Key Economic Drivers for the Airline Industry

In 2016, it is expected that the Airline industry will have its most lucrative year in the history of almost $40 billion profit globally. The fuller planes and cheaper oil prices are mainly the driver of profit for the airline industry (Zhang et al., 2016). The International Air Transport Association (IATA) has forecasted that the profits will improve for the fifth consecutive years that indicates industry player are running normal returns. The analysis of the airlines industry of Australia indicates that the domestic market is in a matured and saturated stage. That means the domestic market of the airlines offers limited opportunity for growth. On the other in the international aviation sector, there are still opportunities for expansion (Zhang et al., 2017).  The analysis of the airline industry indicates that the industry faces medium revenue volatility. The companies operating in the airlines industry has to face certain challenges like the industry is very capital intensive, technological changes occurs very rapidly and  there is stiff competition. The key economic drivers for the airline industry are the listed below:

• Crude oil price;
• International travel to Australia;
• Domestic travel;
• Sentiments of the customer;

 

Figure 1: Domestic Capacity

(Source: OAG schedule Analyzer Data)

In Australia, the competitive scenario in the Airline industry is significantly high and every operator in the industry are competing with each other for gaining larger market share. The analysis of the airlines industry indicates that with respect to the Virgin Airline Australia the major competitor is Qantas airways (Homsombat et al., 2014). The figure above indicates that the domestic capacity of Qantas is declining in a constant basis whereas the Virgin Airline Australia is gaining its domestic capacity on a continuous basis. The gain made by the Virgin Airline is due to the continuous expansion of domestic network in to 42 destinations that are engaged in transporting local travelers and inbound visitors that are travelling to Australia. The company with its tremendous network have helped in connecting the community with the rest of the country. The company has successfully earned a reputation for the on time performance (OTP).  The company has the highest OTP of both the departure and arrival in the year 2016 and this has helped the company to increase its business along with the market share (Yin et al., 2015).

 

Figure 2: OTP

(Source: Annual report 2016)

However, Qantas has certain advantage over the Virgin Airlines. The Qantas is iconic and national carrier of Australia. Based on the overall discussion it can be said that the competitive condition on both the domestic and international market are extremely high and as a result both the companies are ferociously fighting for the larger market share (Whyte & Lohmann, 2015).

Competitive Scenario in the Australian Airline Industry

The Directors report is a document that highlights the state of the company and the compliance with the accounting, financial and corporate social responsibility standard. In this section of the report the director report of the Virgin Airlines and Qantas Airways are analyzed in order to identify one key factor for each company (Prideaux & Whyte, 2014).  The key factor that is analyzed in the director report of both the company is their principal activities and overview of operation.

The analysis of the Directors report of the Virgin Airlines indicates that the principle activity of the group is the operation of domestic and international Airlines business including the operation of the frequent flyers program (Gregson et al., 2015). The company is engaged in providing a variety of aviation products that suits the market.  The business has not witnessed any significant change in the business during the year. The director’s report highlights that the group provides employment to 9500 people. The company has also formed strategic alliance with the four key industry players providing the business a global network of 495 destination. The four key airlines partners are Air New Zealand Limited, Delta Air Lines Inc., Etihad Airways P.J.S.C. and Singapore Airlines Limited. The strategic alliance is the key factors that has contributed in expanding the capacity of the business in many folds (Alexander & Merkert, 2017).

The Directors report of the Qantas provides that the main business of the group is the domestic and international airline transportation. In the current year, the business has not seen any significant changes in the nature of its activities. The director’s report indicates that the business is implementing its strategy for long-term growth in shareholders’ value by developing the leading position in the domestic airways, increasing the non-cyclical earning of Qantas loyalty and making investment in customers (Forsyth & Seetaram, 2016). The company has developed financial framework that is in aligned with the objective of the shareholder.  The company is building an integrated portfolio strategy that is useful in diversifying earning and mitigating risk. It can be seen that company has not formed any strategic alliance with other airline for long-term competitive advantage. Therefore, the key factor of the business is the strategy of the business that is in alliance with the shareholders objective and long-term competitive advantage (Arblaster, 2016).

