Qantas Annual Report

['holic]

Was flicking through last years annual report and had a couple of questions I was hoping someone with a bit more financial nous than myself might be able to answer.

The report shows that Jetstar had an underlying profit of $131m and Qantas $67m. However if you look more closely, here's how they calculate that :

Jetstar
EBITDAR ...................................463
Leases ..................................... (315)
Depreciation and Amortisation (17)
Underlying EBIT .......................131

Qantas
EBITDAR .....................................1415
Leases ..........................................(279)
Depreciation and Amortisation (1069)
Underlying EBIT ............................ 67

Why is there such a massive difference between the depreciation costs of the two? Although the report shows you a breakdown of the profit contributed by each section of the group, it then goes on to report the depreciation and amortisation of the group lumped together.

Secondly, why is the goodwill of Jetstar valued at $130m, while the goodwill of Qantas, Qantas Freight and Qantas Frequent Flyer combined valued at $23m.

Cheers

[OneDotLow]

I had the very same question re the goodwill value of the two brands. They can pretty much put whatever they want to in that field on the balance sheet.

Two reasons why the depreciation is so much higher :

Qantas have much higher depreciation costs due to their plant and equipment.

JQ have numerous aircraft registered to QCC in Mascot where they are owned by Qantas and "leased" to JQ at a rate only known by those who create such deals.

Fair? No... Anything we can do about it? Keep raising issues like this and hopefully the media will eventually pick up (as Ben Sandilands has done recently) on the story and let the QF shareholders know that something (else) is gravely wrong with the group.

['holic]

G'day mate,

Qantas have much higher depreciation costs due to their plant and equipment.Yeah, that's what I suspected at first also. But there's a note in the report that shows the time frame equipment is depreciated over. For example, aircraft and engines are depreciated over 2.5 - 20 years, plant and equipment over 3 - 20 years etc. I would have thought that given the age of mainline's hardware, depreciation would have had less of an impact on its profitability compared with a younger company like Jetstar.

JQ have numerous aircraft registered to QCC in Mascot where they are owned by Qantas and "leased" to JQ at a rate only known by those who create such deals.When I read a bit further into the report, it surprised me that depreciation does affect leased equipment. For example, there are sections for Aircraft and engines – owned, as well as Aircraft and engines – hire purchased/leased. The accumulated depreciation for leased aircraft was valued at $1146m.

Has any of this been attributed to Jetstar?

[Teal]

As a wholly-owned subsidiary of Qantas, the reported 'profit' of Jetstar can just about be whatever Qantas wants it to be. Some resources are shared and other resources are supplied or controlled by Qantas. Qantas only has to have 'control' over equipment/assets (not necessarily ownership) to result in it picking up the lion's share of the depreciation and amortisation. Transfer prices for goods and services between the two can also be manipulated quite easily (and legally).

http://www.cartoonstock.com/lowres/hsc0739l.jpg

[desmotronic]

It's their train set and they can do what they like with it.

[Mr. Hat]

Could someone include Qlink (Eastern Sunstate) figures. I'm curious.

['holic]

It's their train set and they can do what they like with it. Fair enough, but I didn't think that included deceiving shareholders.

Could someone include Qlink (Eastern Sunstate) figures. I'm curious.Sorry, would like an answer to that myself, but the Qlink figures are included in the 'Qantas' numbers.

Another example :
Qantas Frequent Flyer EBITDAR is $330m - Depreciation and amortisation $2m.

The accumulated depreciation on buildings last year was $177m, the amortisation on software was $350m.

So unless they're running Frequent Flyer out of someone's granny flat using an excel spreadsheet to keep track of everyone, I would've thought the DAR figure should have been higher than $2m.

Does Qantas bear the depreciation costs for other sections of the Group?

[Mr. Hat]

Reason I ask is i have a mate that reckons Qlink props mainline up...

[Cactusjack]

How much is 'I Roster' worth ???

[DeafStar]

I've heard the Q400 is a money making machine. Not surprising seeing as apparently its was Qlink that kept Qantas in the black last financial year. The Virgin turboprop thing is gonna hurt Qantas a great deal methinks.

[Mr. Hat]

Thats if they get the 400 as opposed to ATR and try and reinvent the wheel again like they did with the Ejunk,

Whats "I Roster"?

