Comparison among industries based on financial ratios

1. Executive Summary

2. Industry Background

Daily operations of airline companies are providing air transport services for traveling

passenger and cargo, which are their main stream of income. The airline industry has very high

barriers of entry since it is becoming extremely difficult to obtain terminal space at many hub

airports for new comers and airline companies usually operate under very limited amount of

license issued by government (IATA, 2013). Airline customers value low prices above all other

airline specific factors, thus the key for company to survive is to provide lowest ticket price

by lowering cost.

However, besides the very high fixed cost as a nature of airline industry, the variable

costs, mainly salaries and fuel, are pretty much out of the airline’s control due to the need of

highly skilled employee and fluctuating oil price (IATA, 2013). Furthermore, although the

sensitivity of airline service demand depends on economic condition as most of the other industries,

it is slower than average to recover because the spending on travel is discretionary. Demand of

travel picks up momentum only after the economy has recovered. In our analysis, we will focus on

American Airlines, Singapore airlines, Qantas Airways (Australia

3. Company Background and Strategies

Qantas

Airways

Background

the oldest and largest airline in Australia

aims at providing better service, operating more efficiently and harnessing

new technology

Strategy

portfolio strategy with 5 segments: Qantas (Domestic and Internal), Jet star, Qantas

Loyalty and Qantas Transformation

aims to be the world’s best premium and low fares airline

align with large airlines to broaden service

American

Airlines

Background

Founded in New York in 1930, American Airlines is one of the largest airline groups in

the world. It has grown to operate in 339 destinations in the world with scheduled

flights throughout North America, Caribbean, South America, Europe and Asia. The

company is also a member of One World airline alliance, and coordinates fares,

services, scheduling with Qantas Airways in the transpacific market.

Strategy

Singapore

Airlines

Background

listed on the Singapore Exchange Securities Trading Limited in 1985

global networks, high valued staffs, immense passenger

Strategy

sustain its long-term future by retaining strong investment and industry-

leading

brand in the markets

focus on optimal operating efficiency and providing excellent product and service

4. Profitability Analysis

4.1 Gross profit margin ratios

Figure 1: Gross profit margin of three companies (2009 – 2013)

(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

As the whole, figure 1 illustrates that the significance point is the case of American Airlines with

considerable figures of gross profit margin because the company capital dirived from financial loans

(their euity is minus) which resulted in high financial costs over 5 years. In 2012, the profit margin

decreased sharply based on the financial crisis in the US which discourged the net profit of American

Airlines much. Whereas, Singapore Airlines illustrates an opposite trend, which possitve profit margin

in both net and gross profit margins since most of their capital was received from the owner’s equity

without banking loans.

Qantas Airways’ gross profit margin ratios experienced an decrease to the negative ratios from

2009 to 2012, which mean that the company got loss in their operating activities. This was very difficult

period for Qantas due to the sharply rise of fuel costs which leads to grow of expense ratio and as a result

of decreasing in Qantas’s profits in 2012 (Narayanan, 2012). In 2013, Qantas and Emirate are two of the

world's leading airlines which have formed a global partnership (Frazer, S., 2013). Thus, Qantas profit

GROSS PROFIT MARGIN%

boosted under decreasing of expenditure cost when alliance with Emirate. Kuk? Is there any other

reasons?

4.2 Net profit margin

Figure 2: Net profit margin of three companies (2009 – 2013)


Overall, American Airlines’ net profit margin ratios illustrate the negative figures due to their loss

during the period. Due to bad financial positions during American economic crisis, American Airlines

filed for bankruptcy protection in 2011. Besides the economic depression, the fall of American Airlines is

caused by the rise in fuel cost during 2009 to 2011. The U.S. Energy Information Administration (2014)

summarized that from 2009 to 2011, the fuel cost rose approximately 50%. Moreover, American Airlines

also faced with the intense competition from Delta Airlines and United Airlines. Thus, American Airlines

reduced its price in order to attract more passengers, while the fuel cost was rising. It led to the losses of

the company during the five-year – period.

