Qantas Group Strategic Analysis: Porter's Five Forces

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 Qantas, Jetstar, Qantas Frequent Flyer, and Qantas Freight. In both domestic and international markets, Qantas targets premium and business travelers. However, the intense competition in the airline industry led Qantas to establish Jetstar to operate low-cost carriers, focusing on price-sensitive customers. 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 long-distance airline travel and holds Australia's strongest brand.

Over the years, Qantas has built a strong reputation and outstanding standards in operational reliability, safety, customer service, engineering, and maintenance — qualities that have made the Group the largest Australian airline, dominating 65% of the Australian market. Qantas operates a fleet of 308 aircraft serving over 46 countries (Qantas Group, 2015). At present, Qantas has over 33,000 employees, of whom 83% are based in Australia. While the company continues to record profitability, management must take immediate action amid stiff domestic and global competition and high operating costs that are driving down profit margins.

The objective of this paper is to discuss the strategic analysis of Qantas Group. The study identifies the key issues and problems the company faces in the contemporary business environment and applies the Porter's Five Forces model to diagnose company operations, with the aim of providing effective recommendations to enhance Qantas's performance and profitability (Porter, 2008).

Key Problems and Strategic Issues

Increasing fuel prices represent a major threat to Qantas operations, as fuel costs constitute a large percentage of operating expenditure. For example, fuel costs represented expenses of over $4.3 billion out of the company's total expenses of A$15.5 billion (Dallas, Michael, & Ireland, 2012). In addition to raising operating costs, high fuel prices can also force up ticket prices and lead to the closure of underperforming routes, which in turn affects demand for air travel. Recent political events — such as a cut in oil supply from Iran — caused a sudden increase in crude oil prices, reaching $124 per barrel in 2012. High fuel demand from emerging economies such as India and China has further driven up prices. A report by the International Air Transport Association (IATA, 2012) projected fuel prices would exceed $124 per barrel in 2012, contributing to a drop in airline industry profits from $7.90 billion to $3.9 billion.

High labor costs are also a major challenge for Qantas Group. To maintain its strong reputation for customer service, safety, and operational reliability, Qantas relies on certified and skilled pilots, maintenance crews, and trained cabin staff. Unlike low-cost carriers that may pay a pilot $20,000 per year, the lowest-paid Qantas pilot earns $100,000 per year, and a senior captain earns over $500,000 per year (Dallas, Michael, & Ireland, 2012).

Qantas also faces stiff competition from a number of airline operators. The domestic Australian airline market is highly competitive. Virgin Australia is a well-branded and fierce competitor of Qantas Group. Tiger Airways, a low-cost carrier, has also become a significant competitor by focusing on profitable routes and controlling the number of new aircraft in its fleet. Other competitors include Singapore Airlines, Air China, Northwest Airlines, Deutsche Lufthansa AG, Airnorth, and Airlines of Papua New Guinea (Belobaba, Odoni, & Barnhart, 2009).

The Australian Carbon Tax, introduced in 2012 at a rate of A$23 per metric ton, has been another major issue affecting the airline industry. As a result, Qantas paid A$115 million in carbon tax at the end of the 2013 fiscal year. Other adverse factors affecting Qantas operations include a decline in tourist passenger numbers and the broader impact of global events such as the earthquake in Japan, the Iceland volcanic eruption, the Haiti earthquake, and ongoing terrorism concerns around the world.

Limited financial leverage is an additional challenge. A constrained financial position can affect an organization's ability to secure and repay loans, which may consequently impair business operations. At the end of the 2012 fiscal year, Qantas's debt-to-equity ratio was 1.11, compared with competitors Deutsche Lufthansa and Singapore Airlines, which recorded ratios of 0.81 and 0.08 respectively. A lower debt-to-equity ratio generally reflects a stronger financial standing. At the end of the 2011 fiscal year, Qantas recorded an 8.60% increase in debt, amounting to $6.76 billion, compared with $6.22 billion in the previous year.

