1. What has been the most significant expense category for Qantas that you can observe from the annual report 2020; provide your comment in reference to Case below :-

ANTAS ANNUAL REPORT 2020 Consolidated Income Statement For the year ended 30 June 2020 58 Notes 2020 $M 2019 (restated)1 $M REVENUE AND OTHER INCOME Net passenger revenue 12,183 15,696 Net freight revenue 1,045 971 Other revenue and income 4(B) 1,029 1,299 Revenue and other income 14,257 17,966 EXPENDITURE Manpower and staff-related 3,646 4,268 Aircraft operating variable 3,520 4,010 Fuel 2,895 3,846 Depreciation and amortisation 5 2,045 1,996 Share of net loss/(profit) of investments accounted for under the equity method 14 53 (23) Impairment/(reversal of impairment) of assets and related costs 25 1,456 (39) De-designation of fuel and foreign exchange hedges 27(C) 571 - Redundancies and related costs 565 65 Net gain on disposal of assets 6 (7) (225) Other 7 1,950 2,594 Expenditure 16,694 16,492 Statutory (loss)/profit before income tax expense and net finance costs (2,437) 1,474 Finance income 8 33 47 Finance costs 8 (304) (329) Net finance costs 8 (271) (282) Statutory (loss)/profit before income tax expense (2,708) 1,192 Income tax benefit/(expense) 9 744 (352) Statutory (loss)/profit for the year (1,964) 840 Attributable to: Members of Qantas (1,964) 840 Non-controlling interests - - Statutory (loss)/profit for the year (1,964) 840 EARNINGS PER SHARE ATTRIBUTABLE TO MEMBERS OF QANTAS Basic Earnings Per Share (cents) 3 (129.6) 51.5 Diluted Earnings Per Share (cents) 3 (129.6) 51.3 1. The Group adopted AASB 16 Leases effective 1 July 2019 using the full retrospective method of adoption and adopted the IFRIC agenda decision in relation to fair value hedges ("IFRIC Fair Value hedging agenda decision") retrospectively. The comparative period presented above has been restated accordingly. Refer to Note 38 for further information. The above Consolidated Income Statement should be read in conjunction with the accompanying notes.QANTAS ANNUAL REPORT 2020 Consolidated Statement of Comprehensive Income For the year ended 30 June 2020 59 2020 $M 2019 (restated)1 $M Statutory (loss)/profit for the year (1,964) 840 Items that are or may be subsequently reclassified to profit or loss Effective portion of changes in fair value of cash flow hedges, net of tax (205) 51 Transfer of effective hedging gains from hedge reserve to the Consolidated Income Statement, net of tax2 (123) (249) De-designation of fuel and foreign exchange hedges to the Consolidated Income Statement, net of tax 425 - Recognition of effective cash flow hedges on capitalised assets, net of tax (42) (13) Net changes in hedge reserve for time value of options, net of tax (232) (47) Foreign currency translation of controlled entities (9) 5 Foreign currency translation of investments accounted for under the equity method 11 13 Share of other comprehensive loss of investments accounted for under the equity method (6) (6) Items that will not subsequently be reclassified to profit or loss Defined benefit actuarial losses, net of tax (40) (121) Fair value (losses)/gains on investments, net of tax (16) 4 Other comprehensive loss for the year (237) (363) Total comprehensive (loss)/income for the year (2,201) 477 Attributable to: Members of Qantas (2,201) 477 Non-controlling interests - - Total comprehensive (loss)/income for the year (2,201) 477 1. The Group adopted AASB 16 Leases effective 1 July 2019 using the full retrospective method of adoption and adopted the IFRIC agenda decision in relation to fair value hedges ("IFRIC Fair Value hedging agenda decision") retrospectively. The comparative period presented above has been restated accordingly. Refer to Note 38 for further information. 2. These amounts were allocated to revenue of $10 million (2019: nil), fuel expenditure of ($129) million (2019: ($356) million), foreign exchange gains of ($57) million (2019: nil) and income tax expense of $53 million (2019: $107 million) in the Consolidated Income Statement. The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

2.Continue the operating profit and cash flow graph from operation presented in Case below to cover the figures in 2020. Discuss the importance of analysing the two figures.

