Qantas Equity $1.9B Raising and Announcements June 2020

[RAM]

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.

WARNING - make a big cup of tea/coffee before starting to read....

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.

Hypothetical example
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.

Cash collateral

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).

 

[serfty]

Up to $500 million is by way of a share purchase plan to retail investors.

All shares are likely to be issued at A$3.65, a discount to yesterday's market price.

It seems just 5% of eligible shareholders took this up with n average total purchase of $8200., raising a little under $72m.

The shares would be issued at $3.18 each.

https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=02264756

 

[moa999]

Retail take-up generally based on share price on the last few days.. which was at the levels - so no incentive to take up.

Had it closed today if think a much higher takeup

 

[RAM]

Data point - Sydney Airport announcing Capital Raising to keep it solvent....

Investor - Sydney Airport
www.sydneyairport.com.au › investor

5 days ago - 2020 Equity Raising and Interim Results Webcast. 11 August 2020 at 10:30am (AEST). 2020 Equity Raise. Details about the Entitlement Offer.

Following the Q approach? We've a strong balance sheet, raise debt, then look to raise equity..

From an AFR article....

We will get back to the trajectory of consistent, long-term growth. We are in this for the long haul.”

Of course, when that recovery might happen is far from certain. International traffic was down 97.2 per cent in July, with domestic traffic down 88.2 per cent, and August looks likely to deliver broadly similar results.

Culbert is unhappy with the latest round of border closures, arguing they contradict federal health department advice. And he wants to see a more detailed plan about how the country – and particularly aviation – will actually live with COVID-19 under a range of circumstances, including a vaccine not being found.

Surprised that with Melb Level 4 lockdown etc etc that domestic traffic expected to be 'broadly similar'? Hasn't Q cut 10+ flights a day from Melbourne?

Interesting Fact: Which major airport does not have to pay 'rates' for its entire site? Sydney (& possibly others) yet it still uses local Council facilities but has no charge.

Judging by the mass car park (for hire vehicles) established on what was previously a wide grass strip adjacent to the Eastern Distributor near the end/start of the Foreshore Rd turnoff - the car hire companies are facing even worse cash flow issues. Hard to pay airport leases without virtually any cash flow.

 

[antycbr]

Interesting Fact: Which major airport does not have to pay 'rates' for its entire site? Sydney (& possibly others) yet it still uses local Council facilities but has no charge.

This is a legacy of the major airports being Commonwealth land when they were owned and operated by various Federal Government agencies, ending with the Federal Airports Corporation. Federal land is exempt from local council rates - as is defence land. Sydney Airport Corporation is leaseholder to operate the airport which remains Commonwealth land.

 

[ric_melb]

I pondered taking up shares in the Qantas SPP, and decided I didn't wish to increase my holding.
But I did wonder if the price would increase after the offer ended, as there could have been pressure before the close date.
For whatever reason, and indeed the general market has risen, the share price as of now is $3.60, compared to the SPP issue price of $3.18.
The rise of 42 cents is some 13%. A quick profit for any that took up shares! Of course tomorrow it may change.

 

[RAM]

I pondered taking up shares in the Qantas SPP, and decided I didn't wish to increase my holding.
But I did wonder if the price would increase after the offer ended, as there could have been pressure before the close date.
For whatever reason, and indeed the general market has risen, the share price as of now is $3.60, compared to the SPP issue price of $3.18.
The rise of 42 cents is some 13%. A quick profit for any that took up shares! Of course tomorrow it may change.

Very true - have you noticed how low a profile AJ & Q have had since the raising was announced?

Not a word on the payout of the 6,000 staff to be made redundant. Certainly better for those staff to be paid $750/week on JobKeeper & Q not pay any wages then for Q to have to part with the cash to cover their entitlements.

Two guesses whether the Federal Govt's temporary lifting of the "trading while insolvent" prohibition will be extended in 5 weeks time...

 

[mviy]

Not a word on the payout of the 6,000 staff to be made redundant. Certainly better for those staff to be paid $750/week on JobKeeper & Q not pay any wages then for Q to have to part with the cash to cover their entitlements.