[DickyPearse]

Secondly, why is the goodwill of Jetstar valued at $130m, while the goodwill of Qantas, Qantas Freight and Qantas Frequent Flyer combined valued at $23m.

Goodwill is only recognised as a result of some sort of transaction. Most of Qantas' goodwill has been built up over time and is considered "internally generated" goodwill. Internally generated goodwill is not recognised in financial statements. I am not too sure about the history of Jetstar, but the "jetstar" goodwill probably relates to NZ or Asian acquisitions/investments

[wingnut69]

Just reading the latest figures.
Qantas
EBITDAR 865
Leases (152)
Depreciation and Amortisation (548)
Underlying EBIT 165

Jetstar
EBITDAR 305
Leases (131)
Depreciation and Amortisation (31)
Underlying EBIT 143

Depreciation and Amortisation includes $45million (Qantas $43 million and Jetstar $2 million) representing half yearly impact on the change in residual value estimate for passenger aircraft.

[Pedota]

If AirAsia's numbers can be believed, they are very impressive when compared to QF! (my bold/italics - see AirAsia | Fees and charges | Budget airline is extra successful (http://www.theage.com.au/travel/holiday-type/budget/extra-successful-20110317-1bym3.html))

Extra successful

The Age - Clive Dorman
March 19, 2011

Plenty to smile about ... AirAsia chief executive Tony Fernandes (C) with flight attendants.

AirAsia's low-cost model is reaping financial rewards, writes Clive Dorman.
He has become one of the region's most successful entrepreneurs but AirAsia founder Tony Fernandes admits he's "not really an airline person".

Inside the airline industry, which is used to measuring profits in small percentages, Fernandes caused a sensation last month when he showed it was possible for an airline to make money at the rate of the participants in Australia's banking oligopoly.

Most of the time, Malaysia-based AirAsia and its long-haul offshoot, AirAsia X, which flies to Australia, have the cheapest deals in town. They are as little as a few hundred dollars return to south-east Asia, pennies to fly inside Asia and sometimes less than $1000 return to Europe.

The numbers are spectacular: $500 million net profit on $1.83 billion turnover in 2010; in 2009-10 the Qantas group, including Jetstar, made $112 million on $13.8 billion in revenue.

But it is not a magic trick. About two-thirds of the AirAsia profit was "ancillary revenue" - fees for extras on mostly "costless inventory". That's technical jargon for services that cost little or nothing to produce.

In Australia, Tiger Airways suffered backlash over its steep ancillary charges. AirAsia's ancillary charges are lower. "If you look at the bag charge by (Europe's) Ryanair or Tiger Airways (based on the Ryanair model), ours is very, very minimal," Fernandes says.

"But there is a business logic to it. Some of these airlines are just transferring sales from the ticket price to another area. But we're trying to do is give people a choice and make the cost equate to the revenue.

"If you take the bag charge, for instance, there is a cost for loading the bag onto the plane. There is a cost of the plane being heavier, which means more fuel is burnt. So we say if you want that service, you have to pay for it but we're not going to price you ridiculously ... out of the market.

"I'm on Facebook and Twitter and the only one (ancillary charge) that people seem to dislike is the convenience fee for using credit cards.

"Remember, we're adding things like insurance. So we're saying, if you travel, here are all the things that you might spend on - duty-free, hotels, food, insurance, etcetera, and we're saying rather than go and buy it from someone else, buy it all from us."

Fernandes concedes that without ancillary revenue, AirAsia is just another airline - back in the financial ruck with the full-service airline industry that has lost more money than it has ever made.

Unsurprisingly, full-service airlines - especially in the US - are adopting the model in the hope of financial salvation.

Susan Carey wrote in the Wall Street Journal last week about what she called "buy to fly". "Want a seat that reclines more? A pre-ordered champagne brunch in coach? Insurance against a blizzard that waylays a trip? Access to speedy security lines and early boarding? Soon you might be able to get them all - for a price," Carey writes.

[Skystar320]

yes but have you seen Air Asia's FA's? You can hardly say 'No' to buying some peanuts or a cold beverage when she ask's

That, unfortunately cannot be said for most of Australia's FA's however there is some exceptions :ok:

[Mselle AA]

Hi
I dont know if you are still interested,but Qantas depreciation is higher because it owns a greater proportion of its assets.

