An overview of Qantas Group Business Practices Essay

Executive synopsisThis report is commission to analyse the activities of the Qantas company and important perils that Qantas has to plaque. Through analysing the factors that may affect the profit of the corporation, dissimilar derivatives that Qantas meeting apprize hire to falsify the endangerments are discussed and the advantages and losss of these derivatives are given. As a listed company, Qantas Group focuses on providing air passage dos both in interior(prenominal) and international grocery stores. During daily operations, introduce cost guess, outside modify stake and simple eye m hotshottary value danger are the main risks that the company has to use different derivatives to control. Based on analysis, it is suggested that these risks could be dodged by employ picks and forward beats respectively and particular(prenominal) reasons are provided to demonst graze the feasibility of these derivatives. Through hedgerow, it is believed that the risks of Qantas facing today could be better controlled in the future. 1.1 Activity Description Qantas Airways special is Australias count one airline, which connects Australia to 81 destinations in 40 other countries worldwide and ope range extended domestic redevelopments in both Australia and New Zealand (Qantas Airways restrain 2011). Its main business is the transportation of passengers using two complementary airlines, Qantas and Jetstar, operating international, domestic and regional suffices (Qantas Airways Limited 2011).In addition to airline brands, the Qantas Group operates a look of related activities to broaden its portfolio of businesses and positionments, such as Qantas back up Flyer and Qantas Freight Enterprises. With the increasing competition in the airline industry, Qantas Group continues to manage its strategic, financial and operational risks, respect the rights of copeholders, introduce new technology that enhance the customer experience and provide to a greater extent safety service (Qantas Airways Limited 2011). According to the 2011 annual report, Qantas had suffered several signifi gou deposit weather events and indwelling disasters during the year. Hence, Qantas now tries to control the potential risks and recover the airfreight market through improving its joint venture agreements with both domestic and international airfreight network. 1.2 Main risks As a listed national airline company which occupies approximate 65% Australian domestic market share and 18% international market share (Qantas review 2012), Qantas shells various risks during its daily operations, mainly including input worth risks, impertinent transposition risk and investment company worth risk. The input toll risk refers to the volatile in the prices of inputs which may match a companys financial result (Harper 2010). As an airline company, Qantas heavily depends on the commons arouse to support its normal business operation.For instance, it inc urred 3,684 and 4,329 million dollars of discharge cost in 2011 and 2012, separately (Qantas Airways Limited 2012), which leads the company to be significantly polished to the price vacillations in the jet fuels. As a rise in the fuel price might largely gain the costs of escape cock services composition a lineage in input price would save costs in contrast, it may further influence the tag prices and sales volume in its business. In other words, it exposes Qantas to the input price risk to a relative high level. The foreign exchange risk is the financial risk of an film to un judge exchange rates among currencies, which may deliver each a positive or blackball shock absorber to a companys financial position and writ of execution (Harper 2010). Besides the domestic destinations, Qantas also serves international flights and has developed codeshare relationships and joint service agreements with many foreign airline companies all over the world (Ports and Relationships 2012). It indicates that Qantas has to face the financial risk in the unanticipated currency exchange rates between Australian dollar and various foreign currencies in cost of sales, costs, expenses and investments.As a listed company on the ASX, Qantas also confronts the argument price risk, as the changes and hesitations in its impart price may significantly impact the entitys financial position and shareholders wealth. Generally the timeworn price is influenced by both the macroeconomic trends and the corporation-specific factors. For instance, the global economy recession may impact the financial situation in all industries including airlines, which would result in the decline in all wrinkle prices in the stock market while some company-specific factors only influence the certain companys stock price, such as the weather factors