Principals of Financial Markets Management

Question: Discuss about the Principals of Financial Markets Management. Answer: Introduction: The following piece of assignment focuses on conducting a top down analysis of airline industry operating globally as well as on the domestic grounds of Australia. The researcher has undergone an extensive analysis of the airline industry and the research outcome has thoroughly been discussed. The researcher has also provided a substantial judgment for the changes that have occurred in the profit generating capacity and working procedure in these companies. For the purpose of highlighting the changes the researcher has further done the bottom up analysis of the two major airline companies operating in Australia that are Qantas Airways Ltd and Virgin Blue Ltd. On the analysis of these two companies, the researcher has found out the changes that have occurred in the working structure of the companies and the ways through which the profitability of the same were affected. The researcher has done a detailed analysis of the finances of the companies to justify the changes. Top-down Analysis: In the global economy the recent times have witnessed a phase of increase in the operational cost of the airline industry and the deterioration in the same. According to Snider and Williams (2015),it has also been analyzed that the airline industries around the economy is in a state of complete chaos via an extensive research of the industry. Here, the micro perspective of the airline industry comprises of the general economic environment that the firms operate in or will be operating. As stated by Zhang et al. (2013), in order to ascertain the existing available environment for the proper functioning of the firms, pestel analysis forms to be one of the essential tools. In this context, the industrial economic analysis of the working overall environment has further been described as follows: Industrial Economic Environment In the process of understanding the industrial economic environment the GDP, interest rate and currency value of Australia is evaluated. In the second quarter of 2016 the country witnessed a GDP growth of 3.3 % annually compared to the 3.1% registered in the March quarter. In 2015 the economy of the country stood at GDP of AUD$ 1.62 trillion. The interest rate is decided by the Reserve bank of India and also known as cash rate stood at 1. 5% in August 2016 and it is lowest rate compared to the average rate that stands at 4.86%. On the other hand the currency rate of AUD can be expressed as 1AUD is equivalent to 0.758 USD or 0.68 or 0.58 GBP. Thus 1 USD is equal to 1.33 AUD. The airline industries all over the world are under the supervision of the political measures which may not be favorable for the economic working environment of the airline industry. In the words of Dai et al. (2014),as per the rules of the political regulation, the passengers hold more importance in comparison to the airline companies. In addition to the above, the intensive competition among the airline companies along the regulatory political measures are compelling the firms to occur at a situation where in the consumers or passengers take the lead in controlling the price of the tickets and the other various amenities and taking it to a lower level. However, the trading policies of the airline companies operating in Australia are good. According to Chen and Chen (2012), the prime focus of the trading policy in Australia is to break down the barriers of trade through the implementation of the regional, multilateral as well as bilateral trading policies. In this context, the two biggest airline companies operating in Australia namely Qantas and Virgin Blue are mainly concentrating on providing its services to the business travelers that are frequent and are in large number of quantity from all over the world. Here, it is mandatory for the companies to follow the factors listed in the Corporate Social Responsibility scheme. As opinioned by Borenstein and Rose (2014), the Australian airline companies also require considering the international issues to avoid the chances of damage to the culture and breaking of the international laws. As per the current political atmosphere of Australia, the working environment for the airline companies is adequate because the country is not engaged in war like situations with the other countries. According to Bilotkach and Lakew (2014), the following adequacy for the working operations provides an opportunity to the airline companies to serve the business class travelers all around the globe along with the leisure trip travelers that may help the companies to gain more sales as well as profits. Due to the stability of the government in a country like Australia, the political intervention is minimal on the working procedures of the airline firms. In the words of Sivrikaya