CASE STUDIES IN FINANCE (FIN3CSF) – SEMESTER 2, 2016 CASE STUDY 5: FINANCIAL RISK MANAGEMENT FOR QANTAS AIRWAYS LIMITED As part of the wider Qantas Transformation Program, the Senior Management Group of Qantas Airways Limited have requested the risk management division, which you and/or your group members are a part of, to prepare a report on the effectiveness of the company's hedging activities and strategies over the most-recent 5-year period and to design a risk management plan for the company going forward to accommodate strategic changes in the business model and the nature of the activities and assets and liabilities of the company. Qantas Airways Limited is a leading international airline company whose main business is transporting passengers on various domestic and international routes under its two main airline brands – Qantas and Jetstar. The Qantas business includes the provision of airline travel to major international travel destinations within the Unites States, Europe and Asia and domestically it flies to all capital cities around Australia. The Jetstar business is a low-cost carrier providing airline travel services to most Australian capital cities and leading tourist destinations, and also to international destinations in the Pacific region and within Asia through its Jetstar Asia subsidiary business based from a hub in Singapore. Other businesses include Qantas Link which offers flight services to numerous regional destinations across Australia and to Port Moresby in Papua New Guinea, Qantas Freight which operates a network of cargo handling terminals across Australia and a dedicated freight terminal in Los Angeles and a fleet of 11 freight aircraft, dedicated catering and ground handling businesses and the Jetset Travelworld network of retail travel agencies. Senior Management have provided the following summary of major strategic directions and operational activities for the company in the near-term future: • Qantas Airways Limited has entered into a contract to acquire from the Boeing Company the use of eight Boeing 787-9 Dreamliner aircraft, which will be delivered in the 2017- 2019 financial year periods, with Qantas holding purchase options and rights for up to 45 additional aircraft. These aircraft will either be purchased directly or acquired through financial/capital lease or leverage lease arrangements. The initial eight Boeing 787-9 Dreamliner aircraft will replace five earlier model Boeing 747 aircraft currently being flown by Qantas. The new Boeing 787-9 Dreamliner aircraft are more fuel-efficient1 than the Boeing 747 aircraft and also have a larger distance range, which will potentially allow for the creation of new international flight destinations beyond the reach of the Boeing 747 aircraft. • As a result of the code-sharing agreement between Qantas and Emirates Airlines that was announced in March 2013, which means that Asian and European destination flights will use the Emirates airport hub at Dubai rather than flying via Singapore, a greater share of 1 In terms of average fuel usage, a Boeing 747 aircraft uses approximately one gallon of fuel (equivalent to 4 litres) every second of flying time. In terms of travel distance, this equates to the Boeing 747 aircraft using approximately 5 gallons for fuel per mile (or 12 litres per kilometre).total international airline revenue in the future will be dominated in United Arab Emirates dirham (AED) currency.2 • Qantas Airways Limited's Jetstar business plans to further expand flight destinations from Australia to destinations within Asia in the future. • Qantas Airways Limited recently decided to close two of its three Australian-based heavy aircraft maintenance facilities at Tullamarine and Avalon in Victoria, with heavy maintenance of its Boeing 747 and Airbus A330 aircraft fleet now undertaken in Hong Kong and Germany, respectively. • Qantas Airways Limited regained an investment grade credit rating from the Standard and Poor's and Moody's rating agencies in 2016, and will endeavour to strengthen its balance sheet further to maintain, and potentially increase, this credit rating in the future. The following table outlines aviation fuel prices specified in Australian Dollars per Gallon (based on the US Gulf Coast Kerosene-Type Jet Fuel Spot Price) for the past 10 years: Date Price Date Price September 2006 $2.39 December 2011 $2.84 December 2006 $2.30 March 2012 $3.09 March 2007 $2.33 June 2012 $2.68 June 2007 $2.49 September 2012 $3.07 September 2007 $2.68 December 2012 $2.80 December 2007 $2.98 March 2013 $2.87 March 2008 $3.37 June 2013 $2.94 June 2008 $4.08 September 2013 $3.16 September 2008 $4.12 December 2013 $3.29 December 2008 $2.06 March 2014 $3.19 March 2009 $1.91 June 2014 $3.08 June 2009 $2.25 September 2014 $3.01 September 2009 $2.03 December 2014 $2.18 December 2009 $2.19 March 2015 $2.11 March 2010 $2.31 June 2015 $2.24 June 2010 $2.41 September 2015 $1.97 September 2010 $2.26 December 2015 $1.49 December 2010 $2.48 March 2016 $1.43 March 2011 $3.09 June 2016 $1.87 June 2011 $2.87 August 2016 $1.70 September 2011 $2.89 The report is expected to incorporate the following components: • A description of the forms of financial risk that Qantas Airways Limited is exposed to, and determination, with appropriate justification, of the risk elements that Qantas Airways Limited is more sensitive to. • An assessment of the effectiveness, or otherwise, of the hedging and other risk management strategies operationalised by Qantas Airways Limited over a period up to the last 3-5 years. 2 The AED has been pegged to the US dollar at the rate of 1 US dollar = 3.6725 AED, since 1978.• The recommendation of a risk management strategy for the next 2-3 years outlining key future risk elements, incentives to hedge particular aspects of the company's operations or otherwise, potential hedging mechanisms and positions if required, as well as other operational or business transactions that may provide risk management benefit or protection. Required: This case study report is due to be submitted to the Senior Management Group of Qantas Airways Limited by 5.00pm on Monday 17th October 2016, via the FIN3CSF LMS site. This case study contributes 15% to the overall final assessment in the FIN3CSF subject. This case study can be completed individually or in a group of up to a maximum of four people, and the maximum word limit, excluding any calculations, is the equivalent of 500 words per student.