Strategic Analysis of Qantas Group

Qantas Group Overview

Key Problems and Strategic Issues

Diagnosis: Analysis and Evaluation

Porter 5 Analysis

Power of Suppliers: Low-to-Medium

Industry Rivalry: High

Power of Buyer: Medium

Barrier of Entry: High

Availability of Substitutes: Low

The study carries out the strategic analysis of Qantas Group to identify the problems that the company is facing in the contemporary business environments and provide the recommendations that will assist Qantas overcoming its problems and record high profitability. The Porter 5 analysis reveals Qantas is facing the intense competitions at domestic and international routes leading to a decline in the profit margins. Moreover, Qantas has not been able to overcome the problems associated with the high costs of operations from the constant increase in the fuel costs. The paper suggests that Qantas should consider both vertical and horizontal mergers to enjoy economies of scales, which will assist in enjoying a decline in the cost of operations and having a high bargaining of power over its suppliers.

1: Qantas Group Overview

Qantas Group is an Australian airline company that has grown to become the largest airline in Australia. Major brands of Qantas Group include the Qantas, Jetstar, Qantas Frequent Flyer, and Qantas Freight. In the domestic and international market, Qantas targets premium and business travelers. However, the intense competition in the airline industry has made Qantas to establish the Jetstar to operate low-cost carriers, and focusing on customers who are price sensitive. Established in 1920, and “registered originally as the Queensland and Northern Territory Aerial Services Limited (QANTAS)” (Annual Report, 2015 p 1), Qantas has become the world leader in the distance airline and enjoying the Australian strongest brand. Over the years, Qantas has built a strong reputation and outstanding standards in operational reliability, safety, customer services engineering and maintenance that have made the Group becoming the largest Australian airline dominating the 65% of the Australian market shares. The Qantas uses a fleet of 308 aircraft for its operations serving over 46 countries. (Qantas Group, 2015). At present, Qantas has over 33,000 employees where 83% of them are based in Australia. While the company is still recording profitability, however, the management needs to take the immediate actions amidst of stiff domestic and global competitions and high costs operations that are driving down the profitability.

The objective of this paper is to discuss the strategic analysis of Qantas Group. The study identifies the key issues and problems that the company is facing in the contemporary business environment. The study uses the Porter 5 model to diagnosis the company operations to assist in providing the effective recommendations to enhance Qantas operations, which will assist it to drive up the profitability. (Porter. 2008).

1.1: Key Problems and Strategic Issues

Increasing fuel prices are the major threats to Qantas operations since fuels costs represent large percentages of the operating expenditure. For example, the fuel costs represented expenses of over $4.3 billion out of the company total expenses of A$15.5 Billion. (Dallas, Michael, & Ireland, 2012). Apart from increasing, the costs of operation, high fuel costs can also increase the ticket prices, lead to the closure of some underperforming routes, which consequently affect the demand for air tickets. Moreover, recent political events such as a cut in oil supply from Iran led to a sudden increase in the prices of crude oil reaching $124 per barrel in 2012. Moreover, high demand of fuel from the emerging economies such as India and China has provoked an increase in the fuel prices. A report released by the “International Air Transport Association (IATA, 2012)” shows that fuel price was projected to increase by more than $124 per barrel in 2012 that made the profits in airline market dropping from $7.90 billion to $3.9 billion.

High labor costs are also the major problems facing Qantas Group. To maintain its strong reputation and outstanding customer services, safety, and operational reliability, Qantas rely on certified and skilled pilot’s maintenance crew and trained cabin staff. Unlike the low-cost airlines that pay a pilot $20,000-year, the issue is a sharp contrast to Qantas’ pilots where the lowest paid pilot earns $100,000 per year and a senior captain earns over $500,000 per year. (Dallas, Michael, & Ireland, 2012).

Additionally, Qantas faces a stiff competition with some number of airline operators. In Australia, the domestic airline is highly competitive. For example, Virgin Australia is a well-branded and fierce competitor of Qantas Group. Moreover, Tiger Airline, a low-cost airline, has become a major competitor of Qantas because Tiger focuses on the profitable routes and control number of new aircraft. Other competitors of Qantas Group include Singapore Airlines, Air China, Northwest Airlines, Deutsche Lufthansa AG, Virgin Australia, Northwest Airlines, Airnorth, and Airlines of Papua. (Belobaba, Odoni, & Barnhart, 2009).

