Qantas Airways: Analysis of Exchange Rate Risk and Hedging Strategies

This report provides an analysis of Qantas Airways' exposure to exchange rate risk, primarily focusing on the impact of currency fluctuations on the airline's profitability and financial stability. The report examines the company's dependence on imported oil, the influence of the Australian dollar, and the effects of geopolitical factors and interest rate changes. It explores how these factors contribute to exchange rate volatility and affect Qantas's operational income. Furthermore, the report delves into Qantas's hedging strategies, including the use of options and forward contracts, to mitigate the adverse effects of currency fluctuations and protect its cash flow. The analysis highlights the importance of hedging in maintaining financial stability in the face of uncertain economic environments and volatile market conditions, emphasizing how Qantas aims to protect its capital and manage its financial performance through various risk management instruments.

Introduction
Qantas Airways Limited is an Australia’s largest airline company by its fleet size, Qantas
operates domestic as well as international flight and its headquarter is located in Sydney,
Australia. Qantas is an Australian Stock Exchange listed world third oldest airline company.
Qantas Airways - Exchange Risk
Qantas has major exchange rate risk because of its over dependence on imported oil from
overseas market, any exchange rate fluctuation could hit company’s operational income and
ultimately its profitability. It is observe that Australian dollar move with the movement in
commodity price, so any projected move in crude oil prices could impact operational
efficiency of Qantas and as long as higher crude oil prices persists Qantas profitability would
remain dented at least up to that period of time. Hence, rising crude oil prices is not good
news for Qantas group of company for even short to medium period of time. It can be
interpreted as an appreciating Australian dollar is not good for Qantas. Generally, any
depreciation (decrease) in currency lead to export becoming cheaper and imports become
expensive, it works other way round as well, and appreciation (increase) in Australian dollar
could make Australian imports cheaper and its export expensive, it is normally refer as
classic reaction of exchange rate movement (Cattlin, 2018).
If it is taken together for whole Qantas Group, whenever Australian dollar appreciates, cost of
Qantas group as whole fall more than its fall in domestic revenue, this fall in group cost is
happen because of its overseas supplier/buy through its international operation. In more
simple way, cost fall is much higher than it fall in revenue, which makes Qantas financially
profitable (Webber, 2013).
As per the Qantas’ financial report notes provided in its annual report, Qantas has plan ready
to hedge any volatile movement in oil prices and subsequent fall or increase in exchange rate
with movement in world market situation. Whenever, company suffer because of exchange

rate fluctuation economy of that country also suffers. Qantas cash flow may get impacted
because of currency fluctuation but this impact will not be as bigger as for other company.
Moreover, Qantas has already hedged their position to protect it from any exchange rate
fluctuation. As per the recent annual report of Qantas Group, it was found that Qantas has
reduced profit in FY 2019 due to two reasons, first, it is exchange rate volatility and second
reason is also very much, more or less, related to exchange rate, that volatile oil price and
ever growing tension in Middle East (Kumar Sharma, 2018).
Australian Dollar -Exchange Rate
Australian dollar is expected to remain stable with little bit of volatility as always the case. It
is expected that Australian dollar would be get effected by the following factors in next one
year.
1. Volatility in crude oil:
If any major volatility in crude oil prices takes place due to growing tension between
Iran and USA, it may affect Australian exchange rate in near future, which may affect
Australian economy adversely. These days situation in gulf countries are already on
boil due to recent attack on Saudi Arabian oil installation operates by Saudi Armaco.
This could affect exchange rate of Australia. As we all aware that Australian
exchange rate move with the commodity prices, if commodities price goes up so does
Australian dollar, if it goes down, so does the Australian dollar. So, it moves in the
direction of commodities prices. Australia is one of the major crude oil importers in
Asia pacific region. After United States of America, Saudi Arab is the second most
crude oil producer in the world and anything happen in Saudi oil field has major
repercussion on world economy because of short supply of oil from Saudi Arabia,
which adversely affects almost all the nation’s economy who is dependent upon oil of
Saudi Arab.

