2020 FY Results

[Mattg]

Qantas released its 2019-20 financial year results this morning. It made a $124 million underlying profit before tax, but a $2.7 billion statutory loss before tax, mainly due to aircraft value write downs and one-off redundancy costs.

The results tell a story of a very strong first half of the financial year, and a disastrous second half.

QANTAS GROUP FY20 FINANCIAL RESULTS – NAVIGATING EXCEPTIONAL CONDITIONS

Keep up to date with Qantas' latest news and information, media releases, articles, images and more with the Qantas News Room.

www.qantasnewsroom.com.au

 

[Melburnian1]

One analyst had previously suggested the statutory loss would be '$1.02 billion', so this result is poor.

There goes the CEO's claim that break even would be achieved in 2019-20 (though no doubt he'll concentrrate on the 'underlying profit.'

By typing in 'QAN ASX quote' or similar to one's browser or smartphone, the second result that appears allows one to delve into the full ASX announcements including the inevitable multi-page colour Powerpoint presentation, which will give far greater detail than the media release.

Its recent share issue (to the retail market) raised less than $72 million against a target of $500 million. That is informative as to what 'mums and dads' think of its prospects. In contrast, capital raisings (also partly to retail investors) for the likes of NAB (banking) were heavily oversubscribed recently.

Ominous that the CEO says 'AT LEAST 6,000 will leave...' Hard to know how many more as the outlook is so uncertain, but I doubt it'll 'just' be '6000.' This will mean further redundancy costs for the QF Group, as it's difficult to foresee that 20000 staff will still be required if travel demand drops.

$267 million in JobKeeper payments means QF must have been one of the largest recipients of this, as other major employers such as Woolworths and Coles didn't have to access these subsidies as they had no need to stand down staff. It's complex, but arguably JobKeeper has saved QF a lot of money in not having to immediately pay redundancies, and instead given it the ability to keep staff 'on the books' for what it hopes will be a return to greater travel demand (although still way below what it used to be).

Border closures (especially from issues like Melbourne's high rate of virus cases and resultant curfew) must be continuing to eat into reserves. Interesting that the CEO has only said 2020-21 will deliver a 'significant loss', although too early to quantify.

It says it received '$515 million in (Federal) Government support' for flights but the 'net benefit' was only '$15 million.' This is hard to believe: wouldn't the profit margin be a lot higher than under three per cent? I bet the 'costs' QF loaded onto each flight were huge, such as allocating a higher than usual amount of head office overheads.

Is QF really a loyalty scheme with the airline as a side issue? The FF scheme made more money than anything else.

In 2019-20, QFd seat occupancy decreased to 75.9 per cent, down 1.9 percentage points on 2018-19. International flights seat occupancy decreased to 84.1pc, also down 1.9 per cent.

The detailed PowerPoint slides state 'international (flights) moved into losses as a result of international border closures.' Not surprising.

The detail states that JQ incurred an underlying loss before interest and tax of $26 million for 2019-20, although the domestic business made $112 million profit. So that by extrapolation must mean JQi made a loss of around $138 million. The latter hasn't flown since about 23 March 2020 IIRC.

3K is not just terminating 25 per cent of staff but reducing its fleet of 8 by five, some of which appear to be headed for JQd although there's mention of 'lease returns.'

Naturally, no mention in the media release of how the ACCC had to pull up airlines like QF re failure to refund passengers, or quickly refund them, for flights that were cancelled.

And, to delight one of our aviators on AFF, the detailed PowerPoint slides merely state 'A380 fleet moved to long term storage for foreseeable future' at the bottom of the page on QFi.

Very optimistic of QF to suggest that 'recent developments in Victoria and the reimposition of some border restrictions' are 'not expected to have a material impact on the three year plan.' At present, Sydneysiders and Victorians can' travel to Queensland, the latter can't travel anywhere by air, and there are heaps of other border restrictions for states like SA, Tasmania and WA that have been in place for months (although they vary) and haven't just been recently 'reimposed.'