The Australian Carbon Tax introduced in 2012 has been another major issue that is affecting the company operations. In Australia, the carbon tax rate is A$23 per metric ton, and affecting the operation of the airline industry. Thus, the carbon tax made Qantas pay the sum of A$115 million at the end of 2013 fiscal year. Other adverse affecting the operations of Qantas is a drop in the number of tourists passengers, the recent earthquake in Japan, Iceland volcanic eruption, Haiti earthquake, terrorism, and other adverse effects across the world are affecting the company operation.

A limited financial leverage is another problem that the company is facing in the contemporary business environment. Essentially, a limited financial leverage can affect an organizational ability to secure a loan and repay the loan, which may consequently affect the business operations. At the end of the 2012 fiscal year, the debt-to-equity ratio of Qantas was 1.11 where the competitors such as Deutsche Lufthansa and Singapore Airline recorded debt to equity ratios of 0.81 and 0.08 respectively. A debt-to-equity ratio is a relative proportion of debt and shareholder equities that a company uses to finance its business operations.

In the financial environment, a company with low debt-to-equity ratio has a financial standing than a company with the high debt-to-equity ratio. At the end of the 2011 fiscal year, Qantas recorded an increase of 8.60% in debt that amount to $6.76 billion as compared with $6.22 billion in the previous year.

A limited liquidity position is also affecting the operations of the Qantas Group. At the end of the 2012 fiscal year, the company current ratio was 0.77 lower than its competitor’s current ratios. For example, Deutsche Lufthansa and Singapore Airlines recorded 0.97 and 1.37 respectively in the current ratio. Essentially, a lower current ratio reveals that the company may face challenges in meeting its short-term obligations. The current assets of Qantas also decreased by 3.20% at the end of 2012 fiscal year compared to an increase of 14.20% in the previous year. Thus, a limited liquidity put Qantas in a disadvantaged position when intending to fund the potentially profitable business opportunities.

A decline in operational performances is another issue facing the company in the business environment. Since 2012, Qantas return on assets has been declining. Moreover, the company recorded a negative net margin between 2012 and 2014. In 2012, Qantas recorded an operating loss of $360.27 million due to the transformation costs. At the end of the 2012 fiscal year, Qantas operating margin was (2.22%) compared with Singapore Airlines and Virgin Australia that reported an operating margin of 1.85% and 2.69% respectively. The ROE (return on equity) was also -4.16% compared with Singapore Airline and Virgin Australia that recorded the ROE of 2.61% and 2.45% respectively at the end of the 2012 fiscal year. Table 1 reveals the company financial positions in the last 6 years.

Margins % of Sales

TTM

2015-06

2014-06

2013-06

2012-06

2011-06

2010-06

Revenue

COGS

42.99

45.99

50.17

45.40

48.28

44.38

44.76

Gross Margin

57.01

54.01

49.83

54.60

51.72

55.62

55.24

SG&A

31.22

30.77

32.52

32.80

34.23

35.89

34.72

R&D

Other

16.94

18.32

43.50

20.51

24.09

20.37

22.08

Operating Margin

TTM

2015

2014

2013

2012

2011

2010

8.85

4.92

-26.19

1.28

-6.60

-0.63

-1.55

Net Int Inc.

0.48

0.16

-0.05

-1.18

4.26

2.88

2.89

EBT Margin

9.33

5.08

-26.24

0.11

-2.34

2.25

1.34

Profitability

TTM

2015-06

2014-06

2013-06

2012-06

2011-06

2010-06

Tax Rate %

29.74

29.02

64.71

22.91

34.83

Net Margin %

6.56

3.59

-18.76

0.03

-1.64

1.74

0.84

Asset Turnover (Average)

0.91

0.89

0.81

0.77

0.71

0.70

0.67

Return on Assets %

5.98

3.20

-15.16

0.02

-1.17

1.23

0.56

Financial Leverage (Average)