Keeping them employed would mean more entitlements would be accrued and just kick a bigger cash flow problem down the road. Unless the government guaranteed JobKeeper would continue for airlines for years QF would still have to reduce its workforce and then hopefully increase it again if flight demand recovers.

Two guesses whether the Federal Govt's temporary lifting of the "trading while insolvent" prohibition will be extended in 5 weeks time...

The temporary relief for Director's liability only applies to insolvency from COVID onwards, not to pre-COVID. Debts need to be incurred in the ordinary course of business for the relief to apply. Directors still need to take reasonable care in what they do. Directors can still commit offences by being reckless e.g. being blatantly dishonest or committing fraud.

With small companies Directors often personally guarantee major debts, but for a large company like QANTAS there would likely only be some security over company assets for some debts. Valuable assets being repossessed and sold in a fire sale would not be good for QANTAS.

For publicly listed companies most of the board usually have shares, so as well as benefiting other shareholders it's clearly in their own personal financial interest to act for the good of shareholders.

In any case QANTAS the publicly available evidence indicates that QANTAS is not insolvent, so one can only assume that it is solvent.

 

[RAM]

Keeping them employed would mean more entitlements would be accrued and just kick a bigger cash flow problem down the road. Unless the government guaranteed JobKeeper would continue for airlines for years QF would still have to reduce its workforce and then hopefully increase it again if flight demand recovers.

The temporary relief for Director's liability only applies to insolvency from COVID onwards, not to pre-COVID. Debts need to be incurred in the ordinary course of business for the relief to apply. Directors still need to take reasonable care in what they do. Directors can still commit offences by being reckless e.g. being blatantly dishonest or committing fraud.

With small companies Directors often personally guarantee major debts, but for a large company like QANTAS there would likely only be some security over company assets for some debts. Valuable assets being repossessed and sold in a fire sale would not be good for QANTAS.

For publicly listed companies most of the board usually have shares, so as well as benefiting other shareholders it's clearly in their own personal financial interest to act for the good of shareholders.

In any case QANTAS the publicly available evidence indicates that QANTAS is not insolvent, so one can only assume that it is solvent.

Kicking the can down the road has been a favourite for most of the Western world's Govts for well over a decade now - and thousands of companies overseas...

The impact of CV has been the IMHO cause of Q possibly being insolvent.

Publicly available information vs evidence

Tend to disagree here.

If you'd restricted it to 'information' then on a strict interpretation I'd give you that based on it being restricted to publicly released statements, media release, filings by Q. However, on publicly available evidence I disagree.

Q has not said 'Hey. We're insolvent'. But neither have they said "We're solvent!". Bear in mind the timing of the Federal Govt's temporary suspension of the 'trading whilst insolvent' regulations. Perhaps a masochistic shareholder could ask that question at the virtual Q AGM?

Now, being fallible, my analysis below might be wrong - and this is DEFINITELY NOT INTENDED for anyone to base decisions upon.

Q IMHO has been following the 'private equity' model since 2014. Selling & leasing back assets to the point there's virtually no non-aircraft related assets left, using the bulk of free cash flow to buy back its outstanding shares (38% from 2013/14 levels as at 30 June 2019) which looks great when making money as it leverages the returns by 1.61x but not so good in bad times. Also could disguise falling earnings per share from continuing operations & help achieve remuneration (EPS based) targets.

Subsequently bought back another 79.7m shares in November 2019 at $5.56 per share which looks to have nearly zeroed Q's available franking credit balance (which was counting the franking credits on tax to be paid on the 2018/19 profits ($108m) which fell due in 2019/20 just prior to the late 2019 share buyback (p71 Q 2018/19 Annual Report). AKA cutting it close. Otherwise there was just $5m left in the franking credit account, now maybe at $8m.

Now understand why Q had not brought back more shares than it had? It did not have the franking credits to enable many more being bought back in any previous year subsidised by the Australian taxpayer - as every share bought back generated a tax loss for the investor AKA a tax benefit funded by the Australian tax payer!

