Principals of Financial Markets Research Analysis

Question: Describe about the Principals of Financial Markets for Research Analysis. Answer: Introduction: In the following topic of research analysis the research has conducted an extensive research of the airline industries in the global market along with the economical market of Australia. In this regard, the top down analysis of the airline industry has been done with the view of understanding the shortcomings of the industries and strategize the operations of the firm in accordance with the drawbacks. In this regard, the researcher has also provided substantial reasons that are justifying the changes that have occurred in the economical market of the airline industry on a global platform. The prime focus of the researcher was to identify the changes and the causes for the same and suggest the remedial measures that may help these industries in its objective of profit maximization. Furthermore, the researcher has also undergone the bottom up analysis of the two major airline companies operating in Australia that are Qantas Airways and Virgin Blue. The analysis has been done with the p urpose of identifying the causes and highlighting the reasons that have caused the changes in the working structure of the respective companies. In order to justify the said changes, the researcher has conducted a thorough analysis of the finances of the company. Overview of Qantas and Virgin: Qantas was established in the Winton of Queensland on 16th November 1920 in the form of Queensland and Northern territory Aerial Services Limited. At present, Qantas is the largest airline company in Australia and oldest as well. The main international hubs of Qantas are Melbourne and Sydney airport. Qantas is focused on offering a cost effective flying experience to its customers. On the other hand, Virgin is a British conglomerate operating across various product portfolio. It has a group of companies in diversified field namely transport, food drink, health, telecommunications and media. However, airlines is one of the biggest business line of Virgin. The company is missioned to provide quality products and services to the customers to improve standard of living. Top down Analysis: As stated by Bilotkach and Lakew (2014), the recent changes in the economic world have led to a wide variety of changes than on the other hand have caused the Airline Industry to face a rise in the cost of operations and degradation of it as well. An extensive analysis of the airline industry displayed that the global airline industrial market is facing a lot of chaos simultaneously. The general or common economic environment of the industry comprises of the micro perspective of the same. According to Blankespoor et al. (2013), in this regard pastel analysis of the airline industry may be assumed to the one of the most essential tools that would help the firms to evaluate about the existing working environment that may be available for initiating a proper functioning of the business entity. In this regard, the analysis of the working environment available for the firms operating in the airline industry can be explained as below: Economic Environment of Industry: At present, GDP Value in Australia is 1339.54 whereas the annual growth rate of the GDP is 3.30. GDP at constant prices is currently at 421725.00 in Australia whereas the value of Gross National Product (GNP) is 395902.00. Also, the existing interest rate in Australia as indicated by the Reserve Bank of Australia (RBA) stands at 1.50%. As regard to the currency value of Australia, 1 AUD is equal to 0.75 USD or 0.67 Euro. In the opinion of Afonso and Sousa (2012), a subsequent amount of political interference in the workings of the airline companies has had a considerable negative impact on the economic environment of the aviation industry. In the view of the strict political measures, the satisfaction of the passengers is the first priority and not the well-being of the airline firms. As observed by Chen and Chen (2012),the overall rise of competition in the industry have made the consumers to take the lead in deciding and controlling the ticket prices along with the prices of the other amenities and this in turn degrades the price structure. In the words of Gregory and Smith (2016), the strong political measures implemented for this industry also contribute towards the lower price level. In this context it may also be noted that airline companies operating in Australia have good trading policies to abide by. The breaking down of the trade barriers by adopting the trading policies of regional, multilateral and the bilateral nature consists of one of the major concerns of the trading policy of country like Australia. Here, it may be noted that among the major business entities involved in the airline business in Australia, Qantas Airways and Virgin Blue are the primary ones. As opinioned by Merkert and Cowie (2012), the prime agenda of these two airline companies is to attain maximum customers that are frequent users of the companys services from all corners of the world. The factors that are listed below in the scheme of Corporate Social Responsibility is necessary for the stated companies to follow. In addition to this Wang et al (2016), stated that the international issues concerning the industry are also required to be taken into consideration by the airline companies in order to avoid the possibility of cultural damage and breakage of the international laws. In the view of Zou et al. (2014), the working atmosphere for the Australian airline companies is suitable in the present scenario as there is no involvement of the given country in threatening situations such as war and other things. Due to the adequacy in the working situations and economic environment of Australia, the airline companies get the opportunity to provide its services to the passengers of business class more often along around the globe. According to Herndon et al. (2014), it also helps the companies to serve the travelers of the leisure trips that in turn may be favorable for the companies as it will help in generating more amount of revenue. As the economic environment of Australia facilitates a stable business undertaking of the airline companies, therefore the level of political interference in the workings of these companies