Strategic Analysis of Qantas Group Qantas Group Overview

Key Problems and Strategic Issues

Diagnosis: Analysis and Evaluation

Porter 5 Analysis

Power of Suppliers: Low-to-Medium

Industry Rivalry: High

Power of Buyer: Medium

Barrier of Entry: High

Availability of Substitutes: Low

The study carries out the strategic analysis of Qantas Group to identify the problems that the company is facing in the contemporary business environments and provide the recommendations that will assist Qantas overcoming its problems and record high profitability. The Porter 5 analysis reveals Qantas is facing the intense competitions at domestic and international routes leading to a decline in the profit margins. Moreover, Qantas has not been able to overcome the problems associated with the high costs of operations from the constant increase in the fuel costs. The paper suggests that Qantas should consider both vertical and horizontal mergers to enjoy economies of scales, which will assist in enjoying a decline in the cost of operations and having a high bargaining of power over its suppliers.

1: Qantas Group Overview

Qantas Group is an Australian airline company that has grown to become the largest airline in Australia. Major brands of Qantas Group include the Qantas, Jetstar, Qantas Frequent Flyer, and Qantas Freight. In the domestic and international market, Qantas targets premium and business travelers. However, the intense competition in the airline industry has made Qantas to establish the Jetstar to operate low-cost carriers, and focusing on customers who are price sensitive. Established in 1920, and "registered originally as the Queensland and Northern Territory Aerial Services Limited (QANTAS)" (Annual Report, 2015 p 1), Qantas has become the world leader in the distance airline and enjoying the Australian strongest brand. Over the years, Qantas has built a strong reputation and outstanding standards in operational reliability, safety, customer services engineering and maintenance that have made the Group becoming the largest Australian airline dominating the 65% of the Australian market shares. The Qantas uses a fleet of 308 aircraft for its operations serving over 46 countries. (Qantas Group, 2015). At present, Qantas has over 33,000 employees where 83% of them are based in Australia. While the company is still recording profitability, however, the management needs to take the immediate actions amidst of stiff domestic and global competitions and high costs operations that are driving down the profitability.

The objective of this paper is to discuss the strategic analysis of Qantas Group. The study identifies the key issues and problems that the company is facing in the contemporary business environment. The study uses the Porter 5 model to diagnosis the company operations to assist in providing the effective recommendations to enhance Qantas operations, which will assist it to drive up the profitability. (Porter. 2008).

1.1: Key Problems and Strategic Issues

Increasing fuel prices are the major threats to Qantas operations since fuels costs represent large percentages of the operating expenditure. For example, the fuel costs represented expenses of over $4.3 billion out of the company total expenses of A$15.5 Billion. (Dallas, Michael, & Ireland, 2012). Apart from increasing, the costs of operation, high fuel costs can also increase the ticket prices, lead to the closure of some underperforming routes, which consequently affect the demand for air tickets. Moreover, recent political events such as a cut in oil supply from Iran led to a sudden increase in the prices of crude oil reaching $124 per barrel in 2012. Moreover, high demand of fuel from the emerging economies such as India and China has provoked an increase in the fuel prices. A report released by the "International Air Transport Association (IATA, 2012)" shows that fuel price was projected to increase by more than $124 per barrel in 2012 that made the profits in airline market dropping from $7.90 billion to $3.9 billion.

High labor costs are also the major problems facing Qantas Group. To maintain its strong reputation and outstanding customer services, safety, and operational reliability, Qantas rely on certified and skilled pilot's maintenance crew and trained cabin staff. Unlike the low-cost airlines that pay a pilot $20,000-year, the issue is a sharp contrast to Qantas' pilots where the lowest paid pilot earns $100,000 per year and a senior captain earns over $500,000 per year. (Dallas, Michael, & Ireland, 2012).

Additionally, Qantas faces a stiff competition with some number of airline operators. In Australia, the domestic airline is highly competitive. For example, Virgin Australia is a well-branded and fierce competitor of Qantas Group. Moreover, Tiger Airline, a low-cost airline, has become a major competitor of Qantas because Tiger focuses on the profitable routes and control number of new aircraft. Other competitors of Qantas Group include Singapore Airlines, Air China, Northwest Airlines, Deutsche Lufthansa AG, Virgin Australia, Northwest Airlines, Airnorth, and Airlines of Papua. (Belobaba, Odoni, & Barnhart, 2009).

The Australian Carbon Tax introduced in 2012 has been another major issue that is affecting the company operations. In Australia, the carbon tax rate is A$23 per metric ton, and affecting the operation of the airline industry. Thus, the carbon tax made Qantas pay the sum of A$115 million at the end of 2013 fiscal year. Other adverse affecting the operations of Qantas is a drop in the number of tourists passengers, the recent earthquake in Japan, Iceland volcanic eruption, Haiti earthquake, terrorism, and other adverse effects across the world are affecting the company operation.

