Qantas Equity $1.9B Raising and Announcements June 2020

[moa999]

More likely a difference between what Qantas contracted to buy it at (likely a forward close to US$50/bbl for the crude WTI reference if bought say six months ago) and what they closed the contract out at (currently about US$38/bbl).
Call Options that are out of the money they will just let expire.
Call Options in the money (unlikely) you'd take the profit on, even if you weren't flying at all.

Qantas from disclosures uses a mix of forwards and options and I suspect hedges crude as there is more volume and it tracks jet fuel. They never actually take delivery of it, just trade it to smooth out the net price of the jet fuel they are purchasing.

 

[NM]

I may be wrong, but I understood the fuel hedging comment to mean something like this:

Our pre-COVID-19 financial projections included $550-$600M benefits to the bottom line as a result of our expected fuel hedging activities. However, since we are not buying as much fuel now we are operating very few flights, that bottom line benefit from hedging is no longer valid for our FY20 results.

 

[RAM]

The airline takes out a hedge on fuel prices - usually on a year by year basis and the hedge is made up of two basic components: the actual price of the fuel and the amount of fuel to be edged. (it's really three components because time is a component but we've already referenced that)

In this instance the plain english explanation is:
- We didn't use anywhere near the amount of fuel we anticipated and hedged for
- So that means the hedge contract 'wasted' a chunk of money we already paid out to buy that contract
- And accounting rules require that we uhm account for it.. in our accounts..

Not an actual $550-600m loss - but the 'ineffectiveness' of the amount - which might be say $50m on that amount.

The reason it's not in plain English is that (and I only learned this formally last month) that there is actually multiple separate englishes which can have their own syntax and even vocabulary. Aviation English is an easier example to explain - it has a set of rules that you wouldn't use in normal english.

Accounting English is an example of a systemic English that uses a lot of the same words..

I do not have a Masters in Linguistics but given the breadth of forum knowledge I am sure someone with more knowledge than me will jump in

Good explanation but not correct.

This is an actual loss, impacts P&L. Q will have to pay out that amount, perhaps delayed so the 30 June 2020 balance sheet does not have the equity component reduced - depends what the external auditors have to say about it. So $550m to $600m of Q's rapidly depleting cash & credit lines has just been wiped. They may attempt some smoke & mirrors by paying a fee to some counterparty (that assumes Q could NEVER go under) to allow them to roll this loss forward to the 2020/21 financial year - it would be a substantial fee of course - but that's in the future reckoning.

In an earlier posts (April/May) on other threads I mention Q's external auditors would want to do a very close examination of what Q has the A380s valued on the balance sheet as at 30 June 2019 & what they're proposing to have them at for 30 June 2020 given a second hand A380 is now valued at zero. Just ask Malaysian Airlines how expensive it is to park almost brand new A380s for a long term, let alone 8+yrs old ones. Rumoured offers to Emirates at a fraction of cost (with pre-purchased/contracted parts thown in) got a polite 'no thanks'.

In Q's previous Annual Reports they took some fuel hedge losses (even at those levels). Q has been quite 'strong' in trying to squeeze the most based on their view aka speculating. They also wrote back their losses on their investment in a listed Travel Agent.

In an earnings release call a little while back Q detailed how it goes about 'hedging' which came out sounding like speculating.

A perfect hedging is where you offset gains on one side with losses on the other. In reality most hedges are slightly imperfect but may cover you to within 1-3% of a perfect hedge outcome.

Speculating is where a company takes a hard view on exactly what the outcome will be +/1 a few %.

I've only ever come across one company that was honest in describing their approach (taking a punt).

True input or cost hedging for something like avgas happens either when you are happy to lock in a certain (known) price that will guarantee you make the required return OR you're fearful that the price may rocket & are willing to lock in a higher price than desired to get rid of that possible outcome.

Q on the other hand 'backs its judgement'. Owners/investors may call this gambling, others speculating & company executives may call it 'hedging'. It also helps generate bonuses when they get it right.

An example - One of the RBA backed & regulated official money market dealers (OMMD) back in the late 1980s did something similar & sold me as a fund manager very cheap long dated put options. As luck would have it I did some research when at Uni into financial modelling's failings. The OMMD also happened to be the poster child in the options market within Australia & paid their staff accordingly. Unfortunately this time they were wrong, did not fully understand their 'proprietary option pricing system' and their view on the future was way out. The amount they lost when I exercised the put options (asked for my insurance payout) wiped out their total retained earnings and all but under $1m of their capital. They returned their license to the RBA 3 weeks later and shut down. The Australian options market has never regained the liquidity it had in the mid to late 1980s sadly. Then some large institutions saw an opportunity and one was unable to meet its margin call (to us) in October 1987....