is also minimum. The recent economic times having been facing the chances of recession all around the global market especially in the developed countries. This in turn poses an adverse impact on the workings of the airline industry in Australia. The static development of the airline industry is caused by a number of global economic reasons. In the words of Borenstein and Rose (2014), the contact fluctuation in the prices of fuel oil, low rate of the growth of the economy has been the basic reasons for the immobility of this industry. Similarly, as observed by Corsetti et al. (2013), the airline industries are also fighting against a number of economic drawbacks including rise in oil prices, increment in labor demand, high maintenance cost, increased operational cost, reduced consumer quantity and the fierce competition from the similar firms and many more. Along with the recent incidences of airplane highjack and disappearances contribute largely to the leading issues to be tackled by the airline com panies on a global platform. In the words of Fenna (2013), the developed countries like Australia have negligible chances of unemployment due to which the situation of scarcity regarding the skilled and trained workers arrive. As a result of this the airline companies have to bear the rise in the demand of the existing working employees which is not favorable for the companies. Therefore, in the opinion of Zhang et al. (2014), the airline companies require finding out better alternative ways to deal with the above stated problem that may help the companies to attain the maximum number of skilled and trained employees. In this context, it may also be said that owing to the export generation of the Australian economy, the airline companies get the chances to serve the frequent travelers concerning the freight industry and thus make more income. In the words of Altman et al. (2013), on account of the betterment in the service quality of the companies to the consumers along with improves quantity has resulted due to the changes that have occurred in the social environment of the country like Australia. as opinioned by Bonner et al. (2013), in order to attain the maximum opportunity of profit generation, the firms require serving the rise of demands. For the purpose of satisfying the rising demands, the firms require to steady the cost of operations of the company. According to Brueckner and Picard (2013), Owing to the high rate of literacy in the country, the consumers of Australia are well acquainted with the businesses due to which the airline companies are compelled to adopt the consumer friendly business approach. In addition to this, the requirement of business conferences involving physical presence have gradually declined due to the technological advancements that do not require the physical presence of the business de legates. In the words of Lawton et al. (2013), The airline companies operating in Australia need to develop the technological procurements to gather maximum amount of customers owing to the fierce competition generated by the rival firms that may in turn increase the chances of decline in the number of consumers of the airline companies. Besides, the implementation of the technological advancements may also assist the airline industries in narrowing down the prices of the fuel oil and the operational cost of the companies operating in the airline industry. The efficiency of the employees of the companies might also improve due to these said changes. The International Air Transport Association states in its published report that the demand of the industry increased by a percentage of 6.5 than the previous year. According to Misopoulos, et al. (2014), one of the prime reasons for this massive increase in the demand of the airline companies has been determined to be a reduced price of the services offered by the companies. In addition to the increase in demand the revenue generation capacity of the companies have also increased by a percentage of 5.6. Therefore, it can be concluded that the results derived by the airline companies in the year 2015 have been the strongest among the given years. Bottom up Analysis: In the words of Zhang et al. (2013), the better understanding of the micro perspectives constitutes to be the major purpose of undergoing the swot analysis of any particular business organization. Establishing a link in between the objectives and the strategic planning of a business entity comprises of being the basic aim of swot analysis. According to Pearson et al. (2015), in order to attain a consecutive competitive advantage on the rival firms operating in the same industry the analysis helps access the unique features of the nature of the business that helps it become different from its counterparts. The analysis also benefits the companies by accessing and determining the weaknesses and shortcomings of the firms and helping in improvement of the same. For the purpose of determining the above criterions, the profitability ratios along with the financial ratios have been discussed thoroughly by the researcher. In this context, the annual reports of the two major airline companies operating in Australia have been used. These companies are namely Virgin Blue Ltd and Qantas Airways comparison: 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 In accordance to the listed contents of the above profitability table of Qantas Airways Ltd, it can be witnessed that the companys gross margin has increased in the recent years. However, it must also be noted that the proceeding years have been witnessing a decline in the same. In order to evaluate a business entitys gross margin, the value of the revenue generated from sales is deducted from the cost of goods sold by the company. On the other hand, on subtracting the total generated revenue after the deduction of the operating expenses from the revenue generated constitutes of the firms operating margin. From the above stated table it is evident that the following company has been making improvements in the recent years in comparison to the previous years. In this context, Armstrong et al. (2016) concluded that there exists a close link in between the rate of growth of the economy and the improvement rate of the operating margin of the firms. In order to analyze the status of the current ratio