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1. Explain the primary activities of the company and discuss its financial and social performance in FY 2016-17 in comparison to the previous FY 2015-16.

2. Focus your attention on the Statement of Profit and Loss and Other Comprehensive Income. Compare the Profit or Loss of the Year with the Total Comprehensive Income in FY 2016-17 and the Profit or Loss of the Year with the Total Comprehensive Income FY 2015-16. Discuss the nature of the difference (if any) between the two figures in the two financial years and identify whether the difference is related to extraordinary or non-recurring events.

3. Focus on the leases agreements the company has entered, as a lessee. As the new lease accounting standard (AASB16) will be enforced from 2019, the company is probably still applying the previous accounting standard (AASB117). Discuss how the new accounting standard will impact the assets, liabilities and profit of your company.

4. Focus on intangible assets and goodwill in particular. After carefully examining how the company carries impairment testing, explain what the cash generating unit are and identify the criterion for their choice in your company.

5. Consider the items included in property, plant and equipment. Illustrate whether these items are measured according to cost or fair value in the report. Explain, supporting your answer, which model between cost or revaluation is to be preferred to provide a “true and fair” representation of the company’s assets.

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500 500 VVVV VYTF ZISA VVTS VTBB WBKK WSJC WABB H 540 H 540 500 500 500 50 500 450 450 Q A N TA S A NNUA L REPOR T 2016 Contents Qantas Annual Report 2016 Our Performance in 2015/16 02 Our Financial Framework 03 Chairman’s Report 04 CEO’s Report 06 Board of Directors 08 Review of Operations 12 Corporate Governance Statement 24 Directors’ Report 26 Financial Report 51 Shareholder Information 103 Financial Calendar and Additional Information 104 The Qantas Transformation program has reshaped the Qantas Group, delivered record results and unlocked shareholder value. From this position of strength, and with our people more engaged than ever, we’re looking ahead to a new phase of innovation and growth. With world demand for air travel set to double over the next 20 years, Qantas and Jetstar have the ability to lead the aviation industry at a time of unprecedented global change. 01 Q A N TA S A NNUA L REPOR T 2016 Our Performance * in 2015/16 This exceptional performance reflects the strength of our Qantas Group strategy, with record results and increased margins for Qantas Domestic, Qantas International, the Jetstar Group and Qantas Loyalty, and Group-wide return on invested capital of 23 per cent. Total underlying earnings before interest and tax (EBIT) in the domestic market – across both Qantas and Jetstar – rose 30 per cent to $820 million, and total underlying EBIT from the Group’s international operations was $722 million, up 107 per cent. The result also reflects the continued delivery of the Qantas Transformation program, which has now unlocked $1.66 billion in cost and revenue benefits since beginning in 2014. The Group’s disciplined fuel hedging – which helped secure a $664 million benefit from lower global fuel prices – was another driver. The Group’s financial position was strengthened during the year, with $2.8 billion in operating cash flow used for capital expenditure, shareholder distributions and debt repayments, and excess cash used for refinancing aircraft. Qantas’ strong balance sheet and more sustainable outlook was recognised by ratings agencies during the financial year, with an investment grade credit rating restored by Standard & Poor’s and Moody’s Investor services. Qantas Domestic $578m Underlying EBIT. Up 20 per cent Qantas International $512m Underlying EBIT. Up 92 per cent Jetstar Group $452m Underlying EBIT. Up 97 per cent Group Performance Record underlying profit Statutory earnings per share (EPS) Return on invested capital Operating cash flow Ex-fuel unit cost Net debt $1.53 billion ( 57%) 49.4 cents per share ( 24c) Qantas Loyalty $346m Underlying EBIT. Up 10 per cent 23% Q ANTAS FREIGHT $2.8 billion 3% $64m Underlying EBIT. Down 44 per cent $5.6 billion (within target $4.8-$6b) Refer to the Review of Operations section in the Qantas Annual Report 2016 for definitions and explanations of non-statutory measures * 02 Q A N TA S A NNUA L REPOR T 2016 The three core pillars of the framework are consistent: > Maintaining an optimal capital structure that minimises the Group’s cost of capital; > Achieving return on invested capital (ROIC) above 10 per cent through the cycle; and > Growing invested capital with disciplined investment; returning any surplus to shareholders. Optimal Capital Structure The Group maintained an optimal capital structure throughout 2015/16, with net debt at year-end of $5.6 billion within our target range of $4.8 billion to $6 billion. Credit metrics remain significantly better than the investment-grade metrics Qantas targets through the cycle. In addition to strong short-term liquidity of $3 billion – including cash of $2 billion – the Group’s unencumbered asset base totals over US$3.9 billion. Improving Return on Invested Capital (ROIC) The Group’s ROIC of 23 per cent was up from 16 per cent in 2014/15, and well above our threshold of ROIC above 10 per cent through the cycle. All operating segments continue to deliver ROIC above the Group’s cost of capital. Efficient allocation of capital, increased fleet utilisation, and ongoing business transformation all contributed to achieving greater returns from the Group’s existing assets. Qantas Transformation The Qantas Transformation program has unlocked total cost and revenue benefits of $1.66 billion since 2013/14 – including $557 million in 2015/16. A further $450 million in benefits will be realised in 2016/17, to reach the Group’s increased target of $2.1 billion by 30 June 2017. Qantas Transformation Scorecard Target Progress Metric ACHIEVING OUR TARGETS Accelerated Transformation benefits Deleverage Balance Sheet Cash Flow Fleet Simplification Customer and Brand $2.1b gross benefits >10% Group ex-fuel expenditure reduction Timeframe FY17 $1.66b benefits realised. Ex-fuel expenditure reduced by 9% 5,000 FTE reduction FY17 4,605 FTE reduction >$1b debt reduction FY15 Delivered on schedule Debt / EBITDA 45% FY17 Delivered ahead of schedule Sustainable positive free cash flow FY15 onwards Delivered on schedule Eleven fleet types to seven FY16 Eight fleet types Retaining 2 x non-reconfigured B747 Customer Advocacy (NPS) Ongoing NPS record achieved at Qantas Domestic, Qantas International and Qantas Loyalty Maintain premium on-time performance: Qantas Domestic Ongoing Premium on-time performance maintained with increase to 89.7% Surplus Capital ROIC (%) Qantas’ Financial Framework guides how we create value for our shareholders. Our overarching goal is to achieve maintainable earningsper-share growth through the cycle, and in turn deliver total shareholder returns in the top quartile of global airlines and the ASX100. Increased distributions, grow invested capital OPTIMAL CAPITAL STRUCTURE Our Financial Framework* No Surplus Capital Debt reduction focus 10% ROIC 4.8 6.0 Net Debt ($b) Disciplined Allocation of Capital The Group used cash in excess of short-term liquidity requirements to refinance 29 maturing aircraft leases, while funds from operations were directed to debt repayments ($1.1 billion), net capital expenditure ($1 billion), and shareholder distributions ($1 billion). Shareholder Returns The Group has returned more than $1 billion to shareholders over the past 12 months, through a $505 million capital return (completed in November 2015) and $500 million on-market share buy-back (completed in June 2016). Combined, these two capital management initiatives reduced shares on issue by 12.6 per cent. Our strong result in 2015/16 means we can return a further $500 million via a fully-franked ordinary dividend of 7 cents per share – totalling $134 million – and an on-market share buy-back of up to $366 million. Where there is surplus capital in future, the Group will first distribute to shareholders via an ordinary dividend, in conjunction with share buy-backs, special dividends or a capital return should additional surplus exist. Refer to the Review of Operations section in the Qantas Annual Report 2016 for definitions and explanations of non-statutory measures * 03 Q A N TA S A NNUA L REPOR T 2016 Chairman’s Report The Group’s portfolio showed its value in a complex market. The business is stronger, more efficient and more customerfocused as a result – and positioned well for the future. A Strong 2015/16 Once again, the Group’s balanced portfolio of businesses and brands showed its value in a complex market. The Group’s domestic two-brand strategy has proven resilient throughout Australia’s economic transition, and that continued in 2015/16 with record domestic earnings. In the international market, Qantas and Jetstar have grown to meet rising demand in Asia- Pacific markets, while the Emirates partnership gives the Group wide access to European markets without significant invested capital. 04 Q A N TA S A NNUA L REPOR T 2016 Disciplined investment in product and service continues to secure record levels of satisfaction from customers, and the Qantas Loyalty business is increasingly a source of new ventures and diversified revenue streams. Productivity and financial discipline underpin everything the Group does. This was recognised by Moody’s Investor Services, as well as Standard and Poor’s, when they restored our investment grade credit rating. Shareholder Value The Group has increased net free cash flow, grown return on invested capital and further strengthened its balance sheet, remaining in an optimal capital position throughout 2015/16. I’m especially pleased that we have been able to return more than $1 billion in cash to shareholders over the past 12 months. Over the same period, earnings per share have almost doubled to reach 49 cents. Shareholder returns will continue in 2016/17 with Qantas’ first ordinary dividend since 2009, and a further on-market share buy-back. Ordinary dividends will be our first choice for future capital management initiatives, in conjunction with other options including buy-backs, special dividends and capital returns, as appropriate. Economic Conditions Consumer confidence and travel demand softened in the domestic market through the middle of 2016. However, Australia’s economic fundamentals are strong and demand in non-mining sectors is solid; the resurgence of inbound tourism with the lower Australian dollar has been particularly welcome. Internationally, growth in our key Asia-Pacific trading partners is healthy, and Asia will be an engine room of air travel demand and Qantas Group growth for decades to come. The UK Brexit decision had little direct impact on the Group, but did create short-term volatility in global markets, as other geopolitical events have done over recent years. This underlines the importance of the Group’s focus on cost control and diversifying revenue. Global Forces Looking to the long term, it’s clear that global businesses are dealing with accelerating change in technology, geopolitics and demographics. The Board believes Qantas’ ability to deliver sustainable growth over the long term rests on its ability to understand and navigate these global forces, incorporating them into strategic planning. The Qantas Annual Review sets out the Group’s approach to sustainability, its view of the global forces most relevant to the business, and its strategic priorities in responding to both the challenges and opportunities they present. Board Update I was pleased to welcome Michael L’Estrange AO to the Board as a Non-Executive Director in April this year. Michael was a senior public servant and diplomat with the Australian Government for more than 27 years, as well as holding academic posts and directorships. His experience in global affairs will be invaluable to the Board given the wide range of geopolitical issues influencing the Group. Looking forward The Group’s efforts in 2016/17 will be focused on continuing to advance its strategy and grow shareholder value. In doing so, Qantas will continue to drive trade and tourism, serve communities, support small business and champion Australia on the world stage – as only the national carrier can do. As it moves towards 100 years of serving Australia, Qantas is in a position of strength. Again, I congratulate employees on a year of achievement and success. Leigh Clifford AO At the same time, the Board is focused on measuring progress against non-financial value drivers across environmental, social and governance issues. 