A preliminary forensic financial examination of the Qantas group commissioned by the Qantas pilots union casts serious doubts on claims by the company’s CEO Alan Joyce that its international division is losing $200 million a year.
In fact the examination by PPB Advisory found that there is no defined international division for accounting purposes in the Qantas annual reports up to last year’s, although it notes that Qantas may properly define such a segment in the results for the year to June 30 which will be released tomorrow morning.
Among the key early problems PPB Advisory identifies is that although the Qantas frequent flyer program generated EBIT or earnings before interest of tax as a percentage of revenue of 30%, this measure of profitability for the combined international, domestic and regional operations under the full service brand produced only a 0.6% return and Jetstar’s operations produced a 6% return.
It says “the frequent flyer segment is clearly dependent on the Qantas segment for revenue (i.e. the Qantas network) yet profit is not allocated there.
“In fact, the Qantas segment wears the liability for the frequent flyer segment, but doesn’t reap any of the rewards. At least not so long as Frequent Flyer is expanding.”
The preliminary report also says there is a “huge question mark over the mysterious corporate/unallocated segment, which reported a loss of $123 million in the Qantas Group accounts to June 30 last year.” It doesn’t show how much, if any, of that loss was put down to the undefined ‘International Division’ to make up the $200 million loss figure frequently quoted by group CEO Alan Joyce.
PPB Advisory provides strategic advice and forensic accounting services to companies, government bodies, and investment institutions.
Although its examination of the Qantas financials, based on ASX filings and other publicly available information is incomplete, PPB Advisory draws attention to the 100% owned Jetconnect subsidiary based in Auckland, and says “Jetconnect is nothing but a labour hire company.”
Jetconnect is paid 12.5% extra for costs relating to the maintenance and operation of Qantas painted NZ registered 737s operating trans Tasman services as well as 10.4% extra for costs relating to personnel.
PPB Advisory says that if Jetconnect, which flies NZ registered jets identified misleadingly as Qantas ‘The Spirit of Australia’ incurs no other overheads these mark ups represent a profit before tax that is significantly higher than the 1.3% earnings of the Qantas group as a whole in the year to June 30, 2010.
It also held $NZ 140 million in cash, 3% of the groups total cash yet only 0.5% of its assets, on which it was earning only 3%, much less than was available to the group.
The preliminary report identifies a number of other factual issues which would support the conclusion that Qantas is misrepresenting the relative performances of Jetstar and the full service international brand to the detriment of the long haul carrier and the pilots and engineers who are in an industrial dispute with the company.
17 Comments
The first rock is overturned. Lets hope more of this makes the public domain before the AGM. Good work Ben. Hopefully some other journalists may pursue their role a bit more diligently and not just reword company press releases.
Basic Activity Based Accounting should be able to see and advise the Company Segments that are profitable moreover the routes and classes within. How is DFW-SYD doing?..bad because of aircraft type and max passengers allowed. How is SYD-LHR etc in PEco doing. Had 6 sectors on the route this year and they are chockers. Allocating the massive cost of Corporate should be done on a relevant cost driver.
Accountants can make the numbers look like anything.
As I have said price is one thing QF need to look at QF SYD-LHR $9K, CX (& a full QF partner same Status Credits although no Staus Extra FF Points) $7.3K
More and more ??s as the “reinvigorating” of QF unravel.
If the pilots’ union really wants to win this, there are two killer statements here already:
“commissioned by the Qantas pilots union”; and,
“Accountants can make the numbers look like anything.”
C’mon guys/girls/folks/peoples/whateverthepoliticallycorrecttitleforthisgroupis. You have to do better than this.
*I* – a mere passenger – could simply say that these accountants are finding what you want them to find, according to the guidelines you gave them. The Quantas[sic] board and its minions will tear you to pieces over this … if they ever bother to respond.
Another costing I think that should be looked at is Jetstar they advertise from am to pm all day, but you do not see 1 Qantas commercial only if master chef happens to be showing. This advertising budget must be massive, who is paying for it? Also if no international feeder was to occur how would this affect the domestic bottom line? I have voted with my shares NO CONFIDENCE with this board and AJ! Is it too late to get John Borgehetti back………Please!!
