Qantas 2013 Annual Report Download - page 157

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QANTAS ANNUAL REPORT 2013
B MARKET RISK
The Qantas Group has exposure to market risk in the following areas: interest rate, foreign exchange and fuel price. 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, USD, JPY, NZD and EUR. These principally
include corporate debt, leases and cash. The Qantas Group manages interest rate risk by using a oating versus xed rate debt
framework. 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 2013 interest-bearing liabilities amounted to $6,080 million (2012: $6,549 million). The xed/oating split
is 19 per cent and 81 per cent respectively (2012: 11 per cent and 89 per cent).
For the year ended 30 June 2013, other nancial assets and liabilities include derivative nancial instruments relating to debt,
obligations and future interest payments totalling $74 million (liability) (2012: $431 million (liability)). Of these amounts, the derivatives
relating to recognised debt obligations total $4 million (asset) (2012: $380 million (liability)).
(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.
As at 30 June 2013, total unrealised exchange gains on hedges of net revenue designated to service long-term debt were
$115million (2012: $164 million).
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.
For the year ended 30 June 2013, other nancial assets and liabilities include derivative nancial instruments used to hedge foreign
currency, including hedging of future capital and operating expenditure payments, totalling $124 million (net asset)(2012: $62 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. For the year ended 30 June 2013, other nancial assets and liabilities include fuel derivatives totalling
$17million (asset) (2012: $6 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 nancial instruments, on net prot and equity before tax. For the purpose of this disclosure, the following assumptions
were used:
»100 basis points (2012: 100 basis points) increase and decrease in all relevant interest rates
»20 per cent (2012: 20 per cent) USD depreciation and USD appreciation
»20 per cent (2012: 20 per cent) increase and decrease in all relevant fuel indices
»Sensitivity analysis assumes hedge designations and effectiveness testing results as at 30 June 2013 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