas and Virgin with the help of ratio. This analysis helps in making comparative analysis of both the company and finding out which company is more profitable.
Air travel industry is a strongest industry in the economy. It provides economic strength, international finance, world business, and touristy. Therefore, globalization can be taken place in many more industry. Airlines industry provides air transportation to the passenger but excludes air freight transport. In additional to this, Airline Industry of Australia has been seen a strong growth across 2010-2014 in terms of value. Total revenue of Australian airlines industry is $ 15807m in 2014. It represents the annual growth rate of 6.6% between 2010 and 2014 (Belobaba et al., 2015). This industry grew by 2.3 in 2014 to reach the volume of 78.8 million passengers. It compound the annual growth rate is 2.7% in the period of 2010-14.
Virgin Atlantic was established by Richard Branson, Randolph Fields, and Alan Hellary to fly between London and Falkland Islands in 1984. The company enjoyed great popularity, consumers and trade award in whole world (Virgin Atlantic, 2016). The mission statement of this company is “To provide the highest quality innovative service at excellent value for money for all classes of air travellers”.
It is the largest airline company in Australia. It was founded in 1920 in Queensland. It is the national airlines company in the Australia and providing transportation in the different countries. Qantas Airways hold 65% share of Australian domestic market. Mission statement of this company can be defines as “We are Australia’s leading premium airline and we are dedicated to being the best. We aim to meet your expectations every time you fly and so we continue to invest in our business and will always strive to provide you with an exceptional level of service” (QANTAS, 2016).
Top down analysis is used by the investors to pick the stocks, where the investors look the macro economic factors and then narrow down the individual stocks. Further, These investor start analysis including national and international economic indicators such as: Inflation, interest rates, GDP growth rates, exchange rates, energy prices and productivity. It helps for the investors to pick a right stock that create value, which described as under:
GDP is helpful in analysis of economic activity of a nation. Current GDP rate of Australia in March 2016 is 3.1% and 2.16% in 2015. As compare to 2015 it Expanded by 1.1% on the Quarter of March 2016. Total contribution of service industry in the GDP is 52% (Trading Economics, 2016). Revenue of the Airlines industry is rise in a potential way that means economic activity is increase in the country. Due to the increment in the revenue of the Virgin Atlantic and Qantas Airways is increase and it effect on the disposable income so that demand for air travel is rises for both business and leisure purpose. It also reduces the travel cost.
Interest rate refers to the amount of money, which is to be paid by the borrower to the lender for the use of their funds over a period of time. Current interest rate of Australia is 1.5% in 2016 and 2.0% in 2015. As compare to 2015 interest rate of Australia is decrease in 2016. So Airlines industry takes benefit of the decrease value of Australian dollar. In support of this, it also provides the benefit of Australians airline like Virgin Atlantic and Qantas Airways (Reserve bank of Australia, 2016). Due to implementation of lower interest rate Aircraft ownership cost of both the companies is reduce by $ 7.4m and both the companies are highly benefited from the lower ownership cost.
1 $ AUD is equal to 0.7640 US Dollar. It depicts that value of Australian Dollar is lower than the US Dollar. Fluctuation in the currency has both positive and negative impact on the overall airline industry of Australia. In the present context, exchange rate of the Australian dollar is lower so it affects on the flows of the passengers (Morrison and Winston, 2010). Lower value of exchange rate is the reason of fuel hedging for both the airlines companies such as Qantas and Virgin airlines. Fuel hedging is directly impact on airfares of the company.
Inflation rate can be defined as the rate at which the prices of commodities are increasing and the purchasing strength of the currency is to be decreased. This rate of Australia is 2.5 in 2014 and 1.5 is in 2015. It depicts that inflation rate of 2015 is lower than 2014. So the airline industry in the Australia take benefit of this situation such as it purchases more product and service of air transport (Trading Economics, 2016). Inflation rate also make an impact on the airline companies like demand of the domestic air passenger transportation is increases.
Personal Disposable earning is the ratio that is helpful in analysing household for their investment purpose after paying the direct and indirect tax to the government. Personal disposable earning is an important consideration, when deciding the capacity of household to make a loan. Australian people Personal disposable income is 121.67 in 2014 and 122.35 in 2015. It depicts that per capita income of Australian people is increase in 2015 (McTaggart et al., 2012). It makes a positive impact on Airline industry of Australia. Falling oil price bring a significant improvement on airlines companies lower air fares, more domestic consumer spends and increase personal disposable income. Due to this reason, Travel and tourism of Virgin and Qantas is improved in 2015 as compare to 2014.