A limited liquidity position further constrains Qantas. At the end of the 2012 fiscal year, the company's current ratio was 0.77, lower than those of its competitors — Deutsche Lufthansa recorded 0.97 and Singapore Airlines recorded 1.37. A lower current ratio signals potential difficulties in meeting short-term obligations. Qantas's current assets also decreased by 3.20% at the end of the 2012 fiscal year, compared with an increase of 14.20% in the previous year. This limited liquidity places Qantas at a disadvantage when seeking to fund potentially profitable business opportunities.

A decline in operational performance is yet another concern. Since 2012, Qantas's return on assets has been declining, and the company recorded a negative net margin between 2012 and 2014. In 2012, Qantas recorded an operating loss of $360.27 million due to transformation costs. At the end of the 2012 fiscal year, Qantas's operating margin was -2.22%, compared with Singapore Airlines and Virgin Australia, which reported operating margins of 1.85% and 2.69% respectively. Return on equity (ROE) was -4.16%, compared with Singapore Airlines and Virgin Australia, which recorded ROEs of 2.61% and 2.45% respectively. The table below summarizes the company's financial positions over a six-year period (Morningstar, 2016).

Margins % of Sales

Revenue COGS: TTM 42.99 | 2015-06: 45.99 | 2014-06: 50.17 | 2013-06: 45.40 | 2012-06: 48.28 | 2011-06: 44.38 | 2010-06: 44.76

Gross Margin: TTM 57.01 | 2015-06: 54.01 | 2014-06: 49.83 | 2013-06: 54.60 | 2012-06: 51.72 | 2011-06: 55.62 | 2010-06: 55.24

SG&A: TTM 31.22 | 2015-06: 30.77 | 2014-06: 32.52 | 2013-06: 32.80 | 2012-06: 34.23 | 2011-06: 35.89 | 2010-06: 34.72

Other: TTM 16.94 | 2015-06: 18.32 | 2014-06: 43.50 | 2013-06: 20.51 | 2012-06: 24.09 | 2011-06: 20.37 | 2010-06: 22.08

Operating Margin: TTM 8.85 | 2015: 4.92 | 2014: -26.19 | 2013: 1.28 | 2012: -6.60 | 2011: -0.63 | 2010: -1.55

Net Interest Income: TTM 0.48 | 2015: 0.16 | 2014: -0.05 | 2013: -1.18 | 2012: 4.26 | 2011: 2.88 | 2010: 2.89

EBT Margin: TTM 9.33 | 2015: 5.08 | 2014: -26.24 | 2013: 0.11 | 2012: -2.34 | 2011: 2.25 | 2010: 1.34

Profitability

Tax Rate %: 2015-06: 29.74 | 2014-06: 29.02 | 2013-06: 64.71 | 2012-06: 22.91 | 2011-06: 34.83

Net Margin %: TTM 6.56 | 2015-06: 3.59 | 2014-06: -18.76 | 2013-06: 0.03 | 2012-06: -1.64 | 2011-06: 1.74 | 2010-06: 0.84

Asset Turnover (Average): TTM 0.91 | 2015-06: 0.89 | 2014-06: 0.81 | 2013-06: 0.77 | 2012-06: 0.71 | 2011-06: 0.70 | 2010-06: 0.67

Return on Assets %: TTM 5.98 | 2015-06: 3.20 | 2014-06: -15.16 | 2013-06: 0.02 | 2012-06: -1.17 | 2011-06: 1.23 | 2010-06: 0.56

Financial Leverage (Average): TTM 5.09 | 2015-06: 5.09 | 2014-06: 6.05 | 2013-06: 3.40 | 2012-06: 3.60 | 2011-06: 3.39 | 2010-06: 3.35

Return on Equity %: TTM 33.06 | 2015-06: 17.67 | 2014-06: -64.53 | 2013-06: 0.08 | 2012-06: -4.07 | 2011-06: 4.14 | 2010-06: 1.92

