Qantas/Jetstar Depreciation and Amortisation

[600ft-lb]

Presented without commentary
All figures are taken from the financial reports, the 'Jetstar' column started in FY 07/08.

Depreciation and Amortisation
Full Year Results 2004/2005 QF 1241million
Full Year Results 2005/2006 QF 1249million
Full Year Results 2007/2008 QF 1469 JQ 4.6million
Full Year Results 2008/2009 QF 1106million JQ 15million
**Half Year Results 2009/2010 QF 548million JQ 31million**

Qantas to buy up to 188 aircraft - Business - Business - smh.com.au

Qantas will acquire 68 A320/A321 aircraft and has 40 options and purchase rights.

A320

Number in Fleet
44 - Jetstar Airways (JQ)
10 - Jetstar Asia (3K)
2 - Valuair (VF)
2 - Jetstar Pacific (BL)

A321

Number in Fleet
6 - Jetstar Airways (JQ)

A330

Number in fleet
9 - Jetstar Airways (JQ)

Qantas flags $550 million profit despite $200 million hit | News.com.au

"Qantas international is the group's weakest business - it has achieved required returns only three times in the past 15 years," Mr Joyce said.

Jetstar half year results, 2010 versus 2009

2010 Underlying EBIT $143 million
2009 Underlying EBIT $121 million

Qantas's fleet of;
8 x A330-200s
10 x A330-300s
10x A380
44x 737-800s
6x 747-400ERs

25x 767-300s <-assumed owned 100% (no depreciation) most are 20 years old no residual value and extremely favorable lease terms for the ZX series
17x 737-400s <-assumed owned 100% (no depreciation) 20 years old no residual value
20x 747-400s <-assumed owned 100% (no depreciation) more are 20 years old no residual value

I ask the question to everyone else. Does something not add up ?

[What The]

It adds up perfectly. Depreciation is about reducing tax payable so it would make sense to keep the greatest depreciable assets in the entity that would be liable for the most tax.

[SIUYA]

Amortisation...

Amortization (or amortisation) is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill [Wikipedia]

Which (regretably) seems to be PRECISELY what the QF Board and Executive are trying to do to QF - i.e., KILL IT.

[600ft-lb]

Fair enough.

Why is Qantas being labelled the basket case able to return $165million EBIT, on revenues of $5706 million or 2%

Jetstar is being labelled a wildly profitable business segment able to return $143 million EBIT, on $1346 million or 10%

All things being equal, never mind that Qantas is liable for the groups taxes, Qantas's return on revenue would be 15%. Jetstars return on revenue would be 22%.

Remebering that lease costs attribute $131million for Jetstar's operating costs as well.

Total revenue between the two $7052 million of $308 million EBIT, or 4.3% return on revenue.

Oranges are being compared to Kangaroo's in this case.

My point is, if Jetstar were a separate entity out on its own, the depreciation and amortization that it would be liable for, if they were required to actually pay for their fleet of 59 (Australian) aircraft, would wipe out their profit.

[QAN_Shareholder]

600ft-lb,

Jetstar's fleet is almost entirely operating leased and so depreciation and capital charges are included within the operating lease charge. For an airline where aircraft are owned no capital charge is taken in the P&L hence the EBIT margin for an airline which owns their aircraft should be higher.

[ALAEA Fed Sec]

It adds up perfectly. Depreciation is about reducing tax payable so it would make sense to keep the greatest depreciable assets in the entity that would be liable for the most tax.

Company Tax rate is 30% no matter what part of the business it is reported in. It's not like personal income tax with increasing scales.

['holic]

QAN
Ok, so why don't JQ own their aircraft instead of leasing them, if they want to maximise their profits? And why does QF mainline own A320s (which they don't even operate) which they then lease to Jetstar? Considering they are both part of the same group, wouldn't it be more efficient for Jetstar to own the aircraft themselves, cut out the middle man and save on the extra costs associated with setting up the leasing arrangement?

[QAN_Shareholder]

'holic,

Ok, so why don't JQ own their aircraft instead of leasing them, if they want to maximise their profits? And why does QF mainline own A320s (which they don't even operate) which they then lease to Jetstar? Considering they are both part of the same group, wouldn't it be more efficient for Jetstar to own the aircraft themselves, cut out the middle man and save on the extra costs associated with setting up the leasing arrangement?