05 Q A N TA S A NNUA L REPOR T 2016 CEO’s CEO’S Report REPORT Qantas’ record financial performance this past year is the continuation of a remarkable turnaround, built on the safety standards, operational excellence and customer satisfaction delivered by our people. That gives us the strongest possible foundations for the future. It’s a performance that enabled us to announce a cash Record Result Bonus for non-executive employees, in recognition of their outstanding contribution, as well as rewards for our shareholders and the next phase of investment for our customers. Group Performance Every part of the Group contributed to our record result in 2015/16. Qantas Domestic, Qantas International, the Jetstar Group and Qantas Loyalty all reported record underlying EBIT and increased their operating margins. Two-thirds of our earnings now come from our domestic and loyalty businesses, and one-third from our international operations, underlining the diversification and reduced volatility the portfolio strategy gives us through economic cycles. The Group continues to meet both the short-term and long-term goals of our Financial Framework, which shapes the way we think about creating value for shareholders. Role of Transformation The biggest single driver of our performance is the $1.66 billion in cost and revenue benefits that we’ve unlocked through the Qantas Transformation program. With the program now entering its final year, we expect that to increase to $2.1 billion by June 2017. Transformation is making Qantas’ cost base competitive. Just as importantly, it’s changed the way we work. We’re a far more agile company. We’ve accelerated our adoption of new technology, digital platforms and data analytics. And we’ve fostered a culture that encourages diversity, inclusion and innovation. Qantas is a very different company from just a few years ago. Together with our well-balanced Group strategy, transformation means we’re resilient enough to perform in all market conditions and outperform many of our peers. But of course, our environment isn’t going to stop evolving. We need to keep controlling our costs and being open to new ways of doing business. Long-Term Sustainable Future The ultimate goal of our transformation is to secure the sustainability of the Group. We’re well on the way to doing that. But it’s not just about the actions we take in the short-term. We also need to think about the long-term – something that Qantas has done a great deal of over almost a century. When we scan our environment, we see four global forces that are relevant to the success of the Group today and will have an even bigger impact in years ahead: 06 >> New centres of customer demand and geopolitical influence, especially Asia; >> Rapid digitalisation and the rise of big data; >> Shifting customer and workforce preferences; and >> The implications of resource constraints and climate change. All these trends come with challenges, but they also bring new opportunities for our business. Clear Strategic Priorities Preparing to take advantage of the big, global trends shaping aviation means continuing to deliver against our clear strategic priorities: >> Putting safety and security first at all times; >> Maximising the competitive advantages of the Group by aiming to be the best in every market we serve; >> Continuing to invest for our customers and strengthening our brands, including renewing our fleet, lounges, infrastructure and technology; >> Focusing on our people, culture and leadership, because our skilled, engaged workforce is the key to our success in everything we do; and >> Acting responsibly on energy, emissions and our supply chain, so that we reduce the costs and emissions of the fuel we burn, and play a positive role in the communities that support us. We’re committed to advancing these priorities in 2016/17. Q A N TA S A NNUA L REPOR T 2016 Every part of the Group contributed to our record result in 2015/16. Role of the National Carrier The role of the national carrier is core to Qantas’ identity. It’s what sets our brand apart from every other airline serving Australia, and it’s why we continue to invest in promoting Australian tourism, showcasing Australian suppliers and speaking up on issues that go to the heart of the Australian belief in basic fairness. We’re as passionate as ever about helping unlock Australia’s potential. And we believe the best way we can do that is by building a strong, sustainable future for Qantas as the airline that represents Australia in the world. Alan Joyce 07 Q A N TA S A NNUA L REPOR T 2016 Board of Directors For the year ended 30 June 2016 LEIGH CLIFFORD AO ALAN JOYCE BEng, MEngSci BApplSc(Phy)(Math)(Hons), MSc(MgtSc), MA, FRAeS, FTSE Chairman and Independent Non-Executive Director Chief Executive Officer Leigh Clifford was appointed to the Qantas Board in August 2007 and as Chairman in November 2007. Alan Joyce was appointed Chief Executive Officer and Managing Director of Qantas in November 2008. He is Chair of the Nominations Committee. He is a Member of the Safety, Health, Environment and Security Committee. Mr Clifford is a Director of Bechtel Group Inc and Chairman of Bechtel Australia Pty Ltd and the National Gallery of Victoria Foundation. He is a Senior Advisor to Kohlberg Kravis Roberts & Co, a Member of the Council of Trustees of the National Gallery of Victoria and a Board Member of Equestrian Australia. Mr Clifford was previously a Director of Barclays Bank plc and Freeport-McMoRan Inc. Mr Joyce is a Director of the Business Council of Australia and a Member of the International Air Transport Association’s Board of Governors, having served as Chairman from 2012 to 2013. He is also a Director of a number of controlled entities of the Qantas Group. Mr Clifford was Chief Executive of Rio Tinto from 2000 to 2007. He retired from the Board of Rio Tinto in 2007. His executive and board career with Rio Tinto spanned some 37 years, in Australia and overseas. Age: 68 Mr Joyce was the Chief Executive Officer of Jetstar from 2003 to 2008. Before that, he spent over 15 years in leadership positions with Qantas, Ansett and Aer Lingus. At both Qantas and Ansett, he led the network planning, schedules planning and network strategy functions. Prior to that, Mr Joyce spent eight years at Aer Lingus, where he held roles in sales, marketing, IT, network planning, operations research, revenue management and fleet planning. Age: 50 08 Q A N TA S A NNUA L REPOR T 2016 Board of Directors continued For the year ended 30 June 2016 MAXINE BRENNER RICHARD GOODMANSON JACQUELINE HEY BA, LLB BCom, BEc, MBA, MCE BCom, Grad Cert (Mgmt), GAICD Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Maxine Brenner was appointed to the Qantas Board in August 2013. Richard Goodmanson was appointed to the Qantas Board in June 2008. Jacqueline Hey was appointed to the Qantas Board in August 2013. She is a Member of the Remuneration Committee and the Audit Committee. He is Chair of the Safety, Health, Environment and Security Committee and a Member of the Nominations Committee. She is a Member of the Audit Committee. Ms Brenner is a Director of Origin Energy Limited, Orica Limited and Growthpoint Properties Australia Limited. She is a Member of the Council of the University of New South Wales. Ms Brenner was formerly a Managing Director of Investment Banking at Investec Bank (Australia) Limited. She has extensive experience in corporate advisory work, particularly in relation to mergers and acquisitions, corporate restructures and general corporate activity. She also practised as a lawyer with Freehill Hollingdale & Page (now Herbert Smith Freehills) where she specialised in corporate work, and spent several years as a lecturer in the Faculty of Law at both the University of NSW and the University of Sydney. Ms Brenner was the Deputy Chairman of the Federal Airports Corporation and a Director of Neverfail Springwater Limited, Bulmer Australia Limited and Treasury Corporation of NSW. She also served as a Member of the Australian Government’s Takeovers Panel. Mr Goodmanson was a Director of Rio Tinto plc and Rio Tinto Limited from 2004 to 2016. From 1999 to 2009 he was Executive Vice President and Chief Operating Officer of E.I. du Pont de Nemours and Company. Previous to this role, he was President and Chief Executive Officer of America West Airlines. Mr Goodmanson was also Chief Operations Officer for Frito‑Lay Inc, a subsidiary of PepsiCo and a Principal at McKinsey & Company Inc. He spent 10 years in heavy civil engineering project management, principally in South East Asia. Additionally, Mr Goodmanson was an Economic Adviser to the Governor of Guangdong Province, China from 2003 until 2009. Mr Goodmanson was born in Australia and is a citizen of both Australia and the United States. Ms Hey is a Director of Bendigo and Adelaide Bank Limited and is Chair of its Change & Technology Committee and is a Member of both its Credit and Governance and HR Committees. She is also a Director of AGL Energy Limited, the Australian Foundation Investment Company Limited, Melbourne Business School and Cricket Australia, and a Member of the ASIC Director Advisory Panel. Ms Hey was also formerly a Director of the Special Broadcasting Service from 2011 to 2016. Between 2004 and 2010, Ms Hey was Managing Director of various Ericsson entities in Australia and New Zealand, the United Kingdom and Ireland, and the Middle East. Her executive career with Ericsson spanned more than 20 years in which she held finance, marketing, sales and leadership roles. Age: 50 Age: 69 Age: 54 09 Q A N TA S A NNUA L REPOR T 2016 Board of Directors continued For the year ended 30 June 2016 MICHAEL L’ESTRANGE AO WILLIAM MEANEY PAUL RAYNER BA, MA (Oxon) BSc, MEng, MSIA BEc, MAdmin, FAICD Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Michael L’Estrange was appointed to the Qantas Board in April 2016. William Meaney was appointed to the Qantas Board in February 2012. Paul Rayner was appointed to the Qantas Board in July 2008. He is a Member of the Safety, Health, Environment and Security Committee. He is a Member of the Safety, Health, Environment and Security Committee and the Remuneration Committee. He is Chair of the Remuneration Committee and a Member of the Nominations Committee. Mr Meaney is the President and Chief Executive Officer of Iron Mountain Inc. He is a Member of the Asia Business Council and also serves as Trustee of Carnegie Mellon University and Rensselaer Polytechnic Institute. Mr Rayner is Chairman of Treasury Wine Estates Limited, a Director of Boral Limited and Chairman of its Audit Committee, and a Director of the Murdoch Childrens Research Institute. Mr L’Estrange was Head of the National Security College at the Australian National University from 2009 to 2015. Prior to this, he was the Secretary of the Department of Foreign Affairs and Trade for almost five years and the Australian High Commissioner to the UK between 2000 and 2005. He served as Secretary to Cabinet and Head of the Cabinet Policy Unit from 1996 for more than four years and, prior to that, as Executive Director of the Menzies Research Centre. He has been a Non-Executive Director of Rio Tinto plc and Rio Tinto Limited and a Director of the University of Notre Dame, Australia since 2014. Mr L’Estrange studied at Sydney University and later as a Rhodes Scholar at Oxford University where he graduated as a Master of Arts with First Class Honours. Age: 63 Mr Meaney was formerly the Chief Executive Officer of The Zuellig Group and a Director of moksha8 Pharmaceuticals Inc. He was also the Managing Director and Chief Commercial Officer of Swiss International Airlines and Executive Vice President of South African Airways responsible for sales, alliances and network management. Prior to these roles, Mr Meaney spent 11 years providing strategic advisory services at Genhro Management Consultancy as the Founder and Managing Director, and as a Principal with Strategic Planning Associates. Mr Meaney holds United States, Swiss and Irish citizenships. Age: 56 10 Mr Rayner was formerly a Director of Centrica plc from 2004 to 2014 and Chairman of its Audit