The analysis of the Financial

performance drivers of the Qantas

group 2014 – 2017

Assignment: Assignment 1 – Individual Application Paper

Student: Shashen Evantha Fernando
Student Number: s3655990
Teacher: Dr David Lyon
Course code: AERO 2410
Abstract:
The financial performance of Qantas in the years 2014 -2017 was mainly based on the revenue they
generated and the cost they faced for their operations. There were various factors which impacted
both these determinants. The main sources of revenue for Qantas International and Domestic faced
many issues, this was due to the lower spending from the slowing down of the mining boom and
foreign competition. This was improved over the years due to a restructure within Qantas airways. In
addition to changing their flight revenue they also gradually began increasing their operations in
ancillary revenue streams seen with the upgrading of their loyalty program. Qantas also faced many
issues with the rising cost of fuel in the year 2014, this was mitigated through a variety of methods
such as hedging. This cost did eventually reduce due to the changes in the market and the
restructure within Qantas. Qantas also faced high operating cost in 2014 this was however reduced
by a slight amount through transformation program in 2015 but continued to rise in 2016 – 2017
simply due to the fact of increased operations.

Introduction:
To become a profitable airline, an airline must simply have a larger revenue than their cost (Baldanza
1999). This report is going to address the financial performance of the operations of the Qantas
Airlines group from the years 2014 – 2017. The key factors which impact airlines profitability over
the years will be analysed. This includes the analysis of the growth and reduction in the, two largest
revenue streams (Qantas Domestic and International) across the years and the trends of growth for
Qantas new ancillary revenue stream. In addition, the various components which influence the
airline’s cost such as fuel and operating cost will be studied alongside the mitigating actions Qantas
took to reduce the impact of the increasing and volatile expenses over the years. This report will also
address the Qantas Transformation program and its impact on the financial performance in the
airline.

Revenue and profit

Domestic and international flight revenue:
In the end of the financial year 30th of June 2014 the Qantas group faced a loss of $614 Million. This
was caused by increasing cost and loss in revenue. The loss in revenue in 2014 was caused by
changes in both the Qantas passenger revenue streams and ancillary revenue streams (QANTAS
2014). Qantas faced a loss in passenger number in both domestic and international routes. The
domestic market saw a reduction in demand with a revenue loss of 92% compared to the previous
year. This was due to businesses and consumers being more cautious with their spending, due to
slowing down of economic growth in Australia. This reduction in spending reduced Qantas profits in
the business and leisure markets. In addition, this was made worse as Qantas faced increased
competition in the international routes with the increase in foreign airlines entering the Australian
market, some of which had government backing allowing them to offer more competitive prices
reducing Qantas’ market share. This caused the Qantas group to lose $497 Million in revenue in
international flights. With the cautious spending Qantas ancillary revenue stream also reduced (11%
reduction compared to 2013) (QANTAS 2014).

By the year 2015 Qantas experienced a profit of $975 Million which was a large improvement from
the year 2014. This was mainly due to the large reduction in cost of $1.2 Billion and the increase in
revenue of $464 Million. This was said to be due to the Qantas “Transformation Program (QANTAS
2015).” This program focused on restructuring various components of Qantas operations which
include both aeronautical and non-aeronautical services. This program focused on improving the
Qantas service and operations with a goal of gaining $2 Billion dollars in benefits through cost
reduction and revenue increasing strategies (QANTAS 2014). This transformation program greatly
improved the revenue earned by the Qantas Domestic routes this was done through changes in
domestic network with reallocation of flights from weaker performing routes such as intra western
Australia to less served markets such as Hobart to Canberra, increased services to east coast leisure
markets and reduction in turnover times for aircraft. This lead to an increase in profit of $450 Million
compared to the previous year (QANTAS 2015). The transformation program also impacted the
operations of the Qantas international flights. Various changes were done such as retiming of certain
A380 routes to, reduce turnaround times and increase aircraft utilisation (QANTAS 2017).
Furthermore, Qantas also increased partnerships with other airlines to increase the network. These
changes allowed Qantas international flights to increase its revenue. In addition, with the reduction
in international competition due to the weaker Australian dollar Qantas was able to further increase
its market share improving revenue.

In the year 2016 the Qantas group continued to have profits with an increase of $375 Million in
revenue from the previous year. This is said to be mainly due to the continued benefits of the
transformation program. The domestic market did see a reduction in revenue due to reduction in
spending due to the slowing down of the Australian mining sector and general low demand. This
sector however remained profitable with a profit of $5,710. The international market saw larger
growth with the restructuring program and was further enhanced from reallocation of aircraft from
the lower demand domestic routes to facilitate the higher growth of the Qantas new Asian routes
(QANTAS 2016).

Finally, in the year 2017 Qantas Domestic and international operations continued to be profitable
however had a decrease of $115 Million in revenue compared to the previous year. This was mainly
due to reductions in performance in the Qantas international market with a reduction of $185
Million in profit. This was due to the influx of more competitor airlines in to the Australian market.
Qantas international did however manage to remain profitable. Qantas Domestic increased its
profitability by $67 Million. This increase in profit was said to be due to the benefits from the Qantas
transformation program especially with the growth of the new East coast sectors (QANTAS 2017).

