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-   -   The Alleged $200m mainline loss (https://www.pprune.org/australia-new-zealand-pacific/456396-alleged-200m-mainline-loss.html)

QFinsider 4th Jul 2011 06:39

The Alleged $200m mainline loss
 
Just what detail did the little fella give. I find details very scant, why didn't he make it a gazillion?

When you duck shove all sorts of costs through your consolidated accounts you can sort of make it say what you like, but there appears very little scrutiny in the financial industry and the media. Surely they all can't be Chairman's lounge members? :E

TIMA9X 4th Jul 2011 07:16


When you duck shove all sorts of costs through your consolidated accounts you can sort of make it say what you like
Yes my view as well. Q mainline has a 4,7% higher load factor than Jetstar till march this year, just doesn't make sense. Someone is creative with the figures.:=

Artificial Horizon 4th Jul 2011 07:44

Yes, but load factors are only one piece of the puzzle. What are the costs of Qantas compared to Jetstar. Qantas aircraft could be full and not making a profit if the costs are high enough.

Shark Patrol 4th Jul 2011 07:53

Hmmm. Let's see.

Freight cartel charges ($200 mill)? "Commercial arrangement" to get Jetstar Pacific QF executives out of Vietnam (don't know how much that would have cost)? Wonder how Jitconnict are doing after all the cancelled Tasman flying? Wonder if they ever make a profit at all (their CEO doesn't even know if they have a bank acocunt)! Hmmm. Wonder how J* have been going with Japan post-Tsunami/earthquakes?

Aaaaaahhhh doesn't matter anyway cause it can all be billed to that terrible entity - Qantas mainline. After all, Muffins and Coffee Airlines (sorry .... J*) is such an AMAAAAZZZZING business!

newsensation 4th Jul 2011 07:53

If the Qantas flights are full and not making money then i dont think you should blame the pilots, maybe the man at the top has some explaining to do..
check out the loads to Frankfurt or Bangkok, and only one flight a day???

UnderneathTheRadar 4th Jul 2011 08:03

Worth keeping a tab
 
Someone with more intelligence than me should keep a running tab of the 'cross-subsidies' that exist ready for August 24th.

My one:
- I use FF points to (unfortunately) fly J* to holiday destination. What's the bet QF reimburses J* the full cost of a full fare seat for my ticket?
- What's the bet J* don't pay QF anything for FF points earned on J* flights

UTR

Artificial Horizon 4th Jul 2011 08:04

I totally agree, Qantas has a business that should almost be capable of printing money. Some would say though that AJ has started to try and streamline the operation starting with staff costs. I am just fed up with people saying that it is 'impossible' for Jetstar to actually be making a profit when all the evidence from around the world shows that LCC's can be highly profitable without the support of a big brother carrier e.g. Southwest, EasyJet, FlyBe, Ryanair etc. Not to mention they have been one of the only highly profitable areas of the airline industry through the recession out performing most legacy carriers..... except for maybe Qantas who have also sustained a profitable business in bad times...... maybe it hasn't been so badly managed afterall.

ampclamp 4th Jul 2011 08:25

Qantas are known for not issuing separate accounts for the parts of the business. The ONLY reason it has been issued this time is FOR EFFECT and softening up the market for what is coming.
I do not believe it for a nano second. If indeed international has failed to turn a profit for most of the last 15 years it speaks volumes for their management ability.

TIMA9X 4th Jul 2011 08:32


except for maybe Qantas who have also sustained a profitable business in bad times...... maybe it hasn't been so badly managed afterall.
AH
Although you make a good point, Qantas did have a free kick since the demise of Ansett. I thought J* was a good move domestically but strongly believe the J* model long haul does not suit all the traditional Q punters hence the slow decline in mainline market share internationally, accelerating since the implication of J* international routes.

rodchucker 4th Jul 2011 08:56

So how did they justify all the capital investment with A380s?

They cannot have it both ways or suddenly say oops we got it wrong.

This is all a game of smoke and mirrors.

TIMA9X 4th Jul 2011 09:04



10 days or so since this went to air the more contrived the Q spin sounds. The storyline was fed convincingly to lateline by AJ in my view. Worth a listen again, something is not quite right. :suspect:

SOPS 4th Jul 2011 10:09

Something smells bad, it almost sounds like they are getting set to close international altogether:ugh:

Skystar320 4th Jul 2011 10:39

Who else is thinking that Qantas 'International' will become Jetstar?