Committee from 2004 to 2013. From 2002 to 2008, Mr Rayner was Finance Director of British American Tobacco plc based in London. Mr Rayner joined Rothmans Holdings Limited in 1991 as its Chief Financial Officer and held other senior executive positions within the Group, including Chief Operating Officer of British American Tobacco Australasia Limited from 1999 to 2001. Previously, Mr Rayner worked for 17 years in various finance and project roles with General Electric, Rank Industries and the Elders IXL Group. Age: 62 Q A N TA S A NNUA L REPOR T 2016 Board of Directors continued For the year ended 30 June 2016 TODD SAMPSON BARBARA WARD AM MBA, BA(Hons) BEc, MPolEc Independent Non-Executive Director Independent Non-Executive Director Todd Sampson was appointed to the Qantas Board in February 2015. Barbara Ward was appointed to the Qantas Board in June 2008. He is a Member of the Remuneration Committee. She is Chair of the Audit Committee, a Member of the Safety, Health, Environment and Security Committee and a Member of the Nominations Committee. He has been the Executive Chairman of the Leo Burnett Group since September 2015, having been National Chief Executive Officer from 2008 to 2015 and also sits on the Board of Fairfax Media Limited. Mr Sampson has close to 20 years’ experience across marketing, communication, new media and digital transformation. He has held senior leadership and strategy roles for a number of leading communication companies in Australia and overseas, including as Managing Partner for D’Arcy, Strategy Director for The Campaign Palace and Head of Strategy for DDB Needham Worldwide. Age: 46 Ms Ward is a Director of Caltex Australia Limited, a number of Brookfield Multiplex Group companies, and the Sydney Children’s Hospital Foundation. She was formerly a Director of the Commonwealth Bank of Australia, Lion Nathan Limited, Brookfield Multiplex Limited, Data Advantage Limited, O’Connell Street Associates Pty Ltd, Allco Finance Group Limited, Rail Infrastructure Corporation, Delta Electricity, Ausgrid, Endeavour Energy and Essential Energy. She was also Chair of Country Energy and NorthPower and HWW Limited, a Board Member of Allens Arthur Robinson and the Sydney Opera House Trust and on the Advisory Board of LEK Consulting. Ms Ward was Chief Executive Officer of Ansett Worldwide Aviation Services from 1993 to 1998. Before that, Ms Ward held various positions at TNT Limited, including General Manager Finance, and also served as a Senior Ministerial Advisor to The Hon PJ Keating. Age: 62 11 1,532 FY16 FY15 FY14 Q A N TA S A NNUA L REPOR T 2016 FY13 Review of Operations FY12 For the year ended 30 June 2016 RESULT HIGHLIGHTS Underlying Profit Before Tax 1,532 Statutory Profit After Tax 1,029 $M FY16 FY16 1,532 FY15 FY15 975 FY14 (646) FY13 186 FY12 95 FY14 FY13 FY12 $M FY16 FY16 1,029 FY15 FY15 560 FY14 (2,843) FY14 FY13 FY13 2 FY12 FY12 (244) The Qantas Group reported an Underlying Profit Before Tax1 of $1,532 million for the 12 months ended 30 June 2016, an improvement of $557 million from 2014/15 and a record result. The Group’s Statutory Profit After Tax of $1,029 million included $108 million of costs which were not included in Underlying PBT1 primarily driven by redundancies, restructuring and other costs associated with the ongoing Profit QantasAfter Transformation Program. Statutory Tax 1,029 The Group is delivering $M against its strategy to maximise long-term shareholder value; building on our leading position in domestic Australia, growing non-cyclical earnings at Qantas Loyalty, aligning Qantas and Jetstar with the rise of Asia and investing in our people and our customers. Over 2015/16, strategic highlights included: –– –– –– –– –– –– –– –– Record results for the Group and its segments2 FY16 Group Domestic EBIT3 up 30 per cent with enhanced dual brand coordination FY15 4 Reduction in ex-fuel unit cost of three per cent FY14 Building a resilient and sustainable Qantas International through continued unit cost improvement Diversification of earningsFY13 with eight years of double-digit EBIT growth at Qantas Loyalty5 Building a pan-Asia brand at Jetstar, with an $85 million improvement in profitability from Jetstar Airlines in Asia FY12 Record levels of customer advocacy6 with targeted investment in service and product Record people engagement with continued focus on culture and leadership The Qantas Transformation Program continues to underpin a maintainable earnings uplift, delivering $557 million of benefits over the financial year – ahead of a targeted $450 million of benefits. Ex-fuel unit cost was reduced by three per cent, and the Group’s revenue increased by two per cent, reflecting the cost reduction and revenue generation initiatives in the program. As a result of the program exceeding targets to date, the Group has raised the target of Qantas Transformation to $2.1 billion of benefits delivered by the end of financial year 2016/17, up from $2 billion. The Group’s Financial Framework is at the centre of all capital allocation decisions, providing for balance sheet strength, investment in growth, and shareholder returns. Some key achievements under the Financial Framework include: –– –– –– –– –– Net debt7 of $5.6 billion within target range of $4.8 billion to $6 billion8 Investment grade credit metrics and rating from Standard and Poor’s and Moody’s Investor Services Cost of capital minimised by using cash in excess of short-term requirements to refinance operating leases $1 billion returned to shareholders in 2015/16 through a capital return and on-market share buy-back $500 million in additional capital management initiatives announced including resumption of dividend payments with a seven cents per share ordinary dividend totalling $134 million and the announcement of a $366 million on-market buy-back The Group achieved a strong increase in earnings in mixed global trading conditions, with margin expansion realised through total unit cost9 improvement of six per cent partially offset with a two per cent decrease in unit revenue10. 1 Underlying Profit Before Tax (Underlying PBT) is the primary reporting measure used by the Qantas Group’s chief operating decision-making bodies, being the Chief Executive Officer, Group Management Committee and the Board of Directors, for the purpose of assessing the performance of the Group. The primary reporting measure of the Qantas International, Qantas Domestic, Jetstar Group, Qantas Loyalty and Qantas Freight operating segments is Underlying Earnings Before Net Finance Costs and Tax (Underlying EBIT). The primary reporting measure of the Corporate segment is Underlying PBT as net finance costs are managed centrally. Refer to the reconciliation of Underlying PBT to Statutory Profit/(Loss) Before Tax. 2 Based on Underlying Profit Before Tax (PBT) for the Qantas Group and Underlying EBIT (Earnings before net interest and income tax expense) for Qantas Domestic, Qantas International, Jetstar Group and Qantas Loyalty. 3 Underlying EBIT of Qantas Domestic and Jetstar Domestic. 4 Ex-fuel unit cost is calculated as Underlying PBT less ticketed passenger revenue and fuel, adjusted for changes in: employee provision discount rates and other assumptions changes, foreign exchange rates, share of net profit/(loss) of investments accounted for under the equity method and block codeshare flying agreements per ASK. The adjustment for foreign exchange rates is made to the comparative year to enable comparability. 5 When normalised for changes in accounting estimates of the fair value of points and breakage expectations effective 1 January 2009. 6 Record NPS achieved at Qantas Domestic, Qantas International and Qantas Loyalty. 7 Net debt under the Group’s Financial Framework includes net on balance sheet debt and off balance sheet aircraft operating lease liabilities. Capitalised operating lease liability is measured at fair value at the lease commencement date and remeasured over lease term on a principal and interest basis akin to a finance lease. 8 Target range calculated based on current average invested capital. 9 Total Unit cost is calculated as Underlying PBT less ticketed passenger revenue per available seat kilometre (ASK). 10 Unit Revenue is calculated as ticketed passenger revenue per ASK. 12 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 Domestic Australia experienced a stable operating environment in non-resources sectors: –– Lower AUD and increased inbound visitor arrivals supporting domestic traffic growth –– Resource related traffic and revenue down compared to 2014/15 –– Fourth quarter 2015/16 general demand weakness The Group’s international operating environment was more competitive, with competitor capacity growth and sharper pricing activity seen on key routes: –– –– –– –– Increased industry capacity growth on the back of higher operating margins Industry-wide pricing activity passing on a portion of fuel benefit Geopolitical uncertainty impacting northern hemisphere travel Qantas and Jetstar capacity growth focused on higher demand markets in Asia FINANCIAL FRAMEWORK ALIGNED WITH SHAREHOLDER OBJECTIVES Qantas’ Financial Framework aligns our objectives with those of our shareholders. With the aim of generating maintainable Earnings per share growth over the cycle, which in turn should translate into Total Shareholder Returns (TSR) in the top quartile of the ASX100 and a basket of global airlines11, the Financial Framework has three clear priorities and associated long-term targets: 1. Maintaining an Optimal Capital Structure 2. ROIC > WACC12 Through the Cycle 3. Disciplined Allocation of Capital Minimise cost of capital by targeting a net debt range of $4.8 billion to $6 billion Deliver ROIC > 10 per cent through the cycle Grow Invested Capital with disciplined investment, return surplus capital MAINTAINABLE EPS13 GROWTH OVER THE CYCLE TOTAL SHAREHOLDER RETURNS IN THE TOP QUARTILE ROIC (%) Surplus Capital Increased distributions, grow invested capital OPTIMAL CAPITAL STRUCTURE Maintaining an Optimal Capital Structure No Surplus Capital Debt reduction focus 10% ROIC –– The Group’s Financial Framework targets an optimal capital structure with a net debt range of between $4.8 billion and $6 billion, based on the current Average Invested Capital of approximately $9 billion. This capital structure lowers the Group’s cost of capital, preserves financial strength, and therefore enhances long-term shareholder value. –– Capital allocation decisions, including distributions to shareholders, are sized to remain within the target net debt range on a forward basis. –– The Group’s optimal capital structure is consistent with investment grade credit metrics from Standard and Poor’s and Moody’s Investor Services. $4.8 $6.0 Net Debt ($B) 11 Target Total Shareholder Returns within the top quartile of the ASX100 and global listed airline peer group as stated in the 2015 Annual Report, with reference to the 2015-2017 Long Term Incentive Plan (LTIP). 12 Weighted Average Cost of Capital (WACC) is calculated on a pre-tax basis. 13 Earnings per share. 13 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 ROIC > WACC Through the Cycle Return on Invested Capital (ROIC) of 22.7 per cent, up from 16.2 per cent in the prior year, was achieved through generating higher returns from existing assets. Average Invested Capital in 2015/16 of $8.9 billion was slightly below Average Invested Capital of $9.1 billion in 2014/15 with disciplined capital expenditure. With increased fleet utilisation, cost reduction through the Qantas Transformation Program and lower fuel prices, returns were well above the Group’s threshold target of ROIC greater than 10 per cent. Return on Invested Capital 23 % FY16 FY16 22.7% FY15 FY14 FY15 16.2% FY14 (1.5%) Disciplined Allocation of Capital Funds from Operations (FFO)14 increased to $3.1 billion in 2015/16. FFO were applied to: Refinancing of operating leases $0.8b Reduction in cash balance $0.9b –– $1.1 billion of debt repayments15 –– $1 billion of net capital expenditure16 in line with guidance –– $1 billion distributed to shareholders in 2015/16 through a share buy-back and capital return Debt reduction $1.1b Funds from Operations $3.1b $778 million cash in excess of short-term liquidity requirements was used to refinance 29 aircraft out of maturing operating leases. Using the Group’s existing cash balance in this way achieved the following benefits: Net capex $1.0b –– Reduced gross debt and cost of carry, minimal impact to net debt –– Greater fleet and maintenance planning flexibility –– Reduced exposure to USD lease rentals –– Increased value of unencumbered assets to over US$3.9 billion17 Shareholder distributions $1.0b Uses Sources Maintainable EPS Growth over the Cycle Earnings Per Share 49.4 cents FY16 FY16 49.4 FY15 FY15 25.4 FY14 FY14 (128.5) FY13 FY13 0.0 FY12 FY12 (10.8) Earnings per share almost doubled to 49.4 cents, with an 84 per cent improvement in Statutory Profit After Tax and a 12.6 per cent reduction in shares on issue. Shares on issue were reduced through the $505 million capital return and related share consolidation as well as the $500 million onmarket share buy-back, both of which were completed in 2015/16. UNDERLYING PBT The Qantas Group’s full-year 2015/16 Underlying PBT increased to $1,532 million, compared to an Underlying PBT of $975 million in 2014/15. The significant improvement in earnings was driven by the delivery of a reduction in ex-fuel unit cost, fuel efficiency initiatives, and revenue benefits from the Qantas Transformation Program and the benefits of lower fuel prices captured by the Group’s disciplined hedging program. 