Anil Hargovan

The Federal Court has not imposed extra penalties on six non-executive directors involved in the Centro court case, saying their convictions for breaching the Corporations Act are penalty enough.

My first impression suggests that Justice Middleton in the Centro case appears to have taken one step forward (in the liability decision which set the bar on directors performance standards in reading accounts dauntingly high) and two steps back (in the penalty decision handed down yesterday which did not go far enough in sanctioning oversight failure).

The tone of the penalty decision appears to be less caustic and more forgiving of the directors failure to exercise care and diligence.

The failure to throw the book at the directors in the penalty decision  has polarised the corporate community, attracted controversy and seen a vituperative reaction from sections of the media.

The penalty decision elevates shame and reputational loss as strong determinants of general deterrence but will not appease those baying for blood following significant oversight by the directors in the accounts involving billions of dollars.

The penalty decision boosts the directors shame and reputational loss as an effective deterrence tool.  Such sanctions will only be effective, however, for those directors who put a premium on their reputations.

Media reaction to the penalty decision would suggest that the penalties handed down were largely meaningless. It is important to remember that the judge refused to exonerate or grant forgiveness for breaches of the Corporation Act and did issue court declarations of breach of law which puts a stain of the cv of the directors and, more ominously, offers no comfort to the company and its directors facing class action by the shareholders.

In the refusal to grant forgiveness and the confirmation of breaches of law, the penalty decision has laid a stronger foundation and boosts the prospects of  shareholder success in the class action against the company. Herein lies the potential for a greater penalty afforded by this decision.  Perhaps the judge had one eye on the potential impact of the class action and tempered the penalty decision in light thereof.

Anil Hargovan is an Associate Professor at the Australian School of Taxation & Business Law at the ustralian School of Business.

Michael Peters

New legislation is intended to more closely regulate the duties and pay arrangement of financial planners.

However I would argue that more regulation is not the answer.

Financial Services Minister Bill Shorten’s new legislation has been largely supported by the financial services industry however the chant coming from government once again is ‘when in doubt regulate’.  It will only increase costs, make it less accessible and is unlikely to provide better advice.

Under the legislation, known as Future of Financial Advice (FOFA), financial planners will be obligated to renew contractual arrangements with clients every two years from the beginning of July next year.

It is proposed that what are called ‘fiduciary duties’ are to be codified, however most of what the law will require is good business practice, so why make it law? Why not put it in a code of behaviour endorsed by ASIC and enforced by the ACCC like other professions such as travel agents?

As proposed the legislation will also offer more powers for the financial regulator, ASIC, which will be given additional power to intervene earlier, as well as allowing the regulator to ban financial planners in certain circumstances.

Why are we using regulation to make people feel immune from the market place – which will sometimes lose them money?

People will still miss out on their bet on the stock market or interest rates, and that is quite simply how markets work. Protecting people from themselves through more regulation does not mean people will not lose money. Instead, it means those with money are likely to get access to better advice than those who cannot afford it.

Under the legislation, brokers would have to restructure remuneration arrangements on margin lending, cash management and banking products, and other product solutions sold to retail clients such as managed funds.

There is enough law to regulate planners and advisers; it’s just a matter of enforcing these rules, rather than making more law.

Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business

Michael Sherris

There is a large cost to insurance companies of Tropical Storm Irene which has hit America’s north west, and the much larger Tropical Storm Nanmadol which is pounding the coast of China right now.

These two vast tropical storms have shown how unpredictable and potentially damaging these weather events can be. Insurance companies – and those that re-insure them – are now counting the cost. Alas, it seems we’ll all have to pay the price, even those a long way from the storm.

Tropical Storm Irene has killed 38 people, and insurance claims could top seven billion dollars, according to the Consumer Federation of America.

It’s not long since we experienced the massive flooding from Cyclone Yasi in Queensland and we saw the massive damage these events can cause. Even though Irene became a severe tropical storm rather than a hurricane, the costs will be substantial because of the populated area that it affected. The insurance industry will pick up a significant amount of the cost, however considerable losses will be incurred by individuals who will not be covered by insurance.

Claims for wind damage are expected to be one sixth of the total sum from Hurricane Katrina in 2005, and claims for flood damage one tenth, the Consumer Federation of America estimated.

As populations increasingly move into areas such as the East Coast, including Florida in the US, the potential exposure to loses from natural catastrophe events increases, even if the risk of these events happening may not be increasing. Nevertheless, theories on climate change do suggest that these events could be increasing in severity and frequency so this only adds to the risk.

