Qantas Airways Limited is the flag carrier Airways commenced its operations since March 1921. The airline has it’s headquartered in Mascot, New South Wales, Australia. The airline is located in the suburb of Sydney in Mascot and with the main hub at Sydney Airport. Qantas is aiming in providing the services of 22 specialized cargos which is handling terminal of over 15 major gateways port which will be accessed across Australia, with terminal which is dedicated in the Los Angeles. Qantas freights are having 13 aircraft of the supplements of destination with export and import in and around Australia. Qantas Freight has number of carrier on the logistic specialization. Qantas has many carriers with specialization in logistics all around the world. Qantas is specialized in carrying Express Freighters Australia (EFA), JETS Transport Express and Qantas Courier New Zealand. Qantas has many subsidiaries which are Qantas Link, Jet Star Airways, Jet Connect, Network Aviation, Qantas Freight, Australia Air Express, Qantas Holidays and various others. The subsidiaries aim at providing services in Australia and New Zealand which will be flying under the Qantas and also owing to Jet Star Airways and an airline which are cheap and operating from the services internationally under the domestic services between New Zealand and Australia. Qantas is frequently flying services aiming in rewarding the loyalty of the customer. It is getting the points based on the distance flown with bonus varying by the class of travel. Qantas is also providing facilities of Qantas club and lounges for its employees and passengers (Qantas.com.2016).
Virgin Australia Holding Limited is public listed Australian airline company who owes and operates Virgin Australia and Tigerair Australia. The company was previously operating on the airlines of the Pacific Blue Airlines which was in a joint venture with Polynesian Airlines (Virgin. 2016). It has its headquarters in Bowen Hills, Brisbane, Australia. In was founded in the year 2000. Some of the subsidiaries of Virgin are Tigerair Australia, Virgin Australia, Virgin Australian Airlines, Virgin Samoa and some more. Chairman of this airline is Elizabeth Bryan and Chief Executive Officer is John Borghetti. Virgin Blue Holdings was formed as a wholly owned subsidiary in the year 2000 of Virgin Group. In the year 2003, Virgin Blue Holdings Limited entered into the ASX because Virgin Group was going to sell, some its holdings. In 2005, Virgin launched a takeover of the hostile in the Australia with 62% holding in the company. In the year 2008, the company announced for the distribution of 98.3% of the share to the shareholders of the company and by not remaining in the majority of the holding. During the phase of toll holding, 62.7% of the holdings were attempted for selling the shares for the no availing content was left over. In the year 2012, Etihad Airways had purchased 10% shareholdings to 20% then further on the same year there was next purchase of 10% of the Virgine Holdings by Singapore Airlines. Further on October 2012, Tiger Airways Australia 60% of the holdings was purchased by the Virgin Group. In January 2011, 15% of the Virgin Blue Holdings was purchased by Air New Zealand then by the June 2013 the holdings was increased by 23%.
Top – down Analysis
Top down analysis is process which looks for a big picture of with details of components of smaller. Top down approach is very necessary for breaking down system for achieving profit in the organization (Bierman Jr and Smidt 2012). Top down approach is also called stepwise design and in some of the cases is of the decomposition. The analysis will be conducted on the trend of the of the macro environment of the economic. Top down analysis is the investment approach, which is including a large picture of the market. Top – down analysis is determined with the help of Total market estimation.
Top-down analysis is done by the fundamental analysis, based on Economic Analysis, Industry Analysis and Company analysis (Vyatkina et al., 2016). For conducting economic analysis comparison will be done with Interest rate structure and GDP growth which will be affecting the above two Airlines. Industry analysis will be conducted through Demand-supply structure and exchange rate effect. Company analysis will be conducted through analysis of dividend and returns (Fornelli et al., 2013).
Let us consider the economic analysis first, in respect of economic analysis, an interest rate of the Qantas borrowings has been increased from 5.7% to 6.3%. Whereas, Virgin Holdings Limited has much lower interest rates of borrowings which is 2.8% in 2014 and 3.99% in 2015 (Tvardovskiy et al., 2015). Though the interest rate has increased individually but if the comparison is made then Virgin is getting advantage of due to difference in the interest rate (Guerrero et al., 2015). Similarly, if GDP factor is looked into it is observed that Qantas is providing employment opportunity to 28,622 employees has been working until the year 2015, whereas Virgin is providing 50,000 employment opportunities to the people of Australia. From the above analysis is proved that Virgin is in the front line of economic analysis as compared to Qantas (Lee et al., 2016).
