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Introduction
The airline industry is one of the first industries to have gone global. It is also one of the most heavily regulated sectors on the market worldwide. In this short report, we will try to analyze the situation of Qantas, the major domestic airline of Australia. The company is also an important global market player since it became a member of the ‘One World’ alliance, one of the two biggest alliances in the airline industry worldwide.
In order to evaluate adequately the company, we have to first assess the primary drivers for revenue and profit and the KPI’s (key performance indicators) that support these drivers in the airline industry. KPI’s are the ‘tools’ that are used to measure profitability in the airline industry.
There are two types of basic services that drive revenue for airline companies: passenger air transportation and air freights. Like many other services, passenger air transportation is a function of price and volume (or number). There are many financial KPIs in support of the services mentioned above such as passenger traffic and capacity, but there exist many other non-financial KPI’s also. Customer satisfaction and positive brand name recognition are among the most important of them.
They have a direct impact on the sales and marketing and customer loyalty business processes of the company. Sales and marketing have the duty to attract customers to the company in order to guarantee a continuing revenue opportunity. Instead, the customer loyalty process allows it to keep a certain level of revenue from existing customers. Both relate to a certain level of cash flow that the company needs to have for its operations. Customer satisfaction and positive brand recognition directly affect, first, customer loyalty and then create a negative impact on the public by damaging sales and marketing. This way the flow of cash needed for the daily operations of the company would be negatively influenced. The solution for many airlines has been merging or the formation of worldwide alliances.
One-World alliance
Globalism has led many business companies and corporations to believe that the way of gaining more from it is to collaborate with each other instead of ‘fiercely’ competing with each other (Gomez-Mejia et al., 4). In our case, the ‘One-World’ alliance between the various well-known airline companies aims to make them benefit more from this globalized market than they would do if continue to compete with each other. There are various benefits for all of them. In our case, Qantas airlines would be able to enter markets it previously did not serve in an easier way. This way it will be able to gain even more customers and thus, increase its sales. The increase in sales has a direct impact on the company’s revenues and profits. Also, another important factor to be mentioned here is the cutting of costs. By being a member of the ‘One World’ alliance Qantas will have the opportunity to use the routes and services of other companies, which are members of this alliance, instead of setting up new ones on its own. For example, one of the advantages for Qantas of the ‘one world’ alliance is its ability to provide one-stop flights to a host of European cities serviced by alliance member Cathay Pacific which is a former competitor. The usage of other members’ resources will impact Qantas’ revenues positively while retaining the costs at a low level.
But there are not only positive things to mention regarding the membership in this alliance. And this could be especially true for Qantas. Its financials could suffer more from losses than benefits from gains. We mentioned before the participation in new markets which would give to the company the possibility to serve new customers, thus, increase its sales. But Qantas could also lose customers from this new alliance it has joined and thus, decrease its revenues. The company’s two most valuable assets are its customer base and very good brand name and recognition. Participating in the alliance creates significant changes for Qantas customers. An example would be the fact that a customer purchasing an around-the-world ticket from Qantas might fly with any of the ‘One World’ alliance member airlines. If the quality of the flight experience (which may include the aircraft, checking-in procedures, airline personnel, catering, delay, and baggage handling) were below expectation, customer satisfaction may be adversely impacted. And Qantas would suffer the consequences of a low-quality service offered from some other member of the alliance. This would have an impact on the decrease of sales and so revenue for the company.
Financial considerations for Qantas
During the last years, Qantas has managed to have a gradual increase in its sales revenues, operating profit, and net profit. A major achievement for Qantas has been the managing of costs. For example, during the 1998 fiscal year, it managed to gain $475 million in cost reductions and cost avoidance. That is exactly 15.57% of the total liabilities which for the fiscal year 1998 were $7396.4 million. If there is a rise in jet fuel costs then it would have an impact (negative of course) on the total liabilities of the company. The increase of liabilities will impact the operating profit and before tax profit. In turn, this would decrease and thus influence the decrease of the net profits.
More specifically, the increase in jet fuel costs would impact ‘provisions’ under ‘current liabilities’ (as shown in the financial statement). An increase in jet fuel costs would increase the amount of company spending for provisions. As we have mentioned before, the company aims to increase the number of customers it serves, by passenger transportation or air freight of goods, in order to increase its profits. But this situation means that the company has to increase the number of flights and thus, increase the supply of jet fuel. In the statement of cash flows, this would influence the amount increase of the ‘payments to suppliers and employees. If this amount is increased, then the ‘net cash from operating activities’ would result lower than the one we already have. Subsequently, the net operating profit would result lower and so on (like a Domino effect) until we will have as an end result in the decrease of the net profits.
The decrease in the net profits will have negative consequences beyond the financial ones. We will discuss these negative consequences below after considering one more case.
Another important factor of expenditure for an airline company is its aviation fleet. Here there are a few possibilities that should be considered. First of all, if Qantas has its current fleet above the average age of the industry this means it has to spend more for maintenance and amortization than other companies. This situation also means that it has to invest in the near future for new aircraft because the existing ones would come out of service sooner than other companies’ fleets would do. Also, in the financial statements of Qantas, we would see a huge increase in expenditure in the form of investments and a decrease in operating expenses.
This net investment would cut funds for other necessary operations such as sales and marketing, brand imaging, and customer satisfaction programs. Other companies could take advantage of this situation and the operating cash flow generated mainly from the sales activities could decrease gradually. In the current situation, Qantas is in (and the whole industry is in with it) it should think twice before making such a big investment expenditure.
Another possibility is that Qantas decides to update its air fleet with new aircraft. As mentioned above this means that its ‘cash flow from investment activities’ would increase significantly especially under the voice ‘payments for property, plant, and equipment. In turn, this will impact the ‘net cash used in investing activities’ by increasing it significantly. The end result is that cash at the end of the financial year would suffer from this investing activity and show a low value, certainly much lower than without it. But this investment has its positive aspects also. If Qantas manages to get a contract with its carrier provider (like British Airways did with Boeing) it could significantly decrease its aircraft maintenance and utility costs.
This would be an investment for the future as next year the cash flow from investing activities would return to be normal and, furthermore, the costs of maintenance and provisions would decrease favoring a better net operating profit. If the net operating profits are increased then the net after-tax profits will also increase.
Conclusions
In conclusion, it must be noted that the airline industry is a very complex industry in which a company should be very careful to two major trends: expenditure and customer satisfaction. The only way for an airline company to increase its profits is by making more customers fly to a destination or send their cargo to a specific destination with this company.
Works Cited
Gomez-Mejia, Raul, et al. Management: People, Performance, Change, 3rd edition. New York: McGraw-Hill, 2008.
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