Meanwhile overnight torrential rains and fierce winds have hit south-east Taiwan causing extensive disruption, as Tropical Storm Nanmadol swept over the island, and now heads for China.

There are many disasters that can hit dense areas of population. If we just look over the Tasman, even earthquake risk can be seen to be something that can cause massive economic losses. The Christchurch earthquake highlighted this. Insurance companies have taken significant losses and a number of insurers are struggling financially as a result.

The insurance industry is already reeling after 2010 was the second worst year for natural disasters since 1980. There were 950 incidents with insured losses amounting to about 37 billion dollars. Natural catastrophes in Australia and Oceania made up about 16 percent of global losses last year, the costliest being September’s Christchurch earthquake.

I feel it is vital to remember that disasters like this may hit home in Australia. This still remains an issue deserving attention. Australia is not immune from natural catastrophes yet individuals still have significant exposures to these losses that in many cases are not insured.

After the Queensland floods, premiums rose for all Australians, even in non-flood prone areas, because insurers pool risks by averaging losses across all policyholders. As supply falls and demand increases, premiums increase. In this case demand is increasing due to the catastrophic events, and supply is falling due to capital constraints on insurers.

Tropical Storm Irene may seem a long way off – but remember, insurers work in a global market.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business.

Craig Tapper

Executives, policy makers and commentators across the globe suggest that the capacity to generate significant and sustainable growth or gain major competitive advantage via efficiency and productivity, is reaching its limits, if it hasn’t already passed them.  

In the recent book The Future of Management, author Gary Hamel expresses the point that: “While most executives would willingly attest to the value of initiative, creativity, and passion, they face a worrying conundrum.  They are by temperament, managers.  They are paid to oversee, control, and administer. Yet today the most valuable human capabilities are precisely those that are least manageable.  Whilst the tools of management can compel people to be obedient and diligent, they can’t make the creative and committed.”

Once every business is doing the same things, using the same equipment and systems, and every process that can be outsourced or off-shored to a country or provider with lower costs, then the potential for competitive advantage or bottom line growth gets more and more minimal. 

So the growth challenge for executive leaders today is not just to get more efficient at doing the same things as everyone else, nor simply extracting more productive output from our assets, but to find new things to do and better ways to satisfy customers and deliver value for stakeholders. 

In IBM’s March 2010 survey of 1,500 CEO’s from around the world, over 70% said that their number one challenge in growing their business in the 21^st century was creative leadership.

So what’s the solution? 

Whilst it can be complex to implement, achieving growth via creativity has a few simple but different rules to achieving growth through productivity. 

Firstly, creativity is non-hierarchical.  Existing managers can often feel threatened when transformational ideas come from relatively junior and often relatively new people. 

Secondly, creativity is unpredictable. It tends to happen when our brains are at rest and our thinking is allowed to be unconstrained rather than when they are narrowly focused on tasks and outcomes. 

Thirdly, creative growth is risky.  It relies on a pipeline of lots and lots of ideas, most of which will turn out to be false trails, but some of which will turn out to be spectacularly successful and repay the investments of time and capital many times over. 

Finally, creative growth is more achievable through collaboration than specialisation.  It fails in the silos and regimented structures and processes that produce productivity and efficiency.  Rather, it thrives when we take the restrictions of structure away.

Creative growth is more likely to come when we cross boundaries and forget hierarchies, when we encourage and reward people based on challenging the traditional and existing views rather than conforming to them, when we allow people freedom and time just to think rather than constraining them to be busy and productive, and in cultures where risk is tolerated and there is an appetite to see and do things in sometimes radically different ways. 

As you can imagine, the rules and practices of management that lead to the massive gains in productivity we saw in the 20^th century are unlikely to generate growth via creativity. 

But it’s not an either/or issue, creative growth is about having both. 

It’s about unleashing creativity and then applying discipline and the lenses of efficiency to extract the maximum value from whatever the creativity unleashes. 

The organisations that will be spectacularly successful in the next century will still use resources efficiently and produce the maximum outputs and outcomes from efficient processes; they will just be different processes and more creative outcomes.     

Craig Tapper is an adjunct lecturer in strategy and management at AGSM Executive Programs at the Australian School of Business

Michael Aitken

Over the weekend four European countries (France, Italy, Spain and Belgium) extended their ban on all forms of short-selling in a bid to cushion bank stocks from the euro debt crisis, after what is considered unwelcome volatility, particularly in the banking sector, and in particular, in the stock Societe Generale.