I am not saying this is what's happened with Q (not going to go out of business due to the hedging loss) but it is a case of when hedging may not be what it seems....

Q reportedly confidentally forecast rising avgas prices, forecast their expected avgas usage and then (normally) 'hedge' 80% or so of that figure. Sometimes less & sometimes more depending on their level of confidence in their price forecasts.

As Q believes it is a very good operator it (according to filings & earnings calls) it looks to maximise its profits (or minimise the cost) on 'hedging' so it sets a bet that its forecasts are correct and implements the least cost way of locking in that outcome. This works until it doesn't. Q seemingly DOES NOT allow for the fact it may be wrong. This has cost it significantly once or twice before, and may even have been written off when it grounded its planes last time....

The cheapest way (close too zero cost) is to buy future contracts (individual contracts with a supplier, sometimes called Forward Rate Contracts) that set out volumes to be delivered across a range of dates at set prices. Q does not seem to hedge this way.

The next (most risk-averse non speculating) method is through buying an insurance product by paying a premium. In the financial markets this is known as buying a call option with the fuel at a certain price when you expect the price to rise. If the fuel price is lower then you buy it at the lower price and let the call options expire worthless. That way, if a situation happens where oil prices fall not rise, you lose your premium but get to buy the avgas at the much lower prices - so if the price had dropped 15% (say, not the current 45% in Q's case) then after the cost of buying the option is included you may get a net fuel price 11% below where the price was when you bought the options (the 4% difference = call option costs).

This way you are covered for both being wrong about the direction of prices +/or over-estimating the volume of avgas you will need.

Q doesn't like doing this....

In Q's case they like to go for sophisticated financial engineering to make it nearly no (apparent) cost to set-up. After all they know with absolute certainty what the future avgas prices will be...

Financial engineering is often not fully understood by the investment bankers that sell it, let alone understand the implicit assumptions used in the financial pricing models (drawing on the rate of thermo dynamic decay equation to solve it...). However, unique solutions for a customer = great fees for the investment bank BUT a big bitter pill for the customer if things do not turn out as predicted in a big way.

Does make you wonder whether the Q Board have sufficient understanding - after all fuel is either the number 1 or number 2 cost for an airline so you would hope the Board had delved into this quite deeply.

Q's earnings per share (adjusted for all their share buybacks) have been falling over the last approx 5-6 years at the same time as they've been selling off or cashing in on assets they owned. Nearly all cash raised from underlying earnings & asset sales has then been used to buy-back shares - so this has the effect of leveraging their earnings per share. If you divide the eps by the proportion of shares bought back you can see what amount of the eps is due to this accounting trick and what has come from actual increased profits.

They certainly have a lot of intangibles in their valuation which you cannot use to borrow money, and it appears possibly no planes left to use as security to raise more credit.

According to one of the top 3 Aviation valuation firms (sometimes used by Q in recent years) - second hand aircraft values for 'in demand' models (B737-800, B787s, newer B777s, recent A330s, A350s etc) had fallen from Dec 31 2019 values by between 16% to 27% by late April.

Hard times for all airlines, and no lessor wants to pull the pin.

 

[eastwest101]

Wow - general lack of comment about the 6000 Qantas job cuts on here. I guess its out of our and Qantas's control, but I thought the scale of the job losses and grounding of aircraft would have prompted more discussion.

I think there are two things that are interesting to think about.

Firstly - the scale and size of the cutbacks, given that not even QF management know when domestic state borders will reopen thus allowing airlines to at least have a domestic aviation industry, and a lot of uncertainty about when international borders will reopen and of course the big unknown of how long 'Job Keeper' assistance and if any sector specific assistance will be coming to the airlines, another big unknown.

The second is the timing of this announcement, obviously Alan Joyce had to respond and do something with some sort of urgency i.e. the cash burn but I'm still a little curious as to the timing of the cuts and whether the timing was planned to maximise pressure on state and federal governments, and also on any potential bidders for Virgin Australia? With Cyrus just announcing dropping out the timing of the Qantas job cuts has actually worked out be be wonderful timing for Qantas but obviously devastating for the industry and Qantas's workforce.