QANTAS ANNUAL REPORT 2020 Consolidated Cash Flow Statement For the year ended 30 June 2020 63 Notes 2020 $M 2019 (restated)1 $M CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers 14,460 19,050 Cash payments to suppliers and employees (excluding cash payments to employees for redundancies and related costs and discretionary bonus payments to nonexecutive employees) (12,870) (15,425) Cash generated from operations 1,590 3,625 Cash payments to employees for redundancies and related costs (58) (58) Discretionary bonus payments to non-executive employees (6) (25) Interest received 29 41 Interest paid (interest-bearing liabilities) (146) (161) Interest paid (lease liabilities) 16(B) (82) (101) Dividends received from investments accounted for under the equity method 15 11 Australian income taxes paid 9(D) (255) (156) Foreign income taxes paid 9(D) (4) (12) Net cash from operating activities 29 1,083 3,164 CASH FLOWS FROM INVESTING ACTIVITIES Payments for property, plant and equipment and intangible assets (1,549) (1,944) Interest paid and capitalised on qualifying assets 8 (48) (42) Payments for investments held at fair value (22) (60) Proceeds from disposal of property, plant and equipment 50 333 Proceeds from disposal of a controlled entity - 139 Proceeds from disposal of shares in associate - 11 Payments for investments accounted for under the equity method (2) - Net cash used in investing activities (1,571) (1,563) CASH FLOWS FROM FINANCING ACTIVITIES Payments for share buy-back 10(B) (443) (637) Proceeds from share-issuance 1,342 - Payments for treasury shares (5) (98) Proceeds from interest-bearing liabilities 21(D) 2,155 1,137 Repayments of interest-bearing liabilities 21(D) (625) (733) Repayments of lease liabilities 16(B) (367) (368) Dividends paid to shareholders 10(A) (204) (363) Aircraft lease refinancing - (88) Net cash from/(used in) financing activities 1,853 (1,150) Net increase in cash and cash equivalents held 1,365 451 Cash and cash equivalents at the beginning of the year 2,157 1,694 Effects of exchange rate changes on cash and cash equivalents (2) 12 Cash and cash equivalents at the end of the year 21(A) 3,520 2,157 1. The Group adopted AASB 16 Leases effective 1 July 2019 using the full retrospective method of adoption and adopted the IFRIC agenda decision in relation to fair value hedges ("IFRIC Fair Value hedging agenda decision") retrospectively. The comparative period presented above has been restated accordingly. Refer to Note 38 for further information. The above Consolidated Cash Flow Statement should be read in conjunction with the accompanying notes.

3. Much of the financial analysis that analysts do rely on good disclosures provided in the annual report; refer to below information ,wherein the annual report 2020 would you find disclosures to analyze Qantas business? What types of disclosures in the 2020 annual report do you think is particularly important for valuation?

QANTAS ANNUAL REPORT 2020 Review of Operations For the year ended 30 June 2020 12 RESULTS HIGHLIGHTS The Qantas Group applied AASB 16 Leases from 1 July 2019. The results for the 12 months ended 30 June 2019 have been restated on the same basis for comparison purposes. The Qantas Group reported an Underlying Profit Before Tax1 (Underlying PBT) of $124 million for the 12 months ended 30 June 2020, a decrease of $1,202 million from the full year 2018/19 primarily due to the impact of COVID-19 in the second half. The Group's Statutory Loss Before Tax of $(2,708) million was down $3,900 million from the prior year. The Statutory Loss Before Tax for this financial year included a net $2,832 million of costs, mostly non-cash, which were not included in Underlying PBT. Items outside of Underlying PBT included asset impairments including the A380 fleet, Recovery Plan restructuring costs including redundancies, dedesignated hedging and costs such as those associated with transformation and discretionary non-executive employee bonuses. This compares with $134 million of net costs that were not included in Underlying PBT in the prior year. In the first half of 2019/20 the Qantas Group reported an Underlying PBT of $771 million, a decrease of only $4 million from the prior year, as revenue strength offset temporary headwinds totalling $119 million including the impact of protests in Hong Kong, subdued demand in global freight markets and other increases in costs associated with foreign exchange rates on non-fuel costs. During the second half of 2019/20 the measures taken by governments across the world to slow the spread of COVID-19 severely impacted airlines, as travel restrictions and border closures were imposed. Because of these measures, the Qantas Group suffered a $3,967 million decline in total revenue as both domestic and international air travel was virtually halted in the fourth quarter. The Group quickly shifted its focus to preserving liquidity, partially mitigating the 82 per cent fall in Total Revenue in the fourth quarter through a 75 per cent reduction in net operating expenses2, a good proxy for the Group's operating cash costs. Due to the action taken, the Group was able to reduce the combined impact of COVID-19 on the Group earnings for the 2019/20 financial year to $1,224 million3. Despite the grounding of most of the domestic fleet in the fourth quarter, Group Domestic4 remained profitable, contributing Underlying EBIT of $285 million to the Group's overall result. The international businesses5 fell into an Underlying EBIT loss of $82 million as the record result from the Freight business could not offset the losses from the passenger airlines which were driven by international border closures. Qantas Loyalty maintained its value proposition for its members and partners despite the grounding of the Group's airlines and was the largest contributor to the Group's earnings. The Financial metrics for the 2019/20 financial year are: - Statutory Earnings Per Share was a loss of 129.6 cents per share, reflecting the Statutory Loss and the reduction in average shares on issue from the off-market share buy-back conducted in the first half - Return on Invested Capital (ROIC)6 of 5.8 per cent - Operating cash flow of $1,083 million. At the end of the first half of 2019/20, Net Debt7 was towards the bottom of the target range, the Group retained strong liquidity and had an unencumbered aircraft asset base of $4.9 billion8. This put the Group in a strong financial position to weather the impacts of the COVID-19 pandemic. In the second half, the Group's focus turned to safely hibernating the airlines, cutting costs and preserving liquidity. The Group's variable cost base adjusted as activity declined, with a commensurate reduction in fuel consumption costs, aircraft operating variable and manpower costs as approximately 25,000 employees were stood down. Fixed costs and depreciation and amortisation non-cash charges continued to impact the Group's profitability. 