In the previous five years, QF's 'return on invested capital' varied from 16.2 to 22.7 per cent, but in 2019-20 dropped to just 5.8pc. Who knows if it will be even lower in 2020-21?

QF claims to have an 'unencumbered asset base of $2.5 billion' including 46 per cent of its 314 aircraft. The tiny font note to this PowerPoint page says aircraft values in the accounts reflect 30 June 2020's position. AFFer RAM has written extensively on this.

There is also a mention (otherwise unspecified) of 'return of up to 16 leased aircraft if surplus to requirements' so this suggests further fleet rationalisation is possible.

How many months until the Federal Government has to take some equity in this company? I give it about a year, if that despite the supposed '$4.5 billion' in liquidity that the CEO will boast of.

 

[Spongbob]

Is QF really a loyalty scheme with the airline as a side issue? The FF scheme made more money than anything else.

There are many reasons to suggest the answer to this question is "yes".

 

[antycbr]

How many months until the Federal Government has to take some equity in this company? I give it about a year, if that despite the supposed '$4.5 billion' in liquidity that the CEO will boast of.

I think the Government will have to insist on a market based solution here (what goes around for VA comes around for QF). QF is a private company and any assistance should be provided on a sector basis. All creditors of VA would have a high degree of success suing the government otherwise based on public pronouncements of the Government, in writing.

 

[mviy]

QF will probably try and raise further capital from institutions and shareholders in 2021 just to survive. Then maybe a third round in 2022 to survive or get Project Sunrise off the ground depending on what the situation happens to be at that time.

A lot depends on things completely out of QF's control, whether a vaccine is found and/or whether the government decides we just have to live with the virus and allow travel more broadly but with some sensible limitations like testing a few days before you fly, hotel quarantine etc. Mandatory hotel quarantine for 14 days that is passed on has to reduce the demand compared to pre-COVID. People either won't have the leave or the funds for leisure trips to do that very often, and most businesses would have reduced travel budgets going forward.

If QF fail to raise capital then they'll have to do something similar to Virgin where private equity takes over the company and shareholders get left with nothing. It would give QF an opportunity to reduce the variety of aircraft it flies but it would be a devastating way to achieve that.

 

[Carrots]

@Melburnian1 any additional comments/thoughts on the aircraft write downs this year given the previously "inflated" numbers?

Will be interesting to jump onto the report later and have a look when I get a moment.

 

[Melburnian1]

Looking forward, QF's annual presentation to investors says July 2020 capacity was at 19 per cent of normal.

However this was before the Melbourne lockdown (five kilometre travel restriction) and curfew, and further shutting of the Queensland border to Sydneysiders so if anything August 2020 flight numbers may have declined from July. QF however claims August will be around 20 per cent, but admits that it planned for '32 per cent.'

This reduction of about 40 per cent in what it 'planned' for August 2020 flying versus what it suggests it can 'achieve' must be a nighmare for the operations department and flight and cabin crews who thought they'd be rostered but end up remaining idle on JobKeeper or annual/long service leave taking.

Post automatically merged: Aug 20, 2020

@Melburnian1 any additional comments/thoughts on the aircraft write downs this year given the previously "inflated" numbers?

Will be interesting to jump onto the report later and have a look when I get a moment.

I amended my comment above, but people like RAM with experience in the area (and probably RooFlyer too) are best placed to comment as I am a generalist.

This is the tiny font note to the accounts re aircraft values:

'Aircraft valuations based on the average of Aircraft Value Analysis Company Limited (AVAC) and AVITAS market values as at 30 June 2020.'

As with any company listed on the ASX, it's always interesting (and essential if you have shares or wish to) to spend a few minutes reading the detailed presentations companies always make, as these are far more informative than the lengthy press release that Mattg linked to.

 

[Melburnian1]

Subsequently, Alan Joyce has pleaded with State Premiers to reopen borders, saying that these decisions ought be based on medical science.

Irrespective as to what one thinks of this man, he's correct.

