The bill that outgoing Qantas chief executive Alan Joyce has left his successor, Vanessa Hudson, is an eye-watering $14.6 billion.
That’s the total figure for Qantas’s capital expenditure commitments, which are mostly new aircraft purchases, as the group plays catch-up on the renewal of its ageing fleet.
Hudson could also face a nasty headwind in achieving this very large task.
The purchase of those new planes is in US dollars, and Qantas has calculated that cost using a US68¢ exchange rate. However, the Australian dollar has since sunk below that to near US65¢, and forecasts by Commonwealth Bank’s economics team suggest that it could drop to US60¢ in the coming months.
A falling Australian dollar and rising interest rates that make debt more expensive are not going to help an already massive capital expenditure bill that the Qantas Group will have to fund during Hudson’s stewardship, after Joyce is long gone.
On Thursday, Joyce basked in delivering a record underlying profit for Qantas of $2.47 billion for the full-year to June 30, 2023, which will earn him the scorn of customers, who have weathered high fares post-COVID.
However, Qantas shareholders were happier as Joyce and the board announced another $500 million buyback, which is in addition to $1 billion of share buybacks made in the past year.
Still, with such a large bill for new planes on the horizon, it’s hard to understand why Qantas’ board and management haven’t been more prudent in their capital management by reducing the size of buybacks.
Management and the board might argue that $1 billion in cost savings have been achieved through a three-year recovery program, which has helped create a strong base for the company as it begins its fleet renewal, and also that Qantas has not paid any dividends to shareholders this year.
Still, it’s hard not to think that Hudson, who is the group’s chief financial officer, has been given a hospital pass by Joyce. Qantas net debt remains sizeable even if it has fallen to $2.89 billion, which is below the group’s target range of $3.7 billion to $4.6 billion.
On Monday, Joyce will appear before a Senate committee, after he was summonsed to attend, after claims he refused to do so voluntarily. He will face questions about high airfares that the airline has been charging over the past year that have contributed to inflation and cost of living pressures, while delivering a record underlying profit.
Joyce, one of the nation’s most criticised chief executives, has earned the public ire because of high airfares and poor customer service, ranging from lost luggage, cancelled aircraft, delayed flights and delayed flight refunds.
Qantas is the subject of a class action on behalf of customers who were unable to get their money or points back after flights were cancelled due to COVID.
In the full-year results Joyce delivered on Thursday, the extent of Qantas’ recovery was evident in the operating margin of its domestic airline group, which is in rude health. Its operating margin – a profit ratio that measures how much profit a company makes on revenue after deducting costs – rose to 18.2 per cent from 12.8 per cent in 2019.
The performance of its international business was even better, where its operating margin rose from 4.4 per cent in 2019 to 11.7 per cent in the 2023 financial year.
The strong performance of Qantas’ international arm also makes it harder for the federal government to justify its decision to reject a request from Qatar Airways to fly an additional 21 services into Australia’s major airports, beyond the 28 flights a week it currently operates under existing bilateral air rights.
The government’s decision has drawn a backlash from the public and business groups.
Virgin Australia’s boss Jayne Hrdlicka, whose airline has an alliance with Qatar and has a vested interest in it expanding its international service in Australia, argued that international airfares today are nearly 50 per cent above what they were pre-COVID.
Joyce, who will step down at the airline’s annual general meeting in November, might be seeking to go out on a high, but the Senate committee will be doing its best to ground him.
A smaller but more beautiful Corporations Act
When Macquarie Group handed down its full-year result earlier this year, there was a figure that garnered little attention.
It was how much this global financial institution – Australia’s fifth-largest retail bank and one of the nation’s biggest investment banks – is paying in regulatory compliance costs. The figure is $1.043 billion a year. It’s more than double what Macquarie spent on compliance four years ago. See the graph below.
The figure is important in the context of a substantive review of the Corporations Act, which is nearing completion by the Australian Law Reform Commission, with the aim of reducing the complexity of corporation and financial services regulation.
The commission’s intent has been to restructure and tighten up the act, and in doing so, make it easier to understand and navigate. In theory, by reducing the complexity and making the law clearer, it should cost companies less to comply with; make the legislation easier for courts and regulators to enforce; and reduce the timeframe in which that’s done.
The complexity of the Corporations Act, which has had amendments and annotations made to it over decades, has increasingly been criticised as being unwieldy by many judges from former chief justice Tom Bathurst, Justice Steve Rares, Justice Ashley Black to former High Court justice Kenneth Hayne, who helmed the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The law reform commission’s review identified multiple instances where amendments to the act, dating as far back as the mid-2000s, weren’t actually reflected in the act.
Given the size of the act and the detail in it, the commission is considering recommending that the chapter governing financial services regulation be removed and put at the end of the act as a separate component known as a schedule, where it could be known as the Financial Services Law. This has happened elsewhere such as in the Competition and Consumer Act, where the Australian Consumer law sits at the end of that act as a separate schedule.
Again, the purpose is to increase the efficiency and ease with which the Corporations Act can be navigated, particularly with the substantial increase in legislation governing the financial services sector.
The commission also wants to simplify the act by building into it a single glossary that lawyers, judges, regulators, companies, directors and consumers can go to that will contain a list of terms and their definitions, which are littered throughout the act.
Another recommendation is where there is an offence or civil penalty provision mentioned in the act, then the maximum penalty for that breach should be included in that same section, rather than making lawyers and judges wade back and forth through the act to determine the penalty that should be applied.
The law reform commission will hand its final report to the attorney-general in November. So far, it’s made close to two dozen recommendations, and there will be more. While the proposed changes by the commission are technical and dry, the act is important legislation that helps regulate the economy. Any improvements to it that save time and money for companies and consumers, regulators and courts, will have broader economic benefits.
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Source: Thanks smh.com