Virgin Australia Holdings Limited: Financial Performance, Economic Outlook, And Analysis

Subject Learning Outcomes

Virgin Australia Holdings Limited is an Australian airline holding company that operates and owns Virgin Australia, Tigerair Australia and Virgin Australia Regional Airlines. The core business of the company is to provide airline services on international and domestic basis. It operates through various segments and was formerly known as Virgin Blue Airlines. It was founded in 1999 and commenced its business in 2000. The firm offers its services across 29 cities of the nation and has its main hubs situated in Melbourne, Sydney and Brisbane. Looking at the history, the brand entered into the aviation market of Australia in 2000 which ultimately bought competition in the leisure sector of the market (Bloomberg. 2018).

The company is focused on revolutionizing the air travel across all its segments and in order to achieve the same it lays more emphasis on providing seamless experience across all domestic and international markets. The firm provide services to corporate, government, low cost, regional, leisure, charter travelers and air freight customers. Currently, the company is publically listed on Australian Securities Exchange and is traded with the ticker ASX: VAH (Virgin Australia. 2018)

Financial statements, Current Financial performance, economic outlook

Analysis of the financial data presented in the statements deals with the critical examination of the each items presented in company’s final accounts. It is conducted for judging the performance of the firm over the years and to make correct and appropriate decisions related to business. The below abstract is taken from the annual report of Virgin Australia for year 2017 which summaries its operational performance in the last two years.

(Source: Virgin Australia. 2017).

The revenue of the company mainly derives from the operations of Virgin Australia Domestic, followed by Velocity and Tigerair. It can be interpreted from the above abstract that the sales and income of the firm has increased last year from $5021 million to $5047.3 million. It has shown a minor increase of 0.5% worth $26.3 million. However, despite of having increased revenue, the company made a loss of $185.8 million during the year which was less than the loss made in 2016, worth $224.7 million. One thing which is noticeable is the significant decrease of $107.5 million in company’s net operating expenditure. This was due to the reduction in impairment losses on the assets and onerous contract expenses. Along with this, the net finance cost also falls from $169.6 million to $167.8 million. This was because of the increase in company’s finance income worth $5.5 million as a result of the additional funds that were held in deposits.

Introduction to Virgin Australia Holdings Limited

(Source: Virgin Australia. 2017).

From the above abstract, a summarized view of Virgin Australia’s financial position is reflected. It can be observed that the net assets of the entity rose from $898.8 million to $1573.8 million, showing an increase of 75.1%. The factor which contributed in the increase of current assets was the upsurge in the amount of net cash and cash equivalents of Virgin worth $272.3 million. In addition, positive cash flow from operating activities also contributed to this increase. As far as non-current assets are concerned, they boosted because of the hike in company’s Non-current receivables by $33.4 million, as a result of making maintenance prepayments to the third party. Looking at the liability side, the non-current liabilities raised during the year by 3% whereas current reduces by 15.5%. The provisions made for the maintenance of leased aircraft and employee benefits rose by $80.8 million and $35.8 million respectively. In addition, other current liabilities increased by $21.6 million due to the recognition of deferred cost. However, the current and non-current interest bearing liabilities reduced during the year by $566.7 million because of the repayments made by the company.

The equity of Virgin Australia reported an increase of 75.1% during the year, mainly contributed by the upsurge in company’s share capital. Virgin issued shares of worth $394.7 million which were net of transaction cost and were partially offset by the loss of the year. Overall, the position of the company increases during the last financial year.

In this section, the current and future performance of the economy has been analyzed and discussed. The outlook contains those factors which determine the expected productivity, demand and success factors of the companies. According to the recent report of Deloitte, the aviation industry of Australia has enjoyed a strong growth in its passenger movements and a significant growth in domestic air freight in terms of volume.

(Source: Deloitte. 2018).

It can be observed from the above graph that the number of domestic passengers has increased on a great pace in the past ten years. On an average, an annual increase of 3% was there over the last decade that is from 112 million in 2006-2007 to 156 million in 2016-2017. Moreover, the international passengers also increased from 22 million to 39 million in 2016-17. This was because of the support provided by large and growing economies of Asia (Deloitte. 2018).

