Go Back  PPRuNe Forums > PPRuNe Worldwide > Australia, New Zealand & the Pacific
Reload this Page >

The Alleged $200m mainline loss

Australia, New Zealand & the Pacific Airline and RPT Rumours & News in Australia, enZed and the Pacific

The Alleged $200m mainline loss

Old 4th Jul 2011, 23:02
  #21 (permalink)  
Thread Starter
 
Join Date: Jan 2005
Location: Stralya
Posts: 577
Likes: 0
Received 0 Likes on 0 Posts
Here is a novel approach.

Let's say "freight" the stand out business that was fined $200m odd for price cartel behaviour actually paid the fine? Wonder what it's return would look like?
QFinsider is offline  
Old 4th Jul 2011, 23:37
  #22 (permalink)  
 
Join Date: Aug 2006
Location: Australia
Posts: 165
Likes: 0
Received 0 Likes on 0 Posts
Quite simply Qantas has mismanaged QF international with poor fleet choices, poor configuration decisions & poor route structure.
Qantas management has mismanaged their dedicated long term employees.
Qantas has mismanaged their long term loyal customers.

How do you sporn a company the size of Jetstar in such a short timeframe from a business that supposedly doesn't make any money? And still have $3 billion in the bank. I know there have been some capital raising events.

Some things you just shouldn't blame the employees for.
Will Qantas management ever shoulder any blame for their poor decisions?

High $AUD versus $US has both positive & negative effects on the business.
The high cost of fuel is the biggest factor in the current financial year performance. High fuel cost has a smaller impact on full service carriers than LCC's.
Can someone please explain again why Qantas doesn't have B777's. I understand they are about 16% more fuel efficient than B747 over a pacific sector per passenger on a full 3 class load.
-438 is offline  
Old 4th Jul 2011, 23:45
  #23 (permalink)  
 
Join Date: Mar 2006
Location: Australia
Posts: 159
Likes: 0
Received 0 Likes on 0 Posts
QAN,
I think the comment was that International had only made an adequate return on capital 3 times in 15 years, not profit. If International has $5bn of capital employed it needs to earn, conservatively, $500m to justify the investment.
Where did you get your figure of 10% ROC? From what I can gather, the cost of capital is closer to 7%. That would mean QF Int would need to make $350m.

So QF Int has lost $200m. But if you add FF ($326m), the A380 being grounded (at least $100m) and natural disasters (about $50m) you are getting close to making the required ROC. This doesn't include freight fines, deals with the Vietnamese government, adverse media reports on safety, aircraft writedowns etc etc. Without these QF Intl would be making its cost of capital.

Other things to consider :

1. Cross subsidising Jetstar / transfer of assets to Jetstar.

2. Commsec data shows that in the last 10 years, QF have made a ROC of 7% or greater in 5 years. These were generally years before Jetstar was profitable. I haven't checked every single Annual report but the ones I have show Intl as much more profitable than Dom. These were years that Qantas was acclaimed as the world's most profitable airline and a solid investment, returning a solid dividend. In 3 out of the last 10 years, QF achieved a ROC of 6%, just shy of 7%. I don't seem to remember any complaints from the board or investors during those years either. I'd like to know on what information AJ bases his assertion that Intl has met it's cost of capital on only 3 out of 15 years.

3. Of course, the Annual Reports I've looked at from that era don't separate QF Frequent Flyer from Intl. In fact, I remember it as being a liability back then. Now, in a short few years it's the complete opposite - Intl is the liability, FF is the cash cow asset. More accountants' magic tricks to justify their actions.

4. Check out the BITRE Intl load factors. As far as I can see QF Intl has the highest load factors compared with all our major competitors.

QF 82.8%
CX 82.2% - They made over $1B profit
SQ 79.4%
EK 66.2% - No problems getting on staff travel with EK

JQI 76.8%
JQ Asia 61.5% - yet these are both "amazing businesses"

5. Managements' propensity to lie and spin to the media, government, courts, employees, public etc. It doesn't take a giant leap of faith to believe that they might do the same with the financial reports.
'holic is offline  
Old 4th Jul 2011, 23:59
  #24 (permalink)  
Thread Starter
 
Join Date: Jan 2005
Location: Stralya
Posts: 577
Likes: 0
Received 0 Likes on 0 Posts
'holic,

Excellent summation.
My point revolves around the apportionment of cost in the group. If something as simple as a fine for "freight" finds its way to mainline, that implies that none of the segment earnings are representative of the business performance. Naturally mainline would struggle with issues of cross subidisation, cost and who knows what else duck shoved to mainline...
QFinsider is offline  
Old 5th Jul 2011, 00:11
  #25 (permalink)  
 
Join Date: Aug 2004
Location: utopia
Posts: 108
Likes: 0
Received 0 Likes on 0 Posts
Maybe we need figures from other airlines on their long haul division.Maybe Qantas isnt doing it as tough as we think.
Pappa Smurf is offline  
Old 5th Jul 2011, 00:43
  #26 (permalink)  
 
Join Date: Apr 2002
Location: Accruing MilliSiverts
Posts: 561
Received 14 Likes on 7 Posts
What is 'mainline'?

