Quantas Airways Limited Company Financial

Quantas Airways Limited

Company Financial Analysis

history of the company

Quantas Airways, Ltd. is the number one domestic airline industry in Australia and is a leader in the Asia-Pacific region. In fact, Quantas is among the ten largest airlines in the world and connects Australia in approximately 81 destinations and forty countries throughout the world. The company operates several regional airlines in the country of Australia and carries in excess of thirty million passengers each year. The largest shareholder in Quanta is British Airways plc, holding 18% interest in Quanta. Quanta was founded in March 1919 by two veterans of World War I. In the early 1970s a charter subsidiary, Qantair Ltd. was formed by Qantas and at the same time Qantas began a low fares initiative in which one-way fare between London and Sydney was cut from £276 to £169. Similar cuts occurred for single fares between Australia and four European cities. The British government did not approve the fare at first but Qantas sold the tickets anyway and later in the year, the new fare was approved by Britain. The offerings of Qantas to passengers included charter-level fares with the benefits of scheduled services resulting in the passenger traffic for Qantas airline along with the company's revenue growing "dramatically, despite the huge increase in the price of aviation fuel." (Funding Universe, 2008) in the early 1980's Qantas is reported to have been hit with large operating losses however, the government increased the capital base of Qantas from AUD 89.4 million to AUD 149.4 million and Qantas purchased three upper-deck Boeing 747s and six Extended Range Boeing 767 twin-engine jets. Qantas next step in fleet modernization was in 1987 and involved the purchase of four fuel-efficient Boeing 747-400s. In 1988, it was decided that Australian and New Zealand governments would merge and their state-owned airlines would become partially privatized. During the 1990s, Qantas reported a loss due to the program expanding its fleet in combination with the domestic pilot's dispute that had last five months and these losses increased resulting from the crisis in the Persian Gulf. In 1991, Qantas laid off approximately 5,000 employees and cut its flying hours by 14%. During the period between 1993 and 1997, it is stated that the alliance between Qantas and British Airways "evolved into a comprehensive collection of code-sharing arrangements, reciprocal frequent flyer programs, reciprocal lounge access agreements, and scheduling and pricing coordination efforts. The core of this alliance -- and most airline alliances -- was the code-sharing, whereby a flight operated by one carrier would also be listed in computer reservation systems under another airline's code. During this period, Qantas developed or enhanced several other alliances, including ones with American Airlines, Canadian Airlines International, Air Pacific, Asian, Japan Airlines, Emirates, and Reno Air." (Funding Universe, 2008) by 1997, it is related that 'Qantas was solidly in the black, achieving net profits of AUD 252,7 million ($190.1 million) There was a strong negative effect upon operations that were international in nature following the events of September 11, 2001, however at home the situation for Qantas was becoming very favorable. Rival Ansett Airlines collapsed in September 2001, nearly forcing its parent Air New Zealand Ltd. (ANZ) into bankruptcy as well. Qantas was allowed to buy struggling low-cost startup Impulse Airlines Pty Limited, leaving Qantas with an 80% share of the domestic Australian aviation market. In 2002, Qantas proposed acquiring a large (22.5%) interest in ANZ and developing a strategic alliance with the Kiwi carrier. However, the suggested linkup aroused antitrust concerns from the Australian Competition and Consumer Commission. Qantas posted a net profit of AUD 428 million ($230 million) on revenues of AUD 11.3 billion (up 11%) in the fiscal year ended June 30, 2002. The airline underwent an AUD 800 million share offering in part to help raise money for a AUD 2.46 billion capital improvements program, which included aircraft replacement, cabin renovations, and upgraded airport facilities. Profit before tax reached a record AUD 964.6 million in fiscal 2003-04, up 92% from the previous year, though revenue slipped 0.2% to AUD 11.4 billion. Qantas carried more than 30 million passengers in 2003-04. Fifteen new aircraft were added to the fleet during the year, ranging from Dash 8s to Boeing 747s. Qantas was Air Transport World's "Airline of the Year" for 2004." (Funding Universe, 2008) in December 2003, Qantas acquired Star Track Express, a thirty-year-old freight carrier and a few months later Qantas started its new budget airline, Jetstar Airways Pty Limited.

QUANTAS SUBSIDIARIES, DIVISIONS, OPERATING UNITS and COMPETITORS

The principle subsidiaries of Qantas Airlines includes: Airlink Pty Ltd.; Australian Air Express Pty Ltd. (50%); Australian Airlines Ltd.; Eastern Australia Airlines Pty Ltd.; Impulse Airlines Pty Ltd.; Jetstar Airways Pty Ltd.; Jetstar Asia (Singapore; 49.9%); Qantas Flight Catering Holdings Ltd.; Qantas Holidays Ltd.; Sunstate Airlines Pty Ltd.; Star Track Express Pty Ltd. Principle divisions of Qantas Airlines includes:

1) International Flying Businesses;

2) Domestic Flying Businesses;

3) Flying Services; and 4) Qantas Freight.

