Crikey was tickled pink when a volunteer answered the call to attend the QANTAS AGM in Perth.Crikey loaded up Tim Smith with a host of questions and here is what we found out.
Our man did a sterling job to get every question out, as there is always a bit of rumbling from the bikkies and tea crowd when someone holds the floor for anything longer than a perfunctory dig at the board. Our sincere thanks to an absolute champion in Tim Smith for having the balls to get up and ask all of these questions at his first AGM and well done for providing a comprehensive write up.
The unions were also at the meeting to complain about the non-executive directors seeking an increase in their fees from $1.1 million to $1.5 million.
Interestingly, the ASA supported this resolution, but opposed another resolution to introduce a deferred share scheme.
General comments and observations on the meeting from our man on the scene
In all it was a pretty run of the mill AGM, with only a few questions being asked on each Item of Business. The ASA was in attendance, but many of the questions they asked were pretty lame, and they saved most of their questions for the new Qantas Deferred Share Plan.
To be fair, this topic along with the increase to Directors’ fees attracted the most questions from the floor.
Probably my favourite question of the day came from someone who knew a lot about cabin crew.
He asked whether any of the $40m that were saved by cutting the number of hosties on 747s and 767s, would be passed on to the cabin crew who made this productivity gain possible.
In response, Ms Jackson stated that the board was hoping to negotiate a 3% increase across all of the unions with which they deal.
This didn’t answer the question, which I take to mean that they have no intention of passing any of this money on to the people who enabled the savings.
At the end of the meeting we were invited to join the board for afternoon tea, and they really did mean afternoon tea.
There was coffee, tea, OJ and water, as well as value packs of biscuits, no hot food, and no booze. [CRIKEY: Obviously no Neil Perry catering for the AGM!]
I tried to have a chat to some of the board members, but my time was running out and I had to get back to work, so I didn’t get a chance to talk to any of them.
Not so Super
CRIKEY: QANTAS’ superannuation note in the accounts threw up a few issues.
The first was the relevance of the note, which compared “accrued benefits” as at 30 June 1999 and “net market value of plan assets” at 30 June 2001 – hardly a meaningful comparison!
Our man Tim Smith piped up with the following questions:
“Note 28, “Superannuation contributions”, raises several issues:
First, why can’t we get a more meaningful disclosure in this Note, such as a comparison of accrued benefits and net market value of plan assets as at the same date – 30 June 2002 preferably, or at the least as at 31 December 2001? Comparing figures from 1999 and 2001 as this Note does is meaningless – as the annual report itself points out.
QANTAS response: Ms Jackson said the board would look into improving the reporting in this note.
“Secondly, given plunging equity markets since 30 June 2001, will QANTAS be required to “top up” its contributions into the defined benefit plan and, if so, by how much?”
QANTAS response: Apparently there was a significant surplus within the plan and this has meant that they do not need to top it up.
TIM SMITH: I didn’t get a chance to ask, and she didn’t say, how much of this surplus now remained.
“Thirdly, I note also that the Net Market Value of plan assets grew from $3.928b as at 30 June 2000 to $4.056b as at 30 June 2001, including $112m in employer contributions. So, in a period (that is, from June 2000 to June 2001) when equity markets didn’t perform all that badly, the net market value of the plan only grew $16m, excluding employer contributions, or less than half of one per cent. Is there any indication on what the performance of the superannuation fund will be post-30 June 2001, when equity markets have collapsed?”
QANTAS response: Ms Jackson stated that although there was only $16m of net growth, the actual growth was higher. This is due to retirements during the period affecting the net value of the plan.
CRIKEY: We’ll be watching this on with interest next year, as there could be carnage. The unions really should be looking hard at this one.
An Impulse purchase
CRIKEY: The acquisition of Impulse is something that has gone without much comment after the event. What was interesting to us is that they are still carrying $150 million of purchased goodwill in relation to the Impulse acquisition, so Tim Smith fired the following questions at the board:
“Turning to the acquisition of Impulse, why did we pay $26 million for a business with a net asset deficiency of $124.8m and arguably a business that was going nowhere? Secondly, is the Impulse goodwill of $150 million really worth anything and if not, why haven’t we written it off?”