4.3 ROA, ROE and Expense Ratios

Figure 3: ROA, ROE and Expense Ratios for three companies (2009 -2013)

Year

Qantas Airways American Airlines Singapore Airline

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

ROE (%) 2.1 2.0 4.1 -4.1 0.1 45.7 12.7 35.8 24.9 34. 2 7.3 1.6 7.9 2.5 2.9

ROA (%) 1.0 1.3 2.1 -0.8 1.0 -3.9 1.22 -4.72 -8.7 -3.82 4.5 1.2 4.9 1.7 2.0

Expense

ratios

(%)

110 117 115 119 107 105.0 98.6 104.8 108.2 104.7 94.4 99.5 91.2 98.1 98.5


In comparision, the expense ratios are similar with figures fluctuating from 90% to110% to all

companies over five years. Accoording to Birt at.el (2014), these figures mean that the companies did not

well manage the costs in operating since the expenses were consituted for almost gaining revenues.

Net profit margin%

About ROA and ROE, Singapore Airlines got the sustainable and higher figures for both ratios, which

means that their business being profitable and their assets and equity were used efficiently. More

specifically, the followed features of three cases will be mentioned:

4.3.1 Qantas Airways ratios

The performance of ROA and ROE ratios were significantly dropped during 5 years. With

negative ROE in 2012, this is estimated that the ability of annual return for Qantas’s owners is low which

will leads to discourage the motivation of investors. It is also mean that Qantas ineffectively used their

capital over the time. The main reason to explain for the bottomless decline was the rocketing increase of

fuel price in 2012. Simultaneously, the ROA ratio in 2012 is -0.8%, which has been recorded 2.1% in

2011. According Birt et al. (2012), the changing in the entity’s profitability and asset efficiency leads to

the change in the ROA. This figure shows the company insufficiently operated their assets in generating

profit.

4.3.2 American Airlines

Due to the American economic depression in 2008, American Airlines experienced a crisis period.

From 2008 to 2013, the company has always faced with the negative equity and has not gained profit.

Although it has relatively high ROE ratio, which is usually higher than 20%, its ROA ratios are negative

except in 2010. It means that the company had ineffective investment decisions and the investments are

financed by loans. Due to bad financial positions during American economic crisis, American Airlines

filed for bankruptcy protection in 2011.

Besides the economic depression, the fall of American Airlines is caused by the rise in fuel cost

during 2009 to 2011. The U.S. Energy Information Administration (2014) summarized that from 2009 to

2011, the fuel cost rose approximately 50%. Moreover, American Airlines also faced with the intense

competition from Delta Airlines and United Airlines. Thus, American Airlines reduced its price in order

to attract more passengers, while the fuel cost was rising. It led to the losses of the company during the

five-year – period.

4.3.3 Singapore Airlines

Generally, Singapore Airline is a very stable and effective operating company in making profit

over 5 years, except 2010. The financial year 2010 was a relatively bad year for Singapore Airline

as profit margins dropped significantly (by 7.5%) and ROA decreased sharply from 7.3% to 1.6%. In

the first half year of 2010, Singapore Airline reported a loss of 444 million due to the low

demand affected by economic downturn and the outbreak of H1N1. In 2011, the demand recovered

further, profit margin, ROA improved to over 10% and 8% respectively. New CEO joined the company

and made restructures to cut operating costs, which turned out a very good result.

5. Asset Management/Asset efficiency

It is important to evaluate the quality and composition of current asset and inventory. With regard

to day’s sales in receivables is a practical indicator to assess the number of days to collect money

from customers and to sell inventories.

5.1 The Asset Turnover Ratios

Figure 4: The Asset Turnover Ratios of three companies (2009 – 2013)


Qantas Airlines, generally, asset turnover ratios relatively increased over 5 years. These increases mean

that the company is more effective in asset management and active in paying debt. The most significance

is that 0.71 dollar of sales revenue generated per dollars of assets in 2013. Singapore Airlines underwent

the similar trend to Qantas. In which the results show that Singapore’s Asset turnover ratio has

marginally increased from 0.62 to 0.71 between 2009 and 2013 which means that a dollar in Singapore’s

assets was able to generate about 70 cents of sales revenue.

American Airlines’ the asset turnover ratio fluctuated from 0.79 to 1.01, which is shown that they

managed its assets effectively. Each dollar of investment could generate smaller than $1 or $1 of revenue.

5.2 The days Inventory and days Debtors of three comapanies

5.2.1 Day inventory

As can be seen, Day inventory ratios of American and Singapore Airlines presented very high

figures of days for selling their goods/services (over 10 days), which is much higher than Qantas

numbers. Qantas got the lowest figures among three, which allowed them to be much easier in converting

inventory to cash.