While the border closures are 'popular' and politcians who face elections soon (such as in Qld) are especially keen to continue them ('Victorians to be locked out until close to Christmas from Queensland'), voters won't be so keen on them once JobKeeper reduces and many more officially lose their jobs.

Economies but more importantly people's lives are being wrecked yet most of the State Premiers (notable exception: NSW) don't care.

 

[woodborer]

Is QF really a loyalty scheme with the airline as a side issue? The FF scheme made more money than anything else.

Although much of what makes a Frequent Flyer program tick is the airline. Take that away, and....

 

[Carrots]

I amended my comment above, but people like RAM with experience in the area (and probably RooFlyer too) are best placed to comment as I am a generalist.

This is the tiny font note to the accounts re aircraft values:

'Aircraft valuations based on the average of Aircraft Value Analysis Company Limited (AVAC) and AVITAS market values as at 30 June 2020.'

As with any company listed on the ASX, it's always interesting (and essential if you have shares or wish to) to spend a few minutes reading the detailed presentations companies always make, as these are far more informative than the lengthy press release that Mattg linked to.

I'm probably actually crossing my wires between yourself and @RAM - I forgot it's been his domain in past informative posts. oops!

 

[moa999]

One analyst had previously suggested the statutory loss would be '$1.02 billion', so this result is poor.

There goes the CEO's claim that break even would be achieved in 2019-20 (though no doubt he'll concentrrate on the 'underlying profit.'

Plenty of other analysts. Under 1% down share price move suggesting this was mostly expected.
I don't think anyone cares about the number with this result.

The value is in the future which is based on how quickly things recover

Its recent share issue (to the retail market) raised less than $72 million against a target of $500 million. That is informative as to what 'mums and dads' think of its prospects.

Only informative as to where the share price was versus the subscription price on the day the offer closed.
The $1.4bn insto offer had plenty of demand.

It says it received '$515 million in (Federal) Government support' for flights but the 'net benefit' was only '$15 million.' This is hard to believe: wouldn't the profit margin be a lot higher than under three per cent?

Profit margins of airlines globally are typically pretty tiny. Wouldn't expect the government to be letting them make huge profits.

How many months until the Federal Government has to take some equity in this company? I give it about a year, if that despite the supposed '$4.5 billion' in liquidity that the CEO will boast of.

Obviously the longer it goes the greater the impact. QF can still raise more money from shareholders if it needs to

 

[Melburnian1]

The QF CEO had a 40 minute press conference this arvo.

I've not listened to all of it, but Mr Joyce praaised the Federal Government for among other things JobKeeper, confirmed they were discussing further assistance and singled out the NSW Government that AJ said was a role model for a suppression strategy. (Impliedly, that's criticism of Victoria).

Joyce said that QF had been planning on raising MEL- SYD flights each way per day to 11 but was no w back to one, and referred to how disappointing and frustrating this was for QF staff, some of whom thought they'd soon be back on what Joyce called 'wages.'

He said in 2020-21, an $800 million depreciation charge (non-cash) would be likely to be levied against the value of its international aircraft while normally QFi brought in $8 billion per year in revenue. As many AFFers know from previous announcements, QF doesn't expect overseas flying (for passengers) to resume until at least July 2021, as Mattg's article on AFF again highlights.

Joyce said that demand for BNE-CNS, PER-BME and SYD-BNK flights exceeds pre-COVID-19 times. Impressive until one remembers that the most lucrative routes like BNE-SYD, BNE-MEL and SYD-BNE are unavailable to the vast majority of Australians so if one's in Brisbane and wants to holiday, CNS is one of only a few destinations that are accessible. Not as if one can hop on QF or OD and travel to DPS, SIN etc.

 

[Kiwi_Flyer]

Joyce said that demand for BNE-CNS, PER-BME and SYD-BNK flights exceeds pre-COVID-19 times. Impressive until one remembers that the most lucrative routes like BNE-SYD, BNE-MEL and SYD-BNE are unavailable to the vast majority of Australians so if one's in Brisbane and wants to holiday, CNS is one of only a few destinations that are accessible. Not as if one can hop on QF or OD and travel to DPS, SIN etc.

