WARNING - make a big cup of tea/coffee before starting to read....That's a big call to make and one that seems both untrue and not quoting any actual references.
Aircraft value isn't directly linked to operating cash flow and the ability to pay debt 'as and when they become due'.
I'm more of a VA customer/fan than a QAN one but it doesn't seem right to make statements above which seem to be about FUD than facts.
Not really that big a call if you do some homework, and just an opinion based on my potentially flawed analysis or perhaps not! Sometimes the Emperor's clothes need closer scrutiny.
You may be equating operating cashflow with cashflow - or perhaps not. Download Q's 2018/19 AR and look at the cashflow statement. Safer not to click on the link below but search for it yourself but (if you're a risk seeker) here it is....
Annual Reports - Qantas Investors | Investor Centre
investor.qantas.com › investors › page=annual-reports
And that's largely due to the strategy behind our portfolio of businesses. Richard Goyder AO Chairman and Independent Non-Executive Director. Visit the 2019 ...
Look back in this thread you should find some quite detailed posts of mine on balance sheet valuation, cash flow & share buybacks that may fill in some gaps for you. Could that be why AJ was so vehement about the non-future outlook for VA as well as the bulk of the media peddling that view from February through to 23rd June 2020?
Source material - Q & VA Annual Reports 2016/17, 2017/18, 2018/19, statements released to ASX, publicly available information put out by "Official" Aircraft valuation companies (named in Q annual reports in the past as used by them). Also fleet data (including all manufacturer publicly available data - well worth delving in to if you really like info!). Put it into a spreadsheet, with a few formulae & you can try predicting future costs. Also used a number of other publicly available sources - such as SEC filings etc.
Typically many loans have covenants that go with them. These covenants often include a measure of 'over-cover' which if not met may require cash collateral be lodged with the lender. Say you borrow 75% of a plane's valuation (provided by independent certified valuers...hint, hint) and there's a clause saying that if the plane's value drops by X% then you need to lodge cash collateral sufficient to make good (say) 90% of the valuation drop. Just picking some numbers at random here.
Back in the real world - Q has spent an extremely large % of all free cash flow in buying back its shares over the previous 5 years (reducing shares on issue by 1/3 or so) which leverages its sensitivity to the P&L (1.5x). This included profits from cashing in seemingly all its long term leases on property. Add in very large recent losses in fuel "hedges" - due to greater volume than actually required and at prices above current 'close out' prices. So as each month goes by Q is realising losses & would normally have to pay out these losses in the course of business = negative cash flow.
So, picking a totally hypothetical example out of the blue, perhaps you borrowed $1bn secured against 12 A380s valued at $2bn that are on average 9 years old, and their current 'independent' valuation is now $1.2bn (optimistic?) then perhaps you no longer have any security left on your balance sheet to offer for new borrowings, and you could get asked to lodge $600m cash collateral. So effectively your balance sheet has lost $800m in retained (after tax) profits AND you've lost access to $600m in cash - a double hit.
Yes, it does seem mad that you've borrowed money because you need it & then you're required to give some back whilst still being charged at a higher interest rate for it (perhaps getting ZERO interest on the amount given back as cash collateral). So in that hypothetical example you borrowed $1bn and now only have use of $400m of it.
Who said finance was sensible!
Have a look in the 2017/18 & 2018/19 Q Annual Reports as well as the statements put out since February 2020. Add in the public info from the same aircraft valuer as Q has used previously to arrive at a value for its planes (remember the recent >$1bn write-down) and when it occured. Also notice some statements of available security left in its balance sheet post 30/6/2019.
Add in the published aircraft market valuation decline since then coupled with Q's announcement about the A380s and perhaps 1 + 1 may = 2.
Given there has not been a secondary market transaction for a used A380 for close to two years & there are now around 20 newer ones available, that have been retired, than Q has in its fleet, seller no buyer & there has not been 1 sale of a used A380 engine (normally the most valuable part) ever that I could track down plus there are now at a guess at least 20 brand new engines as well available. This has seen the owner of the SIA A380s given back the day after the 10yr lease was up - booking write-down after write-down on those two all the while paying storage (including some maintenance) & part-out costs. Have not seen their latest accounts reported yet.
No, I'm not picking on Q, it is just that Q is potentially more at risk here on out than VA IMHO. I like to see all companies have the same level of scrutiny without bias.
Q have a massive redundancy write down post 30 June 2020 to include in the current financial year as well as well as other issues. With the latest developments internationally - that figure may increase.