Current Financial Performance and Analysis

Along with the increase in number of passengers, the air freight on domestic and international level also rises.

Due to the long geographical distances between the main cities of Australia, the air freight became an important factor in the transportation of goods on international and domestic basis. Generally, goods that are transported by air are mostly of low density, critical commodities and high value. The below graph reflected that during the period of 2009-2014, a steady decline was there in domestic air freight making the total freight volume to reduce to 390,300 tonnes in 2015-16. However, the same increases by 15% in 2016-17 to 450,000 cargo tonnes. This rise in air freight was due to the increasing demand of the perishable goods of Australia such as livestock and fisheries products. 

(Source: Deloitte. 2018).

Apart from this, the aviation industry of the country has made revenue of $43.54 billion and contributed $15.91 billion to the Australian economy during the same year. Furthermore, more than 88,000 people were employed in the five main subsectors of the industry. The profit earned by the industry amounted to $4.12 billion along with the expected growth of 11.5% in terms of employees till 2023 (Deloitte. 2018).

(Source: Australian Industry Standards. 2018).

Overall, it can be said that the sector has experienced a strong growth last year and will continue to achieve the same in future. Hence, there are many opportunities for Virgin Australia to improve its business and turn its losses into profits. As the number of passengers has increased and demand for the transportation has also taken an upward turn, it can be interpreted that Australia airlines such as Virgin and Qantas may enjoy strong growth in their performance and position. On a whole, the economy is growing positively and Virgin Australia has an opportunity to improve its financial position in coming years.

(see appendix for calculations)	2017	2016	Industry average
Return on assets	-3%	-3.80%	-2.24%
Return on equity	-15.02%	-23.41%	-9.22%
Net profit margin	-3.68%	-4.48%	-2.77%
Expense ratio/Cost to Income ratio	1.02	1.05	0.47
Earnings per share	-$2.8 per share	-$7.4 per share	N/A
Price earnings ratio	-5.71 Times	-2.84 times	5.94 times
Earnings yield	-17.5%	-35.24%	N/A

• Return on Assets: It assess the amount generated by the company from its total assets. In other words, the ratio reflects the return made from the capital invested in the business in form of assets (Bragg, 2012).

Virgin Australia has a negative ROA of -3% in 2017 and the same was at -3.80% in 2016. The industry average was also negative at -2.24%. This was due to the losses made by Virgin in both the years. However, the amount of loss reduces in 2017 but still the ratio was negative.

• Return on Equity: This metric measure the amount of return offered by the company to its shareholders on their capital. A high and positive ROE is considered favorable.

Due to the continuous loss made in 2016 and 2017, Virgin had negative ROE of 23.41% and 15.02% in both the years. However, the ratio increases last year because of the upsurge in shareholder’s equity and reduction in the loss. The ratio was still far away from the industry benchmark of -9.22%.

• Net profit margin: It measures the value of net profit against the amount of total revenue earned by the company. The net profit is expressed as the percentage of company’s total sales (Bragg, 2012).

Economic Outlook of the Aviation Industry in Australia

The NPR of Virgin Australia was -3.68% in 2017 and -4.48% in 2016. This is because of the loss made by the company in the past two years which resulted in a negative ratio. The loss incurred was due to the high amount of Virgin’s operating expenses that cannot be set off from the revenue made by the company during the year. However the ratio increases but it was lower than the industry average of -2.77%.

• Expense ratio: It evaluates the cost of the company in relation to its operating income that is earned during a particular financial year.

The cost to income ratio of Virgin Australia has been decreased from 1.05 times to 1.02 times. This is because of the reduction in firm’s net operating expenses against its net sales. However, the ratio was more than the industry average of 0.47 times.

• Earnings per share: It reflects the part of profit which is allocated to the each outstanding share of the entity’s stock. It is a metric used for assessing the profitability of an organization (Camilleri & Camilleri, 2017). 

The EPS of Virgin Australia was negative in past two years because of the loss made. However the same increased in 2017 due to the reduction in amount of loss made by the company in the year as compare to what it was in 2016. The negative EPS reflects that company is losing money and should focus on enhancing its earnings.