Ancillary Revenue:
In addition to the Aeronautical services provided by the Qantas group there has been a growing
trend with placing more importance in to Ancillary services. This is directly seen in The Qantas
transformation program with the emphasis placed on improving lounges internationally and
domestically (QANTAS 2014). This directly ties in to the Qantas group main form of ancillary revenue
which is their loyalty programs (Anonymous 2016). Qantas has been developing their loyalty
programs and has diversified to serve numerous markets this can be seen with the epiQure program
for flyers with specific interest and with the introduction of a loyalty program for small and medium
enterprises called “acquire” (QANTAS 2014). In 2016 Qantas also announced a partnership with the
Australian supermarket chain Woolworths which allowed members to earn points when they shop
there (QANTAS 2018). This development in the loyalty programs has allowed Qantas to produce a
profit of $286 Million in 2014 which increased to $369 Million in 2017 (QANTAS 2017). This shows an
increasing trend in Qantas focusing on the growth of their ancillary revenues.

Cost
The two major components which contribute to the cost in the operation of an airline are divided in
to Operating cost (Excluding fuel) and the cost of Fuel itself. This was seen with the loss of $614
Million by Qantas in the year 2014 (QANTAS 2014). This loss was due to lack of revenue but also
large operating cost (excluding fuel) of the Qantas group and the large increase in fuel prices as seen
below alongside the weakening of the Australian dollar. Qantas uses a variety of methods to manage
these two cost.

Fuel
As fuel is necessary of the operation of Qantas Airlines it is a major component of their cost. The
fluctuating nature of the price of fuel can pose a risk to airline operations. Due to the high
competition in the airline market it is difficult for airlines to transfer the high cost of fuel on to their
passengers. This makes it essential Airline groups like Qantas have a method of mitigating this cost
(Lim & Hong 2014). The Qantas group uses a variety of methods to achieve this the most prominent
being fuel hedging (QANTAS 2014). Fuel hedging is a contract between an airline and their fuel
provider which allows to airline to pre purchase and reserve a certain amount of jet fuel over a set
period of time (Lim & Hong 2014). This allows the Qantas group to fix a price on this commodity
reducing any unexpected cost during the course of their operations over a set period of time. This
method was used during the 2013/14 financial year in order to mitigate the cost and impact of the
fuel prices. In addition to hedging the Qantas group has also used a variety of other methods in
order to mitigate this cost through the “Qantas Transformation program.” The program consisted of
various cost cutting measures such as the upgrading of the Qantas fleet. This was done through the
retirement of older Qantas aircraft such as the Boeing 767, Boeing 737-400 and Boeing 747. Qantas
also purchased more fuel efficient aircraft in order to replace this fleet such as the Boeing 787
(QANTAS 2014). Alongside the reducing fuel cost as seen below (Fig.1) this had a positive impact to
Qantas operations this was seen as the cost of fuel for Qantas was lower in 2017 $3039 Million in
comparison with 2015 $3899 even with the higher fuel prices seen below (Fig.1).

(Fig.1) Fluctuation of the Price of Jet Fuel from 2011-2018 (Platts 2018)

Operating expenses (Excluding fuel)

The operating expense is a fixed cost to Qantas operations and is largely based on the amount of
flights Qantas operates each year (QANTAS 2017). Qantas has managed to reduce its cost slightly
seen in the decrease in cost of $224 Million from the year 2014 to 2015, even though there were
more operations in 2015 seen through the higher Net passenger revenue (QANTAS 2015). This may
be due to the renewing of the fleet alongside various other factors. In the years 2016 and 2017 the
cost continued to rise from 2014 $9228 Million to $9683 Million in 2017. This was mainly due to the
increased number of flights operated by the Qantas group (QANTAS 2017).
Conclusion
As seen in this report there are a variety of factors which influence the two main figures that
determine the profitability of the Qantas Airline. This can be seen with the economic situation and
foreign competition impacting Qantas’ domestic and international revenue and the growth of a new
source of revenue through ancillary products. Furthermore this is reflected through the use and
need for Qantas mitigation programs to handle rising cost such as the volatile price of Aviation fuel
and the reduction of Qantas operating cost.

Reference:
Anonymous 2016, 'Among the World's Air Carriers, U.S.'s Big Three Earn the Most from Ancillary
Revenue', Business Travel News, vol. 33, no. 15, p. 33.

Baldanza, B 1999, 'Measuring airline profitability', Handbook of Airline Operations, vol., pp. 147-159.

Lim, SH & Hong, Y 2014, 'Fuel hedging and airline operating costs', Journal of Air Transport
Management, vol. 36, pp. 33-40.

Platts 2018, Jet Fuel price Currency Comaprision IATA, viewed,

<https://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx>.

QANTAS 2014, Shaping our Future Qantas Annual Report 2014, viewed 12/8/18.

QANTAS 2015, A STRONG, SUSTAINABLE FUTURE Qantas Annual Report 2015, viewed 12/8/18.

QANTAS 2016, 'New Horizons Qantas Annual Report 2016', vol.

QANTAS 2017, Positioning For Sustainablity and Growth Qantas Annual Report 2017, viewed
12/8/18.

QANTAS 2018, Woolworths FAQs, viewed 12/8/18, <https://www.qantaspoints.com/earn-

points/shopping/woolworths-faqs>.