QANTAS response: Ms Jackson replied that at the time of the purchase the board thought it was a good investment, and she believes that the 717s that were picked up in the acquisition have been an excellent addition to the fleet. Ms Jackson did not mention the $150m of goodwill in her reply to my question.
CRIKEY: Given that our man was firing a load of questions at Jacko, it’s understandable that the odd one would slip through the cracks. But we wouldn’t be at all surprised to see the Impulse goodwill written off sooner rather than later. In the context of QANTAS’ business, it’s only a bit more than chump change, but still important.
CRIKEY: Given that QANTAS paid out James Strong $3.6 million last year, we just had to arc up on the issue: Tim Smith asked:
“On executive remuneration, in particular the hot topic of “golden parachutes”, can we please get an assurance that the company is not locked into long-term contracts with senior executives that will require substantial payouts even in the event that the executive’s contract is terminated early due to lacklustre performance?
Secondly, I note that James Strong was given a termination payment of $3.6m. The accounts also reveal that his employment with the company ended in July 2001, yet shareholders are only advised of the payout some 15 months or so later. Could the company please move to disclosing the quantum of these payments as early as possible?
Finally, there were three instances during the year of senior executives obtaining substantial payouts from the company – David Burden $1.6m, Stephen Mann $800,000, and George Elsey $1.0m. In the case of Mr Burden and Mr Elsey, the termination payments were about 8 times their annual salary, which seems to be quite high. Can the company please confirm that none of these were payouts of long-term contracts which were terminated early?”
QANTAS response: According to Ms Jackson, Mr. Strong was under contract, and the $118k that he received for the last four weeks of his time at Qantas was in line with his contract of the time. Also, on the termination payment, Ms Jackson said that the majority of the $3.6m was made up of his accrued long service and holiday leave benefits with the remainder (she didn’t say how much the remainder was) being an end of contract payment.
CRIKEY: Obviously we weren’t at the meeting and our man on the spot was on his feet so he couldn’t scribble down notes while Jacko was answering his questions. But if this is the extent of Jackson’s response, then it is interesting because it suggests that she was waiting for a blast on Strong’s termination payment and this was the prepared response. But that is not what we were getting at. We weren’t complaining about Strong’s payout – given his length of service and his seniority, the quantum wasn’t at all surprising. What we were after was an assurance that QANTAS wouldn’t be paying out huge sums to dud executives, but it seems – although we’re happy to stand corrected – that we didn’t get it.
CRIKEY: Despite all the hullabaloo about excessive auditor remuneration recently, QANTAS’ long-term auditors, KPMG, still pocketed a tidy $5.1 million in fees during the year – nearly $4 million of that was non-audit work.
Here is what Tim Smith asked:
“I have several questions in relation to the remuneration of auditors disclose at Note 7.
“First, why is the company paying $2.1m for KPMG employees on secondment and what is the “$1.5m in user acceptance testing” included therein?”
QANTAS response: Most of these secondments were in the IT area of the business, specifically related to the introduction of the Amadeus Travel System. The UAT was the time spent testing this system.”
CRIKEY: We’re happy to be corrected on this, but this looks like a job that doesn’t need to be performed by the company’s auditor. If QANTAS were serious about reducing the amount of non-audit work performed by KPMG, then they could have easily doled this out to another firm.
“Secondly, what is the rate at which these secondees are charged to the company and is this at a substantial discount to the normal rate charged by KPMG?
Thirdly, surely with that level of secondments it would be cheaper for the company to get permanent employees or get staff from a temp agency?”
QANTAS response: The board believes that the rates at which they are charged by KPMG are reasonable, and these are reviewed regularly.
“Fourthly, has the company satisfied itself that with this significant number of secondees that the distinction between the internal and external audit function is being appropriately maintained?”
QANTAS response: Yes.
“Finally, how long has KPMG been auditor and how long has Mark Epper been the audit partner? In line with corporate governance best practice, is there a policy of partner rotation within KPMG?”
QANTAS response: KPMG have been Qantas’s auditor since 1992. There was a policy in place to rotate the audit or signing partner every seven years, this has now been changed to every five years. This is the first set of accounts that Mark Epper has signed off on for Qantas.