and Tun (2013), most of the developed countries around the globe have been dealing with the outcomes of recession which has also laid an impact on the airline industry. The lowering of the rate of economic growth along with the constant fluctuation of the oil prices have been the largely contributing factors towards the stagnant development of this particular industry. According to Johnston and Ozment (2013), The leading issues that the airline companies are dealing with comprises of hike in the prices of fuels, increase in the demand of labors, rise in the cost of maintenance and an increment in the cost of operations along with the reduction in the quantity of consumers and intense competition from the rival firms serving the customers at apparently lower prices. Besides, the incidence of the disappearing airplanes that is the Malaysian airplane has further added to the difficulties to be faced by the other airline companies globally. As stated by Baker (2013), on account of a lower rate of unemployment in the country, the demands of the workers have increased leading to a crisis of trained and fully skilled workers for conducting the works of the airline firms. Hence, the companies require finding out the alternative ways of having an access to the maximum number of skilled employees. However, an increased rate of export of Australia works in favor of the airline companies by generating opportunities of serving the frequent travelers of the freight transfer. As per the words of Merkert and Cowie (2012), Australia has also witnessed significant changes in its social environment due to increment in the quality as well quantity of service of the consumers. The firms require steadying their costs in order to serve the rising demands and derive the maximum revenue. The literacy rate of Australia is high due to which the customers have a more economical approach forcing the airline firms to adopt the approach of being a consumer friendly business firm. In the view of Misopoulos et al. (2014), the recent technological advancements have reduced the need of one to one business conferences and meetings that has further lead to a decrease in the demand of business class tickets. As stated by Hansen et al. (2013), owing to the rise in the excessive competition among the airline companies, there is a need to develop new technological procurements that may lure the customers bringing in more revenue to the companies than their rival firms. These technological advancements may also cut down the fuel requirements and minimize the cost of operations as well. This may also lead to an increased work efficiency of the employees along with the companies. In context of the reports published by the International Air Transport Association the demand of the airline industry displayed an increase of 6.5 percent than the proceeding year in 2014. In the view of Brueckner et al. (2015), a lower rate of fair charges has been determined to be the major reason for this increase in demand. As per the reports, the annual revenue generating capacity of the companies increased to a percentage of 5.6. Hence, it may be said that the airline industries have derived the strongest results in the year 2015as compared to the previous five years. The domestic airline industry operating in Australia has also portrayed a similar response. An increase of 6.3 percent has been seen in the business growth of such companies. As observed by Zhang et al. (2014),these companies are dealing with a restricted profit margin that may be overcome given the companys focus on lowering down the excessive operational costs and increasing the revenue growth via attaining maximum satisfaction of the consumers. As stated by Akbar et al. (2014), the economic health of a particular country speaks aloud about its industrial growth. The economic indicators of the industrial wellbeing help to determine the economic status of that particular industry. These economic indicators mainly consist of the gross domestic product or GDP, per capita income, industry production, disposable income, scale of business along with the consumer satisfaction and confidence. According to Ramdas et al. (2013), the continuity of fluctuation in the fuel prices also plays a major role in the profitability of the airline companies. In this regard, it may be said that the economic growth of the origin country and the economic growth of the industry operating in the same country are very closely associated. Therefore, the economic indicators and the rising and falling trends of it lay a significant impact on the numbers of passengers along with the magnitude of freight. Bottom-Up Analysis: In the words of Lawton et al. (2013), the basic purpose of conducting a swot analysis is to focus on the business organizations micro perspectives. The main aim of this analysis is to establish an association between