1. Underlying Profit Before Tax (Underlying PBT) is the primary reporting measure used by the Qantas Group's Chief Operating Decision-Making bodies (CODM), 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 Domestic, Qantas International, Jetstar Group and Qantas Loyalty operating segments is Underlying Earnings Before Net Finance Costs and Income Tax Expense (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 (Loss)/ Profit Before Tax on Page 20. 2. Net operating expenses is gross expenditure less depreciation and amortisation, on an underlying basis. 3. Underlying PBT for 2H20 compared to 2H19 excluding the movement of discount rate changes on provisions and depreciation/amortisation expense. 4. Group Domestic includes Qantas Domestic and Jetstar Domestic. 5. International businesses or Group International includes Qantas International, Jetstar International Australian operations, Jetstar New Zealand (including Jetstar Regionals), Jetstar Asia (Singapore), and the contributions from Jetstar Japan and Jetstar Pacific. 6. Return on Invested Capital is calculated as ROIC EBIT for the 12 months ended 30 June 2020, divided by the 12 month Average Invested Capital. ROIC EBIT is derived by adjusting Underlying EBIT to account for leased aircraft as if they were owned and non-aircraft leases as if they were service costs. This is calculated as Underlying EBIT excluding lease depreciation under AASB 16 and including notional depreciation for aircraft (to account for them as if they were owned aircraft) and the full cash payment for non-aircraft leases (to account for them as service costs). Refer to Note 2 for detail. 7. Net Debt under the Group's Financial Framework includes net on balance sheet debt and capitalised aircraft lease liabilities. 8. Based on Aircraft Value Analysis Company Limited (AVAC) market values as at 31 December 2019, representing 51 per cent of aircraft in the Group's total fleet of 316. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 13 RESULTS HIGHLIGHTS (CONTINUED) The impact of the government-imposed lockdowns, travel restrictions and border closures on the broader economy has been profound. This prompted the Australian Government and to a lesser extent the various state governments to establish a series of measures to support businesses and employees that have been severely affected. The Group and its employees benefited from a number of these programs including: - The Australian Aviation Financial Relief Package including the refunding and waiving of a range of government charges to the aviation industry including fuel excise, Airservices Australia charges on domestic airline operations and domestic and regional aviation security charges - The JobKeeper Payment, intended to help keep more Australians in jobs and support affected businesses. The majority of the benefit received by the Group was paid directly through to employees on stand down and the rest used to subsidise wages of those still working. In addition, the Australian Government commissioned Qantas to conduct various charter repatriation flights and rescue missions, including to Wuhan, Tokyo, Hong Kong, London, Lima, Buenos Aires, Johannesburg, New Delhi and Chennai. Along with other Australian domestic airlines, Qantas also performed several domestic, regional and international flights as part of the Minimum Viable Network intended to maintain vital air transport links. Qantas also secured a contract to conduct freight services under the International Freight Assistance Mechanism to ensure import and export freight routes remained open. Liquidity was boosted by cutting capital expenditure outflows, cancelling shareholder distributions and sourcing additional funding through $1.75 billion in new debt, with no financial covenants and $1.36 billion through a fully underwritten Institutional Placement initiated as part of the Group's Three-Year Recovery Plan. At 30 June 2020, cash and cash equivalents totalled $3.5 billion with total liquidity at $4.5 billion including the undrawn revolving credit facilities. Net Debt was $4.7 billion towards the bottom of the Net Debt target of $4.5 billion to $5.6 billion. Importantly, the Group maintained its investment grade credit rating of Baa2 from Moody's Investor Services. The Group's usually strong cash flow generation ability was impacted by lower earnings and the working capital movements associated with lower revenue received in advance, lower receivables, payables (including refunds) and hedge settlements. Net capital expenditure9 of $1.6 billion was invested in the business, skewed towards the first half, and $647 million of surplus capital was returned to shareholders through $204 million of fully franked dividends and $443 million of off-market share buy-backs completed in the first half. Giving consideration to the requirement to protect the strength of the balance sheet, maintain a minimum level of liquidity and the uncertainty of the near-term outlook for the business, the Board has decided not to make further shareholder distributions until the Group's earnings and balance sheet have fully recovered in accordance with the Financial Framework. The off-market share buy-back of up to $150 million and the interim dividend of $201 million announced in February 2020 were cancelled in March 2020 and revoked in June 2020 respectively