For example: Nov 2019 share buyback, $5.56 = $1.19 capital return & $4.37 fully franked amount with franking benefit of $1.31 attached. Investor then claims a tax loss (say bought Q at $4.00) of $2.81 at their top marginal tax rate....so possibly another $1 benefit - which is why people were happy to see into the buyback at 14% below the prevailing market price. Value of $5.56 in hands of investor as much as $5.56 + $1.31 + $1.00 = $7.87 vs market price at the time of $6.47.

Q not likely to be paying much tax for 2019/20 FY - so lucky it cancelled its dividend as it would have been unfranked if my figuring is correct.

Q no longer has any 'hollow' logs to raid to buffer its balance sheet or P&L - no revaluations to 'notionally' increase shareholders' fund (revaluation reserve), has not built up cash balances (predominantly used to buy back shares to maximum possible (exhaust franking credits available), has seen its fleet age leading to higher ongoing maintenance spending (require longer & more expensive scheduled maintenance), somewhat burnt its bridges with Boeing & Airbus over enforcing (massive) compensatoin payments for delayed deliveries (booked as profits & then used to fund buybacks) & plane groundings in safety issues (B787s for example). Other than airframes & parts - Q no longer has much in the way of saleable fixed assets - seemingly less than the value of one B787-9.

In Q's early May 2020 'update' it mentioned that:

Total Current Assets (short term liquidity) stood at around $3.5bn (this is prior to the ACCC telling Q to make full cash refunds btw). Worth looking into how it was made up....

• $1.0 billion in an undrawn (pre-existing) loan facility (so not yet cash on Balance Sheet & not shown as current assets in 30.6.19 BS)
• $1.6 billion in new debt raised in Apr/May 2020 secured against 10 x B787-9s

So Q only had $900m left out of the $4,193m 'Current Assets' as at 30 June 2019.

To put it another way, in the first 10 months of 2019/20 Q looks to have used up around $3,293m of its current assets, or approx $70m /week net burn DESPITE operating for the first 26 weeks on a pre-CV basis. That should have been positive, not negative, cash flow, cash generating not cash burning. Suggests current asset burn rate for the 15 weeks (since 31 Dec 19) of > $200m per week averaged since December 2019.

If my guestimate of current (late June) burn rate around $60m / wk, then you get an idea just how bad things were earlier, perhaps the current cash burn is closer to $100m+/week.

So from publicly available evidence Q has:

