Compliments of the financial press, see below the views of Stephen Bartholomeusz
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In the context of the industry it operates within, the ability of Qantas to post a solidly profitable result in the December half and confirm a full-year profit of about $500 million is a remarkable achievement.
Around the globe, airlines have been toppling like dominos and most of the survivors are awash with red ink. Aviation’s peak body, International Air Transport Association, has said that the industry lost about $US5 billion last year and has forecast losses of another $US2.5 billion this year.
Gyrating fuel prices, wild currency fluctuations, the impact of the global financial crisis and the ensuing steep decline in all the major economies have buffeted a sector that has leveraged exposures to all those influences.
Qantas wasn’t, and couldn’t, be immune to them. Its international and premium businesses have been hit hard by the economic downturn. Its dominance of the domestic market and the relative resilience of Jetstar, with its positioning at the more price-sensitive end of the market have, however, kept it in the black.
A $288 million profit, $2.8 billion in cash reserves and moderate gearing is testimony to the group’s operational flexibility and cost disciplines.
The two brand strategy, the ability to switch off capacity or redeploy it between the Qantas and Jetstar brands and/or between its domestic and international operations has been validated by the testing conditions. As has the diversity of its earnings base.
Despite coming through a period in which oil prices have peaked at more than $US140 a barrel – even with its hedging Qantas experienced a net increase in its fuel costs of $357 million – Qantas has decided to take out some insurance by raising more than $500 million of new equity through an underwritten share placement and a non-underwritten share purchase plan
There are two reasons for raising capital at this moment, despite the badly depressed share price.
One is the more general motivation that is driving companies to ignore the impact of issuing equity in the current market. Companies are raising capital when they can because of the extent of the uncertainty about the future, to reduce the threat posed by volatile credit markets and the risk that battered international banks won’t be prepared or won't be able to refinance maturing debt.
The other, specific to Qantas, is to protect its investment grade credit rating. Qantas is in the midst of a massive fleet modernisation program. Its credit rating is vital to its ability to maintain that program, which is crucial because of the age of its existing fleet and because it will enable a structural reduction in costs
Apart from the Middle Eastern carriers, there would be very few major airlines able to sustain big capital expenditure programs in the current environment.
Qantas’ profitability, its balance sheet and its ability to raise capital to invest counter-cyclically ought to strengthen its competitive position significantly when conditions eventually improve. In that sense it is in an analogous position, relative to its sector, to BHP Billiton.
While Qantas’ flirtation with a merger with British Airways came to nothing, which is probably a good thing given BA’s condition. In the future, Qantas' financial strength and operational flexibility should also give it greater leverage in any further attempt to participate in what is regarded as the inevitable consolidation of the global industry.