suffered by Qantas which affect its services and financial performance may specifically impact the stoke price of Qantas. As explained by Harper (2010), many companies develop strategies to hedge risks by adopting certain derivatives. Qantas can choose proper derivatives such as futures and options to assist in reducing the risks mentioned above to a reasonable level. Hedging input price risk by using options Hedging through optionscould slash the risk from potential future market movements (Hull 2011).Because of the great deal of jet fuel consuming, the price changes in inputs (fuel) are of significant importance to Qantas (Investopedia 2012). Qantas hedges against the price increase of jet fuel (crude oil and jet kerosene) to eliminate the potential risk. Qantas held the hedge using options, which is good deald on the Australian securities exchange, of future aviation fuel purchases by crude oil and jet kerosene derivative bids in 2012 (Qantas Airways Limited 2012). Qantas uses options on crude oil and jet kerosene to hedge exposure to fuel price movements. According to Qantas policy, up to 80% of the estimated fuel c onsumption out to 12 months and up to 40% in the subsequent 12 months could be hedged. Any other hedging outside the parameters must be approved by the Qantas Board. 58% (2012) and 53% (2011) of the estimated fuel exposure slight than one year have been hedged. Also, 6% (2012) and 9% (2011) of the estimated fuel exposures more than one year but less than three years have been hedged. The net gain from future aviation fuel payments less than one year is minus $11 million (2012) and $130 million (2011) (See addendum 2.1.1)(Qantas Airways Limited 2012). Advantages and disadvantages The advantage associated with the hedging strategy is that it reduces the potential fuel price movement risks. Qantas airway, which provides airline services to customers, has no particular skills in predicting changes, fuel price for example (Hull 2011). Hedging the risks associated with these potential increasing variables could be beneficial. Qantas could assign more focus on the main business activiti es by avoiding offensive risks through hedging (Hull 2011). However, there are several limitations within the hedging strategy. First, competitive pressures within the airline industry could result in the fluctuation of costs of raw materials. As a result, companies without hedging strategy can have constant profit margins, and companies which have adopted hedging strategies to reduce potential risks may have fluctuating profit margins (Hull 2011).Second, Bakshi and Kapadia (2003) argued that there could be a market price for the exposure to unpredictability uncertainties when the expected volatility is not constant. The fuel price could experience increasing or lessen in the estimated period of time, so the hedging using options could bring a loss of the direct payment.2.2 Hedging foreign exchange risk by using forward contracts The basic principle of hedging foreign exchangerisk is to exchange the currency when exchange rate is favourable, and indeed invest currency which is native to the country of origin. The purpose of this approach is to prevent a monetary loss by safeguarding the investor against currency exchange rate fluctuation (Sayali Bedekar Patil 2012). preliminary contracts are usually used to lock the receipts and payments in a fixed exchange rate. It offers stability to both the receipts and payments. In Australia many banks provide forward rate as a service to customers. By entering into a forward contract with a bank, the Qantas can simply transfer the risk to the bank, which ordain now have to bear.In this case, Qantas forecasts the exchange rate could fluctuate and end with a possible wear and tear of USD. Qantas then can enter into a short forwards contract with a bank to fix the exchange rate reduce the foreign currency risk. FXStreet website (2012) contains information on spot and forward quotes for the AUD/USD exchange rate, celestial latitude 24, 2012. (See Appendix 2.2.1) By entering into the forwards contract using forwards, Qantas is guaranteed of an exchange rate of AUD 1.0375 per USD in the future irrespective of the spot exchange rate in three months. If USD were actually depreciated in three months, Qantas would hedge the risk. However, if it were to appreciate, then Qantas would have to forego favourable movement and hence bear implied losses. Advantages and disadvantages Forward contract is a management technique to reduce, mitigate and eliminate risks. The proceedings are over the counter without regulation, so the two parties (buyer and seller) can hash out that they mutually agree in any terms, such as the vestigial asset, timing, location, amount and type of trade.The contracts are characterized in flexibility, they are not colonized until the specified date so there is no initial upfront payment required, moreover, there is no commission paid on the trade (Khalid, Mohammed, Abdul and Hisham 2011). On the other hand, the contracts are often illiquid, because a forward contract is usually d esigned to meet specific needs. The buyer may keep an eye on it difficult to sell the position to a third party because of its specificity. Moreover, the credit risk exists as the clearinghouse does not guarantee the amount. Finally, it is unregulated that a nominal body has the responsibility for setting regulations and procedures to protect their transition (Khalid, Mohammed, Abdul and Hisham 2011). 