the objectives of the organization and the strategic planning of the same. According to Sancho-Esper et al. (2016), the analysis further helps to define the unique features of the particular business firms that makes it different from its rival firms and thereby helps to gain a competitive advantage simultaneously. Besides, the weak points of the business entity can also be determined through this analysis and thus may help to improve the working process. In this context, the researcher has thoroughly discussed the changes that can be witnessed in the profitability and financial ratios of the two major airline companies operating in Australia that is Qantas Airways Ltd and Virgin Blue Ltd. Financial Ratios and Growth Profitability of Qantas Airways Ltd Key Ratios - Profitability Years 2007 2008 2009 2010 2011 2012 2013 2014 2015 Margins % of Sales Gross Margin 73.77 56.83 55.77 55.24 55.62 51.72 54.6 49.83 54.01 Operating Margin 6.9 5.83 1.39 -1.55 -0.63 -6.6 1.28 -26.19 4.92 Profitability Asset Turnover (Average) 0.78 0.8 0.73 0.67 0.7 0.71 0.77 0.81 0.89 Return on Assets % 3.71 4.93 0.59 0.56 1.23 -1.17 0.02 -15.16 3.2 Liquidity/Financial Health Current Ratio 0.87 0.74 0.89 0.93 0.9 0.77 0.82 0.66 0.68 Quick Ratio 0.82 0.67 0.78 0.81 0.78 0.65 0.7 0.58 0.6 Financial Leverage 3.17 3.44 3.5 3.35 3.39 3.6 3.4 6.05 5.09 Debt/Equity 0.68 0.62 0.86 0.86 0.89 0.92 0.88 1.84 1.39 Efficiency Receivables Turnover 11.64 11.2 11.69 12.43 13.59 13.95 12.49 11.52 14.41 Inventory Turnover 15.45 34.34 27.64 20.94 18.45 19.25 19.51 22.33 22.36 Fixed Assets Turnover 1.23 1.28 1.19 1.08 1.1 1.07 1.14 1.25 1.46 Asset Turnover 0.78 0.8 0.73 0.67 0.7 0.71 0.77 0.81 0.89 The given table of profitability and financial ratios of Qantas Airways shows that the gross margin of the company have been decreasing in the preceding years whereas it has subsequently shown an increase in the recent years. According to Brueckner and Picard (2013), the gross margin of a firm may be calculated by subtracting the amount of revenue from sales from the cost of the goods sold. On the contrary, the operating margin of a firm consists of the revenue collected after the operating expenses have been deducted from the total revenue generated. It is evident from the given table that the Qantas Airways Ltd has experienced an improvement in the recent years than the earlier years. In the words of Zou et al. (2014),a higher rate of economic growth is associated with the rate of improvement of the operating margin of a business entity. As opinioned by Rosenthal et al. (2013),the capability of a business entity in paying off the liabilities of the same with the company assets help s to understand the status of the companys current ratio. The assets by which the liabilities may be paid off mainly consist the cash balance of the company, its accounts receivables, the inventories as well as market securities and similar other things. In addition to the above, it can also be analyzed from the given table that the current ratio of this airline company has also improved in the recent years. This in turn indicates that the company has become more efficient in paying off its liabilities. In the words of Wang et al. (2016),the efficiency of the company in generating the maximum amount of credit and the collection of debts based on that credit is depicted through the receivables turnover ratio of the Qantas Airways Ltd. The growth of this ratio makes it evident that Qantas Airways lends cash and also collects cash on credit for the purpose of funding its business purposes. Besides, the ability of the company to assist the sales based on the capacity of the assets of the same determines the strength of the asset turnover ratio of Qantas Airways Ltd. In order to facilitate this, the firm will require comparing and drawing a conclusion of the net sales of the company with that of the average total sales of the same. A slow rate of growth of the asset turnover ratio is depicting the stagnant development of Qantas Airways due to the disability of the firm in increasing the number of sales. Financial Ratio and Growth Profitability of Virgin Blue Ltd Key Ratios - Profitability Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 Margins % of Sales Gross Margin _ _ 71.2 _ 72.28 73.33 71.77 71.91 74.68 Operating Margin 14.76 6.09 -7.58 2.87 -1.5 1.56 -3.43 -8.86 -2.41 Profitability Asset Turnover (Average) 0.94 0.82 0.78 0.82 0.85 1 0.95 0.95 0.9 Return on Assets % 9.36 3.46 -4.77 0.59 -1.76 0.58 -2.33 -7.81 -2.12 Liquidity/Financial Health Current Ratio 1.1 0.88 0.53 0.76 0.65 0.65 0.54 0.64 0.69 Quick Ratio Financial Leverage 3.1 3.61 5.83 4.15 4.15 4.3 4.26 4.46 5.37 Debt/Equity 1.02 1.28 2.68 1.65 1.52 1.53 1.46 1.52 2.16 Efficiency Receivables Turnover 39.09 34.45 28.91 26.41 22.52 24.24 23.14 20.83 20.51 Inventory Turnover _ _ _ _ 177.65 104.38 50.38 36.68 30.87 Fixed Assets