of the company the evaluation of the firms capacity of paying off its liabilities with the assets of the company is required. According to Bown and Crowley (2014), the cash balance of the business entity consists of one of the major assets through which the company may channelize the payment of its liabilities. The other similar assets for the payment of the companys liabilities consist of the account receivables, the market securities along with the account receivables of the same. The above table also demonstrates an improvement in the current ratio of Qantas Airways Ltd in the succeeding years. In the words of Biddle (2015), the improvement of the current ratio demonstrates the improved efficiency of the company in paying the liabilities of the same. On the other hand, the receivables turnover ratio of a company helps in determining the credit generating capacity of the firm and the capacity of debt collection based on that particular credit. This further illustrates that Qantas Airways Ltd collects the cash on the basis of credit with the view of funding the business operations. The assets turnover ratio is beneficial for the company as it helps the company to acknowledge the capacity of sales generation on the basis of the assets of the company. in order to initiate this the firm requires to compare the average total sales of the company and the net sales of the same. The stagnant growth of Qantas Airways Ltd describes the slow growth rate of the asset tur nover ratio as the company is not efficient enough so as to increase the quantity 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 The above profitability table of Virgin Blue it is visible that there has been a massive increase in the gross margin of Virgin Blue due to the deduction of the revenue from the cost of goods sold by the company. The results derived after deducting the cost of goods sold by the company from the revenue of the same is ascertained to be the operating margin of Virgin Blue. The company tries to write off the liabilities with the assets of the same. This formulates to become the current ratio of the company. In this context it may be said that the efficiency of the current ratio of Virgin Blue has subsequently improved over the years. It can be noticed from the above table that the company was dealing with a lower current ratio that has shown an increment in 2015. The current ratio of Virgin Blue is displaying the capacity of the firm to pay off the current liabilities of the company in accordance with the assets of the same. The fluctuation in the value of receivables turnover of Virgin Blue among the stated years throws light upon the fact that the company has been dealing with subsequent difficulties regarding generation of money on credit and lending the same for conducting smooth business processes. In addition to this, the sales that the company is capable of generating through the assets are reflected by the companys assets turnover ratio. The above table displays in short the effect on the sales of the company through the above given years due to subsequent changes bin the asset turnover ratio of the company. The debt equity along with the financial leverage of the Virgin Blue is also mentioned in the above profitability table of the company. in the words of Brueckner et al. (2015), the debt equity ratio is a measure of the financial leverage taken up by the company whereas the financial leverage of the same consists of the debt that the company has taken for the purpose of purchasing assets. The shareholders fund as well as the amount of debt of the company is not necessary to be equal. The increment in the amount of debt equity does not necessarily turn out to be favorable for the company. The high rate of debt equity may also compel the investors of the company to refrain from making further investments owing to the high involvement of risk. In other words, this implies that in the long run the companies having a high debt equity ratio may not be able to channelize the required amount of borrowings from the investors. Conclusion The basic reason for conducting the following research analysis is understand the working process of the companies of the airline industry in the global and domestic market economy. In order to understand the changes occurring on the global flatworm the researcher has facilitated the top down analysis of the said industry. The changes that have occurred in the airlines industry have caused a decline in the profit generation of the companies along with increase in the cost of operations, rising demand of the employees, etc that have adversely affected the revenue earning capacity of the company and have also resulted in the decrease in demand of the company and affected its productivity. As a very limited quantity of research has been conducted based on this particular industry therefore the researcher has opted for the following industry with the view of expanding the scale of the research analysis. In this way, the companies operating in this industry may also derive the maximum amo unt of benefit by a better understanding of the working operation of the same. In this regard, the research has also provided a detailed analysis of the two airline companies along with the justification of the concerned changes to support the outcomes of the research analysis. Recommendations: Qantas: It is advisable for Qantas to identify new customer segments and new markets to expand its current business. The company can also focus on developing new marketing mix strategy that could help it to increases sales revenue through diversified range of services. These strategies could help the company in increasing its sales revenues so that the profitability and cash flows can get enhanced. Virgin: Increasing operating costs has been the main area of concern for Virgin. The company is recommended to use cost optimization strategy to reduce its existing operating strategy and increase profit margin. This can be done by identifying non-value adding activities and eliminating the same. In addition, use of variance analysis could help Virgin in keeping a close control over its costs. Reference List: Afonso, A. and Sousa, R.M., 2012. The macroeconomic effects of fiscal policy.Applied Economics,44(34), pp.4439-4454. 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