Analysis Of Business Operations And Financial Performance Of Qantas Airways Limited

Company overview

The present study is based on the analyses of the business operations and the activities along with the financial performance and the capital structure of the Qantas Airways limited.

Qantas was established in 1920, in the Queensland (Australia), and at present it is considered as a prevalent domestic as well as international airline of Australia, and the third oldest airline of the world.  Reputation and the brand image of the company have been increased significantly due to the superiority in safety, operational reliability, engineering and maintenance and the customer services (Shaffner, Mills, and Mills, 2017). The main operation of the company is providing transportation services to the customers, further for facilitating the airline transportation service company is using two complementary airlines brands such as Qantas and Jetstar.

The company is consisting of different operating segments, and all operating segments of the company are working together as a combined portfolio.  The different segments of the company are enumerated as below-

1. Qantas Domestic- it is the major transportation of the Domestic Australian market and has above 40% market share measured by capacity. This segment of the company by its brand, network and product, target the business and premium class customers who give value for the full-service experience. Further for increasing the customer satisfaction, this segment continues in investing in onboard Wi-Fi rollout underway and also developing the domestic lounges.
2. Qantas international- it provides the major transportation services in Australia and out of Australia, and also targeting the business class and the premium class customers who value the services.
3. Jetstar Group- the primary business operations of this segment is in Australia and New Zealand. Further, this segment targets the people who are cost sensitive, by offering the low fare services supported by unique product policy. Moreover, the Jetstar group continuously expanding its international services on the routes of Australia and New Zealand.
4. Qantas Loyalty- this segment contained the important consumers of Australia through SME coalition loyalty program and Qantas frequent flyover and Qantas Business Rewards.  This segment continuously expands its business in the health insurance by Qantas Assures, in credit cards by launching Qantas premier credit card, employee recognition and reward scheme, online trading and so on.

Qantas Airways Limited is providing leading transportation services through its airlines. The growth of the airline industry remains same although there are major changes in the macroeconomic conditions as the return on the investment in the airline industry is more than the cost of investment by the investor (Foley, and Manova, 2015). In the present era, the growth of the airline industry is significant due to the increasing passenger demand. Further, the Qantas Airways Limited is actively involved in the growth of the economic development of the country.

The main competitors of the Qantas Airways limited are the UNITED, Singapore Airlines, American Airlines, Delta, Southwest and Malaysian airlines. These companies are competing with the Qantas Airlines limited on the basis of their routes and the pricing policy (Homsombat,  Lei, and Fu, 2014).

The main objective of the company is to provide the maximum return to the shareholders; therefore for achieving the objective, the company maintains an optimal capital structure which leads to increase in earnings per share of the company (Arrow, 2017). Company finances its operation by the internal sources as well as by the external sources. The external sources of finance of the Qantas Airways limited are such as short-term borrowing which is inclusive of commercial bills, overdraft and long-term borrowing is inclusive of debentures, mortgage, unsecured notes and leasing (Danis, Rettl, and Whited, 2014). The company makes the strategy for maintaining the best capital structure (Fraser, Bhaumik, and Wright, 2015), for instances, in the year 2018 company decided to maintain the debt range between the $5.1 billion and $ 6.3 billion, at the end of 2018, the net debt of the company was $4.9 billion which was below the target, as this will provide the company with significant financial flexibility (Annual report of Qantas Airways, 2018).

Business operations of Qantas Airways Limited

There are five important elements by which the financial performance of the company can be evaluated. Those components are the Assets, Liabilities, Equity, Revenue and expenses of the company.

In the year 2018, the key elements are described as below-

Table 1: Key elements of financial performance

Key element	Value (in $M)
Assets	18647
Liabilities	14688
Equity	3956
Revenue	17060
Expenses	15274

Subsequent events are the events which are occurred between, after the date of the financial report but before the financial statement issued to the public. There is no significant event occurred after the reporting date of Qantas Airways limited except the dividend and other shareholders distribution. The directors of the company declared the dividend of $ 168 million, for the year 2018, in the August 2018. It was properly reflected in the director’s report, which is also the part of the financial report of the company (Annual report of Qantas Airways, 2018).

There are no changes in the accounting policies of the company in the current year. However, the company will adopt some new accounting standard, which leads to changes in the accounting policies of the company in the near future. The company will adopt AASB 9, by which company inclusive of a new expected credit loss model for computation of impairment on the financial assets. Further, they will adopt AASB 15, revenue from the contract with customers, by which company will recognize the revenue when the performance obligation is satisfied at the amount which is expected to realize for the exchange of goods and services (Annual report of Qantas Airways, 2018). Another new standard that will company adopt in future is AASB 16, accounting for lease. This standard mitigates the difference between operating lease and finance lease, and future recognition will be based on the right to use the asset and associated lease liability.

Table 2: Carrying amount of property, plant and equipment

Nature of item	Amount ($M)
Freehold land	49
Buildings	79
Leasehold improvements	402
Plant and equipment	412
Aircraft and engines	10749
Aircraft spare parts	495
Aircrafts deposits	665

Total carrying amount of property, plant and equipment was $ 12,851 Million.