It's a similar reason to Air NZ doing so well on flights AKL-ZQN, CHC-ZQN and WLG-ZQN - there isn't a lot of alternatives now or for the immediate future and lots of people want to spend at least some time away from home this year.

 

[dajop]

It says it received '$515 million in (Federal) Government support' for flights but the 'net benefit' was only '$15 million.' This is hard to believe: wouldn't the profit margin be a lot higher than under three per cent? I bet the 'costs' QF loaded onto each flight were huge, such as allocating a higher than usual amount of head office overheads.

Wouldn't (lack of) economies of scale impact profitability as welll ? For example, you have check-in and ground crew that you pay for a minimum amount of time to handle a single flight, whereas normally in that time they might handle half a dozen flights?

 

[Melburnian1]

Wouldn't (lack of) economies of scale impact profitability as welll ? For example, you have check-in and ground crew that you pay for a minimum amount of time to handle a single flight, whereas normally in that time they might handle half a dozen flights?

True, but the costings that QF, JQ, ZL and VA would have supplied to the Federal Government should have taken account of that.

None of these airlines are altruists.

 

[Melburnian1]

...Obviously the longer it goes the greater the impact. QF can still raise more money from shareholders if it needs to

It can, but it may be at a relatively low price per share.

This then dilutes any shareholders who don't take up the issue. The percentage of retail shareholders who participate in share purchase plans and/or entitlement offers varies widely between companies. So does the median amount subscribed.

And then there can be other issues such as an institutional placement delivering a better deal than the mums and dads can access, a subject dear to the hearts of business commentators like Terry McCrann.

And of course share issues mean that there's a greater number of shares on issue, and hence any money available for dividends will have to cover more shares.

Lastly, in recent history QF bought back shares at prices IIRC such as A$5.56 per share, but has recently had to issue shares at far lower values.

 

[antycbr]

It can, but it may be at a relatively low price per share.

This then dilutes any shareholders who don't take up the issue. The percentage of retail shareholders who participate in share purchase plans and/or entitlement offers varies widely between companies. So does the median amount subscribed.

And then there can be other issues such as an institutional placement delivering a better deal than the mums and dads can access, a subject dear to the hearts of business commentators like Terry McCrann.

And of course share issues mean that there's a greater number of shares on issue, and hence any money available for dividends will have to cover more shares.

Lastly, in recent history QF bought back shares at prices IIRC such as A$5.56 per share, but has recently had to issue shares at far lower values.

Correct me if I am wrong but the last retail shareholder offer was undersubscribed?

I also think that the market will start to include a higher level of risk with QF compared to its historic average, particularly if the VA deal closes.

 

[Melburnian1]

Correct me if I am wrong but the last retail shareholder offer was undersubscribed?

I also think that the market will start to include a higher level of risk with QF compared to its historic average, particularly if the VA deal closes.

Yes. Amount sought was A$500m. It raised $71.7m.

Mr Joyce says QF Group market share (I think this means QFd) should rise to '70 per cent' from '60 per cent.' However I had thought QFd + JQd was around 65pc pre the virus.

 

[sxc]

Reading the presentation, under Loyalty it states:

Margin is only generated on ‘external points’ (unique compared to other airline loyalty programs)

How is this unique to Qantas? I would have expected the same for other airlines?

 

[Melburnian1]

Mr Joyce of Qantas also said on Thursday 20 August 2020:

'...Despite so much financial pain, Mr Joyce said with $4.5bn in available liquidity and a cash burn of about $40m a week, Qantas had the “longest runway of any airline group out there”. '

Hasn't he forgotten that SQ has the Singaporean Government, including Temasek Holdings?

And some Arab nations what were until recently (or still are) oil-rich kingdoms?

Joyce is overstating Qantas' position as its cash burn is likely to be more than $40m a week at present given the unexpected Vic and NSW restrictions/border closures.