Growth Profitability Financial For Qantas Essay

Question:

What Is The Growth Profitability Financial For Qantas?

Answer:

Introduction

Qantas Group is the second oldest airline company founded in 1920. It was originally registered as Queensland and Northern Territory Aerial Services Limited (QANTS). In present era, it is the largest domestic and international airline in Australia, which is mainly engaged in providing transportation services to the customers under two brands named as Qantas and Jester. The main hub of the company is situated in Sydney and it is listed on Australian Securities Exchange with a ticker ASX: QAN (Qantas, 2018). The report contains a critical analysis of company’ policies and strategies and its specific events related to investment, financial and dividend. The report also deals with the analysis of risk and return of the company, done with the help of calculations referred under appendix. Lastly, the summary of the findings and the recommendations are been given to the board of directors as required.

Dividend policies are one of the important decisions taken by the company and its members. It is a strategy followed to decide about the amount of dividends, to be declared to the shareholders of the company (Baker, 2009). The types of dividend policies are:

  • Regular: here, company pay dividend at usual rate and this policy can only be followed when company has regular earnings.
  • Stable: Under this policy, company made an unwavering dividend pay-out every year, irrespective of its earning level.
  • Constant: a specific percentage of the retained earnings is been paid out as dividend every year. The dividend amount varies as per the variations in the earnings.
  • Residual: under this policy, the company make dividend payment out of the funds, left after paying the capital expenditures. The residual earnings which are available after meeting the requirements of capital budget, are used for paying dividend amount.
  • Irregular: Under this, regular dividends are not paid to the shareholders due to uncertain income, lack of resources and many more.
  • No dividend: this policy is followed when company wants to reinvest its earning in the business for the purpose of growth (Shim & Siegel, 2008).


Talking about Qantas Airways, the annual report of 2016-17 shows that, the company follows irregular policy as it has paid dividend amounted to $261 million to its shareholders and $3 million for non-controlling interest in year 2017 and no dividend has been declare in 2016 and past years (Qantas. 2017). Moreover the pay-out ratio of the company was once reported at 107.1% in 2009 and after that it was 22.3% in 2017. Between these years, company has not declared any dividend to its shareholders. The statutory profit of Qantas was $852 million in 2017, out which $261 million has been paid out as dividend to the shareholders. In 2016, the same figure was $1029 million and no dividend payment was made out of them. Therefore, it can be said that company follows an irregular dividend policy.

As far as company’s strategies are concerned, the cash flow statement of Qantas Airways shows that the cash generated from operating activities in 2017 was $2,704 million, though less than that of in 2016. This implies that company has enough liquidity to undertake investments. The investing activities shows net cash used amounted to $2,046 million. This means the outflow is more than the inflow which implies that company is increasing its investment, which is in a way favourable for the growth of Qantas. Management of financing activities reflect the strategies used by Qantas Airways in maintain its cash flow. The activities mostly include payments rather than proceeds, which led to the negative cash balance of financing activities. Here, more outflow indicates that Qantas has not raised its borrowing in 2017, which is a good sign for the company. Critical evaluation of cash flow statement shows that the strategies followed by Qantas are focused on the growth and development of the company (Qantas. 2017).

In perspective of investment, the cash used in investing activities in 2017 is comparatively more than that used in 2016. Reason being, company has invested more money in purchasing the property, plants and equipment. Apart from this, in May 2017, Qantas Airways has launched mobile check-in and digital boarding passes for the passengers who travel between Australia and New Zealand. The adoption of this technology was a part of airline strategy which aims at speeding up the journey for the customers who travel internationally. This new technology will help the customers to check their passports and finalise their check-in online, thus avoiding the long queues for getting boarding pass (Breaking Travel News. 2017).

In February 2017, Tourism Western Australia and Qantas increase the value of their partnership to $12.9 million with a purpose of maximising the benefits of Perth-London carrier service. On November 2017, Qantas declare about its new lounge at London Heathrow Airport. The company has been working on this project for the past 12 months as a part of multi-million dollar investment for its customers. The strategy of making investment in this was to establish an air link between Europe and Australia for the first time. Along with this, the Airline also announced about upgrading the major cabin of Airbus A38os (Breaking Travel News. 2017).