14 Funds from Operations of $3.1 billion is equal to operating cash flows in the Consolidated Cash Flow Statement adjusted for the principal portion of operating leased aircraft rental payments. The principal portion of aircraft operating lease rentals are considered a debt repayment in the Group’s financial framework. After this adjustment, the interest portion of lease rental payments continues to be recognised as an outflow in Funds from Operations. 15 Debt repayments of $1.1 billion refers to repayment of on balance sheet borrowings and capitalised operating lease liability repayments (excluding cash flows relating to aircraft operating lease refinancing). Debt reduction is equal to the total of financing cash flows in the statement of cash flows excluding shareholder distributions and payments for treasury shares, principal portion of operating leased aircraft rental payments and reduction of capitalised operating leases from the return of leased aircraft. 16 Net capital expenditure of $1 billion is equal to net investing cash flows included in the Consolidated Cash Flow Statement (excluding aircraft operating lease refinancing) less the impact to invested capital of returning operating lease aircraft. 17 Based on AVAC market values. 14 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 Net passenger revenue increased by three per cent, reflecting improved passenger loads in most markets and the Group’s capacity growth of five per cent. This stronger revenue performance was supported by network changes and capacity management which led to increased fleet utilisation. A reduction in the Group’s fuel expense resulted from lower AUD fuel prices and fuel efficiency measures in the Qantas Transformation Program. Group Underlying Income Statement Summary18 Net passenger revenue Net freight revenue June 2016 $M June 2015 $M Change $M 13,961 13,604 357 3 850 936 (86) (9) Change % Other revenue 1,389 1,276 113 9 Total Revenue 16,200 15,816 384 2 Operating expenses (excluding fuel) (9,529) (9,064) (465) (5) Fuel (3,235) (3,899) 664 17 Depreciation and amortisation (1,224) (1,096) (128) (12) (461) (495) 34 7 – (29) 29 100 Non-cancellable aircraft operating lease rentals Share of net loss of investments accounted for under the equity method Total Expenditure (14,449) (14,583) 134 1 1,751 1,233 518 42 (219) (258) 39 15 Underlying PBT 1,532 975 557 57 Operating Statistics June 2016 June 2015 Change Change % M 148,691 142,287 6,404 5 Revenue Passenger Kilometres (RPK) M 119,054 112,543 6,511 6 Passengers carried ‘000 51,426 49,181 2,245 5 Underlying EBIT Net finance costs Available Seat Kilometres (ASK)19 20 Revenue seat factor21 % 80.1 79.1 1pts 1 Unit Revenue (RASK) c/ASK 8.08 8.21 (0.13) (2) Total unit cost c/ASK (7.05) (7.54) 0.49 6 Ex-Fuel unit cost c/ASK (4.81) (4.97) 0.16 3 Group capacity (Available Seat Kilometres) increased by five per cent, and demand (Revenue Passenger Kilometres) increased by six per cent, resulting in a one percentage point increase in Revenue Seat Factor. Unit revenue (Revenue per Available Seat Kilometres) decreased two per cent in 2015/16 with growth in the first-half of 2015/16 and a decrease in unit revenue in the second-half of 2015/16 as a proportion of the benefit from lower fuel prices was passed on in pricing in the international market. The Group’s ex-fuel unit cost improved by three per cent. CONTINUED DELIVERY OF BUSINESS TRANSFORMATION The Group’s balanced scorecard through the Qantas Transformation Program ensures a net benefit for the customer experience in addition to permanent reduction of costs. This was seen in customer and brand highlights for the year including: –– Record customer advocacy (NPS) results at Qantas Domestic, Qantas International and Qantas Loyalty –– Reconfiguration of the A330 fleet, progressively adding ‘Business Suites’ with lie-flat beds on A330 family aircraft –– Reconfiguration of the B737 fleet with 5422 completed to date, upgrading cabin interiors and in-flight entertainment at the same time as increasing seat count for efficiency gains –– B787 aircraft with enhanced customer offering in the Jetstar International fleet with the last three of 11 delivered during the year –– Continuation of global lounge upgrade program, with new lounges announced for London Heathrow and Brisbane –– Digital innovation focused on improving speed and ease of travel including auto check-in on mobile and the announced wi-fi roll-out for Qantas Domestic 18 Underlying expenses differ from equivalent statutory expenses due to items excluded from Underlying PBT, such as adjustments for impacts of AASB 9 which relate to other reporting periods and other items identified by Management. Refer to the reconciliation of statutory PBT to underlying PBT on page 22. 19 ASK – total number of seats available for passengers, multiplied by the number of kilometres flown. 20 RPK – total number of passengers carried, multiplied by the number of kilometres flown. 21 Revenue Seat Factor – RPK divided by ASK. Also known as seat factor, load factor or load. 22 As at 24 August 2016. 15 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 The Group has delivered total benefits from the Qantas Transformation Program of $1.66 billion as at 30 June 2016, leading to an increase in the 2017 target to $2.1 billion. Since implementing the program in financial year 2014, ex-fuel expenditure has been reduced by nine per cent and all major milestones have been met on time or exceeded. In 2015/16 Transformation benefits achieved of $557 million consisted of: –– Cost reduction of $451 million, including $51 million of fuel efficiency benefits –– Net revenue benefits of $106 million The target metrics and progress to date as at 2015/16 include: ACHIEVING OUR TARGETS Target Accelerated Transformation Benefits Deleverage Balance Sheet Cash Flow Fleet Simplification Customer and Brand Progress to Date Metric Timeframe $2.1 billion gross benefits >10 per cent23 Group ex-fuel expenditure reduction 2016/17 $1.66 billion benefits realised Ex-fuel expenditure reduced by 9 per cent24 5,000 FTE 2016/17 4,605 FTE reduction25 >$1 billion debt reduction26 2014/15 Delivered on schedule Debt/EBITDA27 45 per cent 2016/17 Delivered ahead of schedule Sustainable positive free cash flow29 2014/15 onwards Delivered on schedule 11 fleet types to seven 2015/16 Eight fleet types Retaining two x non-reconfigured B747 Customer Advocacy (NPS) Ongoing NPS record achieved at Qantas Domestic, Qantas International and Qantas Loyalty 30 Maintain premium on-time performance Qantas Domestic Ongoing Premium on-time performance maintained with increase to 89.7 per cent31 The Group-wide policy of implementing an 18-month wages freeze, whilst not part of the Qantas Transformation Program, is helping to offset inflation, build a more competitive and sustainable wages position going forward and closes the gap to our major domestic competitors. Thirty agreements have been closed with the wages freeze, with all of the major unions representing employee groups having signed up to the policy in at least one agreement. In July 2015, Qantas announced that employees covered by the wages freeze policy will receive a bonus payment worth five per cent of their base annual salary. In August 2016, the Group announced a non-executive bonus payment of $3,000 for full-time and $2,500 for part-time employees, subject to the employee group having signed up to the 18-month wages freeze. 23 Target assumes steady foreign exchange rates and capacity. 24 Includes underlying operating expenses (excluding fuel), depreciation and amortisation (excluding depreciation reduction from Qantas International non-cash fleet impairment) and non-cancellable aircraft operating lease rentals, adjusted for movements in FX rates and capacity. 2015/16 vs annualised first-half 2014/15. 25 Actioned Full Time Equivalent employee reduction as at 30 June 2016. ~30 FTEs still to exit as at 30 June 2016. 26 Reduction in net debt including capitalised operating lease liabilities. 27 Management’s estimate based on Moody’s methodology. 28 Management’s estimate based on Standard and Poor’s methodology. 29 Net free cash flow – operating cash flows less investing cash flows (excluding Aircraft operating lease refinancing). Net free cash flow is a measure of the amount of operating cash flows that are available (i.e. after investing activities) to fund reductions in net debt or payments to shareholders. 30 Measured as Net Promoter Score. Average 2015/16 compared to average 2014/15. 31 Qantas mainline operations (excluding QantasLink) for the period 2015/16 compared to average 2014/15. Source: BITRE. 16 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 BUILDING ON THE GROUP’S LONG-TERM COMPETITIVE ADVANTAGES The Qantas Group’s integrated portfolio strategy is designed to diversify earnings and mitigate risk, with the dual brands of Qantas and Jetstar and their presence in attractive markets across the Asia Pacific providing long-term growth opportunities. The starting point for the Group’s strategy is understanding the global forces that will impact Qantas over the long-term – the megatrends that present both risk and opportunity – and ensuring the Group is well positioned to respond. Qantas has engaged with stakeholders including shareholders, sustainability thought leaders, industry partners and suppliers to identify and prioritise the global forces of most relevance to the Group. With this long-term context in mind, the Group’s strategic priorities allow us to navigate the right path, building on our long-term competitive advantages while recognising and responding to the risks and opportunities arising from emerging global forces. New Centres of Customer Demand & Geopolitical Influence Shifting Customer & Workforce Preferences Rapid Digitisation & the Rise of Big Data Resource Constraints & Climate Change CLEAR STRATEGIC PRIORITIES Maximising Leading Domestic Position through Dual Brand Strategy Building a Resilient & Sustainable Qantas International, Growing Efficiently with Partnerships Aligning Qantas & Jetstar with Asia’s Growth Investing in Customer, Brand, Data & Digital Diversification & Growth at Qantas Loyalty Focus on People, Culture & Leadership Embedding Sustainability Across Qantas Group RAPIDLY IMPROVED CASH GENERATION June 2016 $M June 2015 $M Change $M Change % Operating cash flows 2,819 2,048 771 38 Investing cash flows (excluding aircraft operating lease refinancing) (1,145) (944) (201) 21 Net free cash flow 1,674 1,104 570 52 Cash Flow Summary Aircraft operating lease refinancing (778) – (778) >100 Financing cash flows (1,825) (1,218) (607) 50 Cash at beginning of year 2,908 3,001 (93) (3) Effect of foreign exchange on cash Cash at end of year Debt Analysis Net on balance sheet debt32 Capitalised operating lease liabilities 33 Net debt34 1 21 (20) (95) 1,980 2,908 (928) (32) June 2016 $M June 2015 $M Change Change % 2,880 2,594 286 11 2,766 3,806 (1,040) (27) 5,646 6,400 (754) (12) FFO/net debt % 52 45 7pts Debt/EBITDA times 2.5 3.0 (0.5) times 32 Net on balance sheet debt includes interest-bearing liabilities and the fair value of hedges related to debt reduced by cash and cash equivalents. 