Fleet acquisition costs
CRIKEY: Our intrepid correspondent – who by these stage must have surely been copping the odd angry handbag between the shoulder blades – then asked:
“I note in the cash flow statement that “Payments for property plant and equipment” were up substantially during the year – $2.4b this year compared to $995m in 2001.
What is status of the fleet now and is it in a condition where we will not be required to make such substantial outlays for a number of years or can we expect to make this level of expenditure or thereabouts for a few more years?”
QANTAS response: Due to an ongoing plan to upgrade the fleet via the purchase of new planes and the refurbishment of some existing planes, this expenditure will remain around the same rate for the next few years at least.
The directors’ claim for a 36% pay rise
CRIKEY: We knew the unions were going to come out strongly on this one and were a little surprised that the ASA supported this, although given the size of QANTAS and the complexity of running an airline right now some sort of pay rise is probably warranted.
In any event, we thought it too much and the timing was just completely wrong. Tim Smith delivered the following on directors’ fees:
“While all shareholders would certainly not argue with paying good money for good leadership, the claim for a $400,000 or 36% increase in director remuneration appears excessive.
In the current environment of shareholder outrage against excessive remuneration coupled with a period of wage restraint for the average Joe at the coalface, this claim is ill-timed and surely a more modest increase is called for.
How will the company be able to credibly call for wage restraint amongst its employees when the top brass call for – and no doubt will get today – an increase of this magnitude?
Furthermore, the language contained in the Explanatory Notes of the meeting seems something of an affront to shareholders in that it appears to be merely a “cut and paste” of similar justifications that turn up in other companies’ Notice of AGM.
Specifically, the following comments are vague generalisations that do little to convince ordinary shareholders that an increase of this magnitude is warranted:
– First, the comment that directors’ fees need to be “competitive so as to attract and retain high calibre Directors”;
– Secondly, the comment that “Increasing the maximum amount payable will give the Board the ability over the next two to three years to increase Non-Executive Directors’ Fees in line with market conditions”; and
– Finally, the comment that “It will also allow the Board to possibly expand the membership of Committees”.
I would like the directors to justify their fee increase in more specific terms that would be likely to be applied to QANTAS staff if they were to ask for a pay rise. Answering these questions specifically would provide shareholders much greater satisfaction that an increase in directors’ fees is warranted than simply copying vague platitudes that shareholders have seen elsewhere. For instance:
– Has the task of directing the company become 36% more difficult since 1999?”
QANTAS response: Ms Jackson stated that she believed the turmoil over the past year or so have meant that the task of running an airline has become significantly more difficult.
– “Have the directors as a group become 36% more productive?”
QANTAS response: The board feels that if they have not become more productive over the last couple of years, they have certainly worked harder than they ever have before.
– “Has the role of the board as a group changed so radically that it needs to attract 36% more talent in order to do the job effectively?”
QANTAS response: The board intends to add at least one more Director in the next couple of years.
TIM SMITH: A number of people stood to ask questions on this topic, and it seems that there was a fair amount of feeling against it from individual shareholders. In answer to every question, Ms Jackson stated over and over that this was not a 36% pay rise for the directors, but an increase in the total pool available to pay for ‘director talent’. I asked what percentage of the $400,000 would be used to pay new directors and what percentage would be used to increase the pay of current directors, but this question was not answered. Ms Jackson stated that there will be an addition of one Non-Executive Director to the board, and the numbers on the committees would be increased. At the current rates and taking into account the new NED, this would leave room for the addition of around 30 new committee members. She also stated that there would be some ‘appropriate’ increases applied to the directors’ fees. Ms Jackson was then asked whether the board would hold itself to the 3% per annum limit that they have asked their staff to accept. In reply, Ms Jackson stated that the board would take the market into account and be modest with any fee increases they gave themselves. A couple of times during the discussion of this item, Ms Jackson brought out my personal favourite in terms of increasing the pool of money available to pay directors, the old “Just because we increase the pool by $400,000 doesn’t mean we will use all of this.” It will be interesting to see over the next year or two just how much the board decides is modest, when it comes to paying themselves more.