Times

Figure 5: The days Inventory and Days Debtor of three comapanies (2009 – 2013)(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

Significantly, American Airline ratios showed an upward trend which means that there were

very low demand of using the company services and the insufficient management in inventory. It is

because American Airlines has competed to some rivals such as United Airlines and other cheaper

air ticket airlines. It also depicts that the company is inefficient in converting inventory to cash, and

inventory of the capital turnover speed is low.

And, Singapore Airlines experienced the lower yields due to weak global economic

conditions. Singapore Airlines commits to serve high quality airplane services therefore the average

prices of flying ticket and cargo loads are quite expensive than their rivals. The higher price in

loading prevented them to get positive figures for day inventory ratios. Moreover, because of the

necessity to plan aircraft orders well in advance of delivery, it is not economical for the Group to

have committed funding in place at present for all outstanding orders, many of which relate to

aircraft which will not be delivered for several years. The Group’s policies in this regard are in line

with the funding policies of other major airlines. As the largest expense item of the Group, the

persistently high fuel prices also took a toll on the Group’s bottom line. Political tensions in the

Middle East pushed jet fuel prices to more than USD130 per barrel since the beginning of the

financial year.

5.2.2 Days debtors: In term of day debtor ratios, Singapore Airlines expressed the highest figures

among three companies. This derived from the trade debtors of the company included the amounts

owing by subsidiary, associated and joint venture companies, deposits and other debtors are

classified and accounted for as loans and receivables. From the annual reports of Singapore Airlines

(2013), trade debtors increased over the time while the sales revenues were stable or gradually rose

due to the global economics difficulties and competing to other domestic and international airlines.

Days Day inventory ratios Days Day debtor ratios

6. Liquidity

Liquidity measures the ability to convert firm short-term liabilities. A firm meets a great

risk of liquidation if it cannot generate sufficient cash inflows from operating activities. The

analysis of liquidity is vital and noteworthy because lack of liquidity will hinder a firm from

taking advantage of profitable opportunities or even lead to worse conditions such as sale of

valuable assets and bankruptcy. With regard to airline industry, because it inherently owns little

inventories and also inventories are often the least liquid of current, our focus is on quick

ratio which is more appropriate.

6.1 Working capital

Figure 6: Working capital of Qantas Airways, American Airlines and Singapore

Airlines(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

The chart shows negative or low working capital from 2009 to 2013, which indicates that

Qantas’s and American’s current liabilities are relatively higher than its current assets. However,

low working Capital does not mean that they always insufficiently payoff its short-term liabilities.

Subramaniam argued that negative Working Capital always appeared in companies when possessing

strong brand and consumer franchisee which can be seen in the consumer-centric firms (Narendra,

2008). Instead, they might invest in other assets to generate higher profitability, and the shortage here

is just the short-term situation. In contrast, Singapore Airlines seems to be positive in their working

capital which allows them more assets to satisfy the shorter obligations and investment.

Millions ($)

6.2 Current ratios (working capital ratios)

Figure 7: Current working ratios of three companies (2009 – 2013)(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

The current ratio or working capital ratio shows an upward trend for Qantas and American

from 2009 to 2013. This indicates that Qantas has high liquidity during these five years and was able

to satisfy its short-term obligations and requirements. For instance, approximately 80 cents of current

assists generate a dollar of current liabilities in 2011.

Singapore Airlines showed the very high rate in indicating of ability to pay debts in the

normal course of business with figures always being over one. It means that there are more than one

dollar (minimum $1.16) are available for every one dollar of debts or loans. Summarily, in short term

three companies have been enough assets to pay back for the liabilities and be positive in their

business.

6.3 Quick Ratios

Figure 8: Quick ratios of three companies (2009 – 2013)(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

Times

Times

Singapore Airlines’ quick ratios were much higher than others, with figures approximately 1

and over, and these ratios were slight smaller than current ratios (figure 7). These figures reflect that

the company has strong ability to pay debts of the company, and there were not many available

inventories there.

Qantas and American Airlines’ quick ratios were similar figures and trends over the time.

Figure shows that quick ratios of both companies are relatively high with approximately 8 times.

Qantas experienced the lowest quick ration of 0.66 in 2012. However, as its quick ratios are lower

than 1, which indicates Qantas need to decrease their current liability to be lower than its current

assets (excluding inventory). The average cash flow ratio from 2009 to 2013 is 0.23 which suggests a

significant risk of liquidity and is insufficient to meet its short-term obligations.