33 Capitalised operating lease liabilities are measured at fair value at the lease commencement date and remeasured over the lease term on a principal and interest basis akin to a finance lease. Residual value of capitalised aircraft operating lease liability denominated in foreign currency is translated at the long-term exchange rate. 34 Net debt includes on balance sheet debt and capitalised aircraft operating lease liabilities under the Group’s Financial Framework. 17 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 Operating cash flows of $2.8 billion saw a strong increase from the prior year, reflecting cost and revenue benefits realised through the Qantas Transformation Program, and lower AUD fuel prices. When adjusted for the principal portion of operating rental payments, Funds from Operations were $3.1 billion. Net capital expenditure of $1 billion included investment in replacement fleet such as the Boeing 787 for Jetstar International and customer experience initiatives including airport lounges and the continuation of Airbus A330 and Boeing 737 cabin reconfigurations. Qantas generated $1.7 billion of net free cash flow in the period facilitating net debt reduction and returns to shareholders of $1 billion in the financial year. With reduced financial leverage and minimal near-term refinancing risk, the Group has optimised the mix of liquidity with less requirement for short-term liquidity held in cash. The Group used cash in excess of its short-term requirements to purchase aircraft out of maturing operating leases, reducing the cash at period end and increasing the value of the Group’s pool of unencumbered aircraft to over US$3.9 billion. Qantas continues to retain significant flexibility in its financial position, funding strategies and fleet plan to ensure that it can respond to any change in market conditions. At 30 June 2016, the Group’s leverage metrics were well within investment grade (BBB/Baa range) with FFO/net debt of 52 per cent (2014/15: 45 per cent) and Debt/adjusted EBITDA of 2.5 times (2014/15: 3.0 times). FLEET The Qantas Group remains committed to a fleet strategy that provides for long-term flexibility and renewal. The fleet strategy is designed to support the strategic objectives of the Group’s two flying brands and the overarching targets of the Qantas Transformation Program. At all times, the Group retains significant flexibility to respond to any changes in market conditions and the competitive environment. At 30 June 2016, the Qantas Group fleet35 totalled 303 aircraft. During 2015/16, the Group purchased six aircraft and reclassified one aircraft from assets held for sale back into the fleet: –– Qantas – two B717–200s, one Bombardier Q300 and one Fokker 100 –– Jetstar – three B787–8s The Group removed three aircraft from service in 2015/16 including two lease returns. These included two A330–200s and one B747–400. The Qantas Group’s scheduled passenger fleet average age is now 8.6 years36, within the targeted 8–10 year range. The benefits of fleet investment include improved customer satisfaction, improved environmental outcomes, operational efficiencies and cost reductions. SEGMENT PERFORMANCE Segment Performance Summary June 2016 $M June 2015 $M Qantas Domestic 578 Qantas International 512 Change $M Change % 480 98 20 267 245 92 Qantas Freight 64 114 (50) (44) Jetstar Group 452 230 222 97 Qantas Loyalty 346 315 31 10 Corporate (168) (163) (5) 3 (33) (10) (23) >100 1,751 1,233 518 42 (219) (258) 39 (15) 1,532 975 557 57 Unallocated/Eliminations Underlying EBIT Net finance costs Underlying PBT 35 Includes Jetstar Asia, Qantas Freight and Network Aviation and excludes aircraft owned by Jetstar Japan and Jetstar Pacific. 36 Based on Group’s scheduled passenger fleet, excluding freighter aircraft and Network Aviation. 18 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 QANTAS DOMESTIC Revenue 5,710 Underlying EBIT 578 $M $M FY16 FY16 5,710 FY16 FY16 578 FY15 FY15 5,828 FY15 FY15 480 FY14 FY14 5,848 FY14 FY14 30 FY13 FY13 6,218 FY13 FY13 365 FY12 FY12 6,063 FY12 FY12 463 Metrics June 2016 June 2015 Change Operating margin37 % 10.1 8.2 1.9pts ASKs M 36,260 36,638 (1.0)% Seat factor % 75.2 74.2 1.0pts Qantas Domestic reported a record Underlying EBIT of $578 million, a stand out performance in a year that saw a continued drop off in revenue from the resources sector and general demand weakness in the final quarter 2015/16. Operating margin increased to 10.1 per cent, with ex-fuel unit cost38 improvement offsetting a decrease in revenue that was driven by the downturn in the Australian resources sector. Key drivers of the result included: –– Unit revenue was flat while ex-resources unit revenue39 increased by one per cent –– Ex-fuel unit cost improvement of one per cent on capacity decrease of one per cent Qantas Transformation delivered an increase in aircraft utilisation of two per cent40. In response to the two-speed Australian economy, with passenger growth on east coast and leisure markets and contraction in intra-Western Australia and other resources markets, Qantas Domestic continued to shift aircraft to higher-growth markets. Resource-related passenger revenue was down $121 million41 in the year, not including a reduction in charter activity. Qantas Domestic saw strong improvement in all key operational metrics including: –– –– –– –– Record on-time performance increasing to 89.7 per cent from 88.3 per cent in 2014/1542 Customer advocacy (NPS)43 increased five percentage points to a record result with investment in B737 and A330 cabin upgrades 15 x A330–200 and 54 x B737 reconfigurations completed44 Passenger seat factor increased one percentage point to 75.2 per cent QANTAS INTERNATIONAL Underlying EBIT Revenue 5,750 512 $M $M FY16 FY16 5,750 FY16 FY16 512 FY15 FY15 5,467 FY15 FY15 267 FY14 FY13 FY14 5,297 FY14 FY14 (497) FY13 5,496 FY13 FY13 (246) FY12 FY12 5,770 FY12 FY12 (484) Metrics June 2016 June 2015 Change % 8.9 4.9 4.0pts ASKs M 63,599 59,263 7.3% Seat factor % 81.7 81.5 0.2pts Operating margin 37 Operating margin calculated as Underlying EBIT divided by total segment revenue. 38 Ex-fuel unit cost is calculated as Underlying PBT less ticketed passenger revenue and fuel, adjusted for changes in: employee discount rates and other assumptions, and foreign exchange rates. 39 Ex-resources unit revenue is unit revenue other than specific routes that are classified as resources. 40 Average block hours per aircraft per day compared to 2014/15. 41 Regular Public Transport (RPT) resources routes revenue compared to 2014/15. 42 On time performance (OTP) of Qantas Mainline (excluding QantasLink) operations. Measured as departures within 15 minutes of scheduled departure time. Source: BITRE. 43 Average 2015/16 net promoter score based on internal Qantas reporting. 44 As at 24 August 2016. 19 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 Qantas International achieved a record Underlying EBIT of $512 million, a $1 billion turnaround since 2013/14 that reflects the successful restructure of the segment’s cost base, network and alliance partners, and a more dynamic approach to scheduling that has created new revenue opportunities. Highlights of the 2015/16 result included: –– –– –– –– Revenue increased five per cent with capacity growth and seat factor improvement Unit Revenue decline of one per cent for 2015/16 with a second-half 2015/16 decline of five per cent amid competitive market pricing Ex-fuel unit45 cost improvement of four per cent driving margin uplift Qantas Transformation delivering utilisation increase of five per cent46 Aircraft were reallocated from Qantas Domestic to Qantas International in response to shifting demand, facilitating additional services to higher growth markets in Asia. Over the course of the financial year Qantas International added services to Japan, China, Singapore and Bali, consistent with its strategic objective of aligning with the region’s passenger growth. Qantas International continued to broaden its network and strengthen offshore distribution with new alliance partnerships announced with American Airlines and China Eastern47. The early integration of each alliance tracked according to plan, with synergies to begin being realised in 2016/17. Record customer advocacy48 results at the segment were the result of continued investment in product and service with all 10 International A330–300 cabin reconfigurations completed. JETSTAR GROUP Revenue 3,636 Underlying EBIT 452 $M $M FY16 FY16 3,636 FY16 FY16 452 FY15 FY15 3,464 FY15 FY15 230 FY14 FY14 3,222 FY14 (116) FY13 FY13 3,288 FY13 FY13 138 FY12 FY12 3,076 FY12 FY12 203 Metrics FY14 June 2016 June 2015 Change % 12.4 6.6 5.8pts ASKs M 48,832 46,386 5.3% Seat factor % 81.5 79.9 1.6pts Operating margin Jetstar Group reported a record Underlying EBIT of $452 million, almost double the segment’s prior record result in 2014/15. The result saw a strong contribution from across the Jetstar Group’s domestic and international businesses, with highlights including: –– –– –– –– –– Jetstar Domestic result up 62 per cent to $242 million, leveraging brand and network advantage Strong Jetstar International profit with B787–8 efficiencies and growth in core Asia-Pacific markets Operating margin49 improvement, up 5.8 pts to 12.4 per cent Controllable unit cost50 reduction of three per cent Successful launch of New Zealand regional operations A stand out of the Jetstar Group result was the performance of Jetstar Airlines in Asia51 which delivered an $85 million improvement in profitability compared to 2014/15. Jetstar Japan reported its maiden full year profit with international expansions and realising scale benefits. Jetstar Asia in Singapore had a strong result with the launch of four new destinations (including charters into China) and total unit cost reduction, notwithstanding a challenging competitive market. Jetstar Pacific in Vietnam’s earnings were lower in a highly competitive low fares market in the country, but continues to represent an attractive growth option for the Group in South East Asia. Jetstar’s focus on driving customer advocacy and ancillary revenue growth continued with investment in innovative service training and digital sales. A re-design of jetstar.com, including data-driven ancillary product offering, has enhanced the customer experience. 45 Ex-fuel unit cost is calculated as Underlying PBT less ticketed passenger revenue and fuel, adjusted for changes in: employee provision discount rates and other assumptions, foreign exchange rates, and block codeshare flying agreements per ASK. 46 Calculated as average block hours per aircraft per day. Compared to 2014/15. 47 American Airlines partnership is subject to regulatory approval. 48 Average 2015/16 Net Promoter Score, based on internal Qantas reporting. 49 Operating margin calculated as Underlying EBIT divided by total segment revenue. 50 Controllable unit cost excludes Jetstar New Zealand Regionals which commenced in December 2015, and is calculated as Underlying expenses less fuel, adjusted for changes in foreign exchange rates, share of net profit/(loss) of investments accounted for under the equity method, charter revenue and changes in sector length per ASK. 51 Includes Jetstar Asia (Singapore), Jetstar Japan and Jetstar Pacific. 20 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 QANTAS LOYALTY Underlying EBIT Revenue 1,454 346 $M $M FY16 FY16 1,454 FY16 FY16 FY15 FY15 1,362 FY15 FY15 315 FY14 FY14 1,306 FY14 FY14 286 FY13 FY13 1,205 FY13 FY13 260 FY12 FY12 1,157 FY12 FY12 231 Metrics 346 June 2016 June 2015 Change Operating margin % 23.8 23.1 0.7pts Deferred revenue growth M 56 108 (48)% QFF members M 11.4 10.8 5.4% Qantas Loyalty reported a record Underlying EBIT of $346 million, the eighth consecutive year of double-digit earnings growth52. Diversifying the Group’s non-cyclical earnings at Qantas Loyalty remains a key pillar of the Group’s long-term strategy. Highlights in 2015/16 included: –– –– –– –– –– Revenue up 6.7 per cent; strong margins maintained 3.8 per cent growth in Qantas Frequent Flyer co-branded credit cards, outpacing industry53 Continued growth of core Qantas Frequent Flyer coalition 44 per cent of revenue growth coming from Loyalty businesses other than Qantas Frequent Flyer Record customer advocacy after program enhancements The Qantas Frequent Flyer and Aquire programs continued to attract new partners or extensions with existing ones. Significantly for Qantas Frequent Flyer, a new Woolworths proposition was announced that includes better member earn rates than under previous proposition. Core to the Loyalty strategy is diversification into new businesses that leverage the assets of the 11.4 million member base, in-house marketing expertise and digital capability. New ventures announced in the year were: –– Qantas Assure health insurance on target to deliver two to three per cent market share with a differentiated offering –– Investment in Data Republic – Australia’s first secure public data exchange platform QANTAS FREIGHT Revenue 982 Underlying EBIT 64 $M FY16 $M 982 FY16 FY16 64 FY15 1,067 FY15 FY15 114 FY14 1,084 FY14 FY14 24 FY13 FY13 1,056 FY13 FY13 36 FY12 FY12 1,013 FY12 FY12 45 FY15 FY14 FY16 Metrics Operating margin International capacity International load 55 54 June 2016 June 2015 Change % 6.5 10.7 (4.2)pts B 3.3 3.2 4.7% % 53.4 57.0 (3.6)pts 52 Qantas Loyalty record Underlying EBIT result compared to prior periods normalised for changes in accounting estimates of the fair value of points and breakage expectations effective 1 January 2009. 