Then there is the whole broader political/economic consideration of whether the Covid-19 economic downturn will produce specific industry assistance packages (i.e. an airline industry package that helps Qantas/Jetstar, Virgin Rex, Alliance, Air North, Sharp etc), or whether is more of an extension of Federal Job Keeper across larger sectors such as Travel & Tourism remains to be seen.

 

[jakeseven7]

Wow - general lack of comment about the 6000 Qantas job cuts on here. I guess its out of our and Qantas's control, but I thought the scale of the job losses and grounding of aircraft would have prompted more decision.

I think there are two things that are interesting to think about.

Firstly - the scale and size of the cutbacks, given that not even QF management know when domestic state borders will reopen thus allowing airlines to at least have a domestic aviation industry, and a lot of uncertainty about when international borders will reopen and of course the big unknown of how long 'Job Keeper' assistance and if any sector specific assistance will be coming to the airlines, another big unknown.

The second is the timing of this announcement, obviously Alan Joyce had to respond and do something with some sort of urgency i.e. the cash burn but I'm still a little curious as to the timing of the cuts and whether the timing was planned to maximise pressure on state and federal governments, and also on any potential bidders for Virgin Australia? With Cyrus just announcing dropping out the timing of the Qantas job cuts has actually worked out be be wonderful timing for Qantas but obviously devastating for the industry and Qantas's workforce.

Then there is the whole broader political/economic consideration of whether the Covid-19 economic downturn will produce specific industry assistance packages (i.e. an airline industry package that helps Qantas/Jetstar, Virgin Rex, Alliance, Air North, Sharp etc), or whether is more of an extension of Federal Job Keeper across larger sectors such as Travel & Tourism remains to be seen.

The state based border restrictions are killing QFd and VA1/2d that's for sure and the international restrictions have ended QFi and VA1/2i for the foreseeable future that's right.

QF have read the tea leaves and acted sharply - too sharply? Only time will tell, but its far easier to hire back FA's, HQ staff and the like if they are wrong and have overstepped rather than try to hang onto them and hope for the best. A lot of these staff are not highly skilled and the labour market will be loose for a while it is predicted so there won't be a shortage of people to recruit if the market suddenly picks up miraculously...

QF have to be assertive because the next step will be industry sector assistance - for every airline, obviously. Then they will approach for specific QFi (and VAi if it still exists once Bain run the knife through VA) assistance, underwriting etc because that asset is far far too important a national asset to lose.

They can't lobby properly for either of these things without taking some pain themselves, which they have now done, and will be done to VA2 shortly as well. So then QF and VA can go and say to the gov - we have done this, this is all we can do, now what are you going to do about it.

 

[RAM]

AFR reports that the book has been covered.
(Ie. The underwriters have sufficient demand)

I hope this does not turn out like the 'overwhelming demand' cited last November for the unsecured debt raising for VA's Velocity buyout!

Caveat Emptor.

 

[MEL_Traveller]

The state based border restrictions are killing QFd and VA1/2d that's for sure

The impacts of corona virus are affecting domestic travel. But where is the evidence the border closures are responsible? There isn't demand to fly more than a handful of flights between Sydney and Melbourne, where there are no border closures.

Polls suggest many people don't want to fly. Others won't have the income or certainty of employment to be taking holidays. There will be some repatriation for family members, but enough to save an entire airline?

 

[Melburnian1]

The impacts of corona virus are affecting domestic travel. But where is the evidence the border closures are responsible? There isn't demand to fly more than a handful of flights between Sydney and Melbourne, where there are no border closures.

Polls suggest many people don't want to fly...

One poll I saw a week or 10 days ago suggests that Australians are more reluctant to fly than undertake any other type of 'away from home' activity.

They're more likely to use (surface) pubic transport in urban areas rather than fly anywhere. And even more likely to dine out.

The constant publicity about Victoria's spike in cases and bumbling there won't be helping the airlines.

 

[jakeseven7]

One poll I saw a week or 10 days ago suggests that Australians are more reluctant to fly than undertake any other type of 'away from home' activity.

Not that reluctant as 200,000 fares just sold by Jetstar indicated....

 

[MEL_Traveller]

Not that reluctant as 200,000 fares just sold by Jetstar indicated....

I’m not sure an airline is sustainable on $19 fares

 

[odysseus]

The impacts of corona virus are affecting domestic travel. But where is the evidence the border closures are responsible? There isn't demand to fly more than a handful of flights between Sydney and Melbourne, where there are no border closures.

Polls suggest many people don't want to fly. Others won't have the income or certainty of employment to be taking holidays. There will be some repatriation for family members, but enough to save an entire airline?