Further, moving on with Industry Analysis, the analysis will be made of demand-supply and exchange rate effect of Qantas and Virgin Airlines Holdings (Mao et al., 2013). During the world II, some of the supply of Qantas was dropped in the level of the treetop. After the postwar expansion, it gradually increased there was an increase in the supply of the company which can be seen by observing the increasing trend of sales per year (Piotroski and So 2012). Similarly, if Virgin is looked into the trend is same as to Qantas there is an increase in the supply of the airline's services. Next analysis is the effect of an exchange rate. Qantas had total gains of due in hedging of unrealized gains on long – term debt as $ 12 million in 2015 and $ 54 million in 2014. Whereas, Virgin had suffered from loss of fuel which arises due to hedging of activities which was $129.4 million in the year 2015 and on which $ 106.7 million was the unrealized amount because of hedging. This proves that Qantas has been the front line in the factor of exchange rate mechanism (Bartram and Grinblatt 2015).
Finally moving on with the company analysis the factor of dividend and return has to be looked into in the above two airline (Goodman et al., 2013). Qantas has not paid final dividend and neither interim, instead of that there was declaration of and payment of non-controlling interest to the shareholders, who non-wholly owned the controlled entities $ 4 million in 2015 and $ 1 million on 2014. Virgin too had similar case in respect of dividend; there was not any existence of final dividend and neither the interim (Geis-Asteggiante et al., 2015). Instead, there was distribution of equity which was $ 17.8 million in the form of payment to the non-controlling interest holder during the year. Further moving on with the return on investment factor it is seen that Qantas achieved a return of 16.2% in 2015 and 1.5% in 2014. Whereas Virgin is taken into consideration, there has been decreasing in the percentage of return from 30% to 10%. In this context, Qantas has been the ruler in giving highest return to its shareholder (Breyer et al., 2013).
Bottom – up Analysis
Bottom up analysis is determined on the calculation of the estimation of the sales which are potential in the market. Bottom down analysis is broad sector in the economic environment and is based on the factor affecting the company stock on the basis of business cycle of the business. It does not look into macro environment of the company. Bottom down analysis is the basically quantitative analysis. Bottom down analysis is done only to analyze the financial position in terms of figures (Bierman Jr and Smidt 2012).
Bottom – up analysis is done on the basis few accounting ratios and some of the budgeting factor. Accounting ratio includes computation of Current ratio, Quick ratio, Net Profit Margin Ratio and Return of Asset Ratio (Parker and Vannest 2012). Whereas, Capital budgeting techniques includes Net Present Value, Profitability Index, Annual Percentage Rate and Pay Back Period. All the above computations have been done by data present in the annual report of the respective companies (Hu et al., 2012). First, let us look into the Accounting Ratios which are given as follows:
Current Ratio – Qantas has current ratio 0.66 in 2014 and 0.68 in 2015, whereas, Virgin has 0.64 in 2014 and 0.69 in 2015. Current Ratio is calculated by total current assets divided by total current liabilities. Current ratio depicts cash available to the company for paying the long-term debt in liability. Current ratio interprets the liquidity position of the firm. Virgin has comparatively better position than Qantas in respect of paying long – term debt in the category of current liability. But Qantas position in the year 2014 was comparatively better than that of Virgin because in the year 2014. Qantas ability for paying the long-term debts in respect of current liabilities was much high. On the present analysis, it will be said that Virgin is the better player in respect of paying the debts (Uechi et al., 2015).
Quick Ratio - Qantas has quick ratio 0.56 in 2014 and 0.52 in 2015, whereas, Virgin has 0.57 in 2014 and 0.58 in 2015. Quick ratio is calculated by current asset divided by current liabilities by excluding the inventories form the current asset. Quick ratio depicts the position of the company in terms of cash available to be converted into cash. Virgin has comparatively better position than Qantas in respect of available cash for the transformation of Asset. But if the overall scenario, it has been observed that Qantas position has tremendously decreased that too with large difference. Qantas do not have sufficient amount of cash available as compared to Virgin for transforming into assets (H?rl et al., 2013).