• Price earnings ratio: It is also known as price multiple and it indicates the current share prices of the stock against the earnings per share. In other words, it shows the amount an investor wants to pay for each dollar of earnings (Jenter & Lewellen, 2015).

Company’s P/E ratio was also negative in 2017 and 2016 because of its negative EPS. Moreover, the share price of the company from $0.21 cents to $016 cents in 2017. In addition, the ratio is far away from the industry average of 5.94 times which is positive and high.

• Earnings Yield: It is the inverse of P/E ratio and it reflects the amount of each dollar earned by the entity from the investment made in the stock (Jindal & Jain, 2017).

Similar trend can be noticed in this ratio also as it was also negative for the past two years. The reason was negative earnings per share and fall in the market price of company’s share.

(see appendix for calculations)	2017	2016	Industry average
Asset turnover	0.81 times	0.84 times	0.91 times
Fixed Asset turnover	1.10 times	1.16 times	1.05 times

• Asset turnover ratio: It identifies the potential of the firm to make sales from its average assets.

In 2016, Virgin’s ATR was 0.84 times which reduced to 0.81 times in 2017. This minor reduction was due to the increase in company’s average assets as compare to the change in its net sales. However, the ratio was below the industry benchmark of 0.91 times (Gibson, 2011).

• Fixed Asset turnover: It also shows the amount of revenue made from the non-current assets of the entity (Godwin & Alderman, 2012).

The same trend is been noticed in FATR of Virgin Australia. It reduces from 1.16 times to 1.10 times in 2017. This was due to the significant increase of $241.2 million in the fixed assets of the company. However, the ratio was more than the industry average of 1.05 times which indicated that company is deploying its fixed assets in an efficient manner.

(see appendix for calculations)	2017	2016	Industry average
Current ratio	0.76:1	0.62:1	0.59:1
Quick ratio	0.74:1	0.60:1	0.54:1
Receivables turnover	16 times	16 times	16.92 times
Average collection period	22 Days	23 Days	N/A

• Current ratio: It shows company’s ability to pay off its current liabilities by using its current assets. The ideal ratio is 2:1 which means the firm should always have its CA double of its CL (Levi & Segal, 2015).

Virgin Australia’s CR rose from 0.62:1 to 0.76:1 in 2017. The ratio was also more than the standard of 0.59:1. This means that company has sufficient CA to meet its current obligations. However, the ratio increases because of the rise in Virgin’s cash and cash equivalents and reduction in its trade debtors.

• Quick ratio: It also reflects the same as current ratio. The only difference is that it considers the most liquid assets of the firm which excludes the amount of inventory (Saleem & Rehman, 2011).

Financial Ratio Analysis

Virgin had QR of 0.60:1 in 2016 and 0.74:1 in 2017 and was more than the industry benchmark of 0.54:1. Reason being the same, the quick assets of the company rose during the year 2017 and the current liabilities reduced to $2348 million in the same year.   

• Receivables turnover: This ratio shows the efficiency of the firm in managing its debtors. In other words, it reflects how quickly a company converts its debtors into cash in order to generate more revenue (Vogel, 2014). 

 The DTR of Virgin was same in both the years reported at 16 times and was also close to the industry average of 16.92 times. This was due to the minor reduction in the debtors of the company as compare to its revenue.

• Average collection period: It shows the amount of time taken by an organization to collects its receivables during a specified time period (Kimmel, Weygandt & Kieso, 2010). 

The collection period of Virgin Australia reduced from 23 days to 22 days over the past two years. This means that the company is efficient enough to make revenue out of its receivables and is focused on enhancing its liquidity position.

(see appendix for calculations)	2017	2016	Industry average
Debt to equity ratio	1.55	3.34	1.83
Debt ratio	38.28%	49.66%	23%
Equity ratio	24.77%	14.88%	23%
Interest cover ratio	-0.66 times	-1.42 times	6.32 times

• Debt to equity ratio: This ratio shows the amount of debt taken by the firm against its equity. A high D/E ratio indicates that company relies more on outside borrowings rather than on its equity (Ferrarini, Hinojales & Scaramozzino, 2017).