5.09

5.09

6.05

3.40

3.60

3.39

3.35

Return on Equity %

33.06

17.67

-64.53

0.08

-4.07

4.14

1.92

Return on Invested Capital %

13.17

8.07

-25.24

1.11

-0.99

2.83

1.41

Interest Coverage

5.71

3.26

-12.90

1.06

0.02

2.06

1.70

Source: Morning Star (2016)

2: Diagnosis: Analysis and Evaluation

The study uses the Porter’s five forces to identify the key problems and strategic issues that Qantas is facing in the aviation industry. Auditing of a company strategic position requires an assessment of a firm current position by measuring their resources and competencies while assessing the forces and trends that present negative or positive future’s prospects for the organization. Porter’s five forces is an analytical tool to identify the environmental influence that creates challenges for Qantas. (Porter, Argyres, McGahan, 2012).

2.1: Porter 5 Analysis

In the industry framework, Porter 5 forces have become an effective tool to evaluate the attractiveness and potential profits of different industries. The Porter 5 model assists organizations to identify various competitions in the industry. This section analyzes Porter 5 forces within the aviation industry to identify competition and potential opportunities that Qantas is enjoying in the industry.

2.1.1:Power of Suppliers: Low-to-Medium

Qantas has only two suppliers of the airplane. Airbus and Boeing are the two largest manufacturers of the airplane. Moreover, BP (British Petroleum) and Shell are the major suppliers of crude oil. The NCR Corporation and IBM are the suppliers of information technology. It is essential to realize that it will be very difficult for Qantas to switch from the existing suppliers to another supplier of aircraft because the switching costs are very high.

Since Qantas has limited suppliers of aircraft, its bargaining of power over suppliers is low-to-medium since the availability of aircraft can only assist smooth operations of the company. To enhance a smooth operation of the business, Qantas is forced to develop a good relationship with the suppliers of aircraft and fuel. Inability to have major power over its suppliers makes Qantas to face challenges in term of cost structure. Typically, the cost of fuel forms the bulk of the cost of operations that leads to a decline in profitability in the last few years.

2.1.2:Industry Rivalry: High

Qantas is facing an intense competition among domestic and international airlines. For example, Singapore Airline, Tiger Airways, and Virgin Blue are the top competitors of Qantas. Moreover, the company is facing an intense competition from the low carriers at domestic and international levels. The Deutsche Lufthansa and British Airways are the major competitors of Qantas at international level. The fierce competition experienced in the industry has made the company recording a slow growth rate, and lower profit margins because of the high marketing costs. Beside the low-cost carriers, Qantas is also facing a stiff competition with China Southern Airline and Malaysia Airline making the company face an intense competition at international level.

2.1.3:Power of Buyer: Medium

The airline industry is very competitive, and all the airlines are competing for the same passengers. Moreover, the customer’s switching costs from one airline to another airline is very low. However, a brand loyalty is very critical when customers decide to choose a favorable airline. To discourage customers switching to another airline, Qantas is forced to introduce several programs to attract customers that include frequent flyer program designed to reward loyal customers making the costs of switching to another airline to be high.

2.1.4:Barrier of Entry: High

The threat of entry is low because the capital outlay is very high for a new entrant. Moreover, the airline industry is highly regulated by the government making the barrier enter the industry to be high. The new entrants will also be forced to incur high costs of marketing to have a customer’s share in the market. Moreover, the existing players have already dominated the market and it will be very difficult to snatch the customer of the existing operators in the industry. The high costs of leasing or buying a new aircraft are the major barrier for a new firm. The new entrants also have to implement the effective operational activities that include safety and security measure, workforce and customers services. Thus, the new players will require satisfying these conditions before being allowed to operate in the industry. (Tanja, & Ninon, 2015).

2.1.5:Availability of Substitutes: Low

The threat of substitute is low because other means of transportation such as sea transport, road transport and rail transport are not as efficient as air transport. Moreover, the road and rail transports cannot cover the international routes. While the sea transport is able to cover the international routes, it is not convenient for business and premium travelers. However, an increasing number of business travelers are using the video conferencing and internet phone to save time and the costs of long distance. While the threat of substitute to the international airline is low, however, the threat of substitute to the domestic airline is high. Although, Qantas is still able to enjoy high market demand at domestic level because the Australia landmass is very large making increasing number of people traveling by air.

