Qantas Groups’ performance over the 2007 to 2011 period has been relatively poor mainly as a result of the global financial crisis adversely affecting the firm’s international operations. Strategically, Qantas is likely to continue to dominate the domestic airline industry with the success of Jetstar prompting expansion into the Asia Pacific region. The most significant threats facing Qantas include high fuel prices, the value of the Australian dollar and industrial action. A comprehensive financial analysis reveals that compared to other airlines, Qantas is showing strong signs of recovery despite there being inherent weaknesses in its liquidity. A review of the firm’s annual report revealed the presence of various accounting issues such distortion in its depreciation calculation, however it was determined that they were not significant enough to greatly affect Qantas overall financial position. Overall the firm was found to be in a financially sound position and through the implementation of its “QFuture” program; profitability is expected to continue to improve in following years. An evaluation of the Group’s equity found that the stock price for which Qantas is currently trading is overvalued by $0.50. This is further supported by the fact that over the last year the price of Qantas stocks has been subject to a downward trend suggesting that investors may have already identified the overvaluation. As a result of the findings of our analysis we therefore make a “sell” recommendation for Qantas stock. Overview of Airline Industry
The Airline industry is regarded to be a highly volatile business. This riskiness is derived not only from the enormous capital requirement for start-up and maintenance, but also related to external factors such as high level of competition, seasonality and fluctuation of fuel prices. In the following section, the Porter’s Five Model is applied to the global airline industry in determining the challenges faced by participants.
Threat of New Entrants: The enormous amount of capital required for initial investment, such as acquisition of aircrafts, has created a powerful barrier to entry to the airline industry. High levels of capital are also necessary for maintaining adequate supply of cash so airlines are able to absorb any losses caused by external factors such as increase in fuel prices and decrease of passenger due to seasonality. In addition, the complexity of government policies on licensing and safety measures has created a costly extra barrier for new firm entering the airline industry. Threat of Substitutes: Substitutes of air travel on a domestic level include transportation such as buses, trains and ferries. The degree of threat created by these substitutes is highly dependent on cost, time and convenience. In general, the threat faced by the domestic airline market is higher than that of the international markets given the availability of substitutes. The switching cost associated with various frequent flyer reward programs is also important to be taken into account when measuring the level of threat created by its substitutes as these programs often foster substantial loyalty from customers.
The Bargaining Power of Buyers: The rising number of airlines around the world and the fierce competition between them, has increased the bargaining power of passengers. Given the large number of choices and technological advancement, passengers today are capable of researching and comparing the prices of air tickets instantly online and choose from a wide range of airlines. Therefore, customers are extremely sensitive to price and will often select the cheapest option. However, the reward programs and alliances implemented by various airlines have increased the switching cost of passengers, particularly frequent flyers.
Bargaining Power of Suppliers: The two major aircraft manufacturers worldwide, Airbus and Boeing, have a market share of 88% of the 100 – 200...
References: Qantas Annual Reports 2010, 2011
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