In this section of the report, financial performance of the business is determined by analyzing the profit or loss account of the business.  The analysis of the financial performance is virgin Airlines is discussed below.

Analysis of the financial Performance of Virgin Airlines
Particulars	2016 (mln)	2015 (mln)	Movement	Movement %
Revenue and income	$  5,021.00	$  4,749.20	$  271.80	5.7%
Net operating expenditure	$(5,278.70)	$(4,802.70)	$(476.00)	-9.9%
Share of net profits/(losses) of equity-accounted investees	$         0.70	$     (16.60)	$    17.30	104.2%
Loss before net finance costs and tax	$   (257.00)	$     (70.10)	$(186.90)	-266.6%
Net finance costs	$   (169.60)	$     (93.20)	$  (76.40)	-82.0%
Loss before tax	$   (426.60)	$   (163.30)	$(263.30)	-161.2%
Income tax benefit	$     201.90	$       69.50	$  132.40	190.5%
Loss	$   (224.70)	$     (93.80)	$(130.90)	139.6%

Analysis of Director’s Report of Virgin Airlines and Qantas Airways

 Table 1: Analysis of the Financial Performance

(Source: Created by Author)

The table above indicates the financial performance of 2015 and 2016 of the virgin Airlines. It can be seen that the revenue and income of the business has increased by 5.7%. The revenue indicates the 60% of the Tiger air Australia. The revenue of the business would have been more than that is reported provided that the figures of the Tiger air Australia would have been consolidated for the complete year. The net operating expenditure of the business has increased by 9.9%. The expenditure has increased due to the implementation of the program of increasing the operational and capital efficiency. The share of the net profits of the equity accounted investee is 104.2%. The increase is due to consolidation of Tiger air Australia (Zhang, 2015). The table shows that loss before tax is 266.66% and the increase is loss is due to increase in the expenditure that have been discussed above. It can be seen that the net finance cost of the company has increased by 82%. The main reason for such increase is the weaker vale of the Australian dollar, the new facilities have been developed for financing the operation of the business and increase in the interest rate of the US Federal reserve. The tax benefit of the business has increased by 190.5%. The main reason for such increase in benefit is due to amended tax assessments (Whyte & Lohmann, 2016). The table shows that the Virgin Airlines has made a loss and it has increased by 139.6%. Therefore, it is necessary that the business should adopt certain corrective measures to improve the financial performance.

Analysis of the financial Performance of Qantas
Particulars	2016 (mln)	2015 (mln)	Movement	Movement %
Revenue and income	$        16,200.00	$      15,816.00	$         384.00	2.4%
Net operating expenditure	$        14,557.00	$      14,768.00	$        (211.00)	-1.4%
Share of net profits/(losses) of equity-accounted investees			$                 –
Profit/Loss before net finance costs and tax	$          1,643.00	$        1,048.00	$         595.00	56.8%
Net finance costs	$             219.00	$           259.00	$          (40.00)	-15.4%
Profit/Loss before tax	$          1,424.00	$           789.00	$         635.00	80.5%
Income tax benefit/ expenses	$             395.00	$           229.00	$         166.00	72.5%
Profit/Loss	$          1,029.00	$           560.00	$         469.00	83.8%

Table 2: Financial performance of Qantas

(Source: created by Author)

The table above indicates the financial performance of Qantas. It shows that the revenue of the company has only marginally improved by 2.4%. The operating expenditure of the business has seen decline of 1.4%. It can be said that because of marginal increase in revenue and decline in expenditure the profit before finance tax and cost has seen an increase of 56.8%. The company has seen a decline of 15.4% in finance cost mainly due to decline of interest expense on financial liability from $324 million in 2015 to $268 million in 2016. The above table indicates that the profit of the company has seen significant increase by 83.8% during the year.