THREE-YEAR RECOVERY PLAN The measures taken to cut costs and preserve liquidity through the fourth quarter ensured the Group was well positioned to launch its Three-Year Recovery Plan to rightsize the business, restructure its cost base and recapitalise its balance sheet through the fully underwritten Institutional Placement. A retail Share Purchase Plan was launched on 2 July 2020 consistent with listing requirements, with the $71.7 million raised providing an additional liquidity buffer in the 2020/21 financial year. The Recovery Plan is targeting a total of $15 billion in savings over the three years, including significant activity-based savings associated with the reduced flying, rightsizing benefits and restructuring that are expected to deliver $1 billion in ongoing annual savings from 2022/23. 9. Net Capital Expenditure is equal to net investing cash flows in the Consolidated Cash Flow Statement of $1,571 million. During the year ended 30 June 2020, there were no new aircraft leases entered into and no returns of leased aircraft. Target Key area of focus Metrics Timeframe As at end of August 2020 Cost Savings Restructuring benefits of $0.6b in FY21, $0.8b in FY22, $1b by FY23 FY23 On track to achieve FY21 target 6,000 FTE reduction FY21 On track Group Unit Cost (ex-fuel and depreciation) 10% less than FY20 FY23 Restructuring in progress Deleverage the Balance Sheet Gross debt reduction of $1.75b FY23 Capital allocation is prioritising debt reduction Net debt/ EBITDA <2.5 times FY22 Net debt/EBITDA to peak in FY21 Cash Flow Sustainable positive net free cash flow FY22 onwards Negative net free cash flow in FY21 due to restructuring expenses and payments for FY20 deferred payables Flying activity is contribution positive (RASK-Variable cost/ASK >0) From FY21 Disciplined restart of the network with flexibility to adjust for border closures Capex for FY21 <$0.7b FY21 Majority of expense is for capitalised maintenance Fleet Management Defer deliveries of A321neos and 787-9 aircraft Jun-20 Complete Retire 6 x 747s; 12 x A380s in long term storage Dec-20 Complete Customer and Brand Maintain Customer Advocacy (NPS) premium to domestic competitor Ongoing Measured by Qantas customer research programs Maintain brand and reputation Ongoing Source - Qantas internal research and Corporate Trust Research Qantas Loyalty Return to double digit growth FY22 Program enhancements underway to achieve growth ambiti

11. Evaluate and conclude your analysis with your comment on risk facing Qantas in the current and future; provide your discussion with referral to the below source you based on.

27 FINANCIAL RISK MANAGEMENT (A) RISKS The Qantas Group is subject to financial risks which are an inherent part of the operations of an airline. The Qantas Group manages these risk exposures using various financial instruments, governed by a set of policies approved by the Board. The Qantas Group's policy is not to enter into, issue or hold derivative financial instruments for speculative trading purposes. The Qantas Group uses different methods to assess and manage different types of financial risk to which it is exposed. These methods include correlations between risk types, sensitivity analysis in the case of interest rate, foreign exchange and other price risks, and ageing analysis and sensitivity analysis for liquidity and credit risk. A summary of these risks has been presented below: Risk Nature of Risk Management of Risk Liquidity Risk Difficulty in meeting financial liability obligations. Remaining within optimal capital structure, targeting a minimum liquidity level, ensuring long-term commitments are managed, maintaining access to a variety of additional funding sources and managing maturity profiles. Interest Rate Risk Fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates. Floating versus fixed rate debt framework, interest rate swaps, forward rate agreements and options. Foreign Exchange Risk Fluctuations in the fair value of future cash flows or assets/liabilities denominated in a currency other than AUD because of changes in foreign exchange rates. Forward foreign exchange contracts, currency options, cross-currency swaps and designation of non-derivative foreign currency liabilities in a cash flow hedge relationship. Fuel Price Risk Exposure of future AUD fuel to unfavourable USD-denominated price movements and foreign exchange movements. USD price - options and swaps on jet kerosene, gasoil and crude oil. Foreign exchange risk - foreign exchange contracts and currency options. Credit Risk Potential loss from a transaction in the event of a default by a counterparty during the term or on settlement of a transaction. Trade Debtor counterparties - Use of International Air Transport Association (IATA) clearing mechanism which undertakes its own credit review of members, and stringent credit policies where the Group provides credit to customers directly. Other financial asset counterparties - transact only with counterparties that have acceptable credit ratings and counterparty limits. i. Liquidity Risk Nature of the risk: Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with its financial liabilities. Liquidity risk management: The Qantas Group manages liquidity risk by targeting a minimum liquidity level, ensuring long-term commitments are managed with respect to forecast available cash inflows, maintaining access to a variety of additional funding sources, including commercial paper and standby facilities, managing maturity profiles and maintaining an unencumbered pool of assets. Qantas may from time to time seek to purchase and retire outstanding debt through cash purchases in open market transactions, privately negotiated transactions or otherwise. Any such repurchases would depend on prevailing market conditions, liquidity requirements and possibly other factors. The impact of COVID-19 has seen the Qantas Group take swift action to boost liquidity by