There were no border closures - but there was worse: the lockdown, fines for being out of home without a valid reason, travel sites shut down and tourism off the cards. So sure if you had a legitimate reason to travel you could, but all recreational and most business activity was off, so that doesn't leave a lot behind.

Now, restrictions have loosened, but it's early days and they're already tightening again. So too early to reflect any sort of demand for SYD-MEL traffic.

 

[Melburnian1]

Now, restrictions have loosened, but it's early days and they're already tightening again. So too early to reflect any sort of demand for SYD-MEL traffic.

Plus add in comments by the NSW Premier that while not having the force of law, strongly discourage NSW residents from travelling to Victoria and the reverse, including warnings that NSW businesses ought not accept southerners' patronage.

I feel sorriest for people on the border. 'The Oz' today had a story about Cobram (Vic) soccer players having to travel 90 minutes or more to Albury (NSW) for training so as not to be excluded from some competition.

 

[Melburnian1]

As at 1525 this afternoon, QF shares were 'off' (down) 35 cents, or more than eight per cent, to $3.85 following its successful institutional equity raising. The 'public' (retail) share purchase plan takes longer to be finalised.

Some of the drop may be attributable to profit taking as the placement was at A$3.65 per share.

 

[Vic]

The impacts of corona virus are affecting domestic travel. But where is the evidence the border closures are responsible? There isn't demand to fly more than a handful of flights between Sydney and Melbourne, where there are no border closures.

Polls suggest many people don't want to fly. Others won't have the income or certainty of employment to be taking holidays. There will be some repatriation for family members, but enough to save an entire airline?

Considering the borders aren't closed for essential travelers, and work is one of the essential reasons. Any impact on domestic flights due to border closures should only be related to domestic tourism.

Employers cutting back travel is not due to border closures, but business decisions.

 

[jakeseven7]

Plus ad in the comments by the NSW Premier that while not having the force of law, strongly discourage NSW residents from travelling to Victoria and the reverse, including warnings that NSW businesses ought not accept southerners' patronage.

I strongly suspect not many people are paying attention to this until it becomes a requirement....

Our Melbourne office just booked 20 people into Sydney accom. And flights.

Until it is a requirement then it is not a requirement.

 

[Melburnian1]

Considering the borders aren't closed for essential travelers, and work is one of the essential reasons. Any impact on domestic flights due to border closures should only be related to domestic tourism.

Employers cutting back travel is not due to border closures, but business decisions.

That's incorrect. NSW Premier is actively discouraging travel between NSW and Victoria so a lot of businesses would no longer regard trips as 'essentuial.'

She's suggesting NSW businesses not accept custom from Victorians, so that would scare many businesses in my state (Victoria) from having their staff travel lest an hotel suddenly declines a booking, or something else adverse occurs.

I don't dispute business travel will remain important, because we all need face-to-face contact, but some who are less optimistic suggest that WebEx/Zoom and other forms of telecommunications will render many business trips interstate, or overseas, a thing of the past.

 

[justinbrett]

I'm booked on a NTL-BNE flight on 10 Jul - the first day they are selling. I've been watching the price go up - so obviously some people want to fly. Plenty of people have bought fares at normal prices - many routes didn't get the $19 deal.

I'm sure I heard AJ say he was happy with the forward bookings, so time will tell.

 

[MEL_Traveller]

Our Melbourne office just booked 20 people into Sydney accom. And flights.

I'd genuinely be interested to know of a business that's so essential? I understand from other threads that there are some occupations like engineers that need to do things like checking oil and gas pipelines and service stations etc.

 

[p--and--t]

That's incorrect. NSW Premier is actively discouraging travel between NSW and Victoria so a lot of businesses would no longer regard trips as 'essentuial.'

She's suggesting NSW businesses not accept custom from Victorians, so that would scare many businesses in my state (Victoria) from having their staff travel lest an hotel suddenly declines a booking, or something else adverse occurs.

Pretty ironic given in the last few hours in Melbourne I've heard two Tourism NSW adverts spruiking how we should go explore there

 

[Melburnian1]

With QF's cuts, part of the game plan may be to (re) sign flight crew up at lower rates, perhaps in some new 'vehicle', similar to what was done with flight attendants over the years. This would reduce costs.

The employer will have the advantage of a prospective large pool of labour from which to choose.

Time will tell if this suggestion that I heard from someone with an historically reasonable knowledge of airlines materialises.