QF's Dilemma and the Reasons Why.

[GlobalMaster]

'The pain the Qantas international business is experiencing has its seeds in fleet purchasing decisions made well before Joyce took the reins.'

'Qantas is not meeting its cost of capital and it needs to spend a lot of money to renew the fleet.'

'The problems within Qantas international have been festering for years. They are no longer just about the economic cycle - they are structural issues born of increased competition and poor management decisions.'

The insiders who say management would sell the Qantas international business tomorrow if there was a buyer probably know what lies ahead.

Get the full story from Elizabeth Knight at Plenty of flight risk in Qantas catch-up (http://www.smh.com.au/business/plenty-of-flight-risk-in-qantas-catchup-20110209-1an0z.html)

[Sunfish]

This is crap designed to put pressure on the International pilots.

It happens every EBA.

[hotnhigh]

'Qantas is not meeting its cost of capital and it needs to spend a lot of money to renew the fleet.'


Peter Gregg about 2003 right? Oh hang on we are in 2011.

[dragon man]

Neither do Aust Air Exspress or Startrack Exspress which cost $750 million. But we never hear about them!

[neville_nobody]

Right now the rest of the Qantas operations - its frequent flyer business, the low-cost Jetstar division and the freight operations - are having to cross-subsidise the international operations. Cross-subsidisation is a common feature in many businesses with a broad portfolio of operations but this is not sustainable in the long term.

That's a quote from the article which fails to recognise that the mainline business has been propping up Jetstar for years on end. When they should have reinvested in QF they were spending it all on Jetstar and now that is coming back to haun them.

Not unlike the News Ltd-Ansett scenario really.

[Sunfish]

Cross subsidisation is never sustainable, and in fact may even be illegal in QF's case. Unfortunately there aren't any forensic aviation accountants around, since QF's invention of Jetstar may have been illegal under competition law in my opinion.

[PPRuNeUser0198]

That's a quote from the article which fails to recognise that the mainline business has been propping up Jetstar for years on end. When they should have reinvested in QF .

Jetstar is returning around 6-8% and that goes back to Qantas...

[Ka.Boom]

......and it costs Qantas 60% off its bottom line to receive the 6-8% return from JetStar.Not a good return on capital invested.Plus it deprives Qantas mainline of funds to invest in its own product.The reason mainline is going down the crapper.

[Tankengine]

I doubt if anyone would say we don't need Jetstar and Qantas.
The accountants can argue who subsidises who and by how much!

We do not need Jetconnect!:ugh:

[blow.n.gasket]

Well if JetStar is so flipping great, (some Qantas management guru even put a figure of $350 million on it) Flog it off, and invest and reinvigorate the primary brand.:}

Then everyone would see just how great a business model Jetstar really is, wouldn't we!:E

[indamiddle]

having a look at staff travel for flights to melbourne later in the week and it appears that the 767 (old) is being replaced by 320/330 (new). is this happening every week on a daily basis?

[regitaekilthgiwt]

It would help if we knew where you were flying to melbourne from :ugh:

[-438]

T-vasis, your comment regarding Jetstar returning 6-8% would mean a lot more if anyone had any faith in the actual financial reports Qantas feed the public. You only need to read of the recent revelations about Jetconnect the 'company' to realise these figures cannot be trusted.
Anyone who has worked in Qantas for any length of time could give you many examples of mainline subsidising Jetstar since their inception.

[novice110]

-438

Just wondering if you could elaborate on the cross subsidising?
I've read here and heard from mates about:
-cheap mainline seats after jq breakdowns
-free maintenance / equipment etc
The problem is, the people telling me these stories are usually front line staff without the first clue as to commercial accounting. (So I have to take it as rumour, or a guess!)

Do you have any other examples and could you say for certain that this is happening?

[breakfastburrito]

novice110, perhaps this link may clear things up:Qantas Paid Jetconnects bills (http://www.pprune.org/dg-p-reporting-points/442509-qantas-paid-jetconnects-bills-hearing-told.html).

[novice110]

Thanks burrito.
Sure isn't a good look for the Jetconnect situation, and I guess you could apply the same to any other QF company.

That's my point though. I'm still guessing. Maybe we need a similair investigation into the Jetstar books for me to get my answer!

Thanks all the same.

[Jetsbest]

... since Jetconnect has overlapped the JQ evolution, I don't think it's too long a bow to draw to infer that such creative accounting has been going on for JQ's entire existence too. :*

The view of many is that:
- inept fleet decisions,
- short-sighted engineering decisions,
- marketing budgets skewed in favour of the JQ "brand",
- cost-cutting which has affected the premium and high-yield product,
- dysfunctional internal competition driven by KPIs and bonuses rather than true efficiencies,
- alternately praising then demonising employees depending on the EA negotiation phase,
- deliberate misrepresentation of the pilots’ claims in the media, and
- convenient cost apportionment to make L/H look bad while other parts of the group become the darlings of profitability has
- done real damage to the QF brand.

Is anyone still confused as to why QF employees are annoyed? And there's a certain irony in the fact that JQ staff are also annoyed because they too are facing job exports! At least the 'group' employees are finally seeing the true agenda here. :ugh:

[botero]

Novice 110

An example of Qantas Airways directly subsidising Jetstar.
This was straight from a management pilot whilst briefing some mainline pilots in late 2010.

"We're not sure how it happened, but we've just found out that Qantas has been paying the ACARS bills for the Jetstar 330's since they've had them. Of course now that it has been identified they will have to start paying for it themselves."

I think it about sums up the whole situation rather well...