According to the QF website the following applies:
An overview of Qantas Group Business Practices
“Maintaining financial records
The Qantas Group is committed to preparing and
presenting true and fair financial information
which is:
– measured accurately and completely;
– disclosed appropriately in accordance with relevant
regulatory requirements, accounting standards
and the Group’s Finance and Accounting policies;
and
– prepared within an appropriately controlled
environment.
Financial records must be maintained to
accurately and completely record and explain the
Qantas Group’s transactions, financial position
and performance.
Employees must fully cooperate with the
internal or external auditors of the Qantas Group
and must not make a false or misleading
statement or conceal any relevant information
from these auditors”.
Given the premise of off-shoring the Spirit of Australia has been sold to shareholders, governments and staff-members due to losses of $200 million in International, then the floodgates should now be open.
Ben, at which point do ASIC swing by the office for tea and bickies?
http://www.abc.net.au/news/2011-08-23/jetstar-talked-up-by-qantas/2852550
Finally the ABC is looking deeper.
Well done Ben.
Having been an auditor for many years myself I suggest there would be a few nervous company accountants in the Qantas Group. If a detailed audit trail was undertaken from the recording of figures sampled from the last five years covering all parts of the group I think it could be for some interesting reading by the authority. ASIC must be starting to take an interest and alot will depend on the how Qantas discloses over the next few months. If the vote of no confidence gets up at the next shareholder it could force by investor and public interest ASIC to force open the books. KPMG could then have a great deal of explaining to do. White collar nor blue coller crime is not justified by any means. We wait now for the detail in the pudding due to be released tomorrow.
Well done Ben, AIPA and others involved behind the scenes – FINALLY the mainstream media (no offense intended, Ben) are reporting this ‘new’ news. I hope Alan Joye and the board are sleeping well tonight. I dearly hope that ASIC and others also become interested publicly. Interesting times ahead. Good luck to all of the loyal QF employees, from simple SLF, albeit with a few points under my belt sine 1997.
Ben,
The claim that Qantas Frequent Flyer makes a EBIT of 30% of revenue is misleading as it includes a gain made from a change accounting treatment. The correct figures to use are the normalised EBIT which is 17.5% of revenue.
Jetstar makes an EBIT of 6% of revenue.
Qantas makes an EBIT of 0.6% of revenue.
Qantas includes Qantas International, Qantas Domestic and Qantas Link. We know that Qantas Domestic is very profitable and Qantas Link is profitable.
If Jetstar makes an EBIT of 6% of revenue then the very profitable Qantas Domestic should be making at least that.
If I do a ballpark calculation based on data in their financial accounts I get annual revenue of approximately $3.3bn for Qantas Domestic and $404m for Qantas Link.
Assuming an EBIT of 6% of revenue I get an EBIT of $223m for Qantas Domestic and Qantas Link. That means Qantas International lost $156m in 2009/2010. If I assume a more probably EBIT of 8% of revenue for Qantas Domestic and 6% for Qantas Link then Qantas International lost $223m in 2009/2010.
As for the corporate/unallocated cost of $123m, there is a quote from the annual report:
“Costs associated with the centralised management and governance of the Qantas Group, together with certain items which are not allocated to business segments, are reported as Corporate/Unallocated”
It includes $20m of depreciation and $103m in head office costs.
It appears Alan Joyce is telling the truth and Qantas International is indeed losing money at the rate of approximately $200m per year.
Flying High,
The problem with this allocation of Frequent Flyer Program (FFP) profits is that it assumes that the network elements that generate the points also generate the profits. They don’t.
The vast bulk of profits from the FFP come from FF points being accumulated and not used. Points accumulated at one point in the network (say, a business rep travelling from Sydney to Tamworth for a meeting with a customer) can be used elsewhere on the network (that same rep taking a vacation somewere). Points accumulated on business trips (along with points attached to credit cards etc.) can be used for PERSONAL use, not just for the business that paid for the original business ticket. Accordingly, the number of RPKs generated is not proportional to the FFP profits generated.
Now, if Qantas International (QI) didn’t exist, there would be far fewer points accumulated but not used. A passenger who flies, say, Sydney-Tamworth every two weeks for personal travel will probably use the points from those trips. A person who flies irregularly or accumulates points on a credit card is more likely to seek to accumulate points hoping to use them for (say) a vacation at a later date. This passenger is the FFP’s source of profits, he/she is likely to allow the points to lapse because the overseas vacation he/she was planning to take on points can’t be taken for whatever reason.