Comparative Performance of Virgin Airlines and Qantas
Particulars	Virgin Airlines	Qantas
Revenue and income	5.7%	2.4%
Net operating expenditure	9.9%	-1.4%
Share of net profits/(losses) of equity-accounted investees	104.2%	0.0%
Profit/Loss before net finance costs and tax	266.6%	56.8%
Net finance costs	82.0%	-15.4%
Profit/Loss before tax	161.2%	80.5%
Income tax benefit/ expenses	190.5%	72.5%
Profit/Loss	139.6%	83.8%

Financial Performance Analysis of Virgin Airlines and Qantas Airways

 Table 3: Comparative financial performance

(Source: created by Author)

The table above indicates the comparative financial performance of both the companies. The positive developments are given in the green background and the negative developments are highlighted with red background. The revenue of both the companies have increased but the increase of Virgin airline is more than its competitors. However, the expenses of Virgin Airline has increased by 9.9% whereas the expenses of Qantas has reduced by 1.4%. Therefore, Qantas is in a more advantageous position. The net finance cost of Virgin Airlines has increased by 82% in comparison for Qantas it has declined by 15.4%. Therefore, the loss of Virgin has increased by 139.6% and the profit of Qantas has increased by 83.8%. Based on the above table it is evident that the Qantas is in better position in terms of financial performance than the Virgin Airlines.

SWOT Analysis
Particulars	Qantas Airline	Virgin Airlines
Strength	· The company has strong dominance in the domestic market. · The presence of the airline is growing in Asia. · It has strong public relation and advertising campaign. · The company has partnership with emirates. · The company makes huge expenditure in the innovation and technology.	· The business has skilled workforce. · The growth rate is high. · The domestic market is strong and increasing. · The cost of labor is reducing. · The business units are experienced.
Weakness	· There is mismatch in capacity and the demand in the market. · The business have non-core assets. · The company is indulging in layoff due to increased costs.	· The business unit small. · The future cost structure is increasing.
Opportunities	· There are loyal customer of the airline. · The opportunity to develop partnership with leading airlines of different nations. · Operation of jet star in Hong Kong.	· The income level is constantly increasing. · The new product and services are introduced. · The increase in profitability and the rate of growth. · The market is global. · The demand is constantly increasing.
Threats	· The increase in the cost of fuel. · The competition is increasing. · The ratings have been downgraded.	· The rapid change in technology. · The increasing cost of raw material. · The competition is constantly increasing.

Reference

Alexander, D. W., & Merkert, R. (2017). Challenges to domestic air freight in Australia: Evaluating air traffic markets with gravity modelling. Journal of Air Transport Management, 61, 41-52.

Arblaster, M. (2016). Negotiate-arbitrate regulation of airport services: Twenty years of experience in Australia. Journal of Air Transport Management, 51, 27-38.

Forsyth, P., & Seetaram, N. (2016). The Future of Australian International Aviation: Liberalisation, Competition, and the Dutch Disease. Air Transport in the Asia Pacific, 143.

Gregson, S., Hampson, I., Junor, A., Fraser, D., Quinlan, M., & Williamson, A. (2015). Supply chains, maintenance and safety in the Australian airline industry. Journal of Industrial Relations, 57(4), 604-623.

Homsombat, W., Lei, Z., & 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, 1-16.

Prideaux, B., & Whyte, R. (2014). Implications for destinations when low-cost carrier operations are disrupted: the case of Tiger Airlines Australia. In Advances in Hospitality and Leisure (pp. 99-118). Emerald Group Publishing Limited.

Whyte, R., & Lohmann, G. (2015). Low-cost long-haul carriers: A hypothetical analysis of a ‘Kangaroo route’. Case Studies on Transport Policy, 3(2), 159-165.

Whyte, R., & Lohmann, G. (2016). Airline business models. Air Transport Management: An International Perspective, 107.

Yin, K. S., Dargusch, P., & Halog, A. (2015). An analysis of the greenhouse gas emissions profile of airlines flying the Australian international market. Journal of Air Transport Management, 47, 218-229.

Zhang, Y. (2015). International arrivals to Australia: Determinants and the role of air transport policy. Journal of Air Transport Management, 44, 21-24.

Zhang, Y., Sampaio, B., & Fu, X. (2016). Duopoly competition between airline groups with dual-brand services: the case of the Australian domestic market.

Zhang, Y., Wang, K., & Fu, X. (2017). Air transport services in regional Australia: Demand pattern, frequency choice and airport entry. Transportation Research Part A: Policy and Practice.