• made numerous contradictory (read AJ) statements about their position & back-flipped on their BS position finally resulting in the announced $1.9bn equity raising.
• Institutional offer raised $1.36bn (new shareholders took 6%).
• Retail SPP offer extended by two weeks but pretty much failed. Aimed to raise $500m+, however only brought in 15% of target or close to $71.7m @ $3.18.share << I admit I missed this last week. Anyone else notice it? >>
• written off $1.4bn (according to the release).
• Likely to have to write off $117m on a previously booked surplus on its defined benefit super fund, and likely paid in a cash contribution ($50 - $175m to make up for market falls causing an actuarial deficit)
• just under $130m physical non-aircraft assets (land & buildings) - the cupboard is pretty bare.
• burnt through a good chunk of cash buying back further shares in late 2019 (79.7m @ $5.56, so approx $440m in cash PLUS franking credit $104m) prior to its suspension in early 2020. The Australian tax payer is also subsidising Q shareholders who took this up at their highest marginal tax rate on a capital loss as 'capital component' of the $5.56 price was only $1.19, with the rest in a franked amount. So cost to Australian taxpayer likely around $100m btw...
• stated they expect the 6,000 personnel redundancy will cost $600m (= cash out the door)
• stated they have lost $500+m on fuel hedges (done in a "low cost" not low risk manner) through to 31 May (potentially facing another $350m from 1/6/20 through to 30 Sept 20 based on past patterns). That is actual losses not notional - combination of both price & volume impacts.
• Have been 'communicated with' by the ACCC & seemingly entered into an enforceable undertaking to notify every customer who was issued a travel credit that they are legally entitled to a full cash refund. Revenue received in advance > $4bn, major proportion by value = international flight bookings, which could be why they have been only cancelling the flights (despite removing the ability to book them weeks earlier) on a delayed basis vs their competition to/from Australia. Reportedly only a fraction (less than 10%) refunded in cash prior to 30 June 2020.
• Cash refunds look to only have commenced AFTER the May Q statement.
• Q rated in bottom 3 globally for airlines for length of delay in processing & paying out cash (not travel credit) refunds
• As of 30 June 2019 total of ALL current assets (not just cash & cash equivalents) = $4.19 bn
• As at 30 June 2019 total of ALL current liabilities (not just revenue received in advance) = $8.58 bn
• Raised $1.6bn in 'secured debt' against unencumbered planes in early 2020 that lenders would accept on part security basis ( % of latest valuation)
• Valuer, used by Q previously, reported that airframe values had dropped from 31 Dec 2019 to 31 March 2020 by between 16(7?) to 23%. Since then reports of values falling by further 20%+ from 31 Dec 2019 values.
• A380 market valuations now near zero due to lack of parting out sales of 1st 2 A380s returned by SIA. Owner nearly written off 100% of remaining book value. Realistically used A380s have a negative value as no buyers have been found but for 1 plane which has subsequently been losing money for its purchaser - so all current owners of grounded planes (pre-CV groundings) are still footing the bill for storage costs.
• QFF no longer spitting out consistent positive cash flows AND due to limited flight redemptions the ancilliary cash flow from 'fees & taxes' on QFF flight redemptions estimated to be running at 3% of levels YoY. Due to ACCC 'cash refund' directive - QFF cash flow may now be negative.
• Q weekly cash burn estimated running between $55-60m vs desired level of $40m. Q has not released any further cash burn information since stating that they wanted to achieve a $40m cash burn by late June.
• Cash burn from 31/3 to 30/6 estimated $1.07bn on 'normal operational costs' not inclusive of hedging, nor other 1-off expenses.
• Balance sheet write downs likely to have seen previously raised debt secured against airframe valuations now providing less security than amount borrowed against them & may require cash collateral lodgement to make up the shortfall (so whilst not an expense it decreases available cash).
• Ongoing cash flow burn required for grounded aircraft not processed (yet) for long term storage increases the longer they remained grounded.
• The looming reduction off JobKeeper would see Q on the hook for additional cash burn/wk of $4m+, rising to $8m+/wk at year end.
• In 2018/19 Q wrote back the loss on it HelloWorld Travel shareholding after it sold 2 million shares @ $5.50 on 28.9.18, leaving it with 19.273m (revalued) shares. Value at June 30, 2020 = $2.99, or around a $48m potential writedown. Currently trading at $1.89 on Friday close. Q did not participate in HelloWorld Travel's recent equity raising.

The B/S showed $4.5bn unearnt revenue (tickets sold for future flights etc) in current liabilities as of 30 June 2019 plus an additional $1.5bn due after 12 months. This figure has been rising by around $100m to $200m in the last few financial years. Current assets in total were less than just this one current liability. Q reportedly made it nearly impossible for customers to obtain full cash refunds, and still are delaying paying it out if the AFF blog is to be believed.

QFF also started to haemorrhage cash with redemptions for shopping cards skyrocketing - remember Q shut down QFF redemptions before VA shut down VFF.

If you examine the future cash burn for VA mk1 vs Q - forget about the starting point just focus on the future cash burn - then Q is in a far worse position given that by number around half its passenger fleet (as at 29 feb 20) were tasked on international routes, and close to 70% by value. Since the Fed Govt stopped subsidising international flights (by Q or VA) in early June - Q ceased flying scheduled international passenger flights = a 100% grounding of that fleet. For VA mk1 it's impact was less than 1/6th of its fleet.

As Q has announced (but did not implement pre-June 30th) cutting approx 6k out of 21k personnel, with a (to me) remarkable 25% entitled 'admin' staff - that implies many more than 6 B747s & 12 A380s either permanently retired or put into long term storage (with all the adverse cash flow implications that encompasses - see earlier post by JB747 on the pitfalls of grounding A380s even for a few days).

