‘PLANE’ AND SIMPLE?
by Australians. The adverse revenue effect is
therefore limited to just one segment of the
international business.
Cost effects
A strong Australian dollar also reduces
costs denominated in foreign currency.
The biggest foreign currency costs are
in US dollars and include fuel, operating
leases, capacity hire, spare parts and
aircraft purchases. These costs are born
by all segments of the business, including
international, domestic and regional.
There are also port and route-related
costs denominated in foreign currency that
pertain to the international business only,
including those attributable to ground
handling, station engineering, airport charges,
route navigation, catering, use of overseas
airspace and running overseas offices.
Qantas also enjoys indirect cost benefits
from a strong Australian dollar. Many costs are
paid for in Australian dollars but are affected
by currency movements because the airline’s
suppliers pay for them in foreign currency.
These include the cost of road vehicles
operated by Qantas, and IT, communications
and other electronic equipment. When the
Australian dollar is stronger some of the
benefits of that strength are passed through
into lower Australian dollar prices.
Overall, a stronger Australian dollar
unambiguously results in Qantas group costs
falling by more than revenue, leaving the
company better off. This is mainly because
the favourable cost effect impacts the whole
business, while the adverse revenue effect
impacts a much smaller segment of the
business.
Passenger mix
A strong Australian dollar generally
does not affect the total number of
passengers travelling by air, only the mix
of passengers. When the Aussie dollar
is stronger there are more Australians
travelling abroad than foreign passengers
travelling inbound.
As Qantas has a dominant position in
the Australian market, a strong dollar that
raises outbound and reduces inbound travel
is good for the Qantas group because it
strengthens the demand segment in which it
has the greatest revenue penetration.About the only negative on the
passenger mix front is that strong outbound
travel may come at the expense of domestic
leisure travel. Qantas is in a superior
competitive position domestically than
internationally, and so would prefer strong
domestic demand over international.
Interdependent exposures
The Australian dollar is high because the oil
price and other commodity prices are relatively
elevated; our economy is outperforming
most others; Australia attracts foreign capital
because our interest rates are expected to be
higher in the immediate future; and it appears
that the Australian dollar’s status as a currency
from which to flee when global financial risk is
heightened has weakened.
What this means for Australian airlines is that
the exposure to the exchange rate is inextricably
linked to fuel, interest rate and real economy
exposures and that there are considerable
opportunities to take advantage of the natural
hedges generated as a result of these linkages.
In a world that appears to be
experiencing significantly greater volatility
in financial and commodity markets, this
presents Australian carriers with an enormous
advantage – one that they can use to
overcome the fact they are at a considerable
unit labour cost disadvantage.
Tony Webber was Qantas Group chief economist between 2004 and 2011.
He is now managing director of Webber Quantitative Consulting and
Associate Professor at the University of Sydney Business School.‘High Dollar Good for Qantas’ by Tony Weber, February 8, 2013, Sydney
Morning Herald. Used with permission. Sourced from http://www.smh.com.au/
business/high-dollar-good-for-qantas-20130207-2e0zd.html.ASSIGNMENT
1 Given this background about the
business, and what you have learned in
Part 5, identify the key issues that drive
Qantas’ strategic plans.2 How would these have affected the
company’s financial plans?
3 Assess whether the current AUD–USD
exchange rate is having a beneficial
impact on the company.
4 Based on what you have learned in Part
5, what could the company do to manage
these risks and the issues you have
identified in questions (1) and (2) above?