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Qantas AGM: possible further cuts to staff conditions

Melburnian1

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This is part of a report from 'The Australian' online on Friday 23 October.

The remainder, which I haven't included due to what AFF says is copyright restrictions, is somewhat more optimistic, with Chairman Richard Goyder (marooned in Perth) suggesting that Korea, Taiwan and the Pacific Islands 'could be top travel destinations' if the much talked about 'travel bubbles' became a fact:



'Qantas will seek the same concessions from its pilots and cabin crew as those given to Virgin Australia as the airline strives to recover from the devastating impact of COVID-19.

CEO Alan Joyce has told the airline’s virtual AGM the “unexpected delay” in reopening state borders had cost the company $100m in the first quarter of the 2021 financial year, and would have an impact in the second quarter as well.

The losses were the direct result of border closures, which had kept a tight lid on domestic capacity.

“We had expected group domestic to be operating at about 60 per cent of pre-COVID levels by now,” Mr Joyce said.

“Instead, the continued border closures mean capacity is now below 30 per cent.”

He said the renegotiation of work agreements at Virgin Australia would have a bearing on Qantas employees, particularly if significant cost savings were achieved.

“We’ve made it clear to the unions we can’t be disadvantaged in the process,” said Mr Joyce.

“If there are concessions, we’ll expect the same considerations to be given to Jetstar and Qantas because it will be really important we maintain our competitive advantage.”...'
 

Melburnian1

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In the CEO Mr Joyce's address to the virtual AGM, he also said that QF had identified '$15 billion on cost savings over the next three years, mostly through reduced flying activity'.

This is hardly much of a positive, because while QF doesn't make all its money from flying - the FF scheme is a big contributor normally - if the airline cannot fly to the extent it wants to (due to government restrictions, or lack of demand) then it faces huge costs in keeping idle aircraft in the fleet, to name one example.
 

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The full speeches (not paywalled) are available on the Qantas News Room:


There were a few interesting takeaways for me. Aside from their assumption that the Queensland/NSW border will reopen next month, the comments about looking at new markets they hadn't previously considered (e.g. ICN, TPE, Pacific Islands) were noteworthy.

No surprises that QFF and the Freight business are pretty much single-handedly keeping the airline in business.
 

Melburnian1

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...No surprises that QFF and the Freight business are pretty much single-handedly keeping the airline in business.

No doubt helpful, but the bigger metric is that QF overall continues to lose at least $40m a week.

What isn't clear, although AFFer RAM has commented extensively on it, is whether 'the books' will have to in time show further aircraft valuation writedowns beyond what one would expect for annual depreciation.

No one could disagree that there'll be pent-up demand to travel interstate and (in time) overseas but the $64m question is 'how much', and whether the forecasts that both forms will see demand well below what it was prior to COVI-19 occurring are on the money, understated or overstated.

Will this mean, for instance, that QFd eventually will rid itself of some of its workhorse B738s?

And what about fleet replacement for these - if QF overall continues to lose money due to lower demand than the management hopes, how will it fund such new aircraft?
 
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No doubt helpful, but the bigger metric is that QF overall continues to lose at least $40m a week.

What isn't clear, although AFFer RAM has commented extensively on it, is whether 'the books' will have to in time show further aircraft valuation writedowns beyond what one would expect for annual depreciation.

No one could disagree that there'll be pent-up demand to travel interstate and (in time) overseas but the $64m question is 'how much', and whether the forecasts that both forms will see demand well below what it was prior to COVI-19 occurring are on the money, understated or overstated.

Will this mean, for instance, that QFd eventually will rid itself of some of its workhouse B738s?

And what about fleet replacement for these - if QF overall continues to lose money due to lower demand than the management hopes, how will it fund such new aircraft?
They are interesting question. In 2019 BC (Before Covid), Qantas had been making noises about starting the exercise of replacing some of its 737 fleet - with some of the fleet coming up to 20 years old.
Even then, some analysts were questioning just how it was going to be funded (the looming capital expenditure cliff). Now it's a who knows thing.

Maybe some won't be replaced for the time being, they'll just retire some of the older ones.

I suspect we'll see the average age of the Qantas fleet increase for the next few years. Fleet renewal may well be on hold for a few years.
 

moa999

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Fleet age increase will be offset by getting rid of aircraft (eg the last 747s and parking the 380s).

