REAL-WORLD CASE STUDY
The following extract from the Qantas
website provides a summary of how Qantas
describes itself:
Founded in the Queensland outback in
1920, Qantas has grown to be Australia’s
largest domestic and international airline.
Registered originally as the Queensland and
Northern Territory Aerial Services Limited
(QANTAS), Qantas is widely regarded as the
world’s leading long distance airline and one
of the strongest brands in Australia.
We have built a reputation for excellence
in safety, operational reliability, engineering
and maintenance, and customer service.
The Qantas Group’s main business is
the transportation of customers using two
complementary airline brands - Qantas and
Jetstar. We also operate subsidiary businesses
including other airlines, and businesses in
specialist markets such as Q Catering.
Our airline brands operate regional,
domestic and international services. The
Group’s broad portfolio of subsidiary
businesses ranges from Qantas Freight
Enterprises to Qantas Frequent Flyer.
We employ over 30,000 people with
approximately 93 per cent of them based
within Australia.^5As a global business, Qantas is
significantly exposed to currency risk.
However, there is debate about the
impact of exchange rates on the business.
For example, as the following article
demonstrates, the CEO and a former chief
economist of the business did not agree
about whether or not a strong Australian
dollar was good for the business.High dollar good for Qantas
On Wednesday I attended a speech in which
Qantas chief Alan Joyce presented a view that
a high Australian dollar was bad for the airline.5 Qantas. Used with permission. Sourced from http://www.
qantas.com.au/travel/airlines/company/global/en.There were two main takeaways from the
speech, and the question and answer session
that followed. The first is that Joyce is better
at speaking off the cuff. This is not to say the
speechwriters at Qantas are bad – I know them
well and they are very good at what they do.
The second is that he appears to be
receiving the wrong advice about the impact
of the Australian dollar on the airline’s
business. A strong Australian dollar is
unambiguously good for Qantas.
Exchange complexities
The wrong advice Joyce has received, I
suspect, is a function of the very complex
impact that the exchange rate has on the
airline’s business. And I suspect he is not the
only CEO who has received wrong advice on
the impact of exchange rates.
To unravel this exchange rate complexity,
one must not only know and understand
the revenue and cost streams that are
denominated, directly or indirectly, in foreign
currency, but also the extent to which the
exchange rate exposure is interconnected
with other exposures, such as energy prices,
the economy and interest rates.
Revenue effects
Let me set out the complexity. First, a strong
Australian dollar reduces foreign currency-
denominated revenue. Qantas sells to
passengers from all over the world and they
typically pay in their home currencies.
As long as these home currency airfares are
not adjusted for exchange rate movements,
and generally they aren’t, a strong Australian
dollar against those currencies will result in
lower Australian dollar revenue.
Qantas’ international freight business
generates revenue that is almost exclusively
in US dollars or in currencies heavily tied
to the US dollar. A strong Australian dollar
therefore also results in lower freight revenue.
The exchange rate has very little
impact on the airline’s domestic and
regional revenue streams, and the revenue
generated from international airfares paid‘PLANE’ AND SIMPLE?