Despite a raft of consistent and convincing academic evidence that such action is ill advised, regulators in these countries have never-the-less decided to bury their heads in the sand. I suggest this points to a fundamental problem with securities regulators around the world, namely the failure to embrace the concept of evidenced based policy making.

When the SEC in the USA made a similar decision to ban short-selling  back in the global financial crisis, ASIC and many other regulators also followed suit, presumably because either they thought the SEC knew best (a dangerous assumption at the best of times) or investors would take their frustrations out on our market if we left them to do so.  Despite all the gloom and doom, places like Hong Kong did not follow suit and their markets did not suffer the catastrophe that was predicted.

So why is it that in the face of the available evidence, that banning short-selling is not a useful idea, do regulators still do it? Perhaps the answer is that like the proverbial “cat caught in the headlights,” when they don’t really know what to do, running backwards and forwards looking like they are making conscious decisions will get them the benefit of the doubt if the worst happens. Trouble is, like the cat in the headlight they will still get run over by the car because the volatility will find a way to manifest itself if not today then tomorrow. Russia found this out when it tried to close its markets to avoid the consequences of the GFC and 9/11. As soon as they opened them again, they were hit hard because like the issues underlying the volatility in Europe they are more long-term in nature.

Our own regulator is not immune from the criticism that it acts in the face of the available evidence, as is evident in CP 145 which is contemplating the introduction of market design changes like uniform circuit breakers in an attempt to hold back the dam of negative sentiment.

There is no evidence to support this proposed market design change. The only evidence that does exist, provided by researchers at the Capital Markets Cooperative Research Centre (CMCRC) here in Australia, suggests otherwise.   Researchers at the centre developed a research design that looks at what happened to individual stocks that were halted for the release of information against the same stocks with similar price changes but no halts. The conclusion of the centre’s research was that volatility was higher in the aftermath of stocks that were halted than in the situations where the stocks were not. The logic is the same at the opening of the market. When the market has been closed for 18 hours people don’t really know what the price is and consequently we see significant volatility at the open relative to every other point in the trading day.

The decision to propose uniform circuit breakers here in Australia seems to have been taken based on the fact that other regulators were contemplating similar changes.  Indeed in CP 145 ASIC sites the decision by the SEC (which had no evidence to support it) as a primary reason for ASIC’s decision.

To break out of this cycle of following everyone else’s mistake there has to be an appeal to evidenced based policy making. Every time there is a market design change, the party motivating the change (whether it be a regulator, a market operator a broker or a trader) needs to confront the change pre and post with objective evidence of the likely impact of the change on fairness and efficiency, the uniform mandate of every single regulator in the world.  To do this we need to define and seek empirical proxies for fairness and efficiency and require parties motivating a change to demonstrate that the change will enhance fairness and efficiency or will enhance one without affecting the other before it is implemented or confirmed.

Researchers at the CMCRC are leading the way by demonstrating how evidenced based policy making is achievable. The framework they have created to address the issue, known as the Market Quality Framework, is designed for use by all would be motivators of market design change in securities markets.

In brief the framework identifies two key proxies for efficiency, namely, transactions cost and price discovery and three proxies for integrity, namely, insider trading, market manipulation and broker-client conflict.  We measure the proxies pre and post market design changes to provide objective evidence of the impact of market design changes on efficiency and integrity. The full framework is available from the CMCRC. So how might such a framework be useful?

Using the framework ASIC could demonstrate how the changes to the market it is contemplating in CP 145 would affect the efficiency and integrity of the Australian marketplace. Having such a framework may have saved Chi-X the four years wait it had to endure to secure a market licence in Australia. Had they provided evidence using the framework of the effect on efficiency and integrity of the introduction of Chi-X in the UK market, they might have got their go ahead a lot earlier. Had Magnus Booker used the framework to show how a merger of SGX and ASX would lead to enhancements in efficiency and integrity for Australian investors he might not be lamenting the Government decision.  At the very worst the ACCC would have had to address the evidence rather than appealing to the old chess nut that it was not in the national interest.

Of course studying market design changes elsewhere is no guarantee for what will happen here because a market at a point in time is the end result of hundreds of different market design changes over many years. In consequence this dictates the need for a study post the change in the market in question to confirm that expected outcome eventuated. That is the essence of evidenced based policy making which regrettably is in short supply in most regulatory decision making.