| Name of the ratio | Formula | Qantas 2016 (30/6) (In$) | Virgin2016 (30/6) (In$) | Industry average |
| Current ratio | =.49 | =1.34 | .59 | |
|
| Current assets | 3458 | 656.14 |
|
|
| Current liabilities | 7028 | 489.27 |
|
| Acid Test ratio | =.44 | =1.34 | .54 | |
|
| Current assets | 3458 | 656.14
|
|
|
| Inventory | 336 | 0 |
|
| Cash Ratio | =.31 | =1.22 |
| |
|
| Cash | 2209 | 601.09 |
|
|
| Marketable Securities | 0 | 0 |
|
| Name of the ratio | Formula | Qantas 2016 (30/6) (In$) | Virgin 2016
(30/6) (In$) | Industry average |
|
| Net profit margin | =4.40% | =8.94% | 5.35% |
| |
|
| Net Profit | 341 | 38.1 |
|
|
|
| Sales Revenue | 7737 | 425.73 |
|
|
| Gross Profit Mark up | =48.41% | =248.44% |
|
| |
|
| Gross Profit | 2524 | 303.55
|
|
|
|
| Cost of sales | 5213 | 122.18 |
|
|
| Gross profit margin | =33.59% | =71.30% | 36.62% |
| |
|
| Gross profit | 2524 | 303.55 |
|
|
|
| Sales Revenue | 7737 | 425.73 |
|
|
| Operating profit margin | =7.09% | =16.24% | 9.05% |
| |
|
| Operating profit | 549 | 69.17 |
|
|
|
| Sales revenue | 7737 | 425.73 |
|
|
| Return on assets |
=3.20% |
=3.81% | 4.39% |
| |
|
| EBIT | 549 | 69.17 |
|
|
|
| Average assets | (17506+16705)/2 | (1729.22+1896.45)/2 |
|
|
| Return on shareholder Fund | =10.47% | =4.30% |
|
| |
|
| Net income | 341 | 38.1 |
|
|
|
| SHF | 3255 | 885.19 |
|
|
| Name of the ratio | Formula | Qantas 2016 (30/6) (In$) | Virgin2016 (30/6) (In$) |
|
| Inventory turnover ratio | =23days | Not Available |
| |
|
| Average inventory | (337+336)/2 |
|
|
|
| Cost of sales | 5213 |
|
|
| Trade receivable turnover | =38days | =27.58days |
| |
|
| Average trade receivable | (821+795)/2 | (29.16+35.2)2
|
|
|
| Revenue | 7737 | 425.73 |
|
| Trade payable turnover | =138days | Not Available |
| |
|
| Average trade payable | 1965 |
|
|
|
| Cost of sales | 5213 |
|
|
| Sales revenue to Capital employed | =.80 | =.30 |
| |
|
| Sales Revenue | 7737 | 425.73 |
|
|
| Capital employed | 16705-7028 | 1896.45-489.27 |
|
| Name of the ratio | Formula | Qantas 2016 (30/6) (In$) | Virgin2016
(30/6) (In$) | Industry average |
|
| Debt to equity ratio | =413.21% | =114.24% | 183.76% |
| |
|
| Total liabilities | 13450 | 1011.26 |
|
|
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| Total equity | 3255 | 885.19 |
|
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| Equity ratio | =19.48% | =46.67% | 28.7% |
| |
|
| Total equity | 3255 | 885.19
|
|
|
|
| Total assets | 16705 | 1896.45 |
|
|
| Gearing ratio | =46.31% | =31.33% |
|
| |
|
| Long term debt | 4482 | 440.88 |
|
|
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| Capital employed | 9677 | 1407.88 |
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| Name of the ratio | Formula | Qantas 2016 (30/6) (In$) | Virgin 2016 (30/6) (In$) | Industry average |
| Earnings per share |
=49% |
=7.82% |
39.53% | |
| Price earnings ratio | *100 |
=6.71% | =7.81%
|
5.94% |
| Price to sales ratio |
| =.42 | =1.81 | 0.35 |
| Price to cash Flow |
| =5.63% | Not available | 7.42 |
This ratio helps in analysing the strength of the company in order to understand that the company will be able to face the current liabilities or not. Current ratio describes current assets in relation to the current liabilities shown in balance sheet and this ratio helps in determining the current liquidity of the company in order to analyse the solvency and liquidity position of the company in respect to its competitors. Acid test ratio analyse the liquid assets which consists of current assets less inventories in relation to current liabilities (Albrecht et al., 2010). The current ratio of Qantas is .49 and Virgin is 1.34 for 2016.
The quick ratio of Qantas and Virgin for 2016 is .44 and 1.34 respectively. It can be estimated that ideal ratio is 1:1 and the Virgin airlines has a higher short term liquidity and do not block its finance in extra stocking in comparison to Qantas (Daly, 2011). The airline industry has current ratio of 0.68 and quick ratio of 0.62 which shows that the profitability of Virgin airlines is quite good and the company is solvent.
Profitability ratios are helpful in analysing the efficiency in terms of profit of the organization. This analysis can be in terms of sales made or investment carried out. This ratio helps in analysing the sales made in relation to revenue generation for company. Net profit ratio also helps in determining the effectiveness of organization in cutting down of overall expenses regarding to share. The higher profits can be earn by organization by cutting down of expenses and by making an increase in sales. Net profit ratio of Qantas and Virgin for 2016 is 4.40% and 8.94% respectively. This shows that there is a straight down in the net profit of Qantas and if the company wants to maintain efficiency then it should focus on increasing revenue and decreasing expenses. Net profit ratio of airline industry is 12.6% (Fridson and Alvarez, 2011). The increase in profitability ratio shows that the company has a sound financial position in the market which is depicted by Virgin.