Anyhow here's an idea.

Sell off the unprofitable international operations, perhaps to British Airways who are in expansion mode and long been coveting Qantas' routes etc. Perhaps call it British, Orient Australian Airlines Corporation - BOAC.

Nationalise the profitable domestic operations and change the name to say The Australian Airline - TAA...

Then we might sit back, look at the Wallys we've got involved with airline management over the years and ask ourselves why the hell did we let politicians muck around with something that wasn't broken in the first place?
Al E. Vator is offline  
Old 5th Jul 2011, 02:02
  #27 (permalink)  
 
Join Date: Feb 2011
Location: Australia
Posts: 71
Likes: 0
Received 0 Likes on 0 Posts
holic,

Where did you get your figure of 10% ROC? From what I can gather, the cost of capital is closer to 7%. That would mean QF Int would need to make $350m.
7% is a cost of debt, not a cost of capital. The textbook calculation of cost of capital includes a number of variables including cost of debt, risk free rate, equity risk premium and beta. It is not difficult to find an explanation via Google. To simplify though, cost of capital is the weighted average of cost of equity and cost of debt. Given how volatile airlines are their cost of equity is high, I'll say 14% but plenty would argue it should be higher. Qantas is financed roughly 50% debt / 50% equity so average for cost of debt at 7% and cost of equity at 14% is 10.5%.

So QF Int has lost $200m. But if you add FF ($326m), the A380 being grounded (at least $100m) and natural disasters (about $50m) you are getting close to making the required ROC. This doesn't include freight fines, deals with the Vietnamese government, adverse media reports on safety, aircraft writedowns etc etc. Without these QF Intl would be making its cost of capital.
Neither of us know what is in the $200m figure and not much point in speculating but regarding FF, Borghetti seems to think he can create a successful FF program without having any significant international network which suggests they should be considered independent. The figure for FF that you quote also includes a one off benefit from change in accounting policy.
QAN_Shareholder is offline  
Old 5th Jul 2011, 02:29
  #28 (permalink)  
 
Join Date: Sep 2010
Location: Castle NastySwine
Posts: 157
Likes: 0
Received 0 Likes on 0 Posts
The truth will out

Just spoke to a flight attendant who'd been chatting with a passenger. The passenger was a forensic accountant for ASX/ACCC/ASIC (she couldn't remember which). He happily volunteered that he was investigating QF Group accounts to get to the bottom of QF international's loss.

Should it ever see the light of day, it'll make for interesting reading.

"Four walls, wash basin, prison bed"
Nassensteins Monster is offline  
Old 5th Jul 2011, 02:34
  #29 (permalink)  
 
Join Date: Aug 1999
Posts: 142
Likes: 0
Received 0 Likes on 0 Posts
but plenty would argue it should be higher
Who?

LH 2010 (Page 49 of financial report)
Cost of Equity = 10.5%
Cost of Debt = 5.4%
Group WACC = 7.9%

Doganis also suggests most airlines average 7.5% WACC

EK still has an overall load factor of 80% which is why they are making millions

Last edited by SkyScanner; 5th Jul 2011 at 03:19.
SkyScanner is offline  
Old 5th Jul 2011, 03:21
  #30 (permalink)  
 
Join Date: Mar 2006
Location: Australia
Posts: 159
Likes: 0
Received 0 Likes on 0 Posts
QAN,
Re Cost of Capital, a study of the period 1992-1996 (when the Cost of Debt was much higher) found the cost of capital to be 8-9%. Also, this recent study from 2008 calculated Continental's cost of capital to be 6.82%.

But let's suppose you are right and it is 10.5%. That means that the Qantas Group hasn't returned its cost of capital once in the last 10 years. Why are we only hearing about it now?

Also, none of our competitors seem to be returning cost of capital either.
CX : have exceeded 10.5% in 3 out the last 10 years
SQ : couldn't find historical figures, but last year - 5.4%
Those LCC geniuses at Air Asia X : 7.2%

Maybe we just shouldn't have airlines?

Neither of us know what is in the $200m figure and not much point in speculating
As a shareholder I would have expected you to be demanding a clear and transparent breakdown of this loss, particularly when it is being used to justify significant and radical changes to the company.

Borghetti seems to think he can create a successful FF program without having any significant international network which suggests they should be considered independent
Ok, how profitable do you think FF would have been if there was no QF Intl?

Apart from this, the other points I raised don't concern you?

Anyway, off to work for a few days, happy to continue when I get back.