Michael J Aitken is the Chair of Capital Market Technologies at the Australian School of Business

Fariborz Moshirian

Last week’s Franco-German summit provided a foundation for deeper fiscal convergence amongst the Euro zone countries in the medium term. However, it failed to satisfy the expectations of the market which wanted to see much bolder action immediately.

The QE 2 provided ample US dollars to maintain liquidity in the market and now that this source of funds has disappeared, there are signs that European banks are seeking greater access to dollar market funds and requesting that the ECB provide them with US dollars.

The request made by the New York Federal Reserve to major banks in Europe asking them to ensure that they have adequate cash to deal with their day to day obligations in the US, in the wake of further financial turmoil in Europe, has created greater sensitivity in the market. This process has made the market nervous about the health of European banks and hence the market will focus on European banks in the coming days and weeks. This may well increase the interbank lending rate and create liquidity problems in the banking system. While some may argue that the ECB will be ready, as the lender of last resort, to ensure liquidity is not frozen, there is a limit to how much intervention the ECB can make in the market.

Indeed, there is some concern about the ability of the ECB to be able to continue purchasing government bonds from Italy and Spain over time. The ECB is acting as a de-facto Government or Treasury for the Euro zone. The ECB may continue this role if all the national parliaments of the Euro zone area do not ratify the European Financial Stability Fund’s (EFSF) mission by the end of September. However this role is unsustainable in the long term.

Both Germany and France have flagged that they do not intend to increase the funding of the EFSF from its current 440 billion Euro, as they are fearful that if they increase the amount now, the market will demand more. However, the idea of turning the EFSF into a bank and use this as a way of financing the needs of the member countries may not address the current concerns of the market. Only six European countries are still triple A rated to could ensure that the EFSF will remain a triple A fund. However, further transfers of funds from countries such as France into the EFSF may lead to France losing its triple A rating. Furthermore, the market is looking for bolder action. Merely allowing small economies such as Greece or Ireland access to the EFSF or Italy and Spain to roll over their debt in the next few years are no longer the only concerns for the market.

The Euro zone has lost its steam for generating economic growth. Greece’s economy is now expected to shrink by 4.5 this year. The German economy has slowed down. As the market is now nervous about European banks, the Euro zone leaders may have to take bolder action to either save the Euro and the Euro zone or prepare for a break down of the current monetary union.

Given Germany’s commitment to the Euro, the market is keen to see the Euro zone embrace full fiscal union and in this process allow the formation of Euro zone bonds that will be supported by all member countries. The concern is that small nations will over use euro bonds without any scrutiny, in the way they used the low interest rates of the ECB associated with monetary union, to borrow too much. However, similar to the US Federal system, Euro bonds should emerge as part of a full package that includes requiring small economies to forgo their fiscal independence and be subject to scrutiny by the EC and have a clear cap as to the amount of Euro bonds that they can use. On the other hand, larger economies may see their support and guarantee of the Euro zone bonds as a more effective way to contribute to the current financial turmoil in Europe than being forced by the market to pay more to rescue their large banks which have been exposed to the sovereign debt crisis, to provide more capital for investment, as foreign capital is fleeing the Euro zone rapidly, to spend more to stimulate the Euro zone’s sluggish economy, to spend more to stimulate their export market within Europe and be prepared to pay for a rise in the cost of capital.

The emergence of Euro bonds will create a unique opportunity for Europe to directly compete with US treasury bonds and attract much needed foreign capital to its shores. Large demand for euro-bonds may well bring its yield lower than the current German bond yield and allow for stronger economies in Europe to access cheaper capital and more investment opportunities.

German demands for an increase in the competitiveness of other member countries may not mean that they all become like the German economy. However, competitiveness could increase, if foreign capital moves back to small member countries in Europe and complement the austerity measures that are now in place in more than five countries there.

One of the underlying causes of the financial turmoil is a leadership crisis in Europe. Bold leadership on the part of Germany and France would not only address the current sovereign debt and banking crises but would also ensure that both Germany and France emerge economically stronger, and that capital will flow back into smaller economies. This will result in more consumption and spending in the Euro zone which will ultimately benefit Germany’s exports and German workers’ jobs over time.

Professor Fariborz Moshirian  is a Professor of Finance and Director of the Insitute of Global Finance at UNSW.

A version of this opinion piece appeared in the Australian Financial Review on the 25 August 2011.

Anil Hargovan

The need for directors to be aware of the business fundamentals, to have a questioning mind and to maintain familiarity with the financial status of the company is nothing new to the law on directors duties– such expectations were well established prior to the Centro decision.  However, when such expectations are marshalled and directed to the directors reporting obligations, they begin to bite.