7. Capital Structure

7.1 Debt to equity ratio

Figure 9: Debt to equity ratios of three companies (2009 – 2013)

Debt to equity ratio (%) 2009 2010 2011 2012 2013

Qantas Airways 247 233 239 260 239

American Airlines -829.1 -735.9 -435.4 -394.4 -1,648.1

Singapore Airlines 71.3 63.5 69.2 67.2 67.2


As can be seen from figure 9, American Airlines’ debts to equity had experienced of a

continuous increase in debt to equity ratio from 2009 to 2012 before a sharp decline in 2013. In

others words, the debt in the business reduced. The debt ratio had been over 100% during the period

whereas figure of equity ratio is negative. This indicates that investments in assets are funded totally

by liabilities/loans from the banks. (Ha! Reasons for this)

For debt to equity ratio, it shows that the ratios of Qantas Airways are stable throughout this

period and exceed 100 percent. More detailed, with $100 million of assets, there is about $30 of

equity and $70 of debt. This means that Qantas is more reliant on debt funding throughout these 5

years. Hence, Qantas uses $2.00 of debt per dollar of equity.

Singapore Airlines’ ratios were roughly 70% which means that nearly 70 cents of debts exist

per dollar of equity financing. This reflects a high reliance on debt, which reflects high risk in

financial performance.

7.2 Debt Ratios

The only company- Singapore Airlines- where the debt ratios are less than 50% over 5 year

period. This number means that their finances are active and based on the company’s asset rather

than liabilities.

Figure 10: Debt ratios of three companies (2009 – 2013)(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

Both American Airlines and Qantas’s debt ratios are quite stable with approximately 110% and

70% respectively. These figures mean that most finances and their investments relied much on

the debts. This reflects a high reliance on debt, which reflects high risk in financial

performance.

7.3 Equity Ratios

Figure 11: Equity ratios of three companies (2009 – 2013)(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

Overall, as the result of debt ratios, the equity ratios show that the companies’ finances much

relied on debt than their asset except Singapore Airlines which figures are more than 50%.

Singapore Airlines’ funding almost derived from equity of shareholders.

8. Market Performance

%

%

8.1 Earnings per share

Figure 12: Earnings per share of three companies (2009 – 2013)(Source: Adapted from Qantas, American and Singapore Airlines annual reports)

From the provided information in the chart, American Airlines’ EPS ratio had been falling

and negative during the period except 2010. The reasons behind the negative EPS is the high risk of

events such as disruption of global energy markets, post- earthquake demand effects in

Japan(Anonymous, 2011) contributed to the sharp fall in American Airlines’ revenue in 2011, and

then a consider drop in earnings per share. In 2013 highlighted the better EPS ratio thanks to the

merger with the US Airways Group Inc. (PR Newswire, 2014). The price earnings ratios fluctuate as

share prices change (Birt, Chlmers, Byrne, Brooks, & Oliver, 2012). Overall, the market

performance of American Airlines over the analysis period is not favourable but it becomes better in

the year of 2013.

Singapore Airlines came up with the low cost of capital (most of them are equity capital)

which allowed the company with higher profit in comparison to others. Therefore, the EPS ratios of

it were very high especially in 2009 and 2011 with figures roughly 90 cents per share.

8.2 Price Earnings Ratios

Figure 13: Price Earnings Ratios of three companies (2009 – 2013)

Price Earnings Ratio (PE) (cents/share) 2009 2010 2011 2012 2013

Qantas Airways 35.9 44.9 16.7 -10.0 10.43

American Airlines - 7.79 - 27.57 - 2.46 - 2.60 - 3.46

Singapore Airlines 11.16 83.52 14.97 38.06 33.76


Kuk! Please help to finish this last part.

Cents

I feel so exhausted now. Maybe I could continue to work after 10 am Wed.

References:

Birt, J., Chalmers, K., Beal, D., Brooks, A., Byrne, S., & Oliver, J. (2008). Accounting: business reporting for decision making.Narendra, N. (2012) Firms with low working capital can be good investment basis. The Economic

Times: Stock in News, Retrieved from

http://articles.economictimes.indiatimes.com/2012-11-26/news/35365231_1_capital-year-telecom-

companies-anand-tandon

Comparison among industries based on financial ratios

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