Whereas Jetstar, as the low cost model, will have a higher lease amount (less ownership)

There is a distortion in the way it looks, (and becomes difficult to compare) in part to do with what the lease arrangements look like and how the payment is stacked & reported. eg. some of the lease could be higher 'operating revenue' and/or - like cars leased, there could be a higher payment at the end - if they dont upgrade to the next model, for example.

If you can be bothered, you could look at the balance sheet - as well as what the 'real assets' are and what they're worth. Eg the planes, average value... and try and tell that way what the relative cost. The number and age of planes is reported somewhere..

Its the same same sort of issue with the govt selling assets - they reduce the ongoing associated cost - but do not have to reveal as accurately what the future higher leasing cost will look like - because they are 'off balance sheet'. It is also impossible to tell what residual liabilities the company/govt is left with - because this is in the leasing agreement which is commercial in confidence.

Also re goodwill - it is very interesting and the accounting rules are getting strickter (it is getting closer to be rquired to reflect the actual premium, in addition to assets sold, if it were sold). The goodwill amount ought to be going down along with the relative decline in reputation of the brand... which has been declining in the way qantas is reporting, such as decrease in the international market - as well as the reported declines in on time arrivals/departures etc.

All the best

['holic]

Thanks for the reply.

What you say WRT leasing is correct. The more equipment leased, the lower the depreciation costs but the higher the operating costs. However this raises more questions than it answers.

1. Under the current setup, Qantas own quite a few A320s, which they lease to Jetstar. What is the advantage in this arrangement? Presumably, if Qantas is following senior management's philosophy of each part of the Group being profitable, the costs which Qantas pays for depreciation, maintenance etc on these aircraft should be less than the leasing payments Jetstar pays Qantas. If this is the case, wouldn't Jetstar reduce their costs by owning the aircraft themselves?

2. Why is the best way of structuring one part of the group with leased aircraft, and another part of the group with owned aircraft?

3. Virgin's fleet is slightly larger than Jetstar's with the majority of aircraft also leased. Virgin's depreciation costs were just under $200m vs $17m for Jetstar. Why such a big discrepancy between two similar businesses?

Anyway, all this speculation could go away tomorrow if Qantas would publish a breakdown of depreciation, property, tax etc between the different segments of the group in their annual report. But they choose not to.

[rmcdonal]

3. Virgin's fleet is slightly larger than Jetstar's with the majority of aircraft also leased. Virgin's depreciation costs were just under $200m vs $17m for Jetstar. Why such a big discrepancy between two similar businesses?

Virign's fleet is older, some of the 737s would be nearing 10years?
I would imagine that depreciation is not linear.

['holic]

G'day

From the Annual Report :
Depreciation is provided on a straight-line basis on all items of property,
plant and equipment except for freehold land which is not depreciated.
In any case, if depreciation wasn't linear you would expect the company with the newer fleet to have higher depreciation costs.

Cheers

[ALAEA Fed Sec]

3. Virgin's fleet is slightly larger than Jetstar's with the majority of aircraft also leased. Virgin's depreciation costs were just under $200m vs $17m for Jetstar. Why such a big discrepancy between two similar businesses?


It's quite simple. The discrepency appears to have been cooked into the books by Qantas to make it look like Jetstar is making a much bigger profit than it actually is.

[QAN_Shareholder]

Why is the best way of structuring one part of the group with leased aircraft, and another part of the group with owned aircraft?


Part of it is narrow body v wide body aircraft. There is an active secondary market for narrow bodies and J* overwhelmingly operates narrow bodies. You would struggle to operating lease an A380.

Virgin's fleet is slightly larger than Jetstar's with the majority of aircraft also leased. Virgin's depreciation costs were just under $200m vs $17m for Jetstar. Why such a big discrepancy between two similar businesses?


Virgin have the 777s and must own plenty of their aircraft since they have $2.6bn of 'Aircraft and aeronautic related assets'.

[calogero_vizzini]

Indeed, the lease from Qantas Company to Jetstar could be done at a loss, which would therefore make Jetstar look like a more profitable arm of the business than it 'really' is - which an interpretative investor might think as something of a grower, or a great new development within the company.

Whatever done between each company, it all evens out in the consolidated group reporting. It's just a shame there isn't the full transparency some would feel they need.

