Acct3011 Annual Report of Qantas Limited Case Study

Question1

According to the 30 June 2017 Annual report of Qantas Limited (2017), there are 5 operating segments, they are Qantas Domestic, Qantas International, JetStar Group, Qantas Freight and Qantas Loyalty respectively. The activities undertaken by Qantas Domestic, Qantas International and JetStar Group is to providing flights for passengers to travel domestically and internationally. Qantas Domestic and Qantas International operate high-quality passenger carrying services with a premium price, while the aim of JetStar Group is to provide low-cost flight for passengers to travel both domestically and internationally ("Qantas Annual report 2017", 2017). Additionally, Qantas Freight focuses on providing global service of air cargo and express freight. For Qantas Loyalty, developing and maintaining certain level of customer loyalty is its responsibility, additionally, it is also responsible for marketing services ("Qantas Group Businesses | Qantas Careers", 2018).

Corporate has been regarded as one of the operating segment of Qantas, however, it does not satisfy 3 characteristics of operating segment under AASB8.5 (2015), including firstly, there are revenues and expenses incurred by this segment when it has been involved in business activities, secondly, chief operating decision maker (CODM) will review its operating results, in order to allocate suitable amount of resources to this segment as well as assess its performance, finally, discrete financial information should also be available. In this case, even though Corporate has generated 16 million revenues in 2017 and 13 million revenues in 2016 and its operating results may be viewed by CODM for decision making, there is no clear evidence for discrete financial information of Corporate. Additionally, according to AASB8.6 (2015), it may not be possible that every part of an entity is a necessary operating segment or part of operating segment. Examples exist in corporate headquarters and some functional departments, which could not earn revenues or earn revenues that is only incidental to entities’ activities. Likewise, in this case, revenue earned by Corporate is minor and immaterial compared to other operating segments, therefore it could be regarded as incidental revenues for Qantas. With reference to the aforementioned information, it could be concluded that Corporate should not be regarded as one of the operating segments.

Question2(a)-Table prepared based on “total segment revenue and other income” and “underlying EBIT”- see Appendix

Question2(b)

From the table in Appendix, the general performance of total segment revenue and other income (TSROI) and underlying EBIT of Qantas Limited is unfavourable in 2017 compared to 2016, as majority of segments show decreasing trends. In details, with regarding to TSROI, Qantas Domestic, Qantas International, JetStar Group, Qantas Freight has decreased by 1.37%, 0.73%, 0.99% and 4.48% respectively, while only Qantas loyalty has increased by 3.51%. For underlying EBIT, Qantas International, JetStar Group and Qantas Freight has decreased by 36.13%, 7.74% and 26.56% respectively, while Qantas Domestic and Qantas Loyalty has increased by 11.59% and 6.65% respectively. Therefore, only Qantas Loyalty has an increasing trend in both TSROI and Underlying EBIT, indicating a better performance of Qantas Loyalty in 2017. Additionally, notwithstanding the decreasing trend of TSROI of Qantas Domestic, it still contributes a relatively large percentage of revenue, and the highest amount of profit in 2017. Likewise, even though both TSROI and EBIT has decreased, its performance is still favourable, as it contributes a lot to sum of TSROI and it also generates the second highest amount of profit.

Knight (2017) has defined the performance of Qantas in 2017 as the “second-highest ever” compared to performance in 2016, this is mainly due to the strong competition from international airlines, especially Asian airlines. In general, from the perspective of earning profit, Qantas Domestic and Qantas Loyalty, even JetStar Group has a relatively better performance than Qantas Freight and Qantas International. This corresponds with the statement of Knight (2017), Qantas Domestic and JetStar, in fact, still have a good performance, as there is a strong demand for business travel and leisure travel, additionally, the routes to mining towns also show an improvement. Further, with reference to Qantas Annual Report (2017), Qantas Domestic also benefits from the dual brand strategy as well as transformation and investments in customers, therefore a competitive edge in domestic market. For JetStar Group, it also generates the second highest earnings within 13 years, as partial influence of booking and service fee changes can be offset by freight yields. For Qantas Loyalty, customer confidence malaise does not affect the airline, conversely, this segment still improves (Knight, 2017). The good performance may also because of the participation in Woolworths programs and other growing new businesses ("Qantas Annual report 2017", 2017). As for Qantas Freight, it is a disappointment (Knight, 2017) and the customer advocacy still needs to be enhanced to provide a better experience for customers ("Qantas Annual report 2017", 2017). Moreover, for the relatively unfavourable performance of Qantas International, strong competition with international airlines might be the major cause, as other airlines might be benefited from cheaper fuel, new routes and new capacity (Knight, 2017).  This is the reason why EBIT of Qantas International has decreased dramatically compared to 2016.

Question2(c)

Disclosure of segment assets and segment liabilities could lead to some improvements of the aforementioned analysis from the following aspects. Firstly, ratio analysis would be facilitated, including solvency ratio and profitability ratio, such as debt ratio, return on equity. With the help of these ratios, the ability of Qantas to meet its long-term obligation would be known (Staff, 2018a), additionally, its ability to efficiently earn revenues versus expenses and other costs would also be known (Staff, 2018b). Secondly, as Folger (2018) mentioned, the segment’s net assets would also be determined after disclosure, therefore leading to more accurate figures and accounting results.

Question3(a)

With reference to Woolworths Annual Report (2017), ALH should be subsidiary of Woolworths, instead of a “joint venture”. In this case, Woolworths holds 75% of shares of ALH, while another shareholder only holds 25%. Obviously, the proportion of shares held by Woolworths is greater than 50%, therefore full control should be used in this case rather than significant influence. According to AASB10.B35 (2016), the holder of majority of voting rights has power in either, relevant activities are directed by holder of majority of voting rights, or members of governing body, who direct relevant activities, are appointed by holder of majority of voting rights. Likewise, Woolworths hold 75% of voting rights and there are no statements about sustentative rights of Woolworths as mentioned in AASB10.B36 (2016) and B37 (2016), resulting in power over ALH. Moreover, as a holder of non-controlling interests, Woolworths is exposed to returns and profits of ALH, which is consistent with AASB10.16 (2016). Finally, Woolworths is a principal rather than an agent, with reference to AASB10.18 (2016), it has the ability to affect returns. In conclusion, since Woolworths has full control over ALH rather than joint control, it should be regarded as subsidiary which has segments. This is also in line with disclosure of ALH in Woolworths Annual report (2017), which uses the disclosure method of non-controlling interests of subsidiary mentioned by AASB12.12 (2017).

...