Net Profit Margin ratio - Qantas has Net Profit Margin Ratio -0.19 in 2014 and 0.04 in 2015, whereas, Virgin has -0.09 in 2014 and -0.06 in 2015. Net Profit Margin ratio is calculated by Net income/ loss divided by the net credit sales. In this context, Qantas has become the ruler regarding generating profit and effectively making use of resources available in the company. Virgin has been continuously facing loss for long span of time. On the prior year, Qantas has faced loss but proceeding further with the operations it has recovered from the situation of facing loss. But if a close look is given to the ratio, Virgin loss for the current year have decreased, which shows an indication of gradually improving the situation (Drivelos and Georgiou 2012).
Return on Asset - Qantas has Return on Asset -0.15 in 2014 and 0.03 in 2015, whereas, Virgin has -0.09 in 2014 and -0.02 in 2015. Return on asset is calculated by Net income or loss divided by average of the total asset. In this context, Qantas has become the ruler regarding managing the assets for the producing the profit. Qantas has tremendously increased it return on assets from -0.15 to 0.03, Whereas; Virgin is still in the negative place. Virgin should not be ignored totally in these respects slowly and gradually it is moving decreasing the negative return. Qantas is effectively utilizing the assets for generating profit for the company (Bierman and Smidt 2012).
Now moving on with some of the techniques of capital budgeting, the analyses for those are as follows:
Net Present Value – NPV is calculated as difference between present value of cash inflows and outflows. NPV of Qantas is 9,70,64,239 $ and Virgin is 2,47,72,244 $. It implies that there will be acceptability of Qantas because it has highest NPV. NPV shows acceptability of the project regarding measuring the present value of cash inflow and outflow. It is also helpful in analyzing the profitability of the projected investment. In the above point, Qantas is the ruler (Hayward et al., 2016).
Annual Percentage Rate – Qantas has a negative balance of finance cost in both the year. So there will be no APR in the case of Qantas because it has no borrowings. Whereas, Virgin has very high APR which shows that Virgin is very much liable for paying its return regarding loan taken by the company (Grob 2013).
Profitability Index – Profitability index is a somewhat modification of the NPV; it implies to be accepted if the PI calculated is greater than one and terms to be rejected if it is less than one or zero. Form the calculation done it has been observed that PI of Virgin is comparatively much higher than of Qantas in both the years. So in the respect acceptance, Virgin is accepted for doing the investment (Andor et al., 2015).
Pay Back Period - Pay Back Period implies that the time taken to recover the cost of the investment done on the project. In this Virgin stands to be ruler for the recovery of the cost, for the investment done. Virgin’s Pay Back Period is the highest as compared to the Qantas (Saxena 2015).
Overall analysis of the report is seen that Virgin has comparatively better position in respect of providing liquidity, the acceptability of the project on return, payback period and profitability index. Qantas has proven to be the winner in doing the comparison related to performance of the company. Through the Top – down Analysis it has been observed Qantas is in the better position for doing the further improvement in the company position. Further, it is also recommended that company Qantas should fulfill the requirement of payment of dividend to its investor because it is one of the important factors which is expected by the investors. If Virgin recovers the loss of the company, then it can be become the ruler of the market. Further, it is recommended that Virgin should make proper use of its assets regarding generating profit. From the bottom analysis, it has been observed that Virgin needs to increase its return on the equity otherwise, the investors with withdrawing their investment for the company. The financial position of the two companies depicts that Virgin is continuously facing the loss in the respect of Net income or loss achieved by the company, whereas Qantas has comparatively better position in the in terms of generating the profit for the company. So in this respect Virgin should find way to improve the position of the company by incurring income for the company. In terms of depicting the assets of the company Virgin is in the front line for getting advantage, whereas Qantas shows position, which is comparatively low show it needs to improve the position further. Highest return is the only thing which an investor looks. Further it is suggested that Virgin should increase it amount of assets so that it can fully utilize its asset for the generation of the profit. The overall top – down analysis and bottom – up analysis has been fully completed to its requirement.
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