[CaptainSouth]

Not part of the annual report but in todays Sydney Morning Herald. "Qantas announced increases of up to $10 for one way domestic.....It has now increrased surcharges or fares four times in two months...The latest increase does not apply to....Jetstar.....which has resisted introducing fuel surcharges..."
If THE QANTAS GROUP purcahses all the fuel for the companies, why does mainline only suffer the higher fuel prices? Why is JQ immune from these increases?
Please enlighten me.

[Shark Patrol]

Why is JQ immune from these increases?


It's so that the Orange Cancer can continue to be the shining beacon of profitability (and hence the industrial model) for the Qantas Group. It's also because the punters who travel on Onestar are much more price conscious than their counterparts who travel on Qantas. If they raise the prices too much, the load factors will fall dramatically and (shock, horror) Jetstar may start to lose money. Can't have that happening for BB's bonus can we?

Prior to the onset of the GFC (and during the last big fuel price rise), Jetstar was purportedly hurting big time, until the fuel prices eventually came back down. So hang in there Muamar! We are all behind you!!

['holic]

Part of it is narrow body v wide body aircraft. There is an active secondary market for narrow bodies and J* overwhelmingly operates narrow bodies. You would struggle to operating lease an A380.In that case, why do Qantas own most of their 737s? Why would Jetstar even care about the secondary market? That would be more of a concern for the leasing company, not the lessee. And once again, what is the advantage in one segment of the group purchasing aircraft to then lease them to another part of the group?

[QAN_Shareholder]

In that case, why do Qantas own most of their 737s?

Don't know, they do lease around 1/3rd I believe. LCCs generally use operating leases since they are capital constrained, there is also a tax advantage if you can't use all tax losses when expanding rapidly.

Why would Jetstar even care about the secondary market? That would be more of a concern for the leasing company, not the lessee.

It matters because it is a concern for the leasing company. If the leasing company aren't confident they can sell / re-lease the aircraft at the end of the term then they won't buy the aircraft.

what is the advantage in one segment of the group purchasing aircraft to then lease them to another part of the group?

Don't know, I don't believe it applies to much of the fleet, it could be an accounting trick, but possible that could be for some complex tax reason. Or maybe they bought them expecting to be able to put them into an operating lease structure but the market had dried up at the time.

[Back Pressure]

The purpose of auditing of a company's accounts is to determine if those accounts present a "true and fair" picture of that company's operations, and P&L.

If, as suspected by many who've contributed to this thread, there has been creative accounting, and cost-shifting etc. within Q/J*, then how could the auditors (whoever they are) have signed off on the accounts ?

Either:
. all the accounting shenanigans (assuming they have been perpetrated) are above board,
. or the auditors are incompetent (or criminal).

I'm not an auditor or accountant, and don't work in any aviation-related industry, so I have no ulterior motive here - just wondering...

BP

[breakfastburrito]

Back Pressure, this quote from QAN_shareholder may shed some light on the process of auditing:
T-Vasis, I wouldn't put much weight on auditing for ensuring the accuracy of transactions between Qantas and Jetstar. I worked as an auditor for a spell and internal transactions are way down the priority list, there is very little risk to the auditor from internal transactions being mis-stated.

However, I agree the argument that JQ is being subsidised as part of some plot to undermine QF is rather unpersuasive. The more prosaic explanation is more likely that parts of QF are uncompetitive and management are justifiably unwilling to continue to pour more cash into parts of the business that can't make a return on capital.
QAN_Shareholder 15 Feb, 2011 (http://www.pprune.org/dg-p-reporting-points/442293-qfs-dilemma-reasons-why-2.html#post6246241)

['holic]

Back Pressure,
I have no doubt that the report meets the required accounting standards. However, there is plenty of latitude within that framework to "adjust" the numbers as needed.
Having said that, after the way that the finance arrangements for Jetconnect and the Jetstar cadet scheme have stood up to closer scrutiny lately, anything's possible.

QAN_Shareholder,
Why would Jetstar even care about the secondary market? That would be more of a concern for the leasing company, not the lessee. It matters because it is a concern for the leasing company. If the leasing company aren't confident they can sell / re-lease the aircraft at the end of the term then they won't buy the aircraft.
Sorry, misunderstood the intent of your original post. I think we're on the same page with that one.

