Qantas/Virgin Blue Overview and Contents Essay

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The steep reduction in revenue at Virgin Blue resulted in a reduction in their efficiency ratios. Given that the company continued to expand in size with only a minor expansion in revenue, their efficiency suffered. There is evidence of overcapacity, an issue that they have addressed in the interim with service cuts (Associated Press, 2009).

Financial Stability -- Short-Term

Both companies are liquid at present. Qantas, however, has seen the more significant decrease in its liquidity between 2007 and 2008. The company's cash holdings have been reduced significantly, while its "other" liabilities almost tripled. There have been some working capital issues at Qantas, with the firm increasing is turnover in days. Virgin Blue has also seen a reduction in its liquidity and an increase in its receivables turnover in days. For Virgin Blue, cash has declined in the past year, while interest-bearing liabilities increased. This is most likely attributable to a combination of capacity expansion and revenue reduction.

Financial Stability -- Long-Term

As with most airlines, both of these companies are highly leveraged. Qantas was able to bring down their leverage in 2008, as they were able to reduce their level of interest-paying liabilities. This debt reduction was a savvy move in advance of an economic slowdown, as it better positions Qantas in terms of its liabilities. Qantas for the past couple of years has had no difficulty meeting its interest obligations. Virgin Blue is the highly leveraged of the two. Their steep profit reduction last year reduced their ability to meet their interest obligations and increased their debt equity ratio (slow retained earnings growth). There is little evidence to suggest, however, that either firm is in any significant long-term danger.

d) Limitations

There are several limitations to the findings of this report. The economic and competitive environment has changed significantly since these figures were published.

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Fuel prices have come down substantially but the economy has also weakened. Although Australia is more insulated than many other Western nations from the downturn, the key trans-Pacific routes are threatened by the crisis coming from the United States. These routes are also threatened by increased competition. The effects of Virgin Blue and Delta's entry into this market remain unknown. Another limitation is that the airline industry is highly complex and therefore it is difficult to gain a full understand of the situation based on a ratio analysis, even with supplementary data. This report is therefore intended as an overview only.

Conclusions

Both Qantas and Virgin Blue are healthy companies, but the national carrier appears to be better positioned to withstand economic downturn. Whereas Virgin Blue's business suffered in 2008, Qantas was able to reduce costs, improve profitability and reduce its long-term debt. As a consequence, Qantas now stands as having the better financial position of the two firms. Virgin Blue, being a young airline, is prone to more wild fluctuations in operating effectiveness, a consequence of its relative inexperience.

Recommendations

Qantas needs primarily to keep with its current program. They can expect the economic crisis to weaken revenues. Increased competition on the trans-Pacific route will also hurt Qantas' business. Therefore they need to continue reducing operating costs and long-term debt. They have a strong financial position, but the damage from these chances will weaken them over the next couple of years if they are not aggressive in their cost-cutting.

Virgin Blue needs to put more emphasis on cost-cutting as well. The company built out capacity too quickly. This resulted in them taking on too much debt, such that when business slowed, they were face with a steep reduction in profit. Virgin Blue needs to cut capacity in order to improve load factors and.....

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