Meanwhile VA II gets to give back approx 1/2 their fleet (perhaps more if it includes some of their leased B737s) at seemingly zero cost. VA has already announced, if Bain is successful, that Tiger will be shut down. VA has already broken its long term property leases in both Brisbane (6yrs early) & Sydney with no apparent major cost implications (no announcement that Bain has extended further funds). Is the Qld State Govt going to expand into the now empty space in Brisbane - who knows?
Meanwhile Q has expansive property leases outstanding, including long term ones only put in place in the last three years.
VA gets to say to their leased aircraft secured lessors (who own the planes) - here's your plane please fly it away or perhaps VA have to deliver it somewhere at the lessor's direction. BTW please pay the storage costs starting from (say) 1 Sept 2020 or whatever date Bain achieves formal control. From what came out today VA II looks like it will be solely a B737 carrier (no B777s ) for the next few years - which massively cuts its operating costs.
Q is not yet able to do any of this and also has the complication with its say 70+ international fleet a good number of which it owns in one way or another. Advanced tax management requires a business to be generating taxable profits - if not then there is a significant disadvantage faced.
Q said post CV start that it had NO NEED to do any capital raising earlier this year!
Then only a little later it raised close to $1.9bn in equity not long after (I recall) raising debt ($1.6bn) . After rasing the combined figure it then wrote off $1.3bn from its balance sheet. So gained close to $3.5bn, wrote off $1.3bn to leave net $2.2bn = approx 40 weeks of cash burn while Govt pays bulk of wage costs - ceteris paribus.
Q raised the maximum legally possible without having to call a meeting for shareholders to vote on raising more equity than that.
If you look in the 2018/19 Annual Report at current liabilities and current assets, note pre-sales, 2 + 1 may = 3.
Note the investment write-ups & write-backs they booked in 2018/19...
Just like for VA with VFF, QFF has been a massive profit generator for Q but with no international flight redemptions since March and very few domestic redemption opportunities - that consistent cash source is impaired at least. You may remember that Q put limits on QFF redemptions before VA did for VFF. Why did it do that?
The massive difference though with QFF is that compared with VFF - there are much higher fees & charges with ticket redemptions - with most (if not all) of the difference due to not 'taxes' but fees payable to Q - such as still to this day FUEL SURCHARGES I believe. All of these now are liable for full cash refund although there are reports on AFF of Q refusing to refund the 'taxes & fees' component of QFF bookings - instead issuing 'travel credits' for them. I must admit I have been wondering why the ACCC has not publicly questioned 'Fuel Surcharges'?
Then the ACCC said Q had to provide cash back in place of travel credits and notify all customers issued with travel credits of their right to full cash refunds. Q has been reported as somewhat slow to cancel international flights. As of now virtually every pre-sold international ticket is potentially due for a full cash refund. Look at the cash flow statements and notes to the accounts in the last 2 annual reports - that is a BIG number. Then have a look at the AFF blog on the delays for cash refunds from Q vs other international airlines.
Additional twist - the internet travel booking site (who went belly-up) that made Q bookings - it may now receive 100 cents in the dollar refunds in cash from Q yet the people who booked through that internet site may then only get back a fraction of that payout. You can guarantee that the receiver for that company will be asking for 100% cash refunds.
Back to Q - bear in mind that the Federal Govt announced a 6 month (I think was the timeframe) exemption to the regulations about trading while insolvent. That deadline is fast approaching & could well be in the minds of Q's external auditors.
COVID-19 and the suspension of insolvent trading laws ...
corrs.com.au › insights › covid-19-and-the-suspension-of-insolvent-tr...
Mar 25, 2020 - The recent decision to suspend insolvent trading laws in the face of the ... The duty is said to arise when the company is insolvent, near ..
Meanwhile despite apparently most of Q's staff being paid by JobKeeper - Q's cash burn is large (apparently relatively greater than SIA's), and that was before the ACCC ruled about having to pay cash refunds to customers who were previously given travel credits. Always need to be careful what one goes around saying about your competitors...
"The question many, including Virgin's rival Qantas boss Alan Joyce, are asking is why should government bail out badly managed airlines?"
Fuel hedge losses, Govt paying major % of staff costs, write downs required for investments, further write downs likely required for aircraft.....
Or I could be totally wrong.
That's what makes a market! BTW - I have ALWAYS had an aversion to ever buying or selling airline companies. Neither bought nor shorted them - ever, I prefer going into a casino - better odds (so far).