Qantas 2012 Annual Report Download - page 129

FOR THE YEAR ENDED 30 JUNE 2012
Notes to the Financial Statements continued
(i) Interest Rate Risk
Interest rate risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate 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, USD, JPY, NZD 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 floating and fixed rate debt managed separately. The relative mix of fixed
and floating interest rate funding is managed by using interest rate swaps, forward rate agreements and options.
For the year ended 30 June 2012 interest-bearing liabilities amounted to $6,549 million (2011: $6,031 million). The fixed/floating split
is 11 per cent and 89 per cent respectively (2011: 17 per cent and 83 per cent). Other financial assets and liabilities include financial
instruments related to debt totalling $431 million (liability) (2011: $446 million (liability)). These financial instruments are recognised at
fair value in accordance with AASB 139.
(ii) Foreign Exchange Risk
Foreign exchange risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate 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 sufficient 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 flows 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 flow 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 specific 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 2012, 49 per cent (2011: 39 per cent) of forecast operational and capital expenditure foreign exchange exposures less
than one year and 1 per cent (2011: 12 per cent) of exposures greater than one year but less than three years have been hedged.
As at 30 June 2012, total unrealised exchange gains on hedges of net revenue designated to service long-term debt were $164 million
(2011: $234 million).
For the year ended 30 June 2012, other financial assets and liabilities include derivative financial instruments used to hedge foreign
currency, including hedging of future capital and operating expenditure payments, totalling $62 million (net liability) (2011: $226 million
(net liability)). 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 exposure to movements in the price
of aviation fuel. Hedging is conducted in accordance with Qantas Group policy. Up to 80 per cent of estimated fuel consumption
out to 12 months and up to 40 per cent in the subsequent 12 months may be hedged, with any hedging outside these parameters
requiring approval by the Board. As at 30 June 2012, 58 per cent (2011: 53 per cent) of forecast fuel exposure less than one year
and 6 per cent (2011: 9 per cent) of forecast fuel exposures greater than one year but less than three years have been hedged.
For the year ended 30 June 2012, other financial assets and liabilities include fuel derivatives totalling $6 million (asset)
(2011: $170 million (asset)). These are recognised at fair value in accordance with AASB 139.
(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
financial instruments, on net profit and equity before tax. For the purpose of this disclosure, the following assumptions were used:
— 100 basis points (2011: 100 basis points) increase and decrease in all relevant interest rates
— 20 per cent (2011: 20 per cent) USD depreciation and USD appreciation
— 20 per cent (2011: 20 per cent) increase and decrease in all relevant fuel indices
— Sensitivity analysis assumes hedge designations and effectiveness testing results as at 30 June 2012 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
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