The cash flow statement of Qantas shows that the net cash used in financing activities in 2017 is $854 million which is less than that of in 2016. The main reason behind this reduction is that Qantas received an amount of $419 million as proceeds from borrowings in 2017, while the same figure was nil in year 2016. Apart from this, payments are been made for buy-back of shares, treasury shares and the interest bearing borrowings taken by the company in financial year 2016-17. The amount of all these payments was less as compare to that of in 2016. In addition to this, Qantas has also declared a dividend of $261 million in year 2017 to its shareholders which was also included in its financing activities. In the same year, Lease payments are also done by the company which are classified as its financing activities Qantas. 2017).


Talking about dividend pay-out ratio, the company has DPR of 22.3% in 2017 after having a DPR of 107.1% in year 2009 (Morningstar.com. 2018). In between this, Qantas has not declared any dividend to its shareholders. The recent news shows that Qantas has made a profit of $607 million in the first of the current financial year (Chau, 2018). Also the company has made a profit of $1,029 million in financial year 2015-16 and $852 million in year 2016-17. This make Qantas to announce about declaring dividend to its shareholders for the first time in seven years. The airline announced that it would pay 7 cents per share as dividends to its stakeholders. Reason behind this strong profit was low cost of fuel and remarkable performance of the airline segments. Most of the revenue was generated from its domestic market and investments made in lounges, digital technologies, cabin upgrades lifted up the profits of the company (Hatch, 2016).

A systematic risk is also known as market risk, which mainly affects the industries, assets and stocks. It is not a diversifiable risk and can be measure through beta. On the other hand, unsystematic risk is a diversifiable risk which is associated with the company or industry in which, the investment is been made (Siddaiah, 2009). From the calculations done, it can be said that standard deviation of Qantas Airways is high but its beta is negative. This means the value of beta is lower than the market and is in opposite direction. This does not mean absence of risk, instead it indicates a high risk because the negative beta investment start losing money, as and when market rises. This implies on unsystematic risk that Qantas has high total risk.

Financial risk is basically associated with the shareholders, that they will lose money if they invest in the company which has high portion of debt and its cash flows are not sufficient enough to meet the financial obligations (Horcher, 2011). In other words, it is a borrowing risk which can be measured by looking at the leverage ratio of the company. Leverage ratios such as debt-to-equity ratio indicates financial risk of the company. Qantas has a D/E ratio of 1.25 in 2017 and the same was 1.36 in 2016. This implies that, though company has reduced its borrowings comparatively, but still its debt is more than its equity. This indicates that most of Qantas’s assets are financed through debt than equity. Also, when looking the past year data of the company, the highest D/E ratio was reported at 1.84 in year 2014. So, it can be said that company do have some financial risk, though the ratio has been reduced.

Financial leverage of accompany is also considered while measuring the financial risk. It shows the amount of debt used by the company for purchasing more assets. Qantas Airways has a leverage of 4.87 in 2017, which was less than that of in 2016. The highest was 6.05 in 2014 (Morningstar.com. 2018). This means Qantas has used more debt rather than equity for raising fund to buy more assets. It also reflects the financial risk associated with the company.

Profitability ratios are also one of the financial ratios which are calculated for knowing about the profitability situation of a business and the risk associated with it. They can also be used in determining the financial risk. Among the various profitability ratios, Return on Equity, Operating profit Margin and Return on Asset are the ones, which truly reflect the profit position of the company and also shows the returns provided by the entity to its shareholders and generated from total assets. The ROE of the company in 2017 is 25.09% and in 2016, it was 30.73%. Having a negative ROE of -64.53% in 2014 to a positive one in the past year, Qantas has enhanced its performance and has also offered more returns to its shareholders (Morningstar.com. 2018).