53 Based on number of personal credit card accounts with interest free periods; growth comparison for 12 months to June 2016; RBA credit and card charges statistics. 54 International capacity measured as international available freight tonne kilometres. 55 International load is measured as international revenue freight tonne kilometres divided by International available freight tonne kilometres. 21 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 Qantas Freight reported an Underlying EBIT of $64 million, a $50 million decrease from the prior year in line with guidance provided at the Group’s full year 2014/15 results. The performance reflected challenging global cargo markets, and more in keeping with historical performance. Key drivers of the result included: –– Revenue performance reflecting flat demand against a six per cent global capacity increase –– Conclusion of favourable Australian air Express legacy agreements in 2014/15 –– Continued cost reduction through Qantas Transformation Qantas Freight retains a leading position in the Australian cargo market with Australia Post and Toll Group, Australia’s largest air freight customers, under contract. With yields likely remaining under pressure, the segment is focused on delivering on strategic objectives to ensure sustainable performance in the future: –– –– –– –– Integrated ground to air operations Continued cost reduction through Qantas Transformation Developing growth opportunities into China through tactical freight deployment to Zhengzhou and Chongqing Agile scheduling to adapt to changing markets – for example new freighter stop-off into Dallas RECONCILIATION OF UNDERLYING PBT TO STATUTORY PROFIT BEFORE TAX The Statutory Profit Before Tax of $1,424 million for the year ended 30 June 2016 is $635 million higher than the prior year. Underlying PBT Underlying PBT is the primary reporting measure used by the Qantas Group’s chief operating decision-making bodies, being the Chief Executive Officer, Group Management Committee and the Board of Directors, for the purpose of assessing the performance of the Group. The primary reporting measure of the Qantas International, Qantas Domestic, Jetstar Group, Qantas Loyalty and Qantas Freight operating segments is Underlying EBIT. The primary reporting measure of the Corporate segment is Underlying PBT as net finance costs are managed centrally. Underlying PBT is derived by adjusting Statutory Profit Before Tax for the impacts of ineffectiveness and non-designated derivatives relating to other reporting periods and certain other items which are not included in Underlying PBT. 2016 $M Ineffectiveness relating to other reporting Statutory periods Net passenger revenue Net freight revenue Other 2015 $M Other items not included in Underlying PBT Underlying Ineffectiveness relating to other reporting Statutory periods Other items not included in Underlying PBT Underlying 13,961 – – 13,961 13,604 – – 13,604 850 – – 850 936 – – 936 1,389 – – 1,389 1,276 – – 1,276 Revenue and other income 16,200 – – 16,200 15,816 – – 15,816 Manpower and staff related 3,849 – (22) 3,827 3,604 – (13) 3,591 Fuel 3,250 (15) – 3,235 3,937 (38) – 3,899 Aircraft operating variable 3,362 – (5) 3,357 3,206 – (3) 3,203 Depreciation and amortisation 1,224 – – 1,224 1,096 – – 1,096 461 – – 461 495 – – 495 – – – – 40 – (11) 29 2,411 – (66) 2,345 2,390 – (120) 2,270 14,557 (15) (93) 14,449 14,768 (38) (147) 14,583 1,643 15 93 1,751 1,048 38 147 1,233 Non-cancellable aircraft operating lease rentals Share of net (profit)/loss of investments accounted for under the equity method Other Expenses Earnings Before Interest and Tax Net finance costs PBT (219) – – (219) (259) 1 – (258) 1,424 15 93 1,532 789 39 147 975 Underlying PBT is derived by adjusting Statutory Profit Before Tax for the impacts of: i. Ineffectiveness and non-designated derivatives relating to other reporting periods The difference between Statutory Profit Before Tax and Underlying PBT results from derivative mark-to-market movements being recognised in the Consolidated Income Statement in a different period to the underlying exposure. 22 Q A N TA S A NNUA L REPOR T 2016 Review of Operations continued For the year ended 30 June 2016 ii. Other items not included in Underlying PBT Items which are identified by Management and reported to the chief operating decision-making bodies as not representing the underlying performance of the business are not included in Underlying PBT. The determination of these items is made after consideration of their nature and materiality and is applied consistently from period to period. Items not included in Underlying PBT primarily result from revenues or expenses relating to business activities in other reporting periods, major transformational/restructuring initiatives, transactions involving investments, impairments of assets and other transactions outside the ordinary course of business. Other items not included in Underlying PBT of $93 million includes transformation costs relating to the Qantas Transformation Program of $183 million, the wage freeze employee bonus of $91 million relating to the Enterprise Bargaining Agreements (EBAs) announced on 3 July 2015 and other costs of $20 million offset by the net gain on disposal of property, plant and equipment of $201 million relating to the disposal of Sydney Airport Terminal Three and related assets to Sydney Airport Corporation Limited announced on 18 August 2015. MATERIAL BUSINESS RISKS The aviation industry is subject to a number of inherent risks. These include, but are not limited to, exposure to changes in economic conditions, changes in government regulations, fuel and foreign exchange volatility and other exogenous events such as aviation incidents, natural disasters, war or an epidemic. Qantas is subject to a number of specific business risks which may impact the achievement of the Group’s strategy and financial prospects. The nature of these risks has not changed with the focus remaining on improving the controls in place to manage or mitigate these risks. –– Competitive intensity: Market capacity growth ahead of underlying demand impacts industry profitability. • Australia’s liberal aviation policy settings coupled with the strength of the Australian economy relative to global economic weakness in recent years has attracted more offshore competitors to the Australian international aviation market, predominantly state-sponsored airlines. Qantas is responding by building key strategic airline partnerships with strong global partners and optimising its network. Qantas brings domestic strength and the unrivalled customer offering of Qantas Loyalty. Qantas International has embarked on a major restructure of its legacy cost base through the Qantas Transformation Program with the objective of achieving a cost base comparable to direct competitors. • The Australian domestic aviation market is a highly competitive environment. The Qantas Group’s market-leading domestic position and dual-brand strategy allow Qantas to effectively mitigate the impact of any market changes. This strategy leverages Qantas Domestic (including QantasLink) to serve business and premium leisure customers and Jetstar to serve pricesensitive customers. Qantas Domestic is focused on removing the cost base disadvantage to its competitor through Qantas Transformation initiatives while maintaining a revenue premium. Jetstar is working to maintain its lowest seat cost and yield advantage. These priorities deliver Qantas Domestic and Jetstar Domestic the highest operating margins in their respective markets enabling the Group to retain market share of Underlying EBIT in excess of capacity share. –– Fuel and foreign exchange volatility: The Qantas Group is subject to fuel and foreign exchange risks. These risks are an inherent part of the operations of an airline. The Qantas Group manages these risks through a comprehensive hedging program. For 2016/17 the Group’s hedging profile is positioned such that the worst case total fuel cost is $3.256 billion with 87 per cent participation rate in lower fuel prices (at current forward market price total fuel cost for 2016/17 is $3.157 billion)58. Complementing the hedging program, increased focus on forecasting and operational agility of our aviation operations supports the Group to manage the residual uncertainty. –– Industrial relations: The associated risks of transformation including industrial action relating to Qantas’ collective agreements with its employees. The risk is being mitigated through continuous employee engagement initiatives and ongoing, constructive dialogue with all union groups and other relevant stakeholders. In 2015/16 the Group’s engagement score was at a record 79 per cent up four percentage points since 2014/15. The Group has successfully closed 30 Enterprise Bargaining Agreements (EBAs) subsequent to the commencement of the Qantas Transformation Program inclusive of an 18 month wage freeze. To support the implementation of the 18 month wage freeze a bonus payment of five per cent was announced in July 2015 to be made to all employees covered by an 18 month wage freeze. In addition, in August 2016 in recognition of the contribution towards a record result, the Group announced a further $3,000 bonus to all full-time employees and $2,500 to all part-time employees covered by an 18 month wage freeze. –– Integrity of data and continuity of critical systems: The Group’s operations depend on the continuity of a number of information technology and communication services and the integrity and protection of the privacy of data. The Group’s ongoing investment in cybersecurity, together with its extensive Control and Risk Framework59 work to reduce the likelihood of outages, ensure early detection and the mitigation of impact. –– Key business partners and alliances: The Qantas Group has relationships with a number of key business partners. Any potential exposures as a result of these partnerships are mitigated through the Group Risk Management Framework. 56 The worst case total fuel cost is based on a two standard deviation correlated move in the Brent forward market prices to US$56/bbl with the AUD/USD rate at 0.78 for the remainder of 2016/17. 57 The current forward market price total fuel cost is based on a Brent forward market price of A$67/bbl for the remainder of 2016/17. 58 As at 23 August 2016. 