3:Findings

The outcome of the analysis reveals Qantas is facing the stiff competitions in both domestic and international markets making the company losing part of its market shares. Moreover, the company cannot boast of having high bargaining of power with suppliers because of the limited suppliers of the aircraft. The fuel costs are also the major challenges that the company is facing in the business environment. Typically, Qantas has not been able to overcome the problem of fuel, and the issue has increased the cost of operations.

4: Recommendations

Qantas should consider both the horizontal merger and vertical merger to overcome the problems of high cost of operations and enjoy economies of scale. The horizontal merger occurs when the companies in the same line of business merge. However, a vertical merger occurs when companies that are in the same line of production merge. For example, Qantas should consider a merger with one of the medium scale supplier of crude oil. Major benefits of M & A (merger and acquisition) is the decline in the costs of operations and leading to the market domination at the domestic and international level, which will assist the company to record high profitability. Despite the benefit that the company will derive from the M&A, Qantas is required to implement the negotiation diligently to derive a successful outcome from the M&A process. Although, Qantas attempted to complete the M&A with British Airways despite that both companies were well matched, however, the merger’s process was not successful. The British Airways controlled 45,140 employees and Qantas had 37,000 employees. Moreover, the pretax profits of British Airways were A$2.05 Billion and Qantas’ pretax profit was A$1.4 billion at the end 2008 fiscal year. However, the merger between the two companies failed because Qantas did not implement the negotiation process diligently. (Nikolaos, 2008).

A report carried out by the CFA Institute (2010) reveals that the M&A is complex and involves many parties. Moreover, the M&A involves many issues such as contractual issues, legal issues, corporate governance and form of payments. Qantas should involve the experts at each stage of the M&A negotiations to avoid a failure in the negotiations. Typically, Qantas should consider a merger with a well match-matched major international airline company. This study does not suggest that Qantas should consider a merger with an airline company operating at a domestic level; rather the company should consider a merger with a company operating at international level. For example, the company could reopen the merger’s negotiation with British Airway. Alternatively, the Qantas could consider M & A with the KLM or merger with the Singapore Airline.

Major benefits of merger and acquisition are the economies of scale that will be derived from flying and buying of aircraft, and fuel, which will assist the company to enjoy a cost reduction from the suppliers of the aircraft and other suppliers of the aircraft materials. The finding of the Porter 5 forces reveals that Qantas’s power over the suppliers of fuel and aircraft is low-to-medium. The economic of scale from the merger will assist the company to have high bargaining of power over its suppliers, which will assist the company to deliver values to its shareholders. (Schmidt, 2015).

Nikolaos, (2008) identify major benefits from merger and acquisition. The value creation is one of the major benefits of the M&A because it will assist Qantas to deliver values to its shareholders, increase the marker shares on the international routes and enhancing cost efficiency. The M&A will assist Qantas to enjoy tax gains, and revenue enhancement. The merger will also assist Qantas to have high power over the competitors based on its domination of the market shares. (Tanja, & Ninon, 2015).

Despite the benefit to be derived from the M&A, a corporate cultural clash can jeopardize the merger process. Essentially, personality and the corporate cultural clash between the senior executives are the major reasons that may lead to failure in the merger process. Thus, a high touch skill in effective communication, empathy, persuasion, and personal contacts are the major strategies to overcome the risks associated with the personality and corporate culture clashes. (Cowper-Smith, & de Grosbois, 2011).

5: Conclusion

Qantas Group is a major Australian airline operating at the domestic and international levels. The outcome of the strategic analysis reveals that the company is facing the intense competitions from both the domestic and international players making the company to record low profit margins in the last few years. The findings of the Porter 5 analysis show that the suppliers have a high bargaining of power over Qantas making the company to record high costs of operation. The study recommends that Qantas should consider implementing both the vertical and horizontal mergers to overcome the problem of competitions and high costs of operations.

Reference

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