Return on Invested Capital %: TTM 13.17 | 2015-06: 8.07 | 2014-06: -25.24 | 2013-06: 1.11 | 2012-06: -0.99 | 2011-06: 2.83 | 2010-06: 1.41

Interest Coverage: TTM 5.71 | 2015-06: 3.26 | 2014-06: -12.90 | 2013-06: 1.06 | 2012-06: 0.02 | 2011-06: 2.06 | 2010-06: 1.70

Source: Morningstar (2016)

Porter's Five Forces Analysis

The study applies Porter's Five Forces to identify the key problems and strategic issues Qantas faces in the aviation industry. Auditing a company's strategic position requires an assessment of its current standing — measuring resources and competencies while evaluating the forces and trends that present negative or positive future prospects. Porter's Five Forces is an analytical tool used to identify environmental influences that create challenges for organizations (Porter, Argyres, & McGahan, 2012).

Power of Suppliers: Low-to-Medium

Qantas has only two major suppliers of aircraft: Airbus and Boeing. For fuel, BP (British Petroleum) and Shell are the primary suppliers of crude oil. The NCR Corporation and IBM serve as information technology suppliers. Switching from existing aircraft suppliers to alternatives is very difficult because the switching costs are extremely high.

Given the limited number of aircraft suppliers, Qantas's bargaining power over suppliers is rated low-to-medium, as the availability of aircraft is critical to smooth operations. To ensure uninterrupted business, Qantas is compelled to maintain strong relationships with its aircraft and fuel suppliers. The limited power over suppliers means Qantas faces structural challenges in managing its cost base. In particular, fuel costs represent the bulk of operating expenditure and have contributed to declining profitability in recent years.

Industry Rivalry: High

Qantas faces intense competition among both domestic and international airlines. Singapore Airlines, Tiger Airways, and Virgin Blue are among its top domestic competitors. At the international level, Deutsche Lufthansa and British Airways are major rivals. The fierce competition within the industry has produced slower growth rates and lower profit margins due to high marketing costs. Beyond these major carriers, Qantas also competes with China Southern Airlines and Malaysia Airlines on international routes.

Power of Buyers: Medium

The airline industry is highly competitive, with all carriers competing for the same passengers. Customer switching costs between airlines are very low. However, brand loyalty plays a critical role when passengers choose an airline. To discourage customers from switching, Qantas has introduced programs such as the Qantas Frequent Flyer program, which rewards loyal customers and effectively raises the cost of switching to a competing airline.

Barriers to Entry: High

The threat of new entry is low because the capital outlay required to enter the airline industry is very high. The industry is also heavily regulated by governments, further raising the barrier to entry. New entrants would need to incur substantial marketing costs to acquire a customer base in a market already dominated by established players. The high cost of leasing or purchasing aircraft is a further obstacle. Additionally, new entrants must satisfy extensive regulatory requirements related to safety, security, workforce standards, and customer service before being permitted to operate (Tanja & Ninon, 2015).

Availability of Substitutes: Low

The threat of substitutes is low at the international level, as alternative modes of transportation — such as sea, road, and rail — are not as efficient as air travel. Road and rail transport cannot serve international routes, and while sea transport can, it is not practical for business or premium travelers. However, a growing number of business travelers are using video conferencing and internet-based communication tools to reduce the need for long-distance travel. At the domestic level, the threat of substitution is somewhat higher; however, Australia's vast landmass continues to drive strong demand for domestic air travel.

Conclusion

Qantas Group is a major Australian airline operating at both the domestic and international levels. The strategic analysis reveals that the company faces intense competition from domestic and international players, contributing to low profit margins in recent years. The Porter's Five Forces analysis demonstrates that suppliers hold considerable bargaining power over Qantas, driving up operating costs. This paper recommends that Qantas pursue both vertical and horizontal mergers to address the dual challenges of competition and high operating costs, thereby strengthening its long-term profitability and market position.

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