Wouldn't be surprised to see the 4 oldest 332s and some of the 737s retired before any checks.
 

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'Qantas will seek the same concessions from its pilots and cabin crew as those given to Virgin Australia as the airline strives to recover from the devastating impact of COVID-19.


Nothing was "given" by the Virgin staff. It was taken by Bain as the administrator.
Sadly, I think this is going to be the thinking of airlines around the world. A race to the bottom in terms of remuneration with the management attitude of 'there are plenty of people who will accept this remuneration'.
 

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Interesting that they want to take even more from the very unpopular EBA that they forced through, with threats of outsourcing, AFTER covid was well and truly out of control, and the issues at Virgin had become evident.

I doubt that it will matter, as eventually an administrator will be involved.
 
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Melburnian1

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Interesting that they want to take even more from the very unpopular EBA that they forced through, with threats of outsourcing, AFTER covid was well and truly out of control, and the issues at Virgin had become evident.

I doubt that it will matter, as eventually an administrator will be involved.

Sorry to be a bit obtuse - do you mean eventually an administrator will be appointed to QF or a liquidator to VA 2.0? I'm guessing the former, which is a pessimistic scenario for 'the Australian airline'.
 

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Aside from their assumption that the Queensland/NSW border will reopen next month, the comments about looking at new markets they hadn't previously considered (e.g. ICN, TPE, Pacific Islands) were noteworthy.
Discussing this at dinner tonight with a friend from Taiwan, he questioned if QF will be allowed to operate there (will it be subject to regulatory approval?) given that the QF website reflects TPE as part of China.

Please delete this post if it's political...
 

Melburnian1

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Discussing this at dinner tonight with a friend from Taiwan, he questioned if QF will be allowed to operate there (will it be subject to regulatory approval?) given that the QF website reflects TPE as part of China.

Please delete this post if it's political...

Remember QF operated under that name Australia Asia Airlines or similar to TPE for some years.

Taiwan, a separate nation, has every chance of becoming an even larger trading partner with Australia in the next few years due to our deteriorating geopolitical relationship with mainland communist China.
 

moa999

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As for Taiwan.. certainly there used to be a policy of separate look livery, like Australia Asia (1990-96).. and KLM Asia.
but I understand NZ has operated to TPE recently with same livery (and they have govt ownership).

But reality is China will make its own rules.
 
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RAM

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I must say this part of AJ's speech requires reading several times over to get the full picture, my emphasis added:

CONCLUSION

There is no doubt we’re in the middle of the toughest period the national carrier has ever faced.

But we entered this crisis in a strong position and have plenty of reasons to be confident, including:

  • Our liquidity and significant base of unencumbered assets
  • The progress on our transformation program; and
  • Clear signs of very strong domestic travel demand.
Now first time through, sounds good. Second time through, hmmm something does not read right, third time through EUREKA!

For those of you lucky enough not to regularly read CEOs' AGM reports/speeches (congratulations!) normally the CEO finishes talking (positively) about the future a bit like before a Wallabies v All Blacks game.

So with this in mind, and having seen quite a crop of 'reports' from other AGMs post June 30th - AJ's is different. Why? Perhaps so he is legally covered from future legal action - who knows?

AJ does not mention the current position of Q (well at least current as of June 30th) nor despite mentioning that unexpected domestic border closures had cost about $100m in the Sept Qtr - he does not provide any expectation for the future position. Not that we are now in a strong position or will be in a strong position given current circumstances. The only vague reference he provides is 'we entered this crisis' but not the date at which he refers to - could be purely coincidental that this reads like it was written by legal not finance.

Coincidentally enough, neither does the Chairman. He frames his address;

Since March, we have raised over $2 billion in secured and unsecured debt.
&
In addition to debt, we secured $1.4 billion...

Note that $2.8bn of this $3.4bn was raised by June 26th.

Nowhere in any of these reports/speeches can I find any mention of the mythical(?) $40m/week operating cash burn rate that was supposed to be achieved by late June 2020 - why could that be? It is possible I've missed it - if so please correct me & if you can show me where to find it....