It is now clear it is getting much harder to get people to sit on boards. This may be a hurdle for the government’s plan to increase the diversity of boards.

In September 2007 Centro directors failed to detect an error that led to more than $2 billion of short-term debt being classed as long-term debt. ASIC has now obtained a judgment that calls for proper diligence when directors are reading financial statements. 

I feel the message for directors is clear – namely, reading of the financial statements is not to be a passive exercise, nor will skim reading suffice.  Going through the motions will not be tolerated.  Scrutiny and the understanding of content is required.  This necessitates financial literacy skills. 

The need for financial literacy has been well established by case law. However I believe the Centro decision elevates the financial literacy requirement in a robust manner. 

On the facts of this case it was held that the apparent errors in the financial statements were not complicated.  This is a judgment call which potentially gives rise to uncertainty.

What may appear to be uncomplicated to a judge, with the benefit of expert evidence, may appear to be complicated to a director, particularly given the push towards board diversity by the ASX recommendations on good corporate governance practices.

We are entering unchartered territory here, especially not knowing to what extent should directors be familiar with accounting standards. The mapping of the boundaries, between complicated and uncomplicated items in financial statements, will be reliant on future case law in this area.  Until then, directors will have to live with this uncertainty which is unsettling and unsatisfactory.   

The sting in the judgment lies with the finding that being surrounded by financial experts, or having an Audit Committee, is helpful but not necessarily a panacea for the discharge of the directors reporting obligations.  The Centro decision sends out a strong message for directors to take their financial reporting obligations personally and seriously.  The approval of the company’s financial reports is a personal and fundamental responsibility of each director as emphasised by the judge which is a recurring theme in this case.

In the future the big issue from this decision is do we want to hand the responsibility to experts to free up the directors to focus on other matters like leadership in business skills and strategy or do we want to turn directors into accountants?

This is a policy debate raised squarely by the Centro decision which rejects the notion that compliance obligation for financial reporting lies exclusively with financial accountants.  Centro decision suggests that the time is ripe to revisit policy issues on the role of a company director to provide greater clarity and certainty on the demands expected of this profession.  Herein lies the danger – the Corporations Act says that anyone over the age of 18 can be appointed a director but then, with limited exceptions, remains largely silent on the performance expectations of directors. A reading of the Corporations Act gives little indication of the true challenges and skills set required to successful discharge the responsibilities of office of director. 

The Centro decision is also a wake up call for legislators to address and focus upon the current lack of direction and guidance in the Corporation Act, such as the need for financial literacy, which has simply failed to keep pace with judicial developments in this area of law.

In considering this, I also think there is a dramatic implications for boards in Australia. 

Company directors may be understandably concerned by the ramifications of the judgement which has the potential to undermine the movement towards more diversity of boards. The encouraging signs and momentum in attracting board diversity, currently at a record high, (Women comprised 25% of all new appointments to ASX 200 boards in 2010, compared to only 5% in 2009 and 8% in 2007 and 2008: AICD Figures) which may well be arrested as a consequence of the Centro decision.

Should the Prime Minister deliver on her threat to legislate to lift the representation of woman on boards, the policy outcome will be a potential disaster unless remediated/accompanied by lessons in financial literacy for all such appointees to the board.

Associate Professor Anil Hargovan is at the Australian School of Taxation & Business Law at the Australian School of Business

Professor James Morley

The high Australian dollar certainly plays a role, however when you consider why Bluescope shut their blast furnace at this particular point of time, it isn’t just a high dollar – there are other more basic economic factors at play.

BlueScope Steel yesterday announced it was axing 1000 jobs because it had become unprofitable to export steel with the historically high levels of the Australian Dollar, and unions have urged the government to move to change this.

There is just a lot of steel being produced globally at the moment relative to expected demand, suggesting prices will be low in the future. I note the phrase ‘global steel glut’ cited by Bluescope in their announcement, which I translate as a prediction by them that they expect steel prices to be low for the next few years. The high dollar is only a small part of the story. I think the bigger bet for Bluescope is that demand from Asia (presumably China in particular) is not going to be as robust in the future, perhaps due to the recent financial market wobbles, including in China.

