Captain Kremin
You know as well as I do that there’ll be no third party review of internal QF pricing practices and consequential internal group accounting practices and figures. So asking for it could well be seen by a mean-minded critic as grandstanding. I would not feel competent to comment on that thought were it expressed.
I would draw to your attention the challenge of doing a lot of the work yourself though. I assume you are skilled at financial analysis and associated areas of policy, analysis, airline economics and competitive strategy, and in particular transfer pricing protocols and reporting requirements and the concepts of economies of scale and scope. I say that I assume you are familiar with these elements of analysis and concept as you make statements that could and should only be associated with someone who had in-depth understanding and background in these relevant and necessary areas of competence.
The QF Group (and associated entities) figures for the year ending June 30, 2009 are available on the Qantas website. These will be updated in a few days with the Interim Results for the 6 months ending 31 December 2009. Many publicly available sources will let you estimate LCC A320 and A330 direct and indirect operating costs and hence will let you work backwards from JQ’s passenger numbers, hours flown, ASKs and Load Factors to determine in $A the likely “free market” cost structure of Jetstar. In other words what it would be if they were an independent company with JQ’s routes as their sole operating environment.
You can do the same for Qantas mainline. As you suggest there could well be areas where there is transfer pricing of activity either from Qantas mainline toward a separate but wholly owned or partially owned entity, or from those entities toward Qantas mainline. Note carefully that some corporate Qantas activity might well need to be estimated, identified and removed as “above” all the Group entities. This might well include Board expenses, Treasury, Safety, Legal, Government Relations. These costs might not readily be allocated to any individual Group entity other than perhaps to fix as a component of each revenue dollar, or per passenger, or per flight. I am sure you will hit on the right allocation protocol.
Anyway, having done all the above you will come up with your beginnings, the “stand alone” estimated figures for each of the Group entities. You can then cross check your initial hypothesis by adding up all the results to check that the “sum of the parts” is indeed greater than the whole total of the Group’s published figures. It should be. That much is not disputed at all.
Now comes the interesting bit. What does this mean?
Let’s say that you have estimated the QF mainline figures reasonably well. You subtract that from the Group figures (minus any extraneous entities). You’ll be left with what some jargoneers might call the Long Run Marginal Costs and Revenues of Jetstar activity. You should find that the Qantas Group operates Jetstar and its mainline sister more cheaply than the combined cost of QF mainline (without any transfers to Jetstar) and a stand alone Jetstar sized airline, completely independent of the QF Group. The gap could easily be as much as 15% one imagines. Maybe more. I couldn’t comment.
You might take this “what if” stuff further and see what the Qantas Group’s costs would be if it operated the whole Group at average mainline costs, but with revenues equal to current mainline plus Jetstar revenues. Have a bottle of VSOP ready though as this set of figures may well scare you witless.
Now Captain Kremin, you need to understand that this (say) 10% gap (the whole being cheaper than the parts) represents the Group’s advantage over other carriers. That it can in fact be Legacy and LCC cheaper than any two other independent entities. This is called Economies of Scope. It is not a subsidy. Let Google do the research if you want and you’ll find heaps of discussion. For example at
http://www.investopedia.com/terms you’ll find:
Economies of Scope
What Does Economies of Scope Mean?
An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced.
For example, McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because McDonalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production.
Another example is a company such as Proctor & Gamble, which produces hundreds of products from razors to toothpaste. They can afford to hire expensive graphic designers and marketing experts who will use their skills across the product lines. Because the costs are spread out, this lowers the average total cost of production for each product.
Having identified this key part of the Qantas Groups competitive advantage you can now answer these questions for us all:
1. What would Qantas look like if someone else had started Jetstar and Qantas was competing with this JQ sized competitor on the current QF mainline cost structure?
2. If yields for Qantas mainline fell say 10% in the above scenario amidst a bloody “price war” (and given that, as you often state landing fees, fuel costs, interest rates etc etc are the same for all carriers) how far would productivity (or aircraft and people) have to rise and in particular, how far would unit and overall labour costs at QF mainline have to fall in order for the Group to regain profitability?
3. To what extent therefore are Qantas yields quarantined from reduction by having the competition “in house” at a lower unit cost, therefore making money for Jetstar and lessening losses by Qantas?
There are many other interesting questions you will be able to answer I am sure. But you will need to this hard analytical work first. Let me know either by PM or by posts when you have done the analysis and we can compare figures and methods.
If you can’t do it then please explain your anti-Jetstar posts and on what basis you make your claims. I sincerely trust you will not be found wanting.