Accounting standard AASB 116, describe the accounting treatment for the property, plant and equipment. This standard prescribes about the initial recognition, depreciation, and determination of the carrying amount and the revaluation of assets. Moreover, this standard states that property, plant and equipment are evaluated as per their fair value (Jin, Shan and Taylor, 2015).

In the case of Qantas Airways limited, the accounting for the property, plant and equipment are as per the provisions of accounting standard AASB 116. The assets are shown or recognised at the cost i.e. fair value of the provided consideration and all the incidental cost directly related to the acquisition. The carrying amount of the asset is calculated at cost less depreciation and less impairment loss if any. Further, the company realizes the borrowing cost associated with the purchase, production of a qualifying asset or the construction as a part of the cost of the asset to which they related. All the subsequent expenditure related to property, plant and equipment will be capitalized only if the future economic benefit will be generated.

Qantas Airways Limited’s competitors

The company adopted the straight-line method for determination of depreciation for all the items of the property, plant and equipment except the freehold land, on which depreciation is not charged (Annual report of Qantas Airways, 2018). Company reviews the useful life and residual value annually with regards to the commercial and technological developments (Laing and Perrin, 2014).

The company also receives credit from the manufacturer in connection with purchasing of the aircraft and engine, the credits are deducted from the cost of purchase, and if the aircraft held under an operating lease, then the credits are deferred and reduced from the operating lease rental on a straight line method basis over the lease term period.

Table 3: Carrying amount of intangible assets

Nature of item	Amount ($M)
Goodwill	207
Airport landing slots	35
Software	757
Brand names and trademarks	26
Customer contracts/relationships	1
Contract intangible assets	87

Total intangible assets of the company $1113 Million.

Accounting standard AASB 138, deals with the intangible assets. An intangible asset is recognized only if they can generate the future economic benefit and the cost of the asset can be measured reliably. Cost of the intangible assets comprises with all cost which is directly attributable to the intangible assets (Su and Wells, 2018).

The company recognizes the goodwill at cost after deducting the impairment loss if any. Further under the equity method, with respect to investment, the carrying amount of goodwill is covered under value of shown investment.

Airport landing slots in financial statements are shown at cost less any impairment loss and same provisions has been applied for accounting of the software, Contract intangible assets Brand names and trademarks. As it is also stated at cost less accumulated amortization and any impairment loss, and software development cost is recognized as assets only if the future economic benefit can be generated and the cost can be reliably measured. Customer contracts and relationship stated at their fair value at the time of acquisition and less accumulated amortization and impairment loss (Annual report of Qantas Airways, 2018). Further, amortization will be charged when the asset is in ready to use condition.

Goodwill, brand names and trademark have indefinite lives; therefore they are not amortized by the company. Apart from these assets, remaining assets are amortized to write off the cost of the intangible asset after deducting their residual value over the life of assets (Steenkamp, and Steenkamp, 2016).

AASB 136 deals with the impairment of assets. By applying this standard accounting, entity assures that the value of the assets is not more than its recoverable amount (Vanza, Wells, and Wright, 2018). Qantas Airways limited recognized impairment loss on the some tangible as well as on intangible assets which are as follows

Table 4: Impairment loss of tangible and intangible asset in 2018

Assets	Impairment loss ($M)
Building	213
Leasehold improvements	940
Plant and equipment	1023
Aircraft and engine	10736
Aircraft spare parts	370
Customer contracts and relationship	3
Software	797

Conclusion 

On the basis of the present study, it has been concluded that the financial statements of the company as well and the accounting treatment of the company was as per the accounting standard issued by the Australian Accounting Standard Board. However, there is some deficiency in the presentation of the annual report since the company did not provide the separate amount for the impairment loss; however, it has been calculated from the given information. It is recommended to the company to disclose the separate amount for the impairment loss of the assets.

References 

Annual report of Qantas Airways, 2018. [PDF] Available through <https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2018-Annual-Report-ASX.pdf>. [Accessed on 10th September 2018].

Arrow, K.J., 2017. Optimal capital policy with irreversible investment. In Value, capital and growth (pp. 1-20). Routledge.

Danis, A., Rettl, D.A. and Whited, T.M., 2014. Refinancing, profitability, and capital structure. Journal of Financial Economics, 114(3), pp.424-443.

Foley, C.F. and Manova, K., 2015. International trade, multinational activity, and corporate finance. Economics, 7(1), pp.119-146.

Fraser, S., Bhaumik, S.K. and Wright, M., 2015. What do we know about entrepreneurial finance and its relationship with growth?. International Small Business Journal, 33(1), pp.70-88.

Homsombat, W., Lei, Z. and Fu, X., 2014. Competitive effects of the airlines-within-airlines strategy–Pricing and route entry patterns. Transportation Research Part E: Logistics and Transportation Review, 63, pp.1-16.

Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35, pp.90-107.

Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.

Shaffner, E., Mills, A.J. and Helms Mills, J.C., 2017. Reading Qantas History: Discourses of Intersectionality and the Early Years of Qantas. In Insights and Research on the Study of Gender and Intersectionality in International Airline Cultures(pp. 445-469). Emerald Publishing Limited.

Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions reducing R&D spending?. Journal of Financial Reporting and Accounting, 14(1), pp.116-130.

Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre and post IFRS adoption. Accounting Research Journal, (just-accepted), pp.00-00.

Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated disclosures resolve uncertainty about future returns and reduce information asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.2