1.
Executive summary
2. Qantas group
2.1. Company background
Founded in 1920, Qantas Group is the world’s second oldest airline and the proudly national
carrier of Australia. It is recognized as one of the world’s leading long distance carriers for
covering 173 destinations in 42 countries in Australia, Asia, the Pacific, the Americas, Europe
and Africa. The Qantas Group’s main business is transportation of passengers that stays
specifically within air travel industry and operates under two major brands – Qantas and Jetstar
(Qantas Fact File, 2010). The group holds a diversified portfolio of businesses including Qantas
Frequent Flyer, Qantas Freight Enterprises and Jetset Travelworld Limited (Qantas Data Book
2008/09, 2009). The Qantas Group long term vision is to operate the world’s best premium
airline, Qantas, and the world’s best low fares carrier, Jetstar (Qantas Fact File, 2010).
2.2. Major brands and business
Qantas Group’s business offers both premium and low fare airline by operating under two brands
– Qantas and Jetstar. Qantas is Australia’s largest premium and full service airline that offers
benefits as a global network through its two Qantas brands: Qantas and QantasLink. Qantas’
main markets are domestic and international markets. In 2008/09, it carried 27.7 million
passengers to 72 destinations around the world. Among its revenue of $11,710 million, Australia
domestic market contributes 45% to its revenue while international market takes 55% (Qantas
Data Book 2008/09, 2009).
Jetstar is Qantas Group’s low fare airlines which start operations in May 2004. It is also the
world’s largest low cost long haul carrier which comprises Jetstar Domestic and Jetstar
International. Jetstar’s main market is domestic Australia, but has significantly development in
international markets. In 2008/09, the new airline carried 10.7 million passengers to 50
destinations in Australia and Asia to reach the revenue of $1,851 million. It gets 57% of
passenger revenue from Australia domestic market and the rest 43% comes from international
market. (Qantas Data Book 2008/09, 2009).
3. Major risks that Qantas face
Qantas faces main risks accompanying with the industry. They are strategic, financial,
operational and hazard risks (Loudon, 2004). Financial risks generate uncertain future cash flows
due to changes in economic conditions as well as changes in revenues, operating expenditure and
financing costs (Loudon, 2004). Financial risks in airline industry comprises fuel prices change,
currency/foreign exchange fluctuations, interest rate fluctuations, credit rating, financial market
risks, asset valuation, credit default, accounting/tax law changes (Zea, 2010). Among all, interest
rate, currency and fuel price changes are recognized to be important risks affecting the airline
industry and are commonly hedged (Loudon, 2004). This paper will focus on those three
important risks that Qantas has to face.
3.1. Fuel price risk
The cost of fuel is one of the main costs occurred to an airline provider. It always takes a huge
proportion in total cost due to its essential role. Qantas income statement reveals that the cost for
fuel is the highest expenditure in 2008 ($3,701 million) and rank second in 2009 ($3,602
million). It account for about 25% of total expenditure (Qantas financial report, 2009). Changes
in fuel price will significantly influent the company performance and short term cash flow. The
risks going along with changes in fuel price is therefore one of the most significant risk that
Qantas has to face. However, fluctuations in fuel price are quite common and sometimes,
unstable economic conditions would cause massive jumps in fuel price. In 2008, the market
witnessed a massive jump of oil price due to the global financial crisis. Jet fuel price reached 400
cents per gallon in June 2008 while the price in Jan 2007 was only170 cents per gallon (US
Energy Information Administration, 2010). Such an increase would devastate the airline industry
if there is no measure to hedge fuel price risk.
3.2. Interest rate risk
Interest rate risk is very important to airlines due to the substantial use of debt finance in the
industry (Loudon, 2004). During 2008 – 2009, Qantas has a long term debt of $4,234 million.
The gearing ratio of 75% and the debt/asset ratio is 21% (Qantas financial report, 2009). As
borrowing cost is directly influenced by interest rate changes, the substantial use of debt finance
in Qantas make the company highly expose to interest rate risk.
3.3. Currency risk
Currency changes have extensive influence on Qantas as the company has to deal with different
currencies in many aspects. They obtain revenues in different currencies as they are operating in
both domestic and international market. Their payments such as expenses and debts are also
generated in several different currencies. Moreover, exchange rate has an important impact on
tourism demand and will then indirectly influence Qantas business. For all those reason,
managing exchange rate risk is very important to the company performance.
References
Loudon, G.F., 2004, Financial risk exposures in the airline industry: Evidence from Australia and
New Zealand, Australian Journal of Management, 29(2), p. 295-316.
Qantas financial report, 2009, [internet], available at
[Link] accessed 14
May 2010.
Qantas Fact File, 2010, [internet], available at
[Link] accessed 14 May 2010.
Qantas Data Book 2008/09, 2009, [internet], available at
[Link] accessed 14
May 2010.
Zea, M., 2003, Is airline industry risk unmanageable?, Mercer on Travel and Transport,
Fall2002/Winter 2003 Issue, p. 21-26, [internet], available at
[Link]
%[Link], accessed 14 May 2010.
US Energy Information Administration, 2010, Petroleum Navigator, [internet], available at
[Link] accessed
14 May 2010.