So much for the continuous disclosure requirements.
  • Nothing about shareholders' funds being wiped out if not for the 26th June equity raising
  • No update on what the operating cash burn rate actually was by late June (had the $40m/week that AJ had publicised been missed/achieved)
  • No mention of whether the previously stated achievement of processing/paying out the 6,000 redundancies by Sept 30th had been achieved (which a number of AFFers have suggested that staff who were offered & accepted voluntary redundancy in July still have not been paid out as of mid-October or that around 2,500 have yet to see the offer yet - let alone have the opportunity to accept it).
In the CEO Mr Joyce's address to the virtual AGM, he also said that QF had identified '$15 billion on cost savings over the next three years, mostly through reduced flying activity'.

This is hardly much of a positive, because while QF doesn't make all its money from flying - the FF scheme is a big contributor normally - if the airline cannot fly to the extent it wants to (due to government restrictions, or lack of demand) then it faces huge costs in keeping idle aircraft in the fleet, to name one example.
AJ has now shot up to be ranked #1 in my list of spin merchants.

In a well hidden located explanation in its Annual Report - Q states the cost savings predominantly are from reduced flying (substantially less than projected previously) not from efficiency gains. Resulting in billions in savings on fuel, airport charges, labour costs, etc etc. Recurring savings estimated to be up to $1bn per annum by 2024.

The numbers 'mentioned' do not really stack up to scrutiny. Getting rid of 6,000 staff (round #1, 2020) will produce ongoing annual savings but should get lumped into the 'reduced flying category' not ongoing cost savings due to efficiencies. Q's long term leases signed when it cashed out on the remaining months/years for its Sydney, Melbourne & Brisbane terminal leases will not have been set at a cheaper rate by the owners of the respective airports during the 2016-2019 timeframe they were reset (one per financial year) will they?

Consider this spin often used in the retail industry - "We're investing in competitive measures to drive sales". Sound good?

What this actually means = "We've cut our prices, slashing our margins to try and move stock." Does not sound so good. Trouble is too many analysts & fund managers take the statement at face value (investing = good).

So the $15bn savings, in other words, is fake news IMHO.

Curiously something that AJ neglected to mention (pg 103 Annual Report), details Qantas Airways Limited total shareholders' equity as at 30/6/20 was $1,203m.

I could have sworn Q raised $1.34 bn (after costs) on June 26th - would seem to imply that Q was gone otherwise, negative shareholders equity of approx $130m. Did not see this mentioned anywhere in the retail shareholders offer made in early July 2020 though. Also mentions (pg 102) 'Qantas Group with other shareholders of Jetstar Japan provided limited guarantees to support unsecured debt raising by Jetstar Japan". Together with co-guaranteeing 2 A320 aircraft financing lease obligations. Both not shown on the balance sheet it seems.

Fleet age increase will be offset by getting rid of aircraft (eg the last 747s and parking the 380s).

Wouldn't be surprised to see the 4 oldest 332s and some of the 737s retired before any checks.
Believe it or not - the A380s are in the youngest half of Q's fleet not the oldest. After taking out the B747-400s, Q's average fleet age is over 14 years vs the A380s at 11.2 years. Q's A330s avg age = 14yrs.

For comparison:
  • SIA's avg age is just under 6 years old, A380s 9 yrs.
  • Emirates 7.5 yrs, A380s 6.5 yrs.
  • BA 13 yrs, A380 7 yrs.
  • Etihad 5 yrs, A380 6 yrs
  • Qatar 7 yrs, A380 5 yrs
  • Lufthansa 11 yrs, A380 9 yrs
  • Thai 10 yrs, A380 8 yrs
Q has gone from one of the youngest fleets in the industry to one of the oldest. Compare it with VA at around 10 years average age (waiting on Bain fleet update on which leased B737s will be returned) - more expensive ongoing maintenance cost per aircraft for Q than VA - both in time taken & parts required.

With long term storage it is even more expensive for example, the A380s appear to have taken 12 people working 5 days to put them into long term storage in Arizona after they arrived. An industry MRO operator, when talking about the cost of resurrecting from 'short' long term storage, said the rule of thumb was 4 to 6 times as long required to retrieve as it took to put a plane into storage.

Q's fleet as of today consists of Q mainline (133), National Jet Systems (20), Express Freighter (7), Jetstar (69), QantasLink (91) planes.

They are interesting question. In 2019 BC (Before Covid), Qantas had been making noises about starting the exercise of replacing some of its 737 fleet - with some of the fleet coming up to 20 years old.
Even then, some analysts were questioning just how it was going to be funded (the looming capital expenditure cliff). Now it's a who knows thing.

