Business Analysis and Valuation: Using Financial Statements – Asia Pacific Edition, 3e
Solutions: Part 4 Further case studies
Case 1 Qantas
Student responses will vary. Accordingly, certain answers provide guiding principles and/or a
sample of potential responses.
Solution.
PART A
1. Analyse the competitive forces facing Qantas, using the ‘five forces’ framework from
the strategy literature. Evaluate Qantas’ prospects for profitability and growth in the
next five years.
Threat of new entrants
• Hard for new entrants due to airline industry being capital intensive (i.e., excessive costs to
enter industry).
• New entrants may bring in more innovation to add new value propositions.
• Qantas needs to continually invest in innovation to tackle this threat. For example, new
lounges and modern technology.
• Aviation regulations may impact new entrants ability to successfully enter the industry.
Threat of substitutes
• Exceptionally low given planes are the fastest way to travel long distances
• Pricing of airlines is comparable to that of alternatives (e.g., coach or train)
• Airlines offer add-ons such as meals and Wi-Fi which appeal to customers when deciding
how to travel
Bargaining power of customers
• High given service offerings differ between low-cost airlines and premium offerings.
• Price cuts and discounts are common in this industry
• Qantas relies on customer loyalty and its brand to improve its competitive positioning.
Bargaining power of suppliers
• Low in the airline industry as there are various suppliers from which to procure raw
materials.
• Suppliers in a dominant market position with a quality product may be able to dictate
prices, which may impact Qantas’ margins.
Competitive rivalry
• Qantas rivals include:
o Domestic: Virgin Australia
o International: Singapore Airlines, Emirates, Etihad, Qatar
• Price wars are common in this industry as consumers seek lower cost alternatives
• Qantas introduced Jetstar as its low-cost carrier to serve the Asian tourist market.
, • Domestically, Qantas relies on its strong brand to maintain its competitive advantage. For
example, it sponsors various Australian sporting teams, positioning itself as the ‘Australian’
airline.
Prospects for profitability and growth
Qantas needs to revise its cost structure to maintain profitability. It should invest in its low-cost
carrier (Jetstar) for future growth as consumers have become more price sensitive following the
COVID pandemic and rising levels of inflation.
2. Identify the limitations of this analysis. What other factors do and could affect
Qantas’ competitive environment?
Potential limitations include the scope of the industry and selecting a competitor. The analysis
could be conducted individually on Qantas’ domestic or international operations, which would
then change the way one looks at the five forces framework. Further to this, it is difficult to find a
competitor comparable to Qantas, as there is no other Australian airline operating on the scale of
Qantas.
3. Discuss Qantas’ competitive strategy since 2000. Is it successful, and is it sustainable?
Qantas has pursued an integrated cost leadership/differentiation strategy since 2000. Whilst most
firms struggle to do this, Qantas has focused on diversifying its products (e.g., business class,
economy class as well as focussing on its brand/reputation) whilst also being able to offer
customers products at low costs (e.g., Jetstar). Qantas has faced increased competition
domestically (Virgin) and internationally (from various airlines). This is placing downward pressure
on margins which can constrain future growth.
4. What is Qantas’ competitive advantage, if any? Apply a SWOT evaluation to it.
Qantas’ competitive advantage is its strong brand reputation
Strengths
• Strong international and domestic presence.
• Largest airline operating in Australia.
Weaknesses
• Limited international routes compared to other airlines (such as Emirates).
• Susceptible to negative media attention (e.g., 2011 union disputes and recent delays post
COVID).
Opportunities
• Growth into more overseas markets.
• Further airline alliances.
Threats
• Rising costs (fuel, labour).
Copyright © 2022 Cengage Learning Australia Pty Limited
, • Increased competition within domestic market.
5. What has been Qantas’ corporate strategy across its domestic and international
divisions since 2000? How has that strategy changed in response to market changes?
Have any changes been initiated by Qantas?
• In response to competition domestically from Virgin, Qantas introduced Jetstar Airways in
2003 to target the low-cost market.
• Introducing Jetstar has reduced the dependency on the Qantas brand alone to generate
profit. Further to this, it resulted in Qantas targeting price sensitive customers, whereas it
traditionally pursued customers who were not sensitive to price.
• Internationally, Qantas’ market share has declined since 2000. As a result, it has introduced
changes, such as moving its Asian hub to Singapore and introducing a non-stop Perth-
London route.
6. Prepare an executive summary of recommendations to the Qantas executive, based
on your analysis. Identify three key changes to its structure and/or operations.
An example of key changes is summarised below:
• Qantas needs to revise its staff costs. For example, Virgin flight and cabin crew earn up to
35% less than their Qantas counterparts, and airport check-in staff pay rates can be up to
18% less. Whilst this may be an incentive for staff to join Qantas, it enables Virgin to earn
higher margins in the domestic market. A solution to this may be to employ casual labour
during peak periods which will reduce ongoing staff costs.
• Introducing more non-stop routes. As technology advances, there is an opportunity for
Qantas to introduce more non-stop routes (such as the flagged non-stop routes to New
York). Customers who are sensitive to price may be persuaded to pay increased fares for
the convenience of catching one flight rather than two.
• Review price structure during peak periods. New low-cost airlines are adopting flatter fare
structures during peak periods, while Qantas may increase fares during the same period.
Increased competition is making consumers less loyal to brands. Therefore, Qantas needs
to find ways to revise its fare structure.
PART B
1. Select one accounting policy that was analysed in this case, and make an adjustment
to the account of 10% of the recorded figure in either direction. Follow through the
effect of this adjustment to the financial statements.