Bluescope are closing some parts of the operation, and mothballing others, such as the galvanising line at Hastings. It can make sense to mothball some operations and hold off on steel production until prices are predicted to be higher again. There’s no sense in producing at a predicted loss, but at the same time it cost a lot of money to build to plant to make steel, so if the plant can mothballed, production may start again quickly if there is a sudden uptick in demand.The Federal Government says it will announce further measures this week to help promote Australian products, as unions fear that thousands more jobs will be lost because of the high Australian dollar. This has reignited calls for government intervention and a cut in interest rates or a sovereign wealth fund to rein in the exchange rate. This would be a national fund to save more from the mining boom received backing from the Greens, and the Australian Industry Group.

The high dollar is partly driven by interest rates. But I doubt a cut in rates by the RBA would trigger any imminent reopening of a steel plant. Interest rates are set by the RBA who look at all market conditions – including inflation pressures. Broader economic developments for the whole country would be much more of a concern for the RBA than the closing of a section of a steel plant, even if it is painful for the local economy.

James Morley is a Professor of Economics at the Australian School of Business.

Dean Wilkie

I have been thinking about Qantas’s moves to start a new airline up in Asia.

Starting a new airline from scratch means that consumers will hold absolutely no information about the new brand. Nothing beats a fresh start right?

Wrong.

I really question Qantas’s approach from this perspective. Qantas as a brand has strong positive associations, which consumers will use in forming brand judgments and in comparing to alternatives. A quick search of the internet and you can see that in 2006 it was voted the 2nd best airline in the world. In 2011 it was voted the 8^th best. A dramatic drop but still, Qantas is seen as the eight best airline in the world and it currently has a 14% share of the Asian market.The point is that Qantas has equity where as a new brand has none.

 The next thing I want you to consider is something called the order of entry effect. Essentially, in many categories a brand’s market share has been shown to decrease with its entry position. The later a brand enters, the lower the brand’s share. There are several economic reasons but from a marketing perspective, consumers will learn more about earlier entrants than later entrants. The more you know about a brand, the more likely you are to purchase it. To illustrate, the market share of airlines in the domestic market is roughly Qantas (65%), Virgin Blue (20%), Jetstar (10%), Tiger (5%). It is no coincidence that it follows the order in which these brands entered the market.

 My rough calculations have it that this new brand into the Asian market will be at least the 20^th entrant. Using the average order of entry estimate, the 20^th entrant into a category will get about 2.4% share. This is based on having parity with all other entrants on every other variable. In the airline category, this would be advertising, number of planes, flights, price, service, lounges etc. If this new airlines was at a disadvantage in any of these (which it will be), the market share will be even lower. In addition, the connection we have to Qantas because it is an Australian airline is the same connection every consumer will have with its local airline carrier. (Another barrier to consider).

 So you have to ask the question, does it make sense to launch a new airline or should they try and improve the competitiveness of its existing brand which has 14% share.

Lecturer Dean Wilkie is an expert in branding at the Australian School of Business.

Nina Mistilis

Qantas has unveiled plans to axe 1000 jobs, retire elderly aircraft, and cut routes. It’s not surprising – Qantas needed to take some action urgently, because it was haemorrhaging money and customers.

Airlines typically have low profits and operate in a highly competitive environment. Given the lessening airline protection in the Australian market, these bold actions are long overdue.

Qantas is to lay off 1000 staff, scrap four Boeing 747s, and defer delivery of the final six A380s by up to six years. It will also scrap the long-haul route to Buenos Aires, while launching Jetstar Japan as a new low-cost carrier, along with another new premium airline based in Asia, with a new name, new aircraft and new look.

It was high time Qantas took action to cut back on unprofitable routes, and take bold action with some of it’s more aged fleet. The Boeing 747s are now getting quite long in the tooth, and they need to be retired and replaced with more fuel efficient aircraft.

Qantas has reviewed its offshore operations to cut costs and unprofitable routes. It will launch a new, premium Asian airline and a Japanese budget carrier – the latter jointly with Japan Airlines and Mitsubishi – flying Airbus A320 jets.

It makes sense for Qantas to look at cheaper more efficient Airbus aircraft, that cost less to run. Qantas plans to acquire up to 110 Airbus aircraft, worth more than $9.4 billion at list prices.

However with the Australian dollar hovering close to parity, the Australian dollar is very high and that deters tourism to Australia, and tourists from overseas flying on Qantas. We have seen more Australian’s wishing to fly overseas for their holidays, but in turn they may be switching from domestic destinations. That is equally going to impact the bottom line at Qantas.

Nina Mistilis is from the Tourism & Hospitality Management Group within the School of Marketing at the Australian School of Business.