Qantas 2010 Annual Report Download - page 99

97 ANNUAL REPORT 2010
for the year ended 30 June 2010
Notes to the Financial Statements continued
(B) MARKET RISK
The Qantas Group has exposure to market risk in the following areas: interest rate, foreign exchange and fuel price risks. The following section
summarises the Qantas Group’s approach to managing these risks.
(i) Interest rate risk
Interest rate risk refers to the risk that the fair value or future cash  ows of a  nancial instrument will  uctuate because of changes in market interest
rates. The Qantas Group has exposure to movements in interest rates arising from its portfolio of interest rate sensitive assets and liabilities in a
number of currencies, predominantly in AUD, GBP and EUR. These principally include corporate debt, leases and cash. The Qantas Group manages
interest rate risk by reference to pricing intervals spread across different time periods with the proportion of  oating and  xed rate debt managed
separately. The relative mix of  xed and  oating interest rate funding is managed by using interest rate swaps, forward rate agreements and options.
For the year ended 30 June 2010, interest-bearing liabilities amounted to $5,718 million (2009: $5,503 million). The  xed/ oating split is 30 per cent
and 70 per cent respectively (2009: 37 per cent and 63 per cent). Other  nancial assets and liabilities include  nancial instruments related to debt
totaling $208 million (liability) (2009: $78 million (liability)). These  nancial instruments are recognised at fair value in accordance with AASB 139.
The change in carrying value of  nancial instruments relating to debt includes impairment losses for the year of $28 million (2009: $58 million).
(ii) Foreign exchange risk
Foreign exchange risk is the risk that the fair value of future cash  ows of a  nancial instrument will  uctuate because of changes in foreign
exchange rates. The source and nature of this risk arise from operations, capital expenditures and translation risks.
Cross-currency swaps are used to convert long-term foreign currency borrowings to currencies in which the Qantas Group has forecast suf cient
surplus net revenue to meet the principal and interest obligations under the swaps. Where long-term borrowings are held in foreign currencies in
which the Qantas Group derives surplus net revenue, offsetting forward foreign exchange contracts have been used to match the timing of cash
 ows arising under the borrowings with the expected revenue surpluses. These foreign currency borrowings have a maturity of between one and 12
years. To the extent a foreign exchange gain or loss is incurred, and the cash  ow hedge is deemed effective, this is deferred until the net revenue is
realised.
Forward foreign exchange contracts and currency options are used to hedge a portion of remaining net foreign currency revenue or expenditure in
accordance with Qantas Group policy. Net foreign currency revenue and expenditure out to two years may be hedged within speci c parameters,
with any hedging outside these parameters requiring approval by the Board. Purchases and disposals of property, plant and equipment denominated
in a foreign currency may be hedged out to two years using a combination of forward foreign exchange contracts and currency options.
As at 30 June 2010, 70 per cent (2009: 55 per cent) of forecast operational and capital expenditure foreign exchange exposures less than one year
and 14 per cent of exposures greater than one year but less than three years (2009: 18 per cent of exposures greater than one year but less than
 ve years) have been hedged. As at 30 June 2010, total unrealised exchange gains on hedges of net revenue designated to service long-term debt
were $214 million (2009: $121 million gain).
For the year ended 30 June 2010, other  nancial assets and liabilities include derivative  nancial instruments used to hedge foreign currency,
including hedging of future capital and operating expenditure payments, totalling $29 million (net asset) (2009: $231 million (net asset)).
These are recognised at fair value in accordance with AASB 139.
(iii) Fuel price risk
The Qantas Group uses options and swaps on jet kerosene, gasoil and crude oil to hedge the exposure to movements in the price of aviation fuel.
Hedging is conducted in accordance with Qantas Group policy. Up to 80 per cent (2009: 100 per cent) of estimated fuel consumption out to
12 months may be hedged and up to 40 per cent (2009: 50 per cent) in the subsequent 12 months, with any hedging outside these parameters
requiring approval by the Board. As at 30 June 2010, 48 per cent (2009: 71 per cent) of forecast fuel exposure less than one year and three per cent
(2009: two per cent) of forecast fuel exposures greater than one year but less than three years have been hedged.
For the year ended 30 June 2010, other  nancial assets and liabilities include fuel derivatives totalling $41 million (asset) (2009: $154 million
(liability)). These are recognised at fair value in accordance with AASB139.
(iv) Sensitivity on interest rate, foreign exchange and fuel price risk
The table on the following page summarises the gain/(loss) impact of reasonably possible changes in market risk, relating to existing  nancial
instruments, on net pro t and equity before tax. For the purpose of this disclosure, the following assumptions were used:
—100 basis points increase and decrease in all relevant interest rates
—20 per cent (2009: 20 per cent) USD depreciation and USD appreciation
—20 per cent (2009: 20 per cent) increase and decrease in all relevant fuel indices
—Sensitivity analysis assumes designations and hedge effectiveness testing results as at 30 June 2010 remain unchanged
—Sensitivity analysis is isolated for each risk. For example, fuel price sensitivity analysis assumes all other variables, including foreign exchange rates,
remain constant
—Sensitivity analysis on foreign currency pairs and fuel indices of 20 per cent represent recent volatile market conditions
34. Financial Risk Management continued