“Thanks to segment reporting”, said Qantas Airlines

For a company, that produce wide variety of goods and services, needs a financial reporting which can measure their performance accurately. Whether measure their whole performance or their product performances. This kind of company will be more decentralized in their organization structure. To measure the performance of each product line, they need SEGMENT REPORTING. This reporting will describe the contribution of each product line for the company’s profit/loss.

The best example for implementation of how segment reporting influence the company’s decision-making is Qantas Airlines case in 2011. Qantas (Queensland and Northern Territory Aerial Services) is the largest airline in Australia, that founded in the Queensland on 1920. Qantas group has two complimentary airline brands, which are Qantas and Jetstar. Qantas has five main product line – Qantas, Jetstar, Qantas Freight, Qantas Frequent Flyer, and Qantas Jetset World.

In the 2011 financial year, Qantas reported loss of more than $200 million in its international operation, while they already invested for more than $5 billion for their services. Actually, Qantas did not report international operation separately in their report. They have already used segment reporting before 2011, but they segmented it based on their product line. If we break-down some product line, we can get the other segment-domestic and international. From 1994-2004, Qantas used domestic-international-base segment reporting, but they met a problem started in 2001. While International segment income increase for around 20%  and domestic decrease for almost 50%. Contrary, with the next year income, International segment decrease for 50% and domestic segment increase more than 100%.

Because of that, Qantas started to change their segment base for their report in 2005, from region based into product line based. But the problem arise again on 2010, they found out that Qantas Frequent Flyer, as the largest contributor for their Qantas Group margin, contribute in a big percentage, which is 166 %, while the corporate’s negative contribution increased by $68 million. Big question arise while we read the report, how come those big contribution from Qantas Frequent Flyer can lead the corporate into losses. Qantas do some analysis, and they found that International operation in three of their product line are having a big losses. The answer is they did not allocate the plane cost in Qantas Frequent Flyer and allocated it in Qantas product line. Beside that, the frequency of domestic services are a lot more than international services, while the company already invested and paid the cost for international services much more than domestic services. After they met this kind of problem again, the CEO decided to breakdown the segmentation by divided Qantas into Qantas domestic and Qantas international. So they can be more focus on International services, which causes a big losses in their company.

Based on this case, we can look that how segment reporting can give suggestion for the decision maker in a company by giving many different perspective for one problem, so that they can see what the real probem is.

References

CAPA. (2012, August 23). Retrieved from Centre for Aviation: http://centreforaviation.com/

Shanahan, J. (2011, september 2011). Retrieved 2013, from Financial Review: http://www.afr.com/