2.3 Hedge stock price risk by using options Stock price risk refers to the company performing under its forecast, i.e. a decrease in its stock price (Moazeni and Foroghy 2012). Greater re worms should be in relation with higher stock risks (Koslowsky 2009), and to pursue a higher return in stock market, Qantas has to face a higher level of stock risks, i.e. a larger happening that the company may suffer loss when stock price decrease.To hedge the stock risk, i.e. to hedge stock price from decreasing, we found that Qantas has a number of call and put options in market, with underlyin g assets of Qantas Airways, of different expiry date, either in American or in European style, which is in turn effectively in manage its exposure to risk in stock market. Call option refers to the right to buy while put option refers to the right to sell. As an option seller, Qantas uses call options for the Airways stock in expectation that the stock price ordain decrease in the future whereas use put options for the Airways in expectations that the stock price will increase in the future. First of all, as a call option seller, Qantas will get benefit when the market price is below the turn price as their exercise price is locked. This is because their counterparty will not exercise the option when market price is below the exercise price, so Qantas will benefit from the indemnity their counterparties paid. Similarly, as a put option seller, Qantas will benefit when stock price increases. In addition, as we found that Qantas has a number of options with different expiry date up to 17/12/2015 (ASX 2012), we could say that Qantas will be effective in managing its stock risk by using options in a time horizon.Advantages and disadvantages The advantage of shorting options is the option seller will get benefit, i.e. premium paid by their counterparties, in shorting calls when stock price increases, and in shorting puts when stock price decreases, and it is quite flexible, as their counterparties can exercise the option before the expiry date, depending on the volatility of the share price. However, the disadvantage of interchange option is the loss from stock price volatility, that is, the loss is inexhaustible in selling call options when stock price increases and in selling put options when stock price decreases.Reference ListASX. 2012, viewed 28 celestial latitude 2012, Bakshi, G. and Kapadia, N. 2003, Delta-Hedged Gains and the Negative trade Volatility Risk Premium, Review of fiscal Studies, vol. 16, pp. 527-566. FXStreet, 2012, FXStreet, viewed 24 Dec ember 2012,Harper, D. 2010, How Companies Use Derivatives To Hedge Risk, Investopedia, viewed 19 December 2012, Hull, J. C. 2011, rudiments of Futures and Options Markets, 7th ed., Prentice Hall, London. Investopedia, 2012, How Companies Use Derivatives To Hedge Risk, Investopedia US, A Division of ValueClick, Inc., viewed 20 December 2012, Kameel, A. and Meera, M. 2001, Hedging Foreign Exchange Risk with Forwards, Futures, Options and the Gold dinar A Comparison Note, Department of Business Administration world-wide Muslim University Malaysia, Malaysia, viewed 24 December 2012, Khalid, Z. and Mohammed, J. and Mohammed, L. and Hisham, K. and Abdul, K. 2011, Islamic Derivatives in Saudi Arabia Types of Forward Contracts, A l-Yamamah University, viewed 24 December 2012, Koslowsky, D. 2009, The Relationship between capital structure and expected returns, University of Monitoba, viewed 28 December 2012, Moazeni, G. and Foroghy, D. 2012, Stock Risks Management Applying Market Risk Prem ium in Tehran Stock Exchange, International Conference on Accounting and Finance (AT), pp. 194-199. Ports and Relationships 2012, Qantas Airways Limited, Sydney, viewed 19 December 2012, Qantas Airways Limited 2011, Qantas Annual publish 2011, Qantas Airways Limited, Sydney, viewed 22 December 2012, Qantas Airways Limited 2012, Qantas Annual Report 2012, Qantas Airways Limited, Sydney, viewed 20 December 2012, Qantas reviews 2012, Air Review, viewed 19 December 2012, Sayali Bedekar Patil, 2012,Foreign currency Hedging, viewed 24 December 2012,