PS. Skyscanner, Emirates loads - 66% was from the DOIT International Airline Activity 2010 report, pg 24. Were you looking at one of the monthly reports?
'holic is offline  
Old 5th Jul 2011, 03:23
  #31 (permalink)  
 
Join Date: Apr 2008
Location: On a long enough timeline the survival rate for everyone is zero
Posts: 731
Likes: 0
Received 0 Likes on 0 Posts
Originally Posted by Nassensteins Monster
Just spoke to a flight attendant who'd been chatting with a passenger. The passenger was a forensic accountant for ASX/ACCC/ASIC (she couldn't remember which). He happily volunteered that he was investigating QF Group accounts to get to the bottom of QF international's loss.
The ghosts of Centro stalk the board...
breakfastburrito is offline  
Old 5th Jul 2011, 03:44
  #32 (permalink)  
 
Join Date: Aug 1999
Posts: 142
Likes: 0
Received 0 Likes on 0 Posts
'holic, I got it from the EK annual report, it is the overall LF for the year.
SkyScanner is offline  
Old 5th Jul 2011, 03:45
  #33 (permalink)  
 
Join Date: Jul 2008
Location: Skating away on the thin ice of a new day.
Posts: 1,116
Received 13 Likes on 8 Posts
Yes BB the Centro judgement will have directors wringing their hands all over Australia. The buggers should be accountable for cock ups. They take the damn credit when things are sweet.
ampclamp is offline  
Old 5th Jul 2011, 03:51
  #34 (permalink)  
 
Join Date: Jul 2010
Location: sydney
Posts: 1,469
Likes: 0
Received 0 Likes on 0 Posts
does this describe Qantas Management guys

Never seen a Flow Chart described so clearly.


When top level guys look down, they see only ****;
When bottom level guys look up, they see only assholes...
thorn bird is offline  
Old 5th Jul 2011, 03:51
  #35 (permalink)  
 
Join Date: Feb 2011
Location: Australia
Posts: 71
Likes: 0
Received 0 Likes on 0 Posts
Skyscanner,

LH 2010 (Page 49 of financial report)
Cost of Equity = 10.5%
Cost of Debt = 5.4%
Group WACC = 7.9%
A good spot but a few flaws with this. Firstly it is based off European debt rates which are structurally lower than Australia. The Lufthansa annual report claims a risk free rate of 4.2%, you can probably add 1-1.5% to this for Australian mid cycle risk free rates. Secondly, debt spreads at 1.2% look too low. Thirdly, it isn't independent, it has been calculated by Lufthansa to compare with their rate of return in order to cast this in a more flattering light (it is very easy to estimate beta to be anything you want it to). By contrast Goldman Sachs, (sorry no link) have a WACC for Qantas of 10.4%.

Also all of the above uses the CAPM which academics love since is theoretically pure but investors don't much use since the assumptions don't fit with reality and calculated betas aren't stable. In practice investors know how risky airlines are and most investors will demand a significant premium hence my comment that many would argue Qantas cost of capital should be significantly higher than 10%.
QAN_Shareholder is offline  
Old 5th Jul 2011, 04:06
  #36 (permalink)  
 
Join Date: Aug 1999
Posts: 142
Likes: 0
Received 0 Likes on 0 Posts
Last time I checked Qantas didn't have to borrow everything in the Australian money market and still has a decent credit rating. FWIW Deutche Bank has QF WACC at 8%.
SkyScanner is offline  
Old 5th Jul 2011, 09:27
  #37 (permalink)  
Thread Starter
 
Join Date: Jan 2005
Location: Stralya
Posts: 577
Likes: 0
Received 0 Likes on 0 Posts
If cost were correctly allocated within the group, the operating segments would make more sense.

There are many areas where any budding analyst could drive a container ship through the structure of the Qantas accounts and it sounds like ASIC are a little interested. Heard something similar last week.
QFinsider is offline  
Old 5th Jul 2011, 09:37
  #38 (permalink)  
 
Join Date: Aug 2006
Location: Australia
Posts: 165
Likes: 0
Received 0 Likes on 0 Posts
So QAN shareholder, are you happy with the performance of your QAN shares?
How have the dividends been for the last couple of years?
How has the share price performed for you?
Maybe you have been shorting QAN?
If not I would be starting to ask some questions.
Maybe all these idiots on pprune may have been around airlines long enough to smell something fishy.
Maybe your interest in Qantas is more than just as a shareholder.
-438 is offline  
Old 7th Jul 2011, 10:11
  #39 (permalink)  
 
Join Date: Jan 2008
Location: sydney
Posts: 114
Likes: 0
Received 0 Likes on 0 Posts
Just wondering AJ said QF International lost $200 million. I wonder which department copped the Cargo cartel fines, the Vietnam payoffs & also the travel agent compensation fines. Would be interesting to know!!!!!!!
bandit2 is offline  
Old 7th Jul 2011, 11:06
  #40 (permalink)  
Thread Starter
 
Join Date: Jan 2005
Location: Stralya
Posts: 577
Likes: 0
Received 0 Likes on 0 Posts
Bandit,

The whole point of this thread is the correct apportionment of cost to the operating segment. As allude dto, "mainline/group" carry all the costs. This includes the borrowings the fine and anything else they want to throw at it...
QFinsider is offline  

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Thread Tools
Search this Thread

Contact Us - Archive - Advertising - Cookie Policy - Privacy Statement - Terms of Service

Copyright © 2024 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.