Was just having a look at the leasing arrangements for the A330s. Qantas lease 10 A330s from outside leasing companies to be operated by mainline. At the same time, Jetstar also lease 6 A330s from mainline. For this arrangement to be profitable for mainline, you would expect that mainline would charge Jetstar more for their operating leases than mainline pays to the outside leasing companies. Which begs the question, why wouldn't Jetstar lease directly from the outside leasing company as opposed to Qantas mainline?

[QAN_Shareholder]

Was just having a look at the leasing arrangements for the A330s. Qantas lease 10 A330s from outside leasing companies to be operated by mainline. At the same time, Jetstar also lease 6 A330s from mainline. For this arrangement to be profitable for mainline, you would expect that mainline would charge Jetstar more for their operating leases than mainline pays to the outside leasing companies. Which begs the question, why wouldn't Jetstar lease directly from the outside leasing company as opposed to Qantas mainline?

I believe once 787s arrive the A330s go back to mainline hence some logic in being bought by Qantas.

['holic]

I believe once 787s arrive the A330s go back to mainline hence some logic in being bought by Qantas.ok ... still not sure how this explains why Jetstar operates A330s leased from mainline. In fact, wouldn't this support the argument for mainline operating the A330s it owns? Under the current arrangement, the A330s owned and operated by mainline are transferred to Jetstar, and then returned to mainline when the 787s arrive. So in effect, the costs of transferring these aircraft (repainting, reconfiguring etc) are paid twice. If mainline had retained the aircraft they own and Jetstar has leased their A330s directly, then transferred them to mainline when the 787s arrived, the costs of transferring the aircraft would only be incurred once.

LCCs generally use operating leases since they are capital constrained, there is also a tax advantage if you can't use all tax losses when expanding rapidly.
I'd buy that argument if Jetstar was a new, startup LCC. But you'd have to agree that Jetstar are fairly well established now, not to mention that they have the backing of the mothership mainline. Also, management have repeatedly stated that they will allocate capital within the group wherever they can get the best return. So I wouldn't have thought that being capital constrained was a factor.

Cheers

[stubby jumbo]

QAN Shareholder........you can't seriously put LOGIC and QANTAS in the same sentence.
Here are some illogical examples:
* Closing Heavy Maintenance
*Offshoring "some" Checks?
* "Qantas Mainline and Jetstar will NEVER compete on the same routes"(Dixon 2004):rolleyes:
*IR led by IO (for how long ???)
*Off shore Bases
*Disengagement Policy of "Divide & Conquer" for Pilots & all Front line staff.
*777 -non choice:ugh:
*Irish over Italian
*JQ Asia /Pacific

I could go on and on.

Word out of the QCA bunker though is that the Black Widow will announce her "review" in the next few weeks.

It ain't going to be pretty.:ooh:

[QAN_Shareholder]

Under the current arrangement, the A330s owned and operated by mainline are transferred to Jetstar, and then returned to mainline when the 787s arrive. So in effect, the costs of transferring these aircraft (repainting, reconfiguring etc) are paid twice.

I didn't think they weren't planning on doing much reconfiguring since the J* international and mainline domestic were meant to be equivalent. Seems different now with change of mind on domestic business class.

Also, management have repeatedly stated that they will allocate capital within the group wherever they can get the best return. So I wouldn't have thought that being capital constrained was a factor.


The lack of dividend suggests that the group as a whole is capital constrained.

['holic]

I didn't think they weren't planning on doing much reconfiguring since the J* international and mainline domestic were meant to be equivalent. Seems different now with change of mind on domestic business class.Fair enough. The main point I was trying to make was that the costs of transferring aircraft between the 2 groups appear to be doubled under the current arrangement. This is apart from questioning whether Jetstar and the Group could possibly save money by leasing aircraft from an outside company or by Jetstar owning the aircraft, as opposed to Jetstar leasing aircraft from Qantas.

The lack of dividend suggests that the group as a whole is capital constrained.Yep, I'd agree with that in 2011. However when the A330s were given to Jetstar a few years back, the company was making record profits year after year and was paying one of the best dividends on the ASX. It's ability for generating cash was one of the major selling points to private equity, and I also seem to remember that at one stage GD was being criticised in the media for under leveraging the company. Capital definitely wasn't a problem back then.