Copyright © 2022 Cengage Learning Australia Pty Limited
Solutions: Part 4 Further case studies
Case 1 Qantas
Student responses will vary. Accordingly, certain answers provide guiding principles and/or a
sample of potential responses.
Solution.
PART A
1. Analyse the competitive forces facing Qantas, using the ‘five forces’ framework from
the strategy literature. Evaluate Qantas’ prospects for profitability and growth in the
next five years.
Threat of new entrants
• Hard for new entrants due to airline industry being capital intensive (i.e., excessive costs to
enter industry).
• New entrants may bring in more innovation to add new value propositions.
• Qantas needs to continually invest in innovation to tackle this threat. For example, new
lounges and modern technology.
• Aviation regulations may impact new entrants ability to successfully enter the industry.
Threat of substitutes
• Exceptionally low given planes are the fastest way to travel long distances
• Pricing of airlines is comparable to that of alternatives (e.g., coach or train)
• Airlines offer add-ons such as meals and Wi-Fi which appeal to customers when deciding
how to travel
Bargaining power of customers
• High given service offerings differ between low-cost airlines and premium offerings.
• Price cuts and discounts are common in this industry
• Qantas relies on customer loyalty and its brand to improve its competitive positioning.
Bargaining power of suppliers
• Low in the airline industry as there are various suppliers from which to procure raw
materials.
• Suppliers in a dominant market position with a quality product may be able to dictate
prices, which may impact Qantas’ margins.
Competitive rivalry
• Qantas rivals include:
o Domestic: Virgin Australia
o International: Singapore Airlines, Emirates, Etihad, Qatar
• Price wars are common in this industry as consumers seek lower cost alternatives
• Qantas introduced Jetstar as its low-cost carrier to serve the Asian tourist market.
, • Domestically, Qantas relies on its strong brand to maintain its competitive advantage. For
example, it sponsors various Australian sporting teams, positioning itself as the ‘Australian’
airline.
Prospects for profitability and growth
Qantas needs to revise its cost structure to maintain profitability. It should invest in its low-cost
carrier (Jetstar) for future growth as consumers have become more price sensitive following the
COVID pandemic and rising levels of inflation.
2. Identify the limitations of this analysis. What other factors do and could affect
Qantas’ competitive environment?
Potential limitations include the scope of the industry and selecting a competitor. The analysis
could be conducted individually on Qantas’ domestic or international operations, which would
then change the way one looks at the five forces framework. Further to this, it is difficult to find a
competitor comparable to Qantas, as there is no other Australian airline operating on the scale of
Qantas.
3. Discuss Qantas’ competitive strategy since 2000. Is it successful, and is it sustainable?
Qantas has pursued an integrated cost leadership/differentiation strategy since 2000. Whilst most
firms struggle to do this, Qantas has focused on diversifying its products (e.g., business class,
economy class as well as focussing on its brand/reputation) whilst also being able to offer
customers products at low costs (e.g., Jetstar). Qantas has faced increased competition
domestically (Virgin) and internationally (from various airlines). This is placing downward pressure
on margins which can constrain future growth.
4. What is Qantas’ competitive advantage, if any? Apply a SWOT evaluation to it.
Qantas’ competitive advantage is its strong brand reputation
Strengths
• Strong international and domestic presence.
• Largest airline operating in Australia.
Weaknesses
• Limited international routes compared to other airlines (such as Emirates).
• Susceptible to negative media attention (e.g., 2011 union disputes and recent delays post
COVID).
Opportunities
• Growth into more overseas markets.
• Further airline alliances.
Threats
• Rising costs (fuel, labour).
Copyright © 2022 Cengage Learning Australia Pty Limited
, • Increased competition within domestic market.
5. What has been Qantas’ corporate strategy across its domestic and international
divisions since 2000? How has that strategy changed in response to market changes?
Have any changes been initiated by Qantas?
• In response to competition domestically from Virgin, Qantas introduced Jetstar Airways in
2003 to target the low-cost market.
• Introducing Jetstar has reduced the dependency on the Qantas brand alone to generate
profit. Further to this, it resulted in Qantas targeting price sensitive customers, whereas it
traditionally pursued customers who were not sensitive to price.
• Internationally, Qantas’ market share has declined since 2000. As a result, it has introduced
changes, such as moving its Asian hub to Singapore and introducing a non-stop Perth-
London route.
6. Prepare an executive summary of recommendations to the Qantas executive, based
on your analysis. Identify three key changes to its structure and/or operations.
An example of key changes is summarised below:
• Qantas needs to revise its staff costs. For example, Virgin flight and cabin crew earn up to
35% less than their Qantas counterparts, and airport check-in staff pay rates can be up to
18% less. Whilst this may be an incentive for staff to join Qantas, it enables Virgin to earn
higher margins in the domestic market. A solution to this may be to employ casual labour
during peak periods which will reduce ongoing staff costs.
• Introducing more non-stop routes. As technology advances, there is an opportunity for
Qantas to introduce more non-stop routes (such as the flagged non-stop routes to New
York). Customers who are sensitive to price may be persuaded to pay increased fares for
the convenience of catching one flight rather than two.
• Review price structure during peak periods. New low-cost airlines are adopting flatter fare
structures during peak periods, while Qantas may increase fares during the same period.
Increased competition is making consumers less loyal to brands. Therefore, Qantas needs
to find ways to revise its fare structure.
PART B
1. Select one accounting policy that was analysed in this case, and make an adjustment
to the account of 10% of the recorded figure in either direction. Follow through the
effect of this adjustment to the financial statements.
Copyright © 2022 Cengage Learning Australia Pty Limited