In case of Virgin Australia, the ratio reduces significantly from 3.34 to 1.55, becoming lower than the average of 1.83. This was due to significant fall in its short term debt and increase in its shareholders’ equity. It implies that company has low financial risk a compare to others operating in the industry.

• Debt ratio: It compares the amount of company’s total debt with its total assets. The debt ratio of Virgin Australia has also reduced from 49.66% to 38.28% in 2017. However, it was way more than the industry average of 23%. The decline was due to the upsurge in company’s total assets and a significant reduction in its debt element. This means company does not completely rely on borrowings to finance its assets.
• Equity ratio: It measures the amount of assets that are financed by shareholders’ equity. The ratio rose from 14.88% to 24.77% and was more than the benchmark of 23%. Reason being, a huge increase in Virgin Australia’s owner’s equity in 2017 as compare to the prior year.
• Interest coverage ratio: It shows how frequently a firm makes its interest payments out of its operating profit (Krantz & Johnson, 2014). The ratio was negative in last two years because of the negative EBIT of Virgin during the years.

From the above analysis, it can be said that year 2 was better for the company as it has reduced its loss and improves its solvency and liquidity position as compare to year 1. Yes, the company will succeed in future because it is looking forward to enhance its profitability situation and is focused on reporting profits in coming years. In order to get succeeded the group should focus on improving and enhancing its profits by cutting down the operating expenses and increasing the revenues. In addition, it should also lay more emphasis on using its assets efficiently so that more sales can be generated.

When a firm became insolvent, it is required to follow some ethical considerations such as principle of integrity, confidentiality, objectivity, behavior and professional competence. As far as the competitive environment is considered, recently it has been out in the news that Qantas and Air New Zealand are forming an alliance for beating their competitor Virgin Australia. The external factors which are required to be taken into account are market trends, economic changes, competitors’ strategies and government regulations. Furthermore, there is no probability for any sort of merger or acquisition of Virgin Australia as the company is focused on enhancing its performance in coming future. Overall, it will be better to invest in Virgin Australia because the company is focusing on improving its profits and overall performance. Moreover, it has low financial risk also.

References

Australian Industry Standards (2018). Aviation industry. Retrieved from https://www.australianindustrystandards.org.au/wp-content/uploads/2018/02/Aviation-Key-Findings-Paper2018V4Web.pdf 

Bloomberg (2018). Company Overview of Virgin Australia Holdings Limited. Retrieved from https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=8424628 

Bragg, S. M. (2012). Financial analysis: a controller’s guide. New Jersey: John Wiley & Sons

Bragg, S. M. (2012). Business ratios and formulas: a comprehensive guide. New Jersey: John Wiley & Sons.

Camilleri, E. & Camilleri, R. (2017). Accounting for Financial Instruments: A Guide to Valuation and Risk Management. New York: Taylor & Francis.

Deloitte (2018). The economic and social contribution of Australia’s airports. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/au/Documents/Economics/deloitte-au-economics-contribution-australian-airport-industry-080318.pdf 

Ferrarini, B., Hinojales, M. & Scaramozzino, P. (2017). Leverage and Capital Structure Determinants of Chinese Listed Companies. Retrieved from https://www.econstor.eu/bitstream/10419/169340/1/ewp-509.pdf 

Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.

Godwin, N., & Alderman, C. (2012). Financial ACCT2. USA: Cengage Learning.

Jenter, D. & Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), 2813-2852.

Jindal, D. & Jain, S. (2017). Effect of Receivables Management on Profitability: A Study of Commercial Vehicle Industry in India. Management, 2(2), 246-255.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersey: John Wiley & Sons.

Krantz, M., & Johnson, R. R. (2014). Investment Banking for Dummies. New Jersey: John Wiley & Sons.

Levi, S. & Segal, B., (2015). The Impact of Debt-Equity Reporting Classifications on the Firm’s Decision to Issue Hybrid Securities. European Accounting Review, 24(4), 801-822.

Saleem, Q. & Rehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7),  95-98.

Virgin Australia (2018). Company Overview. Retrieved from https://www.virginaustralia.com/nz/en/about-us/company-overview/ 

Virgin Australia (2017). Annual Report 2017. Retrieved from https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2017-annual-report.pdf 

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.