Originally Posted by Nassensteins Monster
6. The co. has expressed it is limiting growth for JQ International and that once mainline provides a return on capital they'll reinvest in the business and start expanding again.
Nassensteins Monster, a minor, but important clarification about your post.
The "cost of capital" argument was simply a confected excuse to allow justification for whatever decision they had already made. It just need to sound plausible. It never passed the smell test. There was no sudden material change to the "International" business at the time this phrase was uttered. It was "Cherry Picking" a justification to suit a desired outcome. The alleged losses of "International" (a business segment that doesn't even exist) where in fact shown to be bogus in the August 2014 announcement. The losses where as a result of the large depreciation charges on aircraft that were significantly overvalued. This very question was asked of Alan Joyce in the Senate inquiry in March 2014.
Surprise surprise come August, the aircraft were written down to reflect market price, and the enormous burden of depreciation crushing the "International" business miraculously disappears and "International" returns to profitability in the future.
Time travel of capital (duration transformation) is one of the fundemental instruments of modern finance (examples, a loan is bringing future purchasing power to the present, a annuity is sending purchasing power to the future). Profits and losses can be shifted
in time depending upon the need to do so. In this case losses where brought forward for industrial, political (seeking a debt guarentee) and possibly other reasons (Asian franchises losses being covered).
Why am I telling you this? To counter at every opportunity the mythology behind the "International" loss story of the last 4 years. If it continues to be repeated it, it becomes the truth.
The truth is only those with access to the
full suite of company accounts actually know the true profitability of anything within QF. Consolidated accounts are the only published information and therefore provide very little internal information. The number of people who have access to the true picture is very very small. The QF accounts are opaque, and this allows scope for "trust me" bogus type statements, as there is no evidence (until admitted as per the August statement) to counter it. Now the evidence has been revealed, it is important to bury this myth, rather than repeat it.
It is important that everyone understands this process, and not to fall into the trap of allowing it to automatically become "a truth" that clouds judgments.
I covered this in a post just an hour after the August announcement Qantas Announcement: 28 AUG 14 post
#58
Rural and Regional Affairs and Transport References Committee 14/03/2014
Senator XENOPHON: Can you just explain to me the contrast between the two. You are saying that there is a loss but you are now saying that Qantas international is cash flow positive.
Mr Joyce : There is a difference, as you know, between the P&L and the cash flow position. I will let Gareth talk about that.
Mr Evans : I think the difference that you are talking about is exactly that—the difference between the P&L and the cash flow. Our international business has about $800-$900 million worth of depreciation charge to it every year—the depreciation of the aircraft fleet primarily, and the other infrastructure that the international business uses. That is a non-cash charge because it relates to the depreciation of the assets. The businesses, the routes, do in the main generate cash. One route that has not been generating cash in the recent past is Perth-Singapore as an example. As a result of that, that is a route that we are terminating because we cannot afford to have routes where we actually do not even cover the cash costs of our business. The issue in the longer term for the international business is that it does need to spend some significant amounts of capital in the future to reinvest in its fleet. Today, we have a good fleet with great product, and in fact that fleet is moving into a simplification phase and part of the transformation is that it will need to reinvest at some points in the future.
Mr Joyce : That is an important issue. You can generate cash, but if the cash is not sufficient enough to generate the renewal and the replacement of the fleet, then the businesses in turn will decline. That is the definition of terminal decline. If you cannot replace the assets eventually, then that business is not going to be able to renew, it is not going to be ongoing. The requirement for us to turn the business around so it covers the cost of the replacement of its aircraft is critical. That is how the business can renew itself and continue to operate and to grow. At the moment, when the business is not covering the depreciation of those assets, it is in a business that cannot afford to replace those assets into the future.
QANTAS GROUP FINANCIAL RESULTS ALAN JOYCE OPENING REMARKS SYDNEY, 28 AUGUST 2014
Fleet Write-down
The decision to create a separate holding structure and entity for Qantas International has triggered an accounting requirement to test the value of Qantas International assets on a stand-alone basis.
The international fleet was purchased when the value of the Australian dollar averaged 68 cents against the US dollar, and in the case of the B747s, 57 cents.
Today the Australian dollar is trading at 93 cents.
The value of these aircraft on our books has therefore been written down by $2.6 billion to their current market value.
As a result future Qantas International depreciation expenses will be lower by around $200 million per year.
Importantly, this is a non-cash charge – a book write-down to the carrying value of aircraft that Qantas has no intention to sell, and will retain in its fleet.
It will have no impact on the economics of the business or change cash flow forecasts.