unlocking value in the Group's unencumbered asset base and accessing a variety of funding sources, while also maintaining minimal refinancing risk with no major maturities until June 2021. The Group responded quickly to increase liquidity by raising $1.75 billion in new secured debt funding since 31 December 2019. The Group continues to have no financial covenants while raising new debt at competitive rates with long tenors. In March 2020, the Group cancelled the off-market share buy-back announced in February 2020, which preserved $150 million in cash. In June 2020, the Group revoked the interim dividend, announced in February 2020 and deferred in March 2020, avoiding cash outflow of $201 million. On 25 June 2020, the Group announced a fully underwritten Institutional Placement (Placement) to raise approximately $1.36 billion and a non-underwritten retail Share Purchase Plan for eligible existing shareholders. As at 30 June 2020, including the completion of the underwritten Placement, the Group's available liquidity was $4.5 billion, including $3.5 billion of cash and cash equivalents and $1 billion in standby facilities maturing in financial year 2022/23 and 2023/24. In addition to this, the Group maintains an unencumbered asset base of approximately $2.5 billion, including 46 per cent of the Group's fleet, land, spare engines and other assets. QANTAS ANNUAL REPORT 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 92 27 FINANCIAL RISK MANAGEMENT (CONTINUED) (A) RISKS (CONTINUED) i. Liquidity Risk (continued) Subsequent to year end, the retail Share Purchase Plan was completed resulting in the issuance of 22.5 million shares at $3.18 per share (totalling $71.7 million). The Group also completed the debt raising of a 10-year, $0.5 billion in unsecured bonds as part of ongoing management of its debt maturity profile. The proceeds will strengthen short-term liquidity and be used to pay $0.4 billion in bonds due to expire in June 2021. The Group continues to have no financial covenants on any of its debt. These transactions will be recognised within the 2020/21 financial year. The following table summarises the contractual timing of cash flows, including estimated interest payments, of financial liabilities and derivative instruments. The contractual amount assumes current interest rates and foreign exchange rates. The amounts disclosed in the table are undiscounted. 2020 $M Less Than 1 Year 2 to 3 Years 4 to 5 Years More Than 5 Years Total Financial liabilities Payables 2,351 99 - - 2,450 Lease liabilities1 516 773 311 578 2,178 Bank loans - secured2 407 648 512 757 2,324 Bank loans - unsecured2 4 8 333 - 345 Other loans - secured2 165 726 440 1,820 3,151 Other loans - unsecured2 487 390 297 669 1,843 Derivatives - inflows (1) - - - (1) Derivatives - outflows 5 2 - - 7 Net other financial assets/liabilities - inflows 18 10 - - 28 Total financial liabilities 3,952 2,656 1,893 3,824 12,325 1. This represents the Group's contractual undiscounted cash flows relating to leases. 2. Recognised financial liability maturity values are shown pre-hedging. 2019 (restated) $M Less Than 1 Year 2 to 3 Years 4 to 5 Years More Than 5 Years Total Financial liabilities Payables 2,366 - - - 2,366 Lease liabilities1 478 812 342 531 2,163 Bank loans - secured2 295 505 351 72 1,223 Bank loans - unsecured2 9 18 18 334 379 Other loans - secured2 164 470 813 1,341 2,788 Other loans - unsecured2 340 818 285 196 1,639 Derivatives - inflows (6) (3) - - (9) Derivatives - outflows 16 7 - - 23 Net other financial assets/liabilities - inflows (256) (47) - - (303) Total financial liabilities 3,406 2,580 1,809 2,474 10,269 1. This represents the Group's contractual undiscounted cash flows relating to leases. 2. Recognised financial liability maturity values are shown pre-hedging. ii. Interest Rate Risk Nature of the risk: Interest rate risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Qantas Group has exposure to movements in interest rates arising from its portfolio of interest rate sensitive assets and liabilities, which are predominantly in AUD and USD currencies. These principally include corporate debt, leases and cash. Management of interest rate risk: The Qantas Group manages interest rate risk by using a floating versus fixed rate debt framework. The relative mix of fixed and floating interest rate funding is managed by using interest rate swaps, forward rate agreements and options. As at 30 June 2020, interest-bearing liabilities amounted to $6,693 million (2019: $5,137 million). The fixed/floating split is 40 per cent and 60 per cent respectively (2019: 56 per cent and 44 per cent). As noted in Note 23(C), the Group manages its exposure to interest rate risk with reference to the Group's Financial Framework where the fixed/floating ratio is measured against Net Debt. The Group's Net Debt is a non-statutory measure and includes on balance sheet debt, cash and capitalised aircraft lease liabilities. The ratio of fix/floating on Net Debt is 78 per cent and 22 per cent respectively, which assumes cash is treated as floating. As at 30 June 2020, other financial assets and liabilities included derivative financial instruments relating to debt obligations and future interest payments totalling $7 million (liability) (2019: $17 million (liability)). These are recognised at fair value. QANTAS ANNUAL REPORT 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 93 27 FINANCIAL RISK MANAGEMENT (CONTINUED) (A) RISKS (CONTINUED) ii. Interest Rate Risk (continued) Sensitivity to interest rate risk: $M Profit Before Tax Equity (Before Tax)1 2020 2019 2020 2019 100bps increase in interest rates2 Variable rate interest-bearing instruments (net of cash) (8) (5) - - Derivatives designated in a cash flow hedge relationship - - 1 2 100bps decrease in interest rates2 Variable rate interest-bearing instruments (net of cash) 8 5 - - Derivatives designated in a cash flow hedge relationship - - - (2) 1. Equity (Before Tax) does not include sensitivity recognised in Profit/(Loss) Before Tax. 2. Sensitivity analysis assumes hedge designations