Maybe some won't be replaced for the time being, they'll just retire some of the older ones.

I suspect we'll see the average age of the Qantas fleet increase for the next few years. Fleet renewal may well be on hold for a few years.
Sounds like you, and many other AFFers, may enjoy looking through this site:
Addicts keep it updated more frequently than many of the paid subscription services!

Q has 14 B737-800s between 18 to 19 years old as well as four B737-300Fs & one B737-400F - over 30 years old. Perhaps of more interest is all of these freighters appear to have been purchased when they were already over 25 years old! I wonder what value they're shown in Q's books?

QLink's fleet age (included in calculation for Q's total fleet age) for its 91 aircraft is 18 years. Network Aviation = 25 years.

The planespotters pages illustrate how Jetstar's profitability was possibly enhanced at QI's expense.

Have a look at what happened to JQ's A330-200s when they approached a costly service check - they got transferred to QI in the first instance with QI apparently not only paying for the service check (massive cost) but apparently for replacing the seating to convert them from JQ to Q layout. Some of the A330-200s came new from Airbus, others from Q. I wonder which part footed the cost of converting them from Q layout to JQ's layout?

Could that be a very effective way to make one part a good news story (new operation a raging success) and another part look bad... Now who was running JQ back then?

Is it similar to recording profits from fuel hedging as operating profits & fuel hedging losses as non-operating? Heads I win, tails you lose.

So many demands for cash & so few sources left.
 

Melburnian1

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I must say this part of AJ's speech requires reading several times over to get the full picture, my emphasis added:...So many demands for cash & so few sources left.

I agree with much of what you say although we will have to see how it pans out.

Maybe more than three years ago, one of the AFF aviators got stuck into me when I criticised the median age of QF's fleet. Even if we assume good maintenance in any transport equipment maximises safety, an airline must still face increased costs from older planes not being as fuel efficient, and perhaps spare parts availability becoming less as the years wear on. The average age has risen since I made those 'ageing' comments.

AJ's failure to invest may be catching up with him and QF, although one could argue that given likely reduced demand, investing in a whole new domestic mainline fleet to replace fairly old B738s would have been a mistake had the company known coronavirus was about to become a fixture.
 

RAM

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I agree with much of what you say although we will have to see how it pans out.
We better watch out or we'll be creating a 'fan club'!

Agree - logic & reality rarely coincide in financial markets, it is more akin to just how far a rubber band can be stretched before snapping. Q may be able to spin their way through this. The latest Fed Govt largesse to Q at the expense of all the international airlines that served Australia once Q showed the middle finger on June 8th & cancelled all international flights leaving tens of thousands of Australians stranded - may indicate the Fed Govt has been told just how bad a situation Q is in, or maybe not.

One thing for certain, a close to zero cost the 13 international airlines currently providing scheduled services to/from Australia would be happy to increase the passengers allowed per flight from as low as 30-34 (into Sydney some days) currently. Yet another taxpayer funded gift for Q.
Maybe more than three years ago, one of the AFF aviators got stuck into me when I criticised the median age of QF's fleet. Even if we assume good maintenance in any transport equipment maximises safety, an airline must still face increased costs from older planes not being as fuel efficient, and perhaps spare parts availability becoming less as the years wear on. The average age has risen since I made those 'ageing' comments.
99% of the time spare parts are not an issue - just the cost. That's why Q is happy to operate the 33 & 34yr old B737-300Fs & B737-400F.

The older/more flown the plane = the higher the ongoing service/maintenance checks will cost

The greater the number of flight cycles +/or flying hours = greater service checks required which are more extensive in both time involved, labour cost & materials. As the length of time in maintenance = less time in service, there is the secondary impact of more frequent operating repairs/replacements required as parts approach the end of their operational life.

Staying up to date with the US FAA requirements (for any aircraft flying to/from the US) for some aircraft requires on-field checks/work every 2nd day regardless of their age. Hawaiian Airlines published an informative piece on their site a few months back.
AJ's failure to invest may be catching up with him and QF, although one could argue that given likely reduced demand, investing in a whole new domestic mainline fleet to replace fairly old B738s would have been a mistake had the company known coronavirus was about to become a fixture.
Harking back to a now well-worn thread of mine - actual cash available.