Q said they're looking at $15bn in cost reductions. The approx 'cost reduction' per annum from the 6,000 staff to be made redundant is between $650 to $800m based on the Q wage spread. Could be more or less. However it suggests many more one-off cash costs coming up.

As one long time AFF contributor declared last April, the only airlines to survive CV will be Govt owned. That's looking more like a certainty than a bet.

The one possible exception are airlines that go bankrupt or into administration & experience a radical restructuring & cost-base reduction. Even then for this subset to survive requires an effective & safe vaccine to appear in 2021 not 2022.

Or I'm missing something again.

 

[jakeseven7]

Or I'm missing something again.

Oh Ram you essentially post the same thing over and over bless ya heart

QF will be bailed by the government if needed, I suspect the deal may have already been done/lined up internally in their recovery war games.

The government won’t be able to let the national airline go under, strategically, from a security point of view. The community will support this. They will follow all the overseas governments propping their national carriers up if required.

Now what happens to VA2, the new US owned airline is a lot more grey... but that’s for the other thread! It will be interesting to see what happens to them.

 

[trevella]

Oh Ram you essentially post the same thing over and over bless ya heart

He was hoping to be played by Jeff Goldblum, but ended up with Dustin Hoffman.

 

[Melburnian1]

...

• Retail SPP offer extended by two weeks but pretty much failed. Aimed to raise $500m+, however only brought in 15% of target or close to $71.7m @ $3.18.share << I admit I missed this last week. Anyone else notice it? >...

...

RAM, very interesting.

I didn't miss the $3.18 issue price (saw it in ASX company announcements) but apologies to AFFer serfty as with the original media on the issue, I neglected to say how the issue price was either $3.65 OR a volume weighted median of the price for five days, less a 2.5 per cent discount, so that's why they were issued at A$3.18 not $3.65 per share. The share price had fallen.

QF reports its 'preliminary final' results this Thursday, 20 August 2020 so we'll know then about accounting treatment of the A388s and many other fascinating issues that you mention.

One thing that's stood out in my mind is how QF sold its MEL (and IIRC correctly, some other) terminals back to the airports and now must lease them.

Probably a justifiable decision at the time, pre the pandemic, but from September QF has indicated it will again pay rent - I don't know what happens to the rent it declined to pay from around March 2020.

 

[serfty]

Retail SPP offer extended by two weeks but pretty much failed. Aimed to raise $500m+, however only brought in 15% of target or close to $71.7m @ $3.18.share << I admit I missed this last week. Anyone else notice it? >>

See post #142

 

[MEL_Traveller]

The government won’t be able to let the national airline go under, strategically, from a security point of view. The community will support this. They will follow all the overseas governments propping their national carriers up if required.

QFi, perhaps. QFd - not quite the same. We have alternatives... and should the taxpayer really be funding 15 minute frequencies MEL-SYD?

 

[Melburnian1]

QFi, perhaps. QFd - not quite the same. We have alternatives... and should the taxpayer really be funding 15 minute frequencies MEL-SYD?

Fair point, but politically, the Federal Govt will be obligated to "save" QFd/QFi should the need arise. I'm in the camp that says that'll happen.

 

[MEL_Traveller]

Fair point, but politically, the Federal Govt will be obligated to "save" QFd/QFi should the need arise. I'm in the camp that says that'll happen.

QFi already operates as a separate entity. There are regional airlines to provide essential services. We said good bye to Aussie car manufacturing, arguably more important to strategic/national security than having two airlines.

The key question would be whether the government needs to step in to provide a service that is already being offered by another entity (ie QFd vs Rex vs Alliance vs Virgin).

Not sure the public would agree to divert money away from social security, and health, to provide lounge services to the elite?

 

[Melburnian1]

QFi already operates as a separate entity. There are regional airlines to provide essential services. We said good bye to Aussie car manufacturing, arguably more important to strategic/national security than having two airlines.

The key question would be whether the government needs to step in to provide a service that is already being offered by another entity (ie QFd vs Rex vs Alliance vs Virgin).