[rodchucker]

I am truly sickened by these events and the deceptions that have gone on and are continuing.

These guys are the Australian version of US bankers pre GFC without the profits.

Since when is it ok for Boards and management to behave this way and nothing happens to keep them in check until there is a train wreck.

The hypocrisy is only exceeded by the arrogance.

There is immeasurable public interest in the Rat surviving so where are the politicians in all of this given they will be called upon if the thing ends up in a heap. They cannot hide behind some half baked and incomplete Senate inquiry.

[PPRuNeUser0198]

The comments around Qantas subsidising Jetstar I struggle to believe, unless someone has solid evidence to prove it... Jetstar runs its own P + L and yes, initially would have been provided with some working capital to start-up and all returns go back to Qantas, so I am not sure how Qantas subsidises it. All Qantas Group companies operate as independent business and are responsible for their own P + L...

Qantas is audited and has rigid corporate governence. I am not sure how they'd get away with "creative accounting" by the auditors which I think are PWC.

[Bazzamundi]

TVasis, what planet do you live on? Sorry, management planet obviously.

Why did JQ not send their pilots being trained overseas a couple of years back to let the QF guys use their own sydney based simulator? While the QF sim was chock full of JQ training, QF pilots were sent for months on end to France, HK and a few other exotic destinations, on full QF allowances. Now aren't QF allowances supposed to be so much more expensive than JQ??? What idiot thought that was a good way to work it? Surely it saved money.

Or is there an agenda there?

[novice110]

So you now have a comprehensive understanding of airline lease arrangements and subsequent endorsement credits / further allowances do you Bazza?

['holic]

Look, it's quite simple.

Qantas own the sims, and they should be allocating their usage to maximise profits for mainline.

For this to be true, they must have received more from Jetstar for the sims than it cost Qantas for the sims in HKG and accommadation and allowances.

Which also begs the question, if it was cheaper to send people to HKG, why wouldn't Jetstar have done this instead?

I'm sure there's an excellent reason for this, which T-Vasis will have for us shortly.

[Sunfish]

Tvasis:

The comments around Qantas subsidising Jetstar I struggle to believe, unless someone has solid evidence to prove it... Jetstar runs its own P + L and yes, initially would have been provided with some working capital to start-up and all returns go back to Qantas, so I am not sure how Qantas subsidises it. All Qantas Group companies operate as independent business and are responsible for their own P + L...

Qantas is audited and has rigid corporate governence. I am not sure how they'd get away with "creative accounting" by the auditors which I think are PWC.


I'm afraid T Vasis is being "economical with the truth" here...

Yes, I'm sure Jetstar runs its own P & L as do other parts of the Qantas operation.

However that is irrelevant because each individual P & L can be made to show anything you like via cross subsidies.

It has been credibly reported in multiple threads on Pprune that such cross subsidies in favour of Jetstar are massive and ongoing.

Therefore the "independent businesses" line is highly misleading.

As for corporate governance standards at Qantas, one would hope they have improved since the APA debacle, although there does not appear to be any evidence that this is the case, for example another thread regarding Jetstar reports that Alan Joyce allegedly reneged on a promise made in 2008 regarding piloting of B787 aircraft by the then Jetstar pilot workforce.


I do like T Vasis appeal to authority - "the mighty Price Waterhouse Coopers have audited the QF accounts and pronounced them true and correct."

...However the auditors, by definition, are looking at the statutory accounts, not the management accounts. The statutory accounts are not required to provide any detail on cost allocation practices, nor are the auditors required to examine the Qantas internal pricing (cross subsidy) structures., they are merely required to ensure that all expenses and revenues are included somewhere.

..And I speak as someone who has not only worked for a major accounting firm, dealt with Ansett's accountants, who while hard working an intelligent had not the slightest hope of understanding the complexity of operations, and myself been subjected to the attentions of auditors as CEO of a business.

[QAN_Shareholder]

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.

[Ushuaia]

Sunfish is 100% correct. I'm a pilot who has done a foolish thing and studied accounting at uni 20 years ago. So I have enough knowledge on that subject to be dangerous.....

In lay terms, all a listed company has to do is report its OVERALL financial position to the world. There is no requirement to report accurately on individual subsidiaries' performance. Just as long as the overall GROUP performance is accurately reported.

Crux is: a parent company can attribute internal costs to its child as it sees fit. So you can have a situation where excessive costs are attributed to, say, Australian Airlines in Cairns, to make them look unprofitable. Eg. charge them a lot for simulator training. Charge them 100% for maintenance. And so on and so on. "They are unprofitable, so we will shut them down, replace them with.... tadah.... Jetstar!"

Then, of course, parent now absorbs the cost of the child. Parent wears the cost of maintenance for Jetstar. Parent discounts the cost of training. Etc etc. So even if your revenue is low, by artificially lowering your costs you can retain the illusion of being profitable.

We all know Jetstar on its own could not be profitable. But from a group accounting/reporting point of view that doesnt matter because it is only the Group's performance as a whole that is reportable to the ASX

[C207]

Enough return on capital may require loss of life.

Return on capital = less buffer in your safety margin

Less buffer in your safety margin = Lower standards

Lower standards = Airline accidents more frequently

More Airline accidents = more death

What does life = ?????

Airlines have worked out its cheaper to have an accident every now and then, instead of attempting to have none.

About time the government got in there to bring the low cost model up to scratch. Even if it results in the airline industry being less competitive. Maybe customers should be forced to pay a premium for there own safety.

[QAN_Shareholder]

"Enough return on capital may require loss of life."

Or perhaps less dramatically it means when aircraft reach the end of their useful lives you don't replace them.