In other words, the FFP needs QI. Without QI, the FFP and it’s profits would be much reduced. QI is necessary for the FFP and a larger share of its profits should be allocated to it. Reporting the FFP as a separate entity does NOTHING to justify reducing the wages & conditions of QI crews. without those crews the FFP would make far less profit, because (a) fewer people would want to accumulate points and (b) more of those who do accumulate them, would use them before they expire.
If you want a true picture of the profitability of QI you need to allocate a fair (ie. very generous) share of the FFP profits to QI. Otherwise QI is effectively subsidising the reported profits of other network segments. It is QI that generates the bulk of the points that are allowed to expire (and thus to profit the Qantas group).
Fueldrum there are merits in your point about the inter-relationship between FF and the underlying business of flying aircraft. However it does not really change the financial situation of Qantas International.
Lets quickly crunch the numbers.
In 2010/11 Qantas Domestic/Qantas Link had EBIT of $444m whilst Qantas International had EBIT of minus $216m.
FF made a normalised EBIT of $202m. So lets spread that over Qantas Domestic/Qantas Link and Qantas International based on RPK.
After spreading the FF EBIT between the entities you get:
Qantas Domestic/Qantas Link making EBIT of $515m
Qantas International making EBIT of minus $85m.
Qantas International is still losing money and it is making a completely unacceptable return given it is consuming 38% of the capital of Qantas.
Flying High,
You are spreading the FF EBIT based on RPK. That is not a fair reflection of the source of the FF’s profits. The only way to fairly allocate the FF EBIT would be to identify what portion of the points that are earned, but not redeemed, are earned by someone wanting to use them on QI, versus what portion are earned by someone wanting to use them elsewhere in the network. Anecdotally it seems clear that the vast bulk of the points which expire are earned by someone who was wanting to use them for international flight. I would welcome any contrary evidence that you can provide but I haven’t seen any at this time.
Of course there are other cross-subsidies. The ALAEA published a lengthy list which was posted by Mr. Sandilands here on Plane Talking. Jetstar doesn’t hesitate to write to Plane Talking when they think they can show that they are being reported unfairly. They haven’t (to my knowledge) responded specifically to the ALAEA document at this time.
A further cross-subsidy concerns pilots; most Jetstar pilots are working for markedly lower net salaries (compared to their colleagues at Virgin Blue) because they hope to be given a Qantas job in due course. If QI didn’t exist, would Jetstar still be able to get pilots at lower salaries than Virgin Blue? Of course not. This is a major competitive advantage for Jetstar and a primary reason for Jetstar’s high reported EBIT. This wouldn’t happen without QI.
You describe the QI return to the Qantas Group as ‘completely unacceptable.’ How have you accounted for these three very valuable returns to the Group?
1. The very existence of the profitable frequent flyer program?
2. The various small cross-subsidies detailed by the ALAEA?
3. The cost advantage enjoyed by Jetstar (compared to its main rival Virgin Blue) in hiring pilots?
An alternative argument is FF EBIT should be allocated on the basis of where an individual actually earns the points ie more akin to RPK. The alternative argument is you need the underlying airline business to generate the bulk of the FF points.
Continuing the alternative argument, in terms of redemption, you dont need to own an international airline to offer the ability to redeem points for international flights. There are many reward programs out there that allow for redemption of points on international flights without actually owning an international airline. It can be a fee for service arrangement done at arms length.
There is merit in both arguments and there are other arguments as well. Such as for some the main driver of the Qantas FF scheme is about free access to Qantas Club, getting seats up the front of the plane and other priority services that come with FF status.
But whichever way you allocate FF, it doesnt change the poor performance of Qantas International. Allocate all the EBIT from FF to Qantas International and it is still losing money!!! and is still get no return on the 38% of capital it is consuming!!!
The ALAEA is clutching at straws. They should get on with the job of negotiating an EB that trades productivity gains for wage increases because all they are doing at the moment is biting the hand that is feeding them and costing their members more jobs.
Either the ALAEA is not very good when it comes to numbers or they are intentionally seeking to mislead.
Flying High, I’ve been reading your comments & is it possible you are Alan Joyce ? Your vernacular is strikingly similar to his !