Turnover 1.52 1.23 1.04 1.1 1.19 1.42 1.38 1.51 1.63 Asset Turnover 0.94 0.82 0.78 0.82 0.85 1 0.95 0.95 0.9 In the year 2015, as can be seen in the above table, the gross margin of Virgin Blue has increased tremendously as a result of the reduction of the revenue of the company from the cost of the goods sold by the company. Here, the operating margin of Virgin Blue is considered to be the outcome achieved after the revenue has been deducted from the cost of the goods sold by the company. The liabilities of the company are to be paid by the assets of the company that constitutes of the current ratio of the firm. However, as depicted in the above table, Virgin Blues current ratio has improved reflection upon its efficiency in paying the liabilities. The previous years were consequently suffering from a lower current ratio that has steadily become stable in the year 2015. The current ratio of a firm is helpful in the determination of the abilities of the company of using the assets in disposing the liabilities of the company. According to the profitability and financial ratios table of Virgin Blue, the fluctuation of the receivables turnover among the given years reflects that the company has been facing few difficulties in generation of credit and lending of money for the business purposes. As stated by Pearson et al. ( 2015),the ratio of assets turnover shows the sales that the company is able to generate from its assets. Besides, the given table also displays from the changes in the assets turnover that the sales of the company are largely affected all through the stated years. The given table also shows the quantity of financial leverage and the debt equity ratio of the Virgin Blue, Australia. According to Reynolds-Feighan (2013), the term financial leverage explains the debt taken by the company to use it in the purchase of assets and the debt equity ratio helps a company to measure the financial leverage of the same. The amount of debt may not necessarily be equal to the shareholders fund. An increase in the debt equity may not be favorable for the company in the long run. The investors may also be reluctant to invest in a company with high debt equity as it would lead to chances of bad debts. This further illustrates that the companies demonstrating high debt equity may not be able to attract the investors. Conclusion On the completion of the following piece of research work was aimed analyzing the Airline industry on a global platform as well as on the domestic platform of Australia. The researcher has undergone a top down analysis in order to understand the cause of the changes that are taking place in the Airline industries all around the globe. The stated few changes have led the airline industries to experience a reduction in the demand for their service which in turn hampers the profitability and subsequently decreases their productivity. The major reason of choosing this industry is that very less amount of research has been done in this regard which provided an opportunity to the researcher to enlarge the scale of research work. Further, the findings of the current research work may also prove to be beneficial for the airline companies in identifying the reasons behind the occurrence of these changes and take remedial measures for the same. In addition to this, the researcher has further done a detailed analysis of the profitability and financial ratios of the two major airline companies operating in Australia. The prime reason for conducting this analysis was to understand the effect of the causes on the workings of a company in a better way. In order to justify the stated outcome the researcher has also provided the profitability table of both the companies. The researcher has also made use of subsequent references from different journals and authors to support the given research work. Based on the analysis of the two airline company namely Qantas Airways and Virgin Blue, Australia by conducting top down analysis and bottom analysis using the pestle and swot framework it is evident that the company is exhibiting a decreasing trend in the sales margin and profitability. This is mainly attributed to the economic recession faced by the world economy in the recent tome coupled with the growing competition and rising operation cost of the airline industry. The financial ratio and growth profitability of both Qantas Airways and Virgin Blue is able to improve in terms of gross margin, operating margin and profitability in the last financial year 2015. It shows a positive sign for the industry. Recommendation It is recommended based on the reversing trend in the airline industry in the last year that the company should focus on customer loyalty program to improve the customer retention and improve the sales margin and profitability in the future. 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