The ROA of Qantas Airways was 5.02 in 2017 and 6.01 in 2016. The ratio has been reduced in the recent past year but remains positive. Unlike 2014, the company is now able to generate more and positive returns from its assets. In addition to this, the operating profit margin of the company has also been reported at 6.3% in 2017, though less than that of in 2016 (Morningstar.com. 2018). This implies that company is making sufficient profits from its operations. Both the ratios are appropriately maintained by the company and the profitability position has increased after 2014. The data of 2017 indicates that the company is making profits and are providing suitable returns to its shareholders and investors.

Interest rate risk is a kind of risk which is associated with the value of investment. The risk is reflected by the changes in the investment’s value according to the changes in the level of interest rates. It is measured by analysing the inflation rate and interest rate of the country. As per the article published in The Guardian, the RBA Governor states that the official interest rate of Australia will remain at the low level and inflation might rise by 2% by the end of 2019. As the interest rate were low, so there is a minor risk associated with the bond values of Qantas Airways (Hutchens, 2017).

Summarising the whole analysis, it can be said that it will be good to invest in Qantas Airways, as the company has increased its performance in the recent years. It has reported a strong profit in 2017, which was the best in its 97 year history. Starting from its strategies and policies, Qantas has customer focused strategies and its operations has generated a cash inflow in fiscal year 2016-17. Moreover, the amount of cash used in investing and financing activities is less as compare to 2016. In addition this, company has made many investments with a purpose of providing best facilities to its customers, which automatically lifted up its profits in the year. As far as dividend policy is considered, company has an irregular one and has not declared any dividend between 2009 and 2017. However, it has paid $1 billion to its shareholders in form of capital return and share buy-back.


Talking about its investing, financing and dividend related activities, Qantas has made significant investments in past year, which made its financial results stronger. It has followed customer focused investment strategies which provide best services to its clients or consumers. The financing activities of Qantas mostly include the repayments of borrowings and share buy-back. In addition to this, company has also borrowed funds worth $419 million in 2017. The dividend has been paid out of the profits earned after 7 years. Risk and return analysis shows that Qantas has unsystematic risk as it has negative beta of -0.0442 and a high standard deviation of 22.93%. The annual return of the company is 74.84% which more than the market return of 3.38% (Appendix 1). Although the company has high unsystematic risk but its financial and interest rate risk is very minute. It has strong profitability position and because of the low level of interest rates in Australia, its bond value is also increasing. Moreover, company’s debt equity ratio and financial leverage has also decreased in 2017, which somehow reduces the financial risk.

So, on a whole it can be recommended to the board of directors that company is not so risky for investments. Money can be invested in Qantas Airways, as it provides good returns to its shareholders and has made remarkable profits in the last two years. Hence, it will not be risker to make investment in Qantas Airways.

References

Baker, H. K. (Ed.). (2009). Dividends and dividend policy (Vol. 1). New Jersey: John Wiley & Sons.

Breaking Travel News (2017). Qantas Airways News. Breaking Travel News. accounting 20 March 2018, from

Breaking Travel News (2017, May 20). Qantas adds digital boarding passes on Tasman journeys. Breaking Travel News. Retrieved 20 March 2018, from

Chau, D. (2018, February 22). Qantas could start paying corporate tax again from July 1. ABC News. Retrieved 20 March 2018, from

Hatch, P. (2016, August 24). Qantas posts record $1b profit, will pay first dividend in seven years. The Sydney Morning Herald. Retrieved 20 March 2018, from

Horcher, K. A. (2011). Essentials of financial risk management (Vol. 32). New Jersey: John Wiley & Sons.

Hutchens, G. (2017, November 21). Australia's interest rate will stay low for years – Reserve Bank governor. The Guardian. Retrieved 20 March 2018, from

Morningstar.com. (2018). Growth, Profitability, and Financial Ratios for Qantas Airways Ltd (QUBSF). Financials.morningstar.com. Retrieved 20 March 2018, from

Qantas. (2017). Annual Report 2017. Investor.qantas.com. Retrieved 20 March 2018, from

Qantas (2018). Our Company. Retrieved 20 March 2018, from

Shim, J. K., & Siegel, J. G. (2008). Financial management 3rd ed. New York: Barron’s Business Library.

Siddaiah, T. (2009). International financial management. New Delh: Pearson Education India.

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