A limited financial leverage is another problem that the company is facing in the contemporary business environment. Essentially, a limited financial leverage can affect an organizational ability to secure a loan and repay the loan, which may consequently affect the business operations. At the end of the 2012 fiscal year, the debt-to-equity ratio of Qantas was 1.11 where the competitors such as Deutsche Lufthansa and Singapore Airline recorded debt to equity ratios of 0.81 and...

A debt-to-equity ratio is a relative proportion of debt and shareholder equities that a company uses to finance its business operations.
In the financial environment, a company with low debt-to-equity ratio has a financial standing than a company with the high debt-to-equity ratio. At the end of the 2011 fiscal year, Qantas recorded an increase of 8.60% in debt that amount to $6.76 billion as compared with $6.22 billion in the previous year.

A limited liquidity position is also affecting the operations of the Qantas Group. At the end of the 2012 fiscal year, the company current ratio was 0.77 lower than its competitor's current ratios. For example, Deutsche Lufthansa and Singapore Airlines recorded 0.97 and 1.37 respectively in the current ratio. Essentially, a lower current ratio reveals that the company may face challenges in meeting its short-term obligations. The current assets of Qantas also decreased by 3.20% at the end of 2012 fiscal year compared to an increase of 14.20% in the previous year. Thus, a limited liquidity put Qantas in a disadvantaged position when intending to fund the potentially profitable business opportunities.

A decline in operational performances is another issue facing the company in the business environment. Since 2012, Qantas return on assets has been declining. Moreover, the company recorded a negative net margin between 2012 and 2014. In 2012, Qantas recorded an operating loss of $360.27 million due to the transformation costs. At the end of the 2012 fiscal year, Qantas operating margin was (2.22%) compared with Singapore Airlines and Virgin Australia that reported an operating margin of 1.85% and 2.69% respectively. The ROE (return on equity) was also -4.16% compared with Singapore Airline and Virgin Australia that recorded the ROE of 2.61% and 2.45% respectively at the end of the 2012 fiscal year. Table 1 reveals the company financial positions in the last 6 years.

Margins % of Sales

TTM

2015-06

2014-06

2013-06

2012-06

2011-06

2010-06

Revenue

COGS

42.99

45.99

50.17

45.40

48.28

44.38

44.76

Gross Margin

57.01

54.01

49.83

54.60

51.72

55.62

55.24

SG&A

31.22

30.77

32.52

32.80

34.23

35.89

34.72

R&D

Other

16.94

18.32

43.50

20.51

24.09

20.37

22.08

Operating Margin

TTM

2015

2014

2013

2012

2011

2010

8.85

4.92

-26.19

1.28

-6.60

-0.63

-1.55

Net Int Inc.

0.48

0.16

-0.05

-1.18

4.26

2.88

2.89

EBT Margin

9.33

5.08

-26.24

0.11

-2.34

2.25

1.34

Profitability

TTM

2015-06

2014-06

2013-06

2012-06

2011-06

2010-06

Tax Rate %

29.74

29.02

64.71

22.91

34.83

Net Margin %

6.56

3.59

-18.76

0.03

-1.64

1.74

0.84

Asset Turnover (Average)

0.91

0.89

0.81

0.77

0.71

0.70

0.67

Return on Assets %

5.98

3.20

-15.16

0.02

-1.17

1.23

0.56

Financial Leverage (Average)

5.09

5.09

6.05

3.40

3.60

3.39

3.35

Return on Equity %

33.06

17.67

-64.53

0.08

-4.07

4.14

1.92

Return on Invested Capital %

13.17

8.07

-25.24

1.11

-0.99

2.83

1.41

Interest Coverage

5.71

3.26

-12.90

1.06

0.02

2.06

1.70

Source: Morning Star (2016)

2: Diagnosis: Analysis and Evaluation

The study uses the Porter's five forces to identify the key problems and strategic issues that Qantas is facing in the aviation industry. Auditing of a company strategic position requires an assessment of a firm current position by measuring their resources and competencies while assessing the forces and trends that present negative or positive future's prospects for the organization. Porter's five forces is an analytical tool to identify the environmental influence that creates challenges for Qantas. (Porter, Argyres, McGahan, 2012).

2.1: Porter 5 Analysis

In the industry framework, Porter 5 forces have become an effective tool to evaluate the attractiveness and potential profits of different industries. The Porter 5 model assists organizations to identify various competitions in the industry. This section analyzes Porter 5 forces within the aviation industry to identify competition and potential opportunities that Qantas is enjoying in the industry.

2.1.1:Power of Suppliers: Low-to-Medium

Qantas has only two suppliers of the airplane. Airbus and Boeing are the two largest manufacturers of the airplane. Moreover, BP (British Petroleum) and Shell are the major suppliers of crude oil. The NCR Corporation and IBM are the suppliers of information technology. It is essential to realize that it will be very difficult for Qantas to switch from the existing suppliers to another supplier of aircraft because the switching costs are very high.

Since Qantas…