Qantas Capital Structure and the Global Financial Crisis
This paper examines the capital structure of Qantas Airways in the context of the 2008 global financial crisis, evaluating how the airline maintained financial stability while much of the global airline industry suffered severe losses. Drawing on Qantas annual reports and financial analyses, the paper traces the company's 70/30 debt-to-equity ratio before and after the crisis, explores the role of Australia's resilient banking sector, and assesses the strategic decisions — including a proactive equity issue and operational cost reductions — that allowed Qantas to remain profitable. The paper concludes that the existing capital structure is optimal given the airline's stable cash flows, strong leverage capacity, and competitive position, and recommends no restructuring.
- Introduction: Qantas profitability amid global airline industry losses
- Capital Structure Overview: Defining debt-equity balance and Qantas ratios
- Impact of the Global Economic Crisis on Qantas: Australian banking resilience and Qantas borrowing strategy
- Optimal Capital Structure for Qantas: Why high leverage suits Qantas's stable cash flows
- Conclusion: No restructuring needed; current strategy endorsed
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What makes this paper effective
- Grounds abstract financial concepts — such as capital structure and leverage — in concrete data drawn directly from Qantas annual reports, giving the argument empirical weight.
- Uses historical comparison effectively: contrasting the 2007 and 2010 capital structures (68.4% vs. 70% debt) demonstrates that crisis management preserved rather than disrupted the firm's financial position.
- Integrates macroeconomic context (Australia's banking resilience, global equity market disruption) to explain why a company-level strategy succeeded where it might have failed elsewhere.
Key academic technique demonstrated
The paper demonstrates applied financial analysis — translating balance sheet data and theoretical capital structure concepts into a coherent evaluation of corporate decision-making. It moves systematically from definition, to data, to environmental context, to normative recommendation, illustrating how finance papers bridge descriptive and prescriptive reasoning.
Structure breakdown
The paper opens with industry-level context before narrowing to Qantas, then defines capital structure theory and applies it to the firm's actual figures. A dedicated section on the economic crisis examines how external conditions shaped — or failed to disrupt — Qantas's financing decisions. The optimal capital structure section assesses whether the status quo serves shareholders. A brief conclusion synthesizes the findings and explicitly recommends against restructuring.
Introduction
The global financial crisis began in 2008 in the United States and quickly spread. Most major world economies — and many minor ones as well — suffered over the following years from suppressed demand, exacerbated by government cutbacks that increased unemployment while doing little to restore shattered consumer confidence. The impact on the global airline industry was significant. The 2000s were already a difficult decade for many firms in the industry, the result of the September 11, 2001 terrorist attacks and then the economic crisis (Ghosh, 2010). The Air Transport Association reported that the industry lost $4.7 billion (USD) in 2009 (de Bruyn, 2009). While 2010 saw the industry recover somewhat (Ghosh, 2010), the decade was on the whole a challenge for many carriers.
For its part, Qantas weathered the financial crisis well, posting a profit in 2008/2009 (Qantas 2010 Annual Report). The company continued to be profitable in fiscal 2010, posting a profit before tax of $377 million. The company attributes this success to its "decisive response" (Ibid). This response included deferring aircraft deliveries, reducing capacity, and cutting jobs in order to lower the airline's cost structure (Govindasamy, 2009). While the Australian economy held up better than most during the crisis (Eslake, 2009), Qantas saw reduced revenue on its lucrative international routes (2010 Qantas Annual Report). This paper further analyzes the financial condition of Qantas, including an examination of the impacts of the global economic crisis.
Capital Structure Overview
The capital structure of an organization refers to the balance of debt and equity capital used to finance the firm's operations (Loth, 2006). The optimal capital structure for a firm is based on the nature of the business and the stage of the business life cycle in which the company can be categorized. Debt costs less than equity, but leverage is also a source of risk because it represents a fixed demand on free cash flow — a demand that persists even when cash flow is low. Equity financing need not represent any drag on free cash flow, but it costs more. Most firms maintain a target range for their capital structure, though they may deviate from this range during periods of financial distress.
At the end of the 2010 fiscal year (June 30, 2010), the capital structure for Qantas was 70% debt and 30% equity. The largest component of liabilities was interest-bearing liabilities (bonds and debentures), which accounted for 25.6% of the entire capital structure. These included secured bank loans (53.2%), unsecured bank loans (14.5%), other unsecured loans (20.3%), and lease/hire purchase liabilities (8.6%). In comparison, the pre-crisis capital structure at the end of fiscal 2007 (June 30, 2007) was 68.4% debt and 31.5% equity. Not only is this almost identical to the 2010 capital structure, but the company's total size was nearly the same across both periods. In 2007, total assets were $19.6 billion; in 2010, they were $19.91 billion — only 1.5% larger (2007 Qantas Annual Report).
References
de Bruyn, C. (2009). Global airline industry to suffer $4.7 billion loss this year. Engineering News. Retrieved October 9, 2011 from http://www.engineeringnews.co.za/article/global-airline-industry-to-suffer-47bn-loss-this-year-iata-2009-03-24
Eslake, S. (2009). The global financial crisis and its impact on the Australian economy. ANZ Bank. Retrieved October 9, 2011 from http://www.anz.com/singapore/en/resources/f/9/f9da17804d6914aa9fa09f17f89c601a/Saul-Eslake-Presentation-Singapore-Mar-2009-en.pdf
Ghosh, P. (2010). Global airline industry poised to soar in coming decades. International Business Times. Retrieved October 9, 2011 from
Govindasamy, S. (2009). Qantas cuts to tackle crisis. Airline Business. Retrieved October 9, 2011 from
Loth, R. (2006). Evaluating a company's capital structure. Investopedia. Retrieved October 9, 2011 from http://www.investopedia.com/articles/basics/06/capitalstructure.asp
No author. (2009). Qantas profit sinks 87%, Jetstar keeps group afloat. Travel Blackboard Australia. Retrieved October 9, 2011 from http://www.etravelblackboard.com/showarticle.asp?id=96008
Qantas 2007 Annual Report. Retrieved October 9, 2011 from http://www.qantas.com.au/infodetail/about/investors/2007AnnualReport.pdf
Qantas 2010 Annual Report. Retrieved October 9, 2011 from http://www.qantas.com.au/infodetail/about/investors/2010AnnualReport.pdf
Smith, P. (2009). Qantas plans A$500m share issue. Financial Times. Retrieved October 9, 2011 from http://cachef.ft.com/cms/s/0/31b69c80-f224-11dd-9678-0000779fd2ac.html
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