Not sure the public would agree to divert money away from social security, and health, to provide lounge services to the elite?

Some of us may not regard it as so, but the community overall has a romantic attachment to QF (bearing in mind up until COVID-19 it had a c.65 per cent group share of all air passenger traffic on competitive domestic routes in Oz).

QF = icon.

That ZL competes against others hasn't stopped the Federal Government from providing much recent taxpayer assistance to it. ZL arguably romanticises its links to rural Australia even though you, MEL_Traveller, know that on a growing number of routes it has competition from QantasLink, such as SYD-OAG, and on some routes up until COVID-19 there were QantasLink and VAd/VARA in the mix (MEL - MQL was one, SYD - ABX another).

One can also drive and/or use NSWTrainLink or V/Line between SYD-OAG, SYD-ABX and MEL-MQL.

Time will tell, but I am doubtful that the Fed Govt will differentiate much if at all between QFi and QFd/QantasLink, bearing in mind each offers connections to the other(s).

If partial or full government ownership occurred, I assume shareholders would have to be bought out at an acceptable (to them) price.

With a degree of or total govt ownership, bureaucrats may be forced to maintain not just routes but excessive frequencies to destinations that may not always be profitable on every trip. SYD or MEL-LST might be one example. Tassie was allegedly unprofitable for VA (although granted, that alone is no proof this was also so for QFd).

 

[MEL_Traveller]

The problem with the government coming in to 'save' something like QFd is the potential effect on competition. Not something which would be good in the long term for Australians, or taxpayers. Under fair market competition, if self-funded QFd wants to offer business class lounges, that's fine. But hard to justify taxpayer funds for that.

Why should the govt buy out shareholders? let it go bankrupt and come in and buy it then. Not like the pilots, crew, planes or anything associated has anywhere else to go.

 

[RAM]

QF reports its 'preliminary final' results this Thursday, 20 August 2020 so we'll know then about accounting treatment of the A388s and many other fascinating issues that you mention.

One thing that's stood out in my mind is how QF sold its MEL (and IIRC correctly, some other) terminals back to the airports and now must lease them.

Probably a justifiable decision at the time, pre the pandemic, but from September QF has indicated it will again pay rent - I don't know what happens to the rent it declined to pay from around March 2020.

The 'preliminary final' will not cover most of the issues I raised other than the defined benefit super (actuarial requirement for lost asset value) & possibly the HelloWorld Travel. There will be much smoke and mirrors such as raising the liability (possibly) for impending redundancies but as they've not paid them out - it won't hit the current assets' balance.

The same with the plane valuations nor booking the long term storage/maintenance costs.

Ongoing I cannot see an easy way for Q to pay fully franked dividends for some years due to all the losses that have to be booked. Q no longer appears to have anything left on the BS to cash in to generate a taxable profit (to generate franking credits).

That is unless they try to sell part of QFF

The effective value of any Q dividend paid out (unfranked) is worth around 42% less in the shareholders' hands.

Say 7 cent fully franked dividend previously. That came with a 3 cent franking credit so was effectively worth 10 cents in pre-tax income, or 1.42 x the cash component.

Sale of Terminals

Q did not actually own terminals. The media (& many analysts) did report Q selling off terminals just in much the same way as the media have been reporting about the VA bondholders going to court etc. Not factually correct. Q sold off its terminal leases just like it is the unsecured VA bondholders . Subtle but important differences.

What they sold off (cashed out) were their long term leases. Their outstanding long term leases had a large 'value' (monthly cost-savings) built into them. Q sold them at a discount to the implicit value to create taxable profits which they duly paid tax on which then provided more cash together with franking credits to buy back shares.

Think of these long term leases along the lines of a Govt Bond which pays a fixed (or in Q's case an increasing) regular payment every so often. As interest rates fall the value of the bond increases. That's what happened with Q's long term terminal leases.

So Q terminated their long term leases early in exchange for a cash payout. Then they signed up for new long term leases in Sydney, Melbourne & elsewhere at amounts which made the various Airport owners more than happy to front up some cash to buyout the existing leases. The last one, Q was so keen to cash-out for north of a $100m payout - they did so within two years of the lease actually ending! It did make the Nov 2019 share buyback possible though.

