Here is an excerpt from a Eurkea Report article talking about inflation:
"Having prepped you with Gerry Harvey, let’s take a final step into the darkness and look at the third option. You’re Alan Joyce, approaching the end of your tenure with the airline in shutdown, having received hundreds of millions from taxpayers to keep it afloat.
You can see what’s coming. People have been locked in their homes for years and have cash in the bank. Your major competitor has entered administration and inflation is everywhere. The conditions to go out with a bang are ideal. Under the guise of rising oil and input costs, you push through price increases above the average inflation rate simply because you can.
Joyce may have trashed the Qantas brand like a locust swarm through a cornfield but his brutal, destructive efficiency helped Qantas produce a record profit last financial year.
Table 1: Qantas financial performance 2019-2023
|
2019
|
2022
|
2023
|
Total Revenue ($)
|
18.0bn
|
9.1bn
|
19.8bn
|
Underlying profit/(loss) before tax ($)
|
1.3bn
|
(1.86bn)
|
2.5bn
|
Operating margin (%)
|
8.3%
|
(17.1%)
|
13.5%
|
Source: Company accounts
While revenue rebounded to pre-Covid levels and profitability has never been higher, the operating margin, at 13.5%, is 63% higher than in pre-Covid 2019. This measures the profit a company makes on a dollar of sales, after accounting for the direct costs incurred earning those sales.
Had Qantas done a Gerry Harvey, its operating margin would have been within its historical range. It was way above it because Joyce pushed through price increases beyond those justified by an increase in its costs.
With
justification, Alan Joyce may be the bête noire of Australian business but he is not alone in his actions. In those sectors where a few companies dominate and pricing power exists, inflation has offered camouflage for price increases that have boosted profit margins.
Woolworths's latest annual report's front cover carries the line ‘We are better together’. This might be read as a message to Coles rather than staff or customers. Woolworths CEO Brad Banducci has been as adept as Alan Joyce and Coles CEO Leah Weckert in using inflation as cover to increase profit margins.
Food inflation
Woolworths’ food sales business had revenues of $48bn in the 2023 financial year, a 5% increase on 2022. Its cost of doing business as a percentage of sales was 21.9%, up a mere 0.08% on the prior year. And yet earnings (profit) before interest and tax rose 19%. So, revenue went up a bit, costs went up even less and profits went through the roof.
Coles and Woolies attribute the sudden and astronomical margin increases to
productivity improvements and cost efficiencies. Unless Banducci got his forklift licence, that seems unlikely. Price rises well above cost increases are a more likely explanation.
What about energy? Huge profits in annual reports match the bigger numbers on energy bills. Origin Energy’s latest spells it out: “Underlying profit increased to $747 million, $340 million higher than the previous year due to improved earnings across all our operations.”
Usually, companies provide percentage changes on the prior year for such metrics. Origin did so for its integrated gas division but not its energy markets division. Maybe a whopping 158% increase in underlying EBITDA, from $401m in 2022 to $1.03bn in 2023 is a little too good.
Across the world, corporate profiteering is now acknowledged as a major component—perhaps the largest—of the post-Covid inflation surge. Studies supporting this view have been published by the
European Central Bank, the
OECD, the
Bank for International Settlements (BIS), and the
European Commission.
In June last year, the International Monetary Fund said: “Rising corporate profits were the largest contributor to Europe’s inflation over the past two years as companies increased prices by more than the spiking costs of imported energy.”
It seems improbable that in Australia, a highly concentrated economy with a host of industries extracting monopoly rents, profiteering isn’t also a major cause of inflation.
The data bears this out, and not just in annual reports. Using the same ECB methodology,
The Australia Institute finds that about 69% of the increase in inflation above the RBA’s target rate is due to corporate profiteering.
Propaganda front
Companies are mounting a counter-offensive. For much of last year, the Business Council of Australia was howling about the risk of wage-price inflation just as its members were jamming through massive price increases. It continued before Christmas when the
AFR invited CEOs to offer their thoughts on the year ahead. Instead of the usual guff, although there was plenty of that, some took a more gentle approach.
Perhaps you can guess which ones. “We know that many of our customers are under real pressure,” said Woolworths’ Banducci. Ah, bless. Leah Weckert said Coles knows “there are many Australians who are feeling the effects of high cost-of-living pressures” and that it is “continuing to invest in value to help our customers’ budgets stretch a little further”. So sweet. Frank Calabria of Origin said the company was “incredibly mindful of the pressure consumers are under with rising costs.” Consumers who were stiffed last year will be pleased to hear it. After bleeding consumers dry, the charm offensive has begun.
None of this should be a surprise. There is no obligation on companies to ‘do the right thing’. There is, though, a legal duty to maximise shareholder returns. One might argue whether jacking up prices beyond the rate of inflation is the right way to go about it but the law is clear enough: a company is to be run for the benefit of its owners, not its customers.
Joyce, Banducci, Weckert and Calabria are simply doing their jobs; extracting the highest possible prices from customers, without risking them going elsewhere, accompanied by a propaganda campaign that shows their soft, caring side in the forlorn hope consumers won’t notice.
The results speak for themselves. Whilst unit labour costs haven’t kept pace with CPI, unit profit costs have raced ahead of inflation. The pandemic was a banger for big businesses. Inflation is being driven by corporate price gouging, not greedy workers who have experienced real wage declines over the past few years.
Source: Greg Jericho, via Macrobusiness
If there is a failure it is institutional rather than commercial. Politicians are too easily bought, as the East Coast gas cartel knows; entire sectors are too concentrated; and regulators are too weak. The Reserve Bank’s swallowing of the corporate propaganda captures the institutional failure that bedevils the country.
Whilst the rest of the Western world noticed the role of profiteering in 2022, only in November last year did the RBA (weakly) admit it might
play a role: Maybe they’ll get to actual profiteering in early 2025, perhaps after reading some of the annual reports noted in this article."