Return on assets ratio depicts the income produced by an organization in relation to average total assets. This ratio helps in estimating the generation of profits in a shorter span of time by properly management of assets. This ratio shows the management a clear picture of conversion of assets into revenue. Higher profitability ratio shows higher profits of the company in comparison to its competitors. ROA ratio of Qantas and Virgin for 2016 is 3.20% and 3.80% respectively (Qantas Annual Review, 2015). ROA ratio of airline industry is 1.35%. So, from the above analysis it can be depicted that on the basis of different profitability ratios the financial condition of Virgin airline is quite good.
Generally, funds are invested in different assets for business purpose to make sales and revenue generation. Efficiency ratio depicts that larger amount of profit and revenue depends upon how effectively assets are being managed. These ratios shows in how much time assets can be converted into revenue and at what speed. Efficiency ratio shows how efficiently and effectively a company manages its assets and resources (Virgin America Inc, 2016). It is important from creditor’s point of view as it helps in measuring liquidity, cash flows and overall value of firm.
This shows how good the company in making sales. Trade receivable turnover of Qantas and Virgin for 2016 is 38 days and 28 days respectively. Trade receivable turnover shows that in how much time period a company can collect its account receivables in a financial year. This ratio show how efficient is company in collecting cash from credit sales and also helps in analyzing liquidity. Inventory turnover ratio of industry is 36.98 (Fridson and Alvarez, 2011). So, from the above analysis it can be depicted that profitability of Virgin is good in comparison to Qantas.
Capital Structure Ratio helps in making an understanding for investors that if the company incur losses than how much loss they have to suffer. Debt to equity ratio analyses the total debt in relation to total equity. With the help of these ratios the creditor’s role in the ownership of company and capital structure can be determined. A higher debt ratio shows more credit financing in capital structure in relation to equity financing (Coe, 2011).
The equity ratio of Qantas and Virgin for 2016 is 19.48%and 46.67% respectively. The equity ratio identifies the investors finance equipped in purchase of assets of the company. This ratio determines the total leverage because of investors on the company. Higher equity ratio shows that the company has a good financial position in the market and there are many investors who want to invest in the company. The debt to equity ratio of Qantas and Virgin for 2016 is 413.21% and 114.24% respectively. The debt to equity ratio of airline industry is 183.76% (Virgin America Inc, 2016). From the above analysis, it can be determined that Virgin has stability in its capital structure in comparison to Qantas.
Earnings per share can also be called as net income per share to shareholder which helps in analysing the net income earned in regard to shares. It shows the good financial health of company in respect to satisfaction of shareholders towards the organization. The earnings per share of Qantas and Virgin for 2016 are 49% and 7.82% respectively. From the above analysis it can be interpreted that the profitability of Virgin is good because Virgin had stability and do not show frequent upward and downward movements (Daly, 2011). Price earnings ratio of industry is 5.94.
Price Earnings ratio is a ratio which helps in analysing market situation that generally compares the market price per share by the earnings per share (Qantas Airways Ltd, 2016). Companies having higher future earnings show higher profitability. The market price per share of Qantas and Virgin for 2016 is 6.71% and 7.81% respectively.
Both Qantas and Virgin showed a rise in their total assets, but Virgin shows a noticeable rise in comparison to Qantas. Increase in total assets in Virgin is because of increase in cash while on the other hand increase in inventory in Qantas is because of increase in stock. So, from the above analysis it can be concluded that the profitability of virgin is good because of more liquidity. Qantas has shown an increase in its liability in comparison to Virgin. Qantas is arranging funds from debts in comparison to equity which increases the company debt and more accountability (Qantas Annual Review, 2015). While virgin arranges finance from equity and makes decision of arrangement of funds wisely.
From the above analysis it can be concluded that the economic factors of the country affects the profitability of the company situated there. Increase in interest rate decreases the profitability of the company and vice versa. Increase in personal disposable income is directly related to profitability of company. So, on the basis of this report a company should consider various economic factors to increase the profitability of company. On the other hand, on the basis of calculation of liquidity and efficiency ratio it is analysed that the profitability of Virgin airline is more in comparison to Qantas and there is also stability in capital structure and dividend distribution of Virgin.
Qantas shows a significant increase in inventory which raises the total asset of the company. The company should low down its expenses over inventory and should try to maintain liquid cash like Virgin. This will help the Qantas to maintain the solvency and liquidity of the company. The capital structure of Qantas shows increasing proportion of debts in comparison to equity. So, the company should raise funds from equity as raising funds from debt increases interest to pay and profitability of the company also decreases. This will help Qantas to increase the profitability in comparison to virgin.
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