QAN_Shareholder 4th Jul 2011 10:57

ampclamp,


If indeed international has failed to turn a profit for most of the last 15 years it speaks volumes for their management ability.
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.

rodchucker,


So how did they justify all the capital investment with A380s?
Maybe because the LAX and LHR routes have been fairly profitable over the long term but dragged down by numerous loss making routes.

ampclamp 4th Jul 2011 11:30

Yes you are correct on recent statements re return on invested capital qan holder but AJ's recent quote of losing 200 million I believe is a very selective piece of info released for effect and conditioning.

My point stands. If Int is so bad what the hell have they done about it? Nothing that has worked according to their numbers.
Why sink the 380 into it? The LAX and LHR routes are not businesses in isolation and dont require 20 or even 12 380s.
I trust them as far as I could drag a loaded 380 as evidenced by their statements regarding the ALAEA and pilot's claims.
If these people were straight with us just maybe they'd get somewhere in getting the changes they want. AJ had a perfect opportunity to capitalise on GDs sad record with staff relations but has been extremely disappointing. The unions exist and are stronger than ever because of them. They could make them irrelevant if they really wanted to try to take us with them.

Sonny Hammond 4th Jul 2011 11:41

The big problem for mainline is the strength of the $A. For years with a near monopoly on the pacific routes to the USA QF basically printed $A from revenue from a very strong $USD and single handedly propped up the business.

Unfortunately the monopoly is over as is the weak $A, add to that the new competition from EK et al and its not hard to see that currently QF mainline is probably losing money.

2 points on this, the $A won't be so strong forever and more importantly why wasn't mainline given the chance to be able to make $$ with a more efficient fleet.
After all, fuel costs are by far the biggest part of overall operating costs...

QAN_Shareholder 4th Jul 2011 11:44

Ampclamp,


AJ's recent quote of losing 200 million I believe is a very selective piece of info released for effect and conditioning.
You're probably right, however, International does seem to have been a dog for the last decade and doing something about it is long overdue. The fleet reconfiguration looks like a step in the right direction and on August 24th I guess we see whether Joyce has found the solution.

packrat 4th Jul 2011 11:49

Cash on Hand
 
Qantas has $3 Billion in cash.Invest that at 6.5% without flying any aircraft anywhere and you still get a tidy profit.Makes you wonder why they bother with aircraft at all

Xcel 4th Jul 2011 12:31

And how did they get that cash? Wasn't through 6.5%

(yes they floated but that money was spent on aircraft and regained)

Perhaps if they opened qantas bank they would do ok... Their greed and cost cutting turns billions in profits every year... Can't be shutdown by casa and outsource all you like... The economics of the world baffle me!!

qf 1 4th Jul 2011 19:02

i remember when i was there in 2001 that the low Australian dollar was

causing them a problem,now it's the high dollar,so which is it

QFinsider 4th Jul 2011 23:02

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?

-438 4th Jul 2011 23:37

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.

'holic 4th Jul 2011 23:45

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.

QFinsider 4th Jul 2011 23:59

'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...

Pappa Smurf 5th Jul 2011 00:11

Maybe we need figures from other airlines on their long haul division.Maybe Qantas isnt doing it as tough as we think.

Al E. Vator 5th Jul 2011 00:43

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?

QAN_Shareholder 5th Jul 2011 02:02

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.

Nassensteins Monster 5th Jul 2011 02:29

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"

SkyScanner 5th Jul 2011 02:34


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

'holic 5th Jul 2011 03:21

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?

breakfastburrito 5th Jul 2011 03:23


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...

SkyScanner 5th Jul 2011 03:44

'holic, I got it from the EK annual report, it is the overall LF for the year.

ampclamp 5th Jul 2011 03:45

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.

thorn bird 5th Jul 2011 03:51

does this describe Qantas Management guys
 
Never seen a Flow Chart described so clearly.

http://au.mg1.mail.yahoo.com/ya/down...Inbox&inline=1
When top level guys look down, they see only ****;
When bottom level guys look up, they see only assholes...

QAN_Shareholder 5th Jul 2011 03:51

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%.

SkyScanner 5th Jul 2011 04:06

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%.

QFinsider 5th Jul 2011 09:27

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.

-438 5th Jul 2011 09:37

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.

bandit2 7th Jul 2011 10:11

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!!!!!!!

QFinsider 7th Jul 2011 11:06

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...


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