as at 30 June 2020 remain unchanged. Under AASB 16, interest rate movements on lease liabilities are treated as modifications against the corresponding right of use asset and lease liability. As such, there is no immediate impact to the Consolidated Income Statement or Other Comprehensive Income and as a result, interest rate movements on lease liabilities are not included as an interest rate sensitivity. iii. Foreign Exchange Risk Nature of the risk: Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the functional currency of the Group. The Group operates internationally and is exposed to foreign exchange risk, primarily the US dollar. The source and nature of this risk arises from operations, capital expenditure and revaluation risk. The revaluation risk primarily exists in interest bearing liabilities, lease liabilities and other financial assets and liabilities. The Group hedges foreign exchange risk with the objective of minimising volatility of the Australian currency cost of highly probable forecast purchases and disposals of property, plant and equipment and other revenue and operating expenditures. Foreign exchange losses/(gains) for the year ended 30 June 2020 was ($46) million (2019: $130 million). Management of foreign exchange risk: Forward foreign exchange contracts and currency options are used to hedge a portion of net foreign currency exposures in accordance with Qantas Group policy. Net foreign currency exposures, including foreign currency purchases and disposals of property, plant and equipment, may be hedged out to two years within specific parameters. Any hedging outside these parameters requires approval by the Board. For the year ended 30 June 2020, other financial assets and liabilities included derivative financial instruments relating to the hedging of future capital expenditure payments totalling $15 million (net asset) (2019: $16 million (net asset)) and relating to the hedging of future operating expenditure payments totalling $15 million (net asset) (2019: nil). These are recognised at fair value. Non-derivative financial liabilities including interest-bearing liabilities and lease liabilities are designated in a cash flow hedge relationship to hedge forecast foreign currency revenue. These interest-bearing liabilities and lease liabilities have a maturity between one and 7 years. To the extent a foreign exchange gain or loss is incurred, and the cash flow hedge is deemed effective, this is deferred until the revenue is realised. As at 30 June 2020, total unrealised foreign exchange losses on hedges of revenue designated to non-derivative financial liabilities was $3 million (2019: nil). Sensitivity to foreign exchange risk: $M Profit Before Tax Equity (Before Tax)1 2020 2019 (restated) 2020 2019 (restated) 20% movement in Foreign Exchange Risk2,3 20% (2019: 20%) USD depreciation (68) (249) (373) (114) 20% (2019: 20%) USD appreciation 99 379 610 156 1. Equity (Before Tax) does not include sensitivity recognised in Profit/(Loss) Before Tax. 2. Sensitivity analysis assumes hedge designations as at 30 June 20 remain unchanged. Sensitivity analysis on foreign currency pairs of 20 per cent represent recent volatile market conditions. 3. Sensitivity analysis includes foreign currency interest-bearing liabilities, lease liabilities and derivatives. Following the adoption of AASB 16 and the IFRIC Fair Value hedging agenda decision, the Group put in place accounting hedge designations to manage the foreign exchange movements of foreign currency revenue by designating foreign currency interest-bearing liabilities and lease liabilities as the hedging instrument in a cash flow hedge relationship. The effective portion of the foreign exchange revaluation of the hedging instrument is recognised in Other Comprehensive Income and is recycled to the Consolidated Income Statement within Net Passenger Revenue when the hedged item is realised. In accordance with AASB 9, these designations apply prospectively from 1 July 2019. For comparative periods before the designation (which have been restated for the adoption of AASB 16 and the IFRIC Fair Value hedging agenda decision), the foreign exchange movements were recognised immediately in the Consolidated Income Statement within Other Expenses. QANTAS ANNUAL REPORT 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 94 27 FINANCIAL RISK MANAGEMENT (CONTINUED) (A) RISKS (CONTINUED) iv. Fuel Price Risk Nature of the risk: Exposure of future AUD fuel costs to unfavourable USD-denominated price and foreign exchange movements. Management of future AUD fuel costs risk: The Qantas Group uses options and swaps on jet kerosene, gasoil and crude oil to hedge exposure to movements in the USD price of aviation fuel. Qantas considers the crude component to be a separately identifiable and measurable component of aviation fuel. In identifying this component, the Group considers long-term correlation levels between crude hedging products and the underlying jet fuel exposure. The foreign exchange risk in the total fuel cost is separately hedged using foreign exchange contracts and currency options. Hedging is conducted in accordance with Qantas Group policy. Fuel consumption out to two years may be hedged within specific parameters, with any hedging outside these parameters requiring approval by the Board. For the year ended 30 June 2020, other financial assets and liabilities included fuel and foreign exchange derivatives totalling $57 million (net liability) (2019: $286 million (net asset)). These are recognised at fair value. Sensitivity to foreign exchange and fuel price risk: $M Profit Before Tax Equity (Before Tax)1 2020 2019 2020 2019 20% movement in AUD fuel costs2 20% (2019: 20%) USD depreciation, 20% (2019: 20%) increase per barrel in fuel indices 41 - 30 322 20% (2019: 20%) USD appreciation, 20% (2019: 20%) decrease per barrel in fuel indices (29) - 42 93 1. Equity (Before Tax) does not include sensitivity recognised in Profit/(Loss) Before Tax. 2. Sensitivity analysis assumes hedge designations as at 30 June 2020 remain