Treasury Risk Management
Framework
Greg Manning
Qantas Airways
October 2015
Industry Dynamics
Narrow operating margins and high fixed costs
Fuel price (30% of costs) and FX volatility
Cyclical – highly leveraged to global growth
Competition – the rise of the low cost carriers
Significant Government regulation and intervention
Group Treasury Structure
Group
Treasury
Treasury Risk
Management
Treasury
Operations
Capital
Markets
Insurance
Risk Management Approach
“Effective risk management starts with the recognition that any forecast can be
wrong, then weighs the consequences of being wrong.”
Peter L. Bernstein
Economic Historian, September 2008
Overview of Treasury Risk Management Policy
Revised Policy approved by Board in June 2013
– Provides assurance that financial market risks are being managed responsibly, effectively
and within approved parameters
– Defines the financial risk/return profile for the Qantas Group
Key requirements of Policy
– Clear objectives, principles and philosophy
– All financial exposures are identified and quantified
– Outlines appropriate risk management action within approved delegations
– Reporting on a timely basis to appropriate level of management
– List of approved hedging instruments and structures
Treasury Risk Management Responsibilities
Operational Exposures
– Jet fuel - consumption of approximately 32m barrels p.a or US$4.0b p.a
– Foreign exchange - net foreign currency exposure exceeds US$4.0b p.a
– Interest rates -~ A$10b debt portfolio and ~A$3b cash balance
Capital expenditure
– Approximate annual expenditure of US$1b
Liquidity & Working Capital
Credit Risk
INTRODUCTION
Volatility of Risks
Individual risk types can represent a substantial gross exposure
•
Offsets/ correlations can significantly lower net risk
Into-Plane Cost of Fuel - Components
Fuel Procurement purchase the physical Jet
fuel barrels
Managed by
Fuel Procurement
Into-Plane (ITP) Margin
(stable)
– Fuel cost = ITP margin (fixed)
+ Jet Price (Variable)
Refiner’s Margin
Fuel barrel components:
– ITP margin represents cost of
transporting Jet fuel from supplier into
the wing of the plane
Managed by
Treasury
Jet Price
(volatile)
Crude Oil Price
– Jet price can be broken down further into
two components for hedging purposes;
crude oil price and refiner’s margin
USD Cost Base
Policy of net hedging foreign currency
revenues and expenses
– Foreign currency denominated costs
are paid out of revenues in the same
currency
– Remaining net foreign currency
revenue is converted to USD
– Any ‘residual’ foreign currency is
then managed to AUD
Risk Management Tools
Fuel surcharge/ticket pricing
– Lag effect of recovery via surcharge
Use of natural offsets helps to reduce volume of hedging which means:
– Reduction in potential MTM impact
– Manage option premium
– Minimise transaction costs
– Minimise Accounting noise
Offset where ever we can – derivatives a last resort but necessary
Hedging Considerations
Minimise year-on-year cash flow volatility
– Protect financial targets
– Achieved using a layered and measured approach to hedging
– Consideration given to correlation between revenue and market fuel prices
Manage financial risk within Board approved risk management framework
Bank counterparty credit risk and available credit lines
Limited option premium budget
Size of marked-to-market position of derivatives
Competitor Hedging Program
FY15 Fuel Hedging Strategy
Highly hedged fuel position going into
FY15
– Hedging provided cap against high fuel
prices
4,800
– Fuel prices spiked in Jul14 providing an
opportunity to structure existing fuel
collars into outright options
4,400
4,600
4,200
Fuel Cost A$m
– Progressively reduced risk to higher
fuel as fuel prices fell from then
onwards
4,745
4,024
4,000
3,918
3,800
3,733
3,600
3,400
4,512
3,938
as at Jul14 Reforecast
as at 06 February 2015
3,200
3,000
FY16 Fuel Hedging Strategy
Current low fuel prices provide a unique
and strategic opportunity to cap fuel cost
in-line with FY15
Retained participation to lower fuel
prices given economic environment
Continued monitoring of market for
opportunities to restructure fuel
portfolio; consistent with FY15 approach