Principle Competitors of Qantas Airlines are those of:

1) Air New Zealand Ltd.; and 2) Virgin Blue Airlines Pty Ltd.

The business segments of the Qantas Group includes those as follows:

1) Qantas - domestic and international airline and QantasLink regional flying businesses, which are supported by the Qantas Engineering and Airports businesses;

2) Jetstar - representing the Jetstar domestic and international flying businesses as well as the Qantas Group's investments in Asian low-cost carriers;

3) Freight - representing the air cargo freight and domestic express freight businesses as well as the Qantas Group's investments in Australia and international express freight businesses;

4) Frequent Flyer - representing the Qantas Frequent Flyer customer loyalty program;

5) Qantas Holidays - representing the wholesale travel and holiday business; and (6) Qantas Flight Catering - representing the in-flight catering business. (Funding Universe, 2008

The following information has been provided by Qantas for the Year Ended 30 June 2008

Consolidated Income Statement for the year ended 30 June 2008.

As shown in the above table the earnings of Qantas for the year ending 30 June 2008 are up from June 2007 with earnings per share up as well from 2007. The following table is the consolidated balance sheet for Qantas as of 30 June 2008.

Qantas 'Consolidated Balance Sheet' as of 30 June 2008.

As shown in the foregoing table company cash and cash equivalents are down from June 2007 however, other financial assets have almost doubled with total current assets being slightly higher than June 2007. Current liabilities increased from 6,939.2 in June 2007, to 7,603.9 in June 2008 however, non-current liabilities have slightly decreased from June 2007 to June 2008. Qantas Airways Revenues are stated at the amount of $16.19bn and the Net Income for the Company is stated at 969.00m. When compared to their industry peers as shown in the following table, Qantas is ahead of the others excepting British Airways both in terms of company revenues and net income.

Peer Industry Review

Name Revenues

TTM) Net Income

TTM) Market Cap Employees

Air China Ltd. H Shr HK 9.29bn 676.31m 6.49bn 37,401

Air France - KLM FR 42.47bn 869.79m 8.44bn 104,659

All Nippon Airways Co Ltd. JP -- 8.47bn 32,593

British Airways UK 19.13bn 1.49bn 5.51bn 42,377

Cathay Pacific Airways Ltd. HK 12.65bn 574.93m 8.11bn 27,000

Japan Airlines Corporation JP -- 6.85bn 50,614

Qantas Airways Ltd. AU 16.19bn 969.00m 6.61bn 33,342

Ryanair Holdings IE 4.86bn 280.09m 6.98bn 6,280

Qantas is stated to be subject to "foreign currency, interest rate, fuel price and credit risks." (Qantas Airways Limited and Controlled Entities - Preliminary Final Report, 2008) This risks are hedged through derivative financial instruments. The policy of Qantas is "not to enter into, issue or hold derivative financial instruments for speculative trading purposes." (Qantas Airways Limited and Controlled Entities - Preliminary Final Report, 2008) it is related that the 'Accounting Standard AASB 139: Financial Instruments: Recognition and Measurement' contains a "strict definition of hedge effectiveness for accounting purposes" and makes a requirement that "all derivatives be held at current market values. Each derivative transaction used to hedge identified risks must be documented and proven to be effective in offsetting changes in the value of the underlying risk within a range of 80% to 125%. This measure of effectiveness may result in economically appropriate hedging transactions being deemed ineffective for accounting purposes." (Qantas Airways Limited and Controlled Entities - Preliminary Final Report, 2008) This report has split the accounting ineffectiveness for derivative transactions into two lines and shown in the following table listing the foreign exchange rate, interest rate and fuel hedging transactions that fail the accounting effectiveness measure in the year ending June 20, 2008.

Source: (Qantas Airways Limited and Controlled Entities - Preliminary Final Report, 2008)

Qantas recognized a loss of $12.3 million as 'ineffective derivatives - open positions'. This amount is stated to have been excluded from the operating result "as it relates to derivative hedging instruments deemed ineffective for accounting purposes that are to hedge underlying risks in future reporting periods." (Qantas Airways Limited and Controlled Entities - Preliminary Final Report, 2008)

In July, 2008 Qantas reported that it intends to "eliminate 1,500 jobs world-wide and it shed plans to increase flying capacity as it continues to battle high jet-fuel costs." (the Wall Street Journal, 2008) in addition, the plans to hire 1,200 people have been canceled. Qantas will also be retiring 22 aircraft from its fleet and call centers in Arizona and London will be closed as well. (Thurlow and McFarland, 2008)