59 An overview of the Group Risk Management Framework is available through the Qantas Group Business Practices Document on www.qantas.com.au. 23 Q A N TA S A NNUA L REPOR T 2016 Corporate Governance Statement For the year ended 30 June 2016 OVERVIEW THE BOARD IS STRUCTURED TO ADD VALUE Corporate governance is core to ensuring the creation, protection and enhancement of shareholder value. The Board maintains, and requires that Qantas Management maintains, the highest level of corporate ethics. The Qantas Board currently has 10 Directors. Eight Directors are Independent Non-Executive Directors elected by shareholders and one has been appointed by the Board to fill a casual vacancy. The Qantas CEO, who is an Executive Director, is not regarded as independent. The Board comprises a majority of Independent Non-Executive Directors who, together with the Executive Director, have an appropriate balance of skills, knowledge, experience, independence and diversity to enable the Board as a collective to effectively discharge its responsibilities. The Board endorses the ASX Corporate Governance Principles and Recommendations, 3rd Edition (ASX Principles). Accordingly, Qantas has taken the opportunity to disclose its 2016 Corporate Governance Statement in the Corporate Governance section on the Qantas website (http://www.qantas. com/travel/airlines/governance-structure/global/en). As required, Qantas has also lodged the Corporate Governance Statement with the ASX. Details of the current Directors, their qualifications, skills, experience and tenure are set out on pages 8 to 11 of the Qantas Annual Report 2016. The Board has four Committees: –– –– –– –– Audit Committee Nominations Committee Remuneration Committee Safety, Health, Environment and Security Committee Each of these committees assists the Board with specified responsibilities that are set out in Committee Charters, as delegated and approved by the Board. Following is a summary of the key aspects of the Corporate Governance Statement. Membership of and attendance at 2015/2016 Board and Committee Meetings is detailed on page 26 of the 2016 Annual Report. THE BOARD LAYS SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT THE BOARD PROMOTES ETHICAL AND RESPONSIBLE DECISION-MAKING The Board has adopted a formal Charter which is available in the Corporate Governance section on the Qantas website (http://www.qantas.com.au/infodetail/about/ corporateGovernance/BoardCharter.pdf). The Board has established a corporate governance framework, comprising Non-Negotiable Business Principles (Principles) and Group Policies, which forms the foundation for the way in which the Qantas Group undertakes business. The Principles and Group Policies, including the Qantas Group Code of Conduct and Ethics, are detailed in the Qantas Group Business Practices document. This framework is supported by a rigorous whistleblower program, which provides a protected disclosure process for employees. The Board is responsible for setting and reviewing the strategic direction of Qantas and monitoring the implementation of that strategy by Management. The CEO is responsible for the day-to-day management of the Qantas Group with all powers, discretions and delegations authorised, from time to time, by the Board. The Company Secretary is accountable directly to the Board, through the Chairman, on all matters to do with the proper functioning of the Board. The Qantas Group Employee Share Trading Policy sets out guidelines designed to protect the Qantas Group Directors and its employees from intentionally or unintentionally breaching the law. The Qantas Group Employee Share Trading Policy prohibits employees from dealing in the securities of any Qantas Group listed entity while in possession of material nonpublic information. In addition, certain nominated Qantas employees are also prohibited from entering into any hedging or margin lending arrangement or otherwise granting a charge over the securities of any Qantas Group listed entity, where control of any sale process relating to those securities may be lost. 24 Q A N TA S A NNUA L REPOR T 2016 Corporate Governance Statement continued For the year ended 30 June 2016 THE BOARD SAFEGUARDS THE INTEGRITY OF CORPORATE FINANCIAL REPORTING The Board and Audit Committee closely monitor the independence of the external auditor. Regular reviews occur of the independence safeguards put in place by the external auditor. Qantas rotates the lead external audit partner every five years and imposes restrictions on the employment of personnel previously employed by the external auditor. Policies are in place to restrict the type of non-audit services which can be provided by the external auditor and a detailed review of non-audit fees paid to the external auditor is undertaken on a half-yearly basis. At each meeting, the Audit Committee meets privately with Executive Management without the external auditor, and with the internal and external auditors with Executive Management. THE BOARD MAKES TIMELY AND BALANCED DISCLOSURE Qantas is committed to ensuring that trading in its shares takes place in an orderly and informed market, with transparent and consistent communication with all shareholders. Qantas has an established process to ensure that it complies with its continuous disclosure obligations at all times, including a biannual confirmation by all Executive Management that the areas for which they are responsible have complied with the Group’s Continuous Disclosure Policy. Qantas proactively communicates with its shareholders via the ASX and its web-based Newsroom, with all materials released by the Group made available to all shareholders at the same time. Additionally, Qantas actively conveys its publicly-disclosed information and seeks the views of its shareholders, large and small, in a number of forums, including at the Annual General Meeting (AGM), the Qantas Investor Day and, as is common practice among its major listed peers, through periodic meetings with current and potential institutional shareholders. THE BOARD RESPECTS THE RIGHTS OF SHAREHOLDERS Qantas has a Shareholder Communications Policy which promotes effective two-way communication with shareholders and the wider investment community, and encourages participation at general meetings. Shareholders also have the option to receive communications from, and send communications to, Qantas and its Share Registry electronically, including email notification of significant market announcements. The external auditor attends the AGM and is available to answer shareholder questions that are relevant to the audit. THE BOARD RECOGNISES AND MANAGES RISK Qantas is committed to embedding risk management practices to support the achievement of business objectives and fulfil corporate governance obligations. The Board is responsible for reviewing and overseeing the risk management strategy for the Qantas Group and for ensuring the Qantas Group has an appropriate corporate governance structure. Within that overall strategy, Management has designed and implemented a risk management and internal control system to manage Qantas’ material business risks. During 2015/2016, the two Board committees responsible for oversight of risk-related matters, the Audit Committee and the Safety, Health, Environment and Security Committee, undertook their annual review of the effectiveness of Qantas’ implementation of its risk management system and internal control framework. The internal audit function is carried out by Group Audit and Risk and is independent of the external auditor. Group Audit and Risk provides independent, objective assurance and consulting services on Qantas’ system of risk management, internal control and governance. The Audit Committee approves the Group Audit and Risk Internal Audit Charter, which provides Group Audit and Risk with full access to Qantas Group functions, records, property and personnel, and establishes independence requirements. The Audit Committee also approves the appointment, replacement and remuneration of the internal auditor. The internal auditor has a direct reporting line to the Audit Committee and also provides reporting to the Safety, Health, Environment and Security Committee. THE BOARD REMUNERATES FAIRLY AND RESPONSIBLY The Qantas executive remuneration objectives and approach are set out in full below. Information about remuneration of Executive Management is disclosed to the extent required, together with the process for evaluating performance, in the Remuneration Report from page 30 of the 2016 Annual Report. Qantas Non-Executive Directors are entitled to statutory superannuation and certain travel entitlements (accrued during service) that are reasonable and standard practice in the aviation industry. Non-Executive Directors do not receive any performance-based remuneration (see pages 47 to 48 of the Qantas Annual Report 2016). 25 Q A N TA S A NNUA L REPOR T 2016 Directors’ Report For the year ended 30 June 2016 The Directors of Qantas Airways Limited (Qantas) present their Report together with the Financial Statements of the consolidated entity, being Qantas and its controlled entities (Qantas Group), for the year ended 30 June 2016 and the Independent Audit Report thereon. DIVIDENDS DIRECTORS SIGNIFICANT CHANGES IN STATE OF AFFAIRS The Directors of Qantas at any time during or since the end of the year are: Leigh Clifford AO Alan Joyce Maxine Brenner Richard Goodmanson Jacqueline Hey Michael L’Estrange AO (appointed 7 April 2016) William Meaney Paul Rayner Todd Sampson Barbara Ward AM In the opinion of the Directors, there were no significant changes in the state of affairs of the Qantas Group that occurred during the year under review. Details of current Directors, their qualifications, experience and any special responsibilities, including Qantas Committee Memberships, are set out on pages 8 to 11. The Qantas Group’s strategies, prospects for future financial years and material business risks have been included in the Review of Operations to the extent that they are not likely to result in unreasonable prejudice to the Qantas Group. In the opinion of the Directors, detail that could be unreasonably prejudicial to the interests of the Qantas Group, for example, information that is commercially sensitive, confidential or could give a third party a commercial advantage, has not been included. The Directors have declared a fully franked dividend of seven cents per ordinary share in relation to the year ended 30 June 2016, totalling $134 million (2015: nil). No interim dividend was paid during the year. Any matter or circumstance that has arisen since the end of the year that may affect the Qantas Group’s state of affairs in future financial years has been included in Note 27 to the Financial Statements. REVIEW OF OPERATIONS A review of, and information about, the Qantas Group’s operations, including the results of those operations during the year together with information about the Group’s financial position appear on pages 12 to 23. PRINCIPAL ACTIVITIES The principal activities of the Qantas Group during the course of the year were the operation of international and domestic air transportation services, the provision of freight services and the operation of a frequent flyer loyalty program. There were no significant changes in the nature of the activities of the Qantas Group during the year. EVENTS SUBSEQUENT TO BALANCE DATE Refer to page 87 for events which occurred subsequent to balance date. Other than the matters disclosed on page 87, since the end of the year and to the date of this Report no other matter or circumstance has arisen that has significantly affected or may significantly affect the Qantas Group’s operations, results of those operations or state of affairs in future years. DIRECTORS’ MEETINGS The number of Directors’ Meetings held (including Meetings of Committees of Directors) during 2015/2016 is as follows: Qantas Board Scheduled Meetings Directors Unscheduled Meetings Audit Committee1 Safety, Health, Environment and Security Committee1 Remuneration Committee1 Nominations Committee1 Sub-Committee Meetings2 Attended Held3 Attended Held3 Attended Held Attended Held3 Attended Held3 Attended Held Attended Held Leigh Clifford 7 7 1 1 2 24 – – – – – – 2 2 Alan Joyce 7 7 1 1 2 2 – – 4 4 – – – – Maxine Brenner 7 7 1 1 – – 5 5 – – 3 3 – – 4 Richard Goodmanson 7 7 1 1 – – – – 4 4 – – 2 2 Jacqueline Hey 7 7 1 1 – – 5 5 – – – – – – Michael L’Estrange5 2 2 – – – – – – 1 1 – – – – William Meaney 7 7 1 1 – – – – 4 4 3 3 – – Paul Rayner 7 7 1 1 – – – – – – 3 3 2 2 Todd Sampson 7 7 1 1 – – – – – – 3 3 – – Barbara Ward 7 7 1 1 2 24 5 5 4 4 – – 2 2 1 All Directors are invited to, and regularly attend, committee meetings in an ex-officio capacity. The above table reflects the attendance of a Director only where he or she is a member of the relevant committee. 2 Sub-Committee meetings convened for specific Board-related business. 3 Number of meetings held during the period that the Director held office. 4 Number of meetings held and requiring attendance. 5 Mr L’Estrange was appointed as a Director on 7 April 2016 and as a Member of the Safety, Health, Environment and Security Committee on 21 June 2016. 