I think Virgin, Tiger, Easyjet, Ryanair all operating lease much of their fleet. Don't know why JQ lease some from QF, could be tax related or maybe they are intending to sell to an operating lease company at some point in future.

['holic]

QAN,
Fair enough. I think the question still stands though, as to why anyone would use an operating lease when ownership or even a finance lease would be better for the bottom line. Perhaps I can understand it with a startup LCC with little capital and which may have trouble getting finance at favourable rates, but JQ has the backing of QF and could take advantage of QF's credit rating if it chose to do so.

It's always baffled me that the aircraft leasing/ownership arrangements which are the best strategy for QF are apparently the wrong strategy for Jetstar

[What The]

True Fed Sec. However if your EBIT is not large enough to wear half a billion in depreciation then you wouldn't put it there regardless of the tax rate. Remember JQ must show a profit in order to be used as a vehicle against mainline employees. It is the Group that pays company tax and JQ is merely a subsidiary of THE GROUP (QF mainline).

[600ft-lb]

RegoSearch | Global Aircraft Registration Search

You can see Qantas's past and present policy regarding aircraft ownership there. The old aircraft are owned and registered by Qantas itself.

Aircraft residual price is based off a 20 year schedule, at 20 years of age they're regarded as being worth 0-10% of initial purchase price, ie it's hard to claim depreciation on any of the 767s or 734s or 744s as they would all be fully depreciated.

So now we have dozens of shelf companies owned by Qantas and a variety of outright aircraft leasing companies (like Allco) that each own an aircraft of 2 and lease it back to Qantas.

Why is Qantas mainline reporting in the Qantas specific column in the half/full year reports the aircraft depreciation and amortisation ? Jetset has its own column. Freight has its own column. Jetstar has its own column. Frequent Flyer has its own column.

Why isn't the cost being attributed to the individual leasing companies like;
738 Leasing Company - owner of VH-VXG
or
Sicily Leasing Company - owner of VH-VXH
or
QF ECA A380 2010 NO. 4 PTY LTD - owner of VH-OQH

Are they profitable ? Are they maintaining cost of capital ? Are they underperforming ? Shouldn't 738 Leasing Company be bearing the depreciation and amortisation costs ? After all Qantas, mainline, like Jetstar, is only leasing the aircraft off them, aren't they ?

edit: To qualify the changing of standards, the Frequent Flyer aspect was only realised as a 'money spinner' after the financial wiz kids of MacBank&co tried to take over Qantas. Previously it was incorporated into the Qantas profit. Today it's a separate entity. A separate entity that has s symbiotic relationship with the part of the company that's so unprofitable it needs to be taught a lessonthey don't exist without one another.

[Teal]

Jetstar's fleet is almost entirely operating leased and so depreciation and capital charges are included within the operating lease charge. For an airline where aircraft are owned no capital charge is taken in the P&L hence the EBIT margin for an airline which owns their aircraft should be higher.

If I read the Annual Reports correctly, the Qantas Group aircraft (and engines) are largely owned, with the balance under finance leases, not operating leases. Huge difference legally and in terms of what is shown in the Balance Sheet and P & L. Most of the operating leases at Qantas are associated with buildings, not aircraft.

Why isn't the cost being attributed to the individual leasing companies like;
738 Leasing Company - owner of VH-VXG
or
Sicily Leasing Company - owner of VH-VXH
or
QF ECA A380 2010 NO. 4 PTY LTD - owner of VH-OQH

Under a typical finance lease, the control, risks and rewards are taken by Qantas. International financial reporting standards require both the assets and liabilities to be reflected in the financial accounts, and the amortisation of the leases to be reported in the P & L. QF ECA A380 No. 4 Pty Ltd is 100% owned by Qantas - same as the 30+ other fully owned companies set up to lease aircraft.

[-438]

'holic says,
"It's always baffled me that the aircraft leasing/ownership arrangements which are the best strategy for QF are apparently the wrong strategy for Jetstar"

It's always baffled me why Jetstar require new, fuel efficient, low maintenance aircraft, whilst Qantas (the premium) airline are supposedly better off with old, inefficient, high maintenance aircraft.