unchanged. Sensitivity analysis on foreign currency pairs and fuel indices of 20 per cent represent recent volatile market conditions. Sensitivity analysis assumes an offset between USD and fuel price indices based on observed market movements. v. Credit Risk Nature of the risk: Credit risk is the potential loss from a transaction in the event of default by the counterparty during the term of the transaction or on settlement of the transaction. The Group has credit exposure in respect of trade receivables and other financial instruments in the ordinary course of business. The maximum exposure to credit risk is represented by the carrying value of financial assets. Management of credit risk: The Qantas Group conducts transactions with the following major types of counterparties: - Trade debtor counterparties: The credit risk is the recognised amount, net of any impairment losses. As at 30 June 2020, trade debtors amounted to $318 million (2019: $885 million). The Qantas Group has credit risk associated with travel agents, codeshare partners, industry settlement organisations, and credit provided to direct customers, such as large airline, loyalty and freight corporate customers. A significant proportion of receivables are settled through the International Air Transport Association (IATA) clearing mechanism which undertakes its own credit review of members The Qantas Group minimises this credit risk through the application of stringent credit policies and accreditation of travel agents through industry programs - Other financial asset counterparties: The Qantas Group restricts its dealings to counterparties that have acceptable credit ratings. Should the rating of a counterparty fall below certain levels, internal policy dictates that approval by the Board is required to maintain the level of the counterparty exposure. Alternatively, Management may consider closing out positions with the counterparty or novate open positions to another counterparty with acceptable credit ratings The Qantas Group minimises the concentration of credit risk by undertaking transactions with a large number of customers and counterparties in various countries in accordance with Board-approved policy. As at 30 June 2020, the credit risk of the Qantas Group to counterparties in relation to other financial assets, cash and cash equivalents, and other financial liabilities amounted to $3,311 million (2019: $2,125 million). Refer to Note 27(C) for offsetting disclosures of contractual arrangements. The Qantas Group's credit exposure in relation to these assets is with counterparties that have a minimum credit rating of A-/A3, unless individually approved by the Board. QANTAS ANNUAL REPORT 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 95 27 FINANCIAL RISK MANAGEMENT (CONTINUED) (B) FAIR VALUE The fair value of cash, cash equivalents and non-interest-bearing financial assets and liabilities approximates their carrying value due to their short maturity. The fair value of financial assets and liabilities is determined by valuing them at the present value of future contracted cash flows. The fair value of forward foreign exchange and fuel contracts is determined as the unrealised gain/loss at balance date by reference to market exchange rates and fuel prices. The fair value of interest rate swaps is determined as the present value of future contracted cash flows. Cash flows are discounted using standard valuation techniques at the applicable market yield, having regard to the timing of the cash flows. The fair value of options is determined using standard valuation techniques. Other financial assets and liabilities represent the fair value of investments and derivative financial instruments recognised on the Consolidated Balance Sheet. Refer to Note 37(C) for a definition of the fair value hierarchy. June 2020 June 2019 (restated) Carrying Amount Held at Carrying Amount Held at $M Fair Value Through Profit And Loss Fair Value Through Other Comprehensive Income3 Amortised Cost Fair Value Fair Value Through Profit And Loss Fair Value Through Other Comprehensive Income Amortised Cost Fair Value Cash and cash equivalents - - 3,520 3,522 - - 2,157 2,162 Receivables - - 646 646 - - 1,178 1,178 Other financial assets1 251 104 - 355 422 96 - 518 Financial asset 251 104 4,166 4,523 422 96 3,335 3,858 Payables - - 2,450 2,450 - - 2,366 2,366 Interest-bearing liabilities2 - - 6,693 7,450 - - 5,137 5,607 Other financial liabilities1 285 - - 285 137 - - 137 Financial liabilities 285 - 9,143 10,185 137 - 7,503 8,110 1. Other financial assets and liabilities represents the fair value of equity investments and derivative financial instruments recognised on the Consolidated Balance Sheet. Derivative financial instruments have been measured at fair value using Level 2 inputs in estimating their fair values. Equity instruments have been measured at fair value using Level 1 or Level 2 inputs in estimating their fair value. 2. The fair value of interest-bearing liabilities is calculated as the present value of outstanding contractual cashflows discounted at a risk-free rate. 3. As at 30 June 2020, $96 million of the $104 million of other financial assets relates to the Group's investment in Alliance Airlines Limited (ASX: AQZ) which has been accounted for as an investment held at fair value through other comprehensive income under AASB 9. During the year, the Group recognised fair value changes in relation to listed and unlisted equity investments, net of tax in Other Comprehensive Income of ($16) million (2019: $4 million). The Group recognised fair value changes, net of tax of $7 million (2019: $3 million) in respect of listed equity investment using Level 1 inputs. The Group recognised fair value changes, net of tax of ($23) million (2019: $1 million) in respect of unlisted equity investments using Level 2 inputs. (C) DERIVATIVES AND HEDGING INSTRUMENTS The following section summarises derivative financial instruments in the Consolidated Financial Statements: Type of Hedge Description Derivative Cash Flow Hedges A derivative or financial instrument