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.

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