Many Australians regard Qantas Airways Limited as a national icon and pride of Australia. Discuss and analyse whether the involvement of Australia's Qantas Airways in international operations has...

QUANTAS AIRWAYS ANALYSIS
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Part I
In Aug 11, Company launches a new budget airline called Jet star Japan in partnership
with Japan Airlines and Mitsubishi Corporation. If we will see the number of
destination increased to 201 in 2011 in comparison to 184 in 2010. At the same time
passenger revenue/RPK also increased to 11.3 from 10.9 which is a good indicator of
growth. Number of passenger got increase by 3 million. After coming in alliance with
international airlines, yield variance also goes up 13% positively.
Net passenger revenue increased to $12,042 million from $10,938 million and statutory
profit before taxes got up by 1.8 times almost. At the same time net freight revenue also
got increased by 2.8% in comparison to last year net freight revenue.
From shareholders point of view, EPS increased by 6.1 cents in a year. Drop down in
international market share was less in comparison to last year i.e. 1% in comparison to
3% last year.
Net cash flow from operating activities got increased by 32% in comparison to last year
net cash flow from operating activities which shows that company has sufficient
liquidity in hand. Return on equity got doubled in comparison to last year.
In my opinion, involvement of Qantas Airways in international operation has enhanced
the company performance.


Part II
Foreign exchange risk occurs when fair value of future cash flow of an instrument
financial in nature which will deviate or fluctuate because of deviation in currency rates
or foreign exchange rates. The three kinds of risks which generate source and also the
nature of this risk arise from operations, capital expenditure and transaction risk in
general. The Foreign exchange rates changes on a real time basis hence it is very
dynamic in nature also.
Hedge accounting impacts a vast cross section of industries including the airline
industry. In addition to foreign currency, interest rate and credit risk the airline
industry has to manage significant fuel exposure. Many airlines have risk management
policies which inclusively uses and implement derivative financial instruments to
hedge the risks. Changes in the time value of purchased options are recognized in
comprehensive income and bring brought to the income statement when the underlying
transaction occurs. The deviations or changes in fair value or the time value of a
purchased option hedging a transaction will be recognized as in comprehensive income
and bring brought to the income statement after undergoing transaction.
There is lack of liquidity in the market for jet fuel derivatives with a maturity greater
than six months and therefore airlines use crude derivatives with maturities up to 2-3
years to meet their risk management objectives. Airline can designate the component of
the jet fuel price that relates to the crude input as a separately identifiable risk and the
same should reduce income statement volatility. Airline will however need to carefully
consider the most appropriate crude oil derivative that best correlates to their inter

plane pricing benchmark to ensure that the detailed requirement of the proposed
standard re met as there still a risk of ineffectiveness if this is not undertaken.
Since retrospective effectiveness testing is no longer required to support existence of a
valid hedging relationship, for fuel hedging in particular this should derive efficiency in
back office function of airline treasuries.
FINANCIAL RISK MANAGEMENT
Financial Risk management is the practice of creating economic value in a firm by using
financial instrument to manage risk, particularly credit risk and market risk. Other
types include foreign exchange, Shape, Volatility Sector, liquidity inflation risk etc.
Financial risk management needs to identify its sources, measuring it,and plans to
mitigate the risk.
Financial risk management can be of two types. It can be qualitative as well as
quantitative both. Financial risk management mainly focuses on when and how to
hedge the financial instruments to manage heavy exposure to various types of risk.
Financial risk management focuses hedge the financial instruments in a planned way to
reduce the risk exposure.
Finance theory says that a firm should take on a project when it increases the
shareholder value. When same theory applied to financial risk management, it implies
that firm manager should not hedge risk that investors can hedge for themselves at the
same cost. In a perfect market, the firm cannot create value by hedging a risk when the
price of bearing that risk within the firm is same as the price of bearing it outside of the
firm in practice; financial risk markets are not likely to be perfect markets.

This suggests that firm financial risk manager likely have many opportunities to create
value for shareholders by using various techniques of financial risk management. The
financial risk manager has to determine which risk is cheaper for the firm to manage
than the shareholders. A thumb rule in financial risk management, is that market risk
that results in unique risk for the firm is the best candidate for financial risk
management
The Qantas group as a whole is subjected to several kinds of risks including interest rate
risk credit risk, foreign exchange risk and fuel price risk which are considered to be an
inherent body for any operations in an international airline carrier. The Qantas group
has a centralized treasury function that manages the financial risk in line with the board
approvals.
INTEREST RISK MANAGEMENT
Interest rate risk is that which exist in a interest bearing assets, such as a loan or bond,
due to possibility of a change in the asset value resulting from the variability of interest
rates. Interest rate risk management is very important and assorted instruments has
been developed over the time to deal with interest rate risk.
Interest ratio swaps allows borrowers or investors to...