26 Q A N TA S A NNUA L REPOR T 2016 Directors’ Report continued For the year ended 30 June 2016 DIRECTORSHIPS OF LISTED COMPANIES HELD BY MEMBERS OF THE BOARD AS AT 30 JUNE 2016 – FOR THE PERIOD 1 JULY 2013 TO 30 JUNE 2016 Leigh Clifford Qantas Airways Limited –– Current, appointed 9 August 2007 Alan Joyce Qantas Airways Limited –– Current, appointed 28 July 2008 Maxine Brenner Qantas Airways Limited –– Current, appointed 29 August 2013 Origin Energy Limited –– Current, appointed 15 November 2013 Orica Limited –– Current, appointed 8 April 2013 Growthpoint Properties Australia Limited –– Current, appointed 19 March 2012 Richard Goodmanson Qantas Airways Limited Rio Tinto Limited Jacqueline Hey –– Current, appointed 19 June 2008 –– Ceased, appointed 1 December 2004 and ceased 5 May 2016 Rio Tinto plc –– Ceased, appointed 1 December 2004 and ceased 5 May 2016 Qantas Airways Limited –– Current, appointed 29 August 2013 AGL Energy Limited –– Current, appointed 21 March 2016 Australian Foundation Investment Company –– Current, appointed 31 July 2013 Michael L’Estrange William Meaney Paul Rayner Todd Sampson Barbara Ward Bendigo and Adelaide Bank Limited –– Current, appointed 5 July 2011 Qantas Airways Limited –– Current, appointed 7 April 2016 Rio Tinto Limited –– Current, appointed 1 September 2014 Rio Tinto plc –– Current, appointed 1 September 2014 Qantas Airways Limited –– Current, appointed 15 February 2012 Iron Mountain Inc –– Current, appointed 7 January 2013 Qantas Airways Limited –– Current, appointed 16 July 2008 Treasury Wine Estates Limited –– Current, appointed 9 May 2011 Boral Limited –– Current, appointed 5 September 2008 Centrica plc –– C  eased, appointed 22 September 2004 and ceased 31 December 2014 Qantas Airways Limited –– Current, appointed 25 February 2015 Fairfax Media Limited –– Current, appointed 29 May 2014 Qantas Airways Limited –– Current, appointed 19 June 2008 Caltex Australia Limited –– Current, appointed 1 April 2015 Brookfield Capital Management Limited1 –– Current, appointed 1 January 2010 Brookfield Funds Management Limited2 –– Current, appointed 22 October 2003 1 Responsible entity for the Brookfield Prime Property Fund and the Multiplex European Property Fund, both of which are listed Australian registered managed investment schemes. Previously responsible entity for the Brookfield Australian Opportunities Fund, which was wound up on 30 October 2012. 2 Responsible entity for the Multiplex SITES Trust, which is a listed Australian registered managed investment scheme. QUALIFICATIONS AND EXPERIENCE OF EACH PERSON WHO IS A COMPANY SECRETARY OF QANTAS AS AT 30 JUNE 2016 Andrew John Finch –– –– –– –– –– Anna Rachel Pritchard –– –– –– –– –– Appointed as Company Secretary on 31 March 2014 Joined Qantas on 1 November 2012 2002 to 2012 – Mergers and Acquisitions Partner at Allens, Sydney 1999 to 2001 – Managing Associate at Linklaters, London 1993 to 1999 – Various roles at Allens, Sydney (previously Allens Arthur Robinson and Allen Allen & Hemsley), including Senior Associate (1997 to 1999) and Solicitor (1993 to 1997) –– Admitted as a solicitor of the Supreme Court of NSW in 1993 John David Francis Morris –– –– –– –– –– Appointed as a Company Secretary on 22 June 2016 Joined Qantas on 23 August 2010 2005 to 2010 – Solicitor at Allens Arthur Robinson, Sydney 2001 to 2005 – Solicitor at the Australian Government Solicitor Admitted as a solicitor of the Supreme Court of NSW, the High Court of Australia and the High Court of New Zealand in 2001 Appointed as a Company Secretary on 9 April 2014 Joined Qantas on 28 March 2010 2002 to 2008 – General Counsel and Company Secretary at KAZ Group 1997 to 2002 – Solicitor then Senior Associate at Ashurst (previously Blake Dawson Waldron) Admitted as a solicitor of the Supreme Court of Victoria in 1992 27 Q A N TA S A NNUA L REPOR T 2016 Directors’ Report continued For the year ended 30 June 2016 DIRECTORS’ INTERESTS AND BENEFITS Particulars of Directors’ interests in the issued capital of Qantas at the date of this Report are as follows: Number of Shares Directors Leigh Clifford Alan Joyce 2016 2015 362,613 291,622 2,728,924 5,379,721 Maxine Brenner 30,065 21,900 Richard Goodmanson 18,780 20,000 Jacqueline Hey 38,170 30,000 Michael L’Estrange – n/a William Meaney – – 220,324 201,622 Paul Rayner Todd Sampson 4,695 5,000 Barbara Ward 44,694 47,597 In addition to the interests shown, indirect interests in Qantas shares held in trust on behalf of Mr Joyce are as follows: Deferred shares held in trust under: 2014/15 Short Term Incentive Plan 258,0621 2015/16 Short Term Incentive Plan 490,738 274,826 – 2 1 The number of deferred shares awarded under the 2014/15 Short Term Incentive Plan were impacted by the share consolidation completed on 6 November 2015 through the conversion of each share into 0.939 shares. 2 The deferred shares under the 2015/16 Short Term Incentive Plan are awarded to Mr Joyce on 2 September 2016. Number of Rights 2016 2015 Rights granted under: 2014–2016 Long Term Incentive Plan 2015–2017 Long Term Incentive Plan 2016–2018 Long Term Incentive Plan Total rights –1 3,248,000 2 2,151,000 3,248,000 947,0003 – 4,195,000 5,399,000 1 100 per cent of the 2014–2016 Long Term Incentive Plan Rights awarded to Mr Joyce on 18 October 2013 vested and converted to 2,151,000 shares following the performance hurdle testing conducted as at 30 June 2016. 2 Shareholders approved the award of these Rights on 24 October 2014. Performance hurdles will be tested as at 30 June 2017 to determine whether any Rights vest to Mr Joyce. 3 Shareholders approved the award of these Rights on 23 October 2015. Performance hurdles will be tested as at 30 June 2018 to determine whether any Rights vest to Mr Joyce. RIGHTS Performance Rights are awarded to select Qantas Group Executives under the Qantas Deferred Share Plan (DSP) and the Qantas Employee Share Plan (ESP). Refer to pages 38 to 40 for further details. The following table outlines the movements in Rights during the year: Number of Rights Performance Rights Reconciliation 2016 2015 80,309,588 33,579,432 Rights granted 6,086,500 64,317,000 Rights forfeited (3,995,000) (1,914,000) Rights lapsed (1,719,450) (15,614,000) Rights exercised (9,790,023) (58,844) Rights outstanding as at 30 June 70,891,615 Rights outstanding as at 1 July 1 The movement of Rights outstanding as at 30 June 2016 to the date of this Report is explained in the footnotes on page 29. 28 1 80,309,588 Q A N TA S A NNUA L REPOR T 2016 Directors’ Report continued For the year ended 30 June 2016 Rights will be converted to Qantas shares to the extent performance hurdles have been achieved. The Rights do not allow the holder to participate in any share issue of Qantas. No dividends are payable on Rights. The fair value of Rights granted is calculated at the date of grant using a Monte Carlo model and/or Black-Scholes model. The following Rights were outstanding at 30 June 2016: Number of Rights Value at Grant Date 2016 Net Vested 2016 Unvested 2016 Total 2015 Net Vested 2015 Unvested 2015 Total Name Testing Period Grant Date 2005 Performance Rights Plan 30 Jun 08 – 30 Jun 101 22 Nov 05 $2.67 – – – 38,517 – 38,517 2006 Performance Rights Plan 30 Jun 09 – 30 Jun 111 4 Oct 06 $2.95 111,115 – 111,115 119,071 – 119,071 2013–2015 Long Term Incentive Plan 30 Jun 152 2 Nov 12 $0.88 – – – – 11,272,000 11,272,000 2013–2015 Long Term Incentive Plan 30 Jun 152 13 Jun 13 $0.70 – – – – 2014–2016 Long Term Incentive Plan 30 Jun 163 18 Oct 13 $0.83 – 10,208,000 10,208,000 – 10,463,000 10,463,000 2015–2017 Long Term Incentive Plan 30 Jun 17 15 Sep 14 $0.972 – 48,024,000 48,024,000 – 50,925,000 50,925,000 2015–2017 Long Term Incentive Plan 30 Jun 17 24 Oct 14 $0.97 – 4,457,000 4,457,000 – 4,582,500 4,582,500 2015–2017 Long Term Incentive Plan 30 Jun 17 3 May 15 $3.05 – 2,202,000 2,202,000 – 2,580,500 2,580,500 2016–2018 Long Term Incentive Plan 30 Jun 18 1 Sep 15 $2.09 – 4,893,500 4,893,500 – – – 2016–2018 Long Term Incentive Plan 30 Jun 18 23 Oct 15 $2.46 – 996,000 996,000 – – – Total 111,115 70,780,500 70,891,615 329,000 329,000 157,588 80,152,000 80,309,588 1 These Rights convert to Qantas shares on the 10th anniversary of the date of award, however Executives may call for the Rights to be converted sooner at their request. 2 85 per cent of Rights vested subsequent to 30 June 2015 and before the issuance of this Report following the performance hurdle testing conducted as at 30 June 2015. 3 100 per cent of Rights vested subsequent to 30 June 2016 and before the issuance of this Report following the performance hurdle testing conducted as at 30 June 2016. 29 Q A N TA S A NNUA L REPOR T 2016 Directors’ Report continued For the year ended 30 June 2016 REMUNERATION REPORT (AUDITED) COVER LETTER TO THE REMUNERATION REPORT Dear Shareholder, The Remuneration Report sets out remuneration information for the Chief Executive Officer (CEO), direct reports to the CEO (Executive Management) and Non-Executive Directors. In addition to the detailed Remuneration Report, we have provided an introduction to the Report which contains a summary of: –– The Remuneration Framework and how it was applied for the 2015/2016 financial year –– The remuneration outcomes for the CEO Qantas’ Remuneration Policy Qantas is committed to having remuneration outcomes that are aligned with performance and the creation of shareholder value. The commitment and practice is demonstrated in 2015/2016 and also in the five years prior where: –– Annual incentives were not paid to the CEO in two years (2011/2012 and 2013/2014), partial awards were paid in two years (2010/2011 and 2012/2013), and above ‘At Target’ was paid once (2014/2015) –– Long Term Incentive Plan (LTIP) awards partially vested once (2014/2015) and did not vest at all in the four previous years The Remuneration Report includes further details of the history of incentive plan outcomes on page 33. Qantas’ Performance in 2015/2016 2015/2016 was an outstanding year for Qantas. Over the financial year, Qantas continued to improve the customer experience, exceeded its commitments under the Qantas Transformation program, and has delivered a record financial result and returned over $1 billion to shareholders. All employees can be very proud of their contribution to these results. Remuneration Outcomes in 2015/2016 Fixed Remuneration – During 2015/2016 our restrained approach to fixed remuneration increases continued. Variable Remuneration – The 2015/2016 remuneration outcomes for the CEO and Executive Management align with Qantas’ performance and the creation of shareholder value. Annual Incentive Outcomes: Annual incentives were paid to the CEO and Executive Management based on their contribution to the achievement...
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Running Head: FINANCIAL ACCOUNTING AND REPORTING

Financial Accounting and Reporting
Name
Instructor
Institutional Affiliation
Date

1

FINANCIAL ACCOUNTING AND REPORTING

2

Financial Accounting and Reporting
Primary Activities
Qantas Airways is an airline company based in Australia. The multinational company is
the largest airline in Australia based on its international destinations, international flights, and by
fleet size. The company’s primary activity entails the transportation of customers via two
complementary airline brands; Jetstar and Qantas. Moreover, Qantas Airways also operate
subsidiary entities entailing other airlines. The company also operates domestic, regional, and
international services. With approximately 30,000 employees based in Australia and other
foreign markets, the company is able to effectively perform its primary activities as well as the
secondary activities. Additionally, the company’s transformational program has impacted its
operations and has played a significant role in maximizing shareholders’ value. The exceptional
performance depicted in the company’s financial statements shows that Qantas Group is
dedicated to proving high-quality and unique services.

Financial and Social Performance of Qantas Group in FY 2016/2017 vs. FY 2015/2016
FY 2016/2017
In the financial year 2016/2017, Qantas Group posted an underlying profit before tax of
$1.401 billion. This result is the second highest performance of the company since its inception.
Typically, this financial result depicts the company’s competitive advantage over its local and
international rivals, which has been strengthened by the implementation of Qantas Group
transformational framework. Since the company is a multinational company, it faces stiff
competition from both domestic and global rivals who are competing for the same market share.
In the domestic market, the underlying EBIT (earnings before interests & tax) of Qantas Group
which entails the combination of Jetstar and Qantas was $865 million. This result made the
group to be the most profitable airlines in Australia. Furthermore, in the global market, the
company posted EBIT of $327 million (Scott, 2015).
The 2016/2017 financial statements sho...


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