to hedge the exposure to variability in cash flows attributable to a particular risk associated with an asset, liability or forecast transaction. Exchange derivative contracts to hedge future AUD fuel costs and foreign currency operational payments (forwards, swaps or options). Interest rate derivative contracts to hedge future interest payments (forwards, swaps or options). Foreign exchange derivative contracts to hedge future capital expenditure payments (forwards or options). The Group's derivative assets and liabilities as at 30 June 2020 are detailed below: $M 2020 2019 Current Non-current1 Total Current Non-current1 Total Derivative assets Designated as cash flow hedges 66 35 101 334 88 422 De-designated derivatives 150 - 150 - - - Total other financial assets 216 35 251 334 88 422 Derivative liabilities Designated as cash flow hedges (95) (47) (142) (89) (48) (137) De-designated derivatives (143) - (143) - - - Total other financial liabilities (238) (47) (285) (89) (48) (137) Net other financial assets/(liabilities) (22) (12) (34) 245 40 285 1. Other financial assets in the balance sheet also includes investments in equity instruments of $104 million (2019: $96 million) recognised at fair value through other comprehensive income (refer to note 27(B)). QANTAS ANNUAL REPORT 2020 Notes to the Financial Statements continued For the year ended 30 June 2020 96 27 FINANCIAL RISK MANAGEMENT (CONTINUED) (C) DERIVATIVES AND HEDGING INSTRUMENTS (CONTINUED) i. Offsetting The Group enters into contractual arrangements such as the International Swaps and Derivatives Association (ISDA) Master Agreement where, upon the occurrence of a credit event (such as default), a termination value is calculated and only a single net amount is payable in settlement of all transactions that are capable of offset under the contractual terms. The ISDA agreements do not meet the criteria for offsetting in the Consolidated Balance Sheet and consequently, financial assets and liabilities are recognised gross. This is because the Group does not have any current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events. The amounts shown as financial assets and financial liabilities would each have been $185 million lower (2019: $119 million lower) in the event of the right to offset being currently enforceable. ii. Hedge Reserve The effective portion of the cumulative net change in the fair value of derivative financial instruments designated as a cash flow hedge and the cumulative change in fair value arising from the time value of options are included in the hedge reserve. These options relate entirely to transaction-related hedged items. For further information on accounting for derivative financial instruments as cash flow hedges, refer to Note 37(C). For the year ended 30 June 2020, $122 million (2019: $41 million) is expected to be released to the Consolidated Income Statement within one year and $25 million (2019: $(5) million) after one year. Other financial assets and liabilities represent the fair value of derivative financial instruments recognised on the Consolidated Balance Sheet. Refer to Note 37(C) for a definition of the fair value hierarchy. iii. De-designated Hedging The Group has applied judgement referencing inputs of the Recovery Plan in assessing whether hedged forecast transactions are still expected to occur. Given the significant decrease in flying activity in the last quarter of the 2019/20 financial year, which is expected to continue into the 2020/21 financial year, $571 million of hedge losses were de-designated and recognised immediately in the Consolidated Income Statement. The amount recognised in the Consolidated Income Statement includes foreign exchange movements since dedesignation. Prospective changes in fair value of de-designated hedging will be accounted for through the Consolidated Income Statement. Where hedging has been closed out with deferred settlement terms, this is reflected in the current and non-current payables balance. Any further decline in forecast flying activity and fuel consumption will result in deferred hedge gains and losses to be de-designated and released to the Consolidated Income Statement when the forecast transaction is no longer probable. (D) HEDGE ACCOUNTING As at 30 June 2020 Nominal Amount of Hedging Instrument and Hedged Item Hedge Rates Carrying Amount of the Hedging Instrument1,2 Change in Value of the Hedging Instrument Used for Calculating Hedge Ineffectiveness Change in Value of the Hedged Item used for Calculating Hedge Ineffectiveness Change in Value of the Hedging Instrument Recognised in Other Comprehensive Income Hedge Ineffectiveness Recognised in Profit or Loss Amount Reclassified from the Cash Flow Hedge Reserve to Profit or Loss Dedesignated Cash Flow hedges Reclassified to Profit or Loss3 Assets Liabilities M $M $M $M $M $M $M $M $M $M Cash flow hedges AUD fuel costs (up to 3 years) 17 Barrels AUD/Barrel 59-102 68 (131) (371) 371 (371) - 128 (603) Operational expenditure (up to 2 years) 566 USD AUD/USD 0.65-0.77 15 (1) 57 (57) 57 - 57 (3) Revenue (up to 7 years) 777 USD AUD/USD 0.69 - (1,098) (14) 14 (14) - (10) (1) Capital expenditure (up to 2 years) 566 USD AUD/USD 0.67- 0.74 18 (3) 27 (27) 27 - - - Interest (up to 2 years) 100 AUD Fixed 4.45%-5.99% - (7) 8 (8) 8 - - - 1. Derivative cash flow hedging instruments are located within the Other Financial Assets and Other Financial Liabilities on the Consolidated Balance Sheet and include costs of hedging. The carrying amount of the hedging instrument is presented in AUD where the hedged item equals the nominal amount of the hedging instrument. 2. The revenue hedging instrument is a non-derivative financial liability with the carrying amount presented in USD and is located within Interest-bearing Liabilities and Lease Liabilities. 3. $571 million of hedge losses were de-designated and recognised to the Consolidated Income Statement for the year ended 30 June 2020. This includes $607 million released from Hedge Reserve and ($36 million) of foreign exchange movements since de-designation.