2. Interest rate:
Exchange rate gets affected due to movement in rate of interest by central bank of
Australia. Whenever interest rate increased by Australia’s central bank, foreign
investor take out money from low interest paying instrument and put in Australian
bank to get surplus return. Though, interest rate movement depend on many factors,
domestic as well as international and decided by Central Bank of Australia, Reserve
Bank of Australia, after detail consultation with all its board member after taking
stock of the entire prevailing situation, local as well as overseas. After discussion with
it member it take final decision on any change in Bank interest rate. Which ultimately
affect currency rate fluctuation and its impact on other various aspect of Australian
economy (Xe.com. 2019).
3. Geo political factor:
Geo-political factor put pressure on price of commodity, which affects crude oil
prices and ultimately Australian dollar move in the direction of crude oil prices. So,
international crude oil prices need to be watch carefully and regularly. Geo-political
risk, though, always exist but at current position it is bit more precarious and unstable
which is causing concern for everybody or every nation. More so for Australia
because of its over dependence on obverses oil import (Ketchell, M. 2017).
4. US China trade war:
Any escalation in China-US trade war would lead to situation which leads further
deterioration in global economic outlook and its impact on global economy. Its
cascading effect will be seen across the world in terms of further slowdown of already

weak global economy. Many economists have warned the two big economy of its
disastrous effect if China – US trade war does not resolve shortly.
Some others factors, such as, Brexit, inflationary outlook, Job data, performance of
Chinese Yuan and Japanese currency and its exchange rate. Yen also effect currency
fluctuation in short term because it is also among worlds’ best trading currency. These
all above mentioned factors certainly has bearing on it future outlook (Ketchell,
2019). But, in spite of these entire things it expected that Australian dollar remain in
range during next one year.
Hedging and Exchange Rate
It is very difficult to predict what type of hedging instrument is used by various companies to
protect their company’s future cash flow and maintain financial stability in their company.
This is done as a part of strategy, since fuel hedging is a one of very good tool for taking
strategic advantage and remains competitive in business. Generally, company adopt policy of
fuel hedging through call and put option. Buy hedging through Option strategy of derivative
market Company protect themselves with prevailing uncertain economic environment of
company and protect the interest of company in short to medium time frame. Hedging
process cap companies’ losses but it also caps their profit level through the payment of
hedging premium (Ketchell, 2019).
As per the financial report of Qantas, it is a 94% hedged company means in case of any
eventuality it can protect 94% of their capital. Whenever company does not apply hedging
strategy, it means that they are expecting that fuel prices would fall in near future. In the
absence of proper hedging instrument company can hit badly, whenever sudden down ward
or upward movement happen in currency exchange

Another method can be adopted to protect from currency fluctuations is through the adoption
or buying a contract of Forward Contract for upto 1-3 months period. Forward contract
secured a currency rate for future use. It has provision of reserving the exchange rate
determined on the day of the transaction for use in future. Forward contract give protection
from exchange rate fluctuation by buying forward contract at present spot price and locking
its volatility.

References
Cattlin, B. (2018). What is the relationship between exchange rates and stock prices?.
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between-exchange-rates-and-stock-prices-181031#information-banner-dismiss [Accessed 17
Sep. 2019].
Kumar Sharma, N. (2018). Do exchange rate fluctuations helps determine the stocks market
trend in India?. [online] Rmoney. Available at: https://rmoneyindia.com/research-blog-
traders/exchange-rate-fluctuations/ [Accessed 17 Sep. 2019].
Xe.com. (2019). AUD - Australian Dollar rates, news, and tools. [online] Available at:
https://www.xe.com/currency/aud-australian-dollar [Accessed 17 Sep. 2019].
Ketchell, M. (2017). Explainer: how the Australian dollar affects the results of companies.
[online] The Conversation. Available at: http://theconversation.com/explainer-how-the-
australian-dollar-affects-the-results-of-companies-72585 [Accessed 17 Sep. 2019].
Ketchell, M. (2019). Explainer: fuel hedging and its impact on airlines and airfares. [online]
The Conversation. Available at: https://theconversation.com/explainer-fuel-hedging-and-its-
impact-on-airlines-and-airfares-36773 [Accessed 17 Sep. 2019].
Ketchell, M. (2019. Qantas profit hit by fuel costs and exchange rate - Airline Ratings.
[online] Airline Ratings. Available at: https://www.airlineratings.com/news/qantas-profit-hit-
fuel-costs-exchange-rate/ [Accessed 17 Sep. 2019].

Webber, T. (2013). High dollar good for Qantas. [online] The Sydney Morning Herald.
Available at: https://www.smh.com.au/business/high-dollar-good-for-qantas-20130207-
2e0zd.html [Accessed 17 Sep. 2019].