Qantas’ announcement today that it will repay $450 million of debt ahead of schedule appears to be part of a major restructuring of its borrowings ahead of the massive and traumatic next wave of restructuring it is just embarking on.
It is the second early repayment of debt Qantas has made this month, with Qantas repurchasing $US254 million of debt in an earlier transaction.
The point of the exercise, however, isn’t about debt reduction but a lengthening of its maturity profile. The debt Qantas is buying back was due to mature in April next year and forms part of about $1.6 billion of borrowings that would have matured between 2015 and 2017.
Given that Qantas’ restructuring involves carving another $2 billion from its cost base over the next three years and that about 4000 of the 5000 reductions in its workforce are scheduled to occur by the end of the 2014-15 financial year, those maturities represented a threat to Qantas’ stability during a period when there will be enormous disruption occurring within the business, as well as the heavy upfront cost of funding the change program.
While it would be premature to say that hostilities in the domestic aviation market have ceased, both Qantas and Virgin have stopped pushing extra capacity into a market that already had overcapacity.
Qantas has said it plans to freeze capacity at current levels for at least the first three months of next financial year and, while Virgin hasn’t declared its hand, it has actually shrunk capacity slightly in its main brand in recent months. While it has been adding capacity to the Tiger Australia brand, it is off a very small base.