Ongoing Q leases costs will have jumped by more than the value they were paid by the various airport owners. The airport owners are not known for their humanitarian nature - just look at car parking charges!

Melbourne:

The deal is part of a 10-year access agreement for Melbourne Airport's Terminal 1, where Qantas has been a tenant for 30 years.

and the other 'terminal sale':

In August 2015, Sydney Airport paid Qantas $535 million to buy back the airline’s lease over Terminal 3 at Mascot four years before the 30-year lease was due to expire. (So airport paid Q approx $3m/week for remaining lease period - makes you wonder what the extra lease cost is?)

The deal included Qantas retaining priority usage to Terminal 3 through to 30 June 2025.

And in February 2014, Brisbane Airport paid Qantas $112 million to purchase the lease over the northern end of the domestic terminal. The 31-year lease was due to expire at the end of calendar 2018.

Qantas still held the lease on the maintenance facilities at its Mascot jetbase.

Q selling these leases may have helped achieve short term targets but not good for ongoing operating costs. Of course these were all driven by what was in the best interests of Q & nothing else.

The proceeds of these long term leases sales were then used to fund a big component of the cash required for the share buybacks and provide the same relative amount of franking credits. Q's operating profits were not sufficient to fund anywhere near the 38% share buyback since 2014 through to 30 June 2019. Q's cupboard is now very bare.

For example the May 2019 Melbourne Terminal transaction caused a $276m profit, taxed at 30% would have generated around $83m of the just over $100m Franking Credits used for the Nov 2019 share buyback. Arguably without the Melbourne transaction then the Nov 2019 buyback would not have happened, or at least only 1/7th the size (available amount of franking credits)!

 

[RAM]

Some of us may not regard it as so, but the community overall has a romantic attachment to QF (bearing in mind up until COVID-19 it had a c.65 per cent group share of all air passenger traffic on competitive domestic routes in Oz).

QF = icon.

That ZL competes against others hasn't stopped the Federal Government from providing much recent taxpayer assistance to it. ZL arguably romanticises its links to rural Australia even though you, MEL_Traveller, know that on a growing number of routes it has competition from QantasLink, such as SYD-OAG, and on some routes up until COVID-19 there were QantasLink and VAd/VARA in the mix (MEL - MQL was one, SYD - ABX another).

One can also drive and/or use NSWTrainLink or V/Line between SYD-OAG, SYD-ABX and MEL-MQL.

Time will tell, but I am doubtful that the Fed Govt will differentiate much if at all between QFi and QFd/QantasLink, bearing in mind each offers connections to the other(s).

If partial or full government ownership occurred, I assume shareholders would have to be bought out at an acceptable (to them) price.

With a degree of or total govt ownership, bureaucrats may be forced to maintain not just routes but excessive frequencies to destinations that may not always be profitable on every trip. SYD or MEL-LST might be one example. Tassie was allegedly unprofitable for VA (although granted, that alone is no proof this was also so for QFd).

If the Govt bails out Q other than with existing share holders losing everything then it would risk being sued in a class action by ALL of VA's shareholders (including the foreign airlines), and they'd most likely be successful.

Equally, it could lead to other foreign National carriers serving Australia seek equal largesse from the Commonwealth Govt. After all given that Q ceased international passenger flights from early June (to save money) - hasn't it lost the ability to claim its the National Carrier - it is not carrying any Australians to/from Australia anymore is it?

Seems Q is only a fair-weather National Carrier.

As to the 'Australian public having a love affair with Qantas' - the same love affair with Holden, xx_X beer & Tooheys etc(now owned mostly by Japanese & other foreign investors), Vegemite, Myer saw them fail +/or be taken over by 100% foreign owners. A bit like the joke in the early 1990s;

A man walks into a bar in Noosa and asks how much for a xx_X?

280 Yen.​

Going into a Federal election in 2021 is not a good background to be bailing out the $24m man.

After all AJ did say back in March (April), the Govt has no place in bailing out a badly run airline.