Aircraft manufacturers have an annoying habit of requiring hard cash down as a deposit for firm orders. If an airline is low on cash then it prohibits them from making firm orders & getting in the delivery schedule. So, from this perspective Q was very lucky it had not signed up with Airbus/Boeing on Project Sunrise - otherwise things could have been that much worse.

As it stands Q had $762m as deposits for existing firm orders. Defering the delivery dates (A321neos & B787-9s) may have seen some of the deposits absorbed post June 30th as quid pro quo.

The value of these capital expenditure commitments is $9,028m. To put this in perspective, the written down value for its current 300+ aircraft is $9,785m.

It looks as if the 6 B747-400s & spares were valued at around $10m per plane an avg of just under 18 yrs old and were described as highly saleable.

Mea culpa 😭

I missed an item in the Annual Report that I have been looking for - the carrying value of the A380s (& spares) after the write down of $1,018m (across the 12 planes). It was there all along on pg 89 at the end of a sleep-inducing riveting paragraph, as at 30 June $611m or just under $51m per plane down from around $138m/plane after the year's depn had been charged.

Air France decided to retire all their much younger A380s as the cost of upgrading the business/first seats was rumoured to be around $60m (AUD) per plane. Given one of the Q A380s recently returned from being refreshed (so now 6 of 12 are done) - it would be good to know what that cost was.

Seems too high but Q references 'external valuations'.

Remember how Q proclaimed an operating profit?

Pg 87 states that the A380s are not part of Q's recovery plan so all these costs/writedowns/ongoing maintenance/storage costs were not reflected in the 'operating profit' for Q as a whole nor for the segmental details of QI and will be excluded until further notice - due to "considerable uncertainty". The A380s were valued on the basis of 'fair value less costs of disposal'.

To see just how different the CEO remarks at the AGM were, here is the August 2019 version:


Note the highlighting of hedging 100% of fuel as a positive.
 
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Melburnian1

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...Pg 87 states that the A380s are not part of Q's recovery plan so all these costs/writedowns/ongoing maintenance/storage costs were not reflected in the 'operating profit' for Q as a whole nor for the segmental details of QI and will be excluded until further notice - due to "considerable uncertainty". The A380s were valued on the basis of 'fair value less costs of disposal'...

I am merely a layman but given the experience of some other airlines, wouldn't 'fair value' for each A388 in the accounts for 2019-20 be 'nil'?
 

RAM

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I am merely a layman but given the experience of some other airlines, wouldn't 'fair value' for each A388 in the accounts for 2019-20 be 'nil'?
My thoughts exactly.

If Q had written down just the 6 A380s yet to be refurbished then their shareholder equity would look even worse (which is why I suspect they have not). Otherwise writing off the full $611m would halve their shareholder equity to just $600m or so vs the $1,320m or so raised on June 26th.

Equally it would make their refurbs of the other 6 A380s(including the last one finished just a few weeks back), & flown directly for Dresden to Arizona, inconvenient.

Q announced all 12 to be refurbished by the end of 2020 - does raise the question on how much they are liable for not going through with the refurbs. I expect that many of the new first class, new business & new premium economy seats already have been built. Q must be on the hook for that. I think the refurb for Y seats was a cushion exchange - so nowhere near the expense.

I have not located, despite a reasonable search effort, any costing for these refurbs.

The only datapoint I can find is a quoted >AUD 50m per plane cost for Air France to refurb their younger A380 fleet which reportedly help drive Air France's decision to retire their entire A380 fleet. The cheapest refurb of an A380 I came across was over AUD 30m per plane.

Considering the scale (number of seats of each type) to be replaced per Q A380, then even if Q stockpiled them all to use as spares & on the now-delayed Airbus A321neos (if at all feasible?) - that's another big call on their dwindling cash.

JobKeeper

Q received or was entitled to receive $273m of JobKeeper funds from 30 March through to 30 June (covering the pay period through to 5 July. That is 7 fortnightly pay periods.

Doing the maths ( $273,000,000 / {$1,500 fortnight x 7 fortnights}) = exactly 26,000 employees' paid over that period.
At the AGM the Chairman mentioned that 18,000 or so Q employees are still on JobKeeper.

Since Sept 28th JK has reduced from $1,500/fortnight to $1,100 - based on the Chairman's comments it is saving/worth $19.8m/fortnight to Q.

With the Federal Govt now talking about our international border opening by the end of 2021 I wonder how long it will be before the various credit rating agencies revisit Q's outlook.
 

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