The joy of segment reporting
1 September 2011
Financial Review CFO
Copyright 2011. Fairfax Media Management Pty Limited.
Qantas segment analysis 1999-2004
1999 2000 2001 2002 2003 2004
$bn $bn $bn $bn $bn $bn
International 308.3 374.3 458.7 202.3 221.6 397.8
256.8 272.0 127.4 298.2 165.7 465.7
136.7 169.4 109.7 178.3 179.7 234.7
Total EBIT 701.8 816.2 695.8 679.3 567.0 1,098.2
Source: Qantas Annual Reports
Information on losses incurred by Qantas's international operations would have been prepared and reported internally. Under AASB 8, that data should be spelt out in detail to shareholders, John Shanahan suggests. Segment reporting is often seen as an afterthought. It doesn't change the results, it's just more disclosure and the numbers are too aggregated to be useful. However, particularly when analysed over a period of years, segment reporting gives a real insight about a company's performance. Previously we reported business and geographic sectors. Since June 2010, companies must report on operating segments under AASB 8. An operating segment is a component for which separate financial information is available that is evaluated regularly by the chief operating decision-maker. The principle is that financial information must be reported on the same basis as is used internally for evaluating operating segment performance.
Qantas provides an interesting example. Its international operations reported a loss of more than $200 million in the 2011 financial year and restructuring is essential. Qantas states that this is an unacceptable return "on invested capital of over $5 billion". However it doesn't report international operations as a separate operating segment. The segments it chooses are Qantas, Jetstar, Qantas Freight, its frequent flyer operation and its Jetset Travelworld. Three of these segments clearly involve flying operations, both domestic and international. For management to focus on the losses incurred by its international operations, information must be being prepared and reported internally on that basis. Under AASB 8 if that information is used by management, it should also be given to shareholders at an appropriate level of aggregation. At present, that's not happening.
The history is interesting. From at least 1999 to 2004, EBIT was reported on a segment basis for three main segments: international airline , domestic airline and subsidiary operations. Clearly, international has always been a focus. Subsidiary operations in this segment analysis included Qantas Holidays, regional airlines, flight catering and a small "other" category.
The data raises questions such as why, when earnings before interest and taxes fell 15 per cent in 2001, did international's contribution increase by 22 per cent while domestic's fell by 53 per cent? In the next year, international more than halved while domestic more than doubled. One year on, international picked up 10 per cent while domestic fell 45 per cent. The next year EBIT rose 93 per cent; international EBIT lifted by 89 per cent and domestic by 181 per cent.
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The notes say the principal group asset is the airline fleet, which is almost entirely registered and domiciled in Australia. These assets are used flexibly across Qantas' worldwide network and thus there is no suitable basis for allocating them, and related liabilities, between geographic areas. Simple observation suggests that there weren't too many 747s flying on domestic routes and not many international routes used 737s. (The same note appears in the 2009 report.)
While this segment data shown is now seven years old, clearly international was able to be identified previously. If international losses are the main reason for the current restructure, perhaps international is still reviewed by the chief operating decision-maker.
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