The Great Turnaround
 

Another Qantas PR scoop from Ticky Fullerton in today’s Australian.

Hark! Everyone. Alan Joyce at Qantas has driven the turnaround of the decade.
He had to ground an airline globally to do it, for which he could have been fired.
Instead backed by his board, his strategy reset the airline on a path to profit and he led the legalisation of same-sex marriage, so important for many of his employees:a true captain of industry.

Gee, I miss The Truth newspaper!

Wonder were Ticky sits when she travels on Qantas?

Wouldn't be towards the back. Don't recall seeing her in the Oz before?

Isn't there some kind of cleanout er talent realignment going on at the Eye Bee Cee.

CC

Ticky is marrying the Australian Financial Review's Editor in Chief:
Michael Stutchbury and Ticky Fullerton to wed

'Transformation' equaled

Fuel down AUD$597 million
Depreciation down AUD$326 million

Deep diving investigative journalists are a thing of the past, Chairman's lounge and upgrades are nothing more than 'comfort for comment' As Leigh says, who is in the club is secret, most bribes are in paper bags..

As for the Australian its subscription base equals its quality: You can't give them away in boarding lounges these days

How can depreciation be down? Don't they mean it's just being amortized over a longer period? Or have they fully depreciated what should be an aging fleet or have they disposed of a about a billion bucks worth of assets? Accountants....

Just spending the inheritance kids. The only difference is, in the financial world, they call it a turnaround.

Different airlines use different schedules, mostly straight line with varied terms. Cathay Pacific use 20 years from memory and 25 for freighters, Singapore 15 years, both to 10% residual value.

Qantas are the same 10-20 years between the various aircraft.

Amazingly a write down is subject to management timing and discretion: A little nudge to auditors and 'oh the book value is too high compared to the second hard market' and the write down gets done...

Ever wonder why Mr. Joyce predicted exactly when Qantas mainline was to be profitable again? Not only did his bonus depend on it, the timing was his to start with...

Exactly...will be good for share price in the interim and the CEO gets
paid or bonuses upon...the creation of share holder value and you don't see them complaining since the shares were at rock bottom do you?

I would beg to differ on whether a changed book value is equivalent to shareholder value creation.

'Rock bottom' may in fact relate to an industrial campaign, grounding lockout and 'transformation' i didn't ever say they weren't audacious, but revenue has declined in real terms and even after 10 years Qantas still lags its peers in most metrics of financial performance; with the exception of executive remuneration.

Rated de. I actually welcome your perspective. Across numerous threads you keep it civil and factual and encourage intellectual thought and input, no matter what respective positions we take.
Without being a protagonist, would QF have survived in its current form without the CEO?
Aviation and publicly listed companies can't please everyone, but without shareholders and investors, what would be left?

Without customers, what would be left.

Qantas has survived despite its CEO not because of it.

In fact, that could be said for the previous CEO as well.

Corporate parasites the lot of them.

I suspect had the APA buyout proceeded, fees would have been extracted, the Frequent Flyer business ( Dixon segmented this in 2004 from memory...wonder why?) spun off to reduce the debt load and the various (including 'management') parasites would have jumped well before the short term debt load was refinanced at significantly higher rates. My best guess is the business would have not had sufficient remaining cash flow to carry the higher debt burden.

In real terms since the little fella got to play in the sand box, Qantas revenue have declined in real terms.The group revenue in FY10 was $13.7 billion, in FY17 was $16.1 billion. Adjusted for inflation this a real decline. Other peer airlines over the corresponding period have not exhibited the same 'amazing' performance.

• Turnaround achieved with same fleet, same contracts.
• JQ fleet grew from 36 aircraft to around 120 now
• Substantial decline in Qantas tailed flying, net reduction in hulls.
• One 787

Most of the 'transformation' is a decrease in fuel expense, which given the fleet metrics (lots of 747, A380) means a corresponding drop is a larger order of magnitude reduction for Qantas than say Air New Zealand (who gave up B747 a number of years ago) The other big contributor was a reduced depreciation non cash charge. The biggest loss overseen by Qantas of $2.8 billion was mostly the fleet write down, This write down panicked labour unions to sign pay freezes. Amazingly as soon as that ink was dry the business spectacularly recovered...







Whilst Mr Joyce is a very wealthy man and lacks no audacity, my personal opinion is that someone of his humble origins could have embarked on a different path, he chose the adversarial model, something many voices in his ear tell him is necessary. Airlines are people business. I say it having worked for them and analysed them for many years. To airline management, the people are reduced to units of cost.

There are exceptions to this model, I chuckle when Qantas conveniently ignores an airline of far better performance just a few hours away in New Zealand.Led by capable people and also a cornerstone of its management under Rob Fyfe was a genuine affinity for staff, such that he personally would spend a day a month out there, working in various areas.

My suspicion is Mr Joyce would likely go no where without his security detail, whisked into an underground car park and home to his security laden building. Sad really.

Massive Accounting write down of fleet.
Close to zero new aircraft introduced or actually flown in the Qantas fleet.
Massive drop in global fuel prices giving advantage to the airlines that had older fleets and spent less CAPEX(No new planes purchased or operating).

What a stunning transformation.
Steve Bradbury won gold. Doesn't make him a fine ice Skater.

It always amazed me that not one journalist ever read financial statements and asked any probing questions. It is from publicly available information that any half competent financial journalist would see that not only did fuel save them but management discretion on depreciation juiced the numbers...

I suspect that most journalists are upgraded with their family and in some instances, perhaps like Ms Fullerton invited into the Chairman's lounge with an opacity that even hard core criminals would applaud, so that they quietly sings the praises of an audacious IR campaign with many losers, but ultimately very few winners.

You will need to get a new chairman if you want a new leader without Alan’s blood. The next chief will be orchestrated by the man himself and Alan will no doubt stay on board as a ‘advisor’ to make sure the ship sails how he wants it to when he leaves it.

One of the worst leaders a business could have. Not one to look up to by the employees which is paramount.

Leigh Clifford is the apex of the problem. A self proclaimed industrial warrior, he took personal delight in the Rio Tinto dispute, guard dogs lock out and all. As connections of mine have listened to him at numerous corporate functions, he is neither a a high intellect nor a leader. A CEO friend was not complimentary when explaining his language, grammar nor manners.

The picture painted had me thinking of this guy...

https://s14-eu5.ixquick.com/cgi-bin/...b24f8b50533eb5

Bit rough, for sure he wasn't a favourite, but he still had to make the olympic final in the first place.

Steve Bradbury
 

Kiwiconehead is correct. Steve Bradbury had several bad accidents and took 12 years of training and Competitions before he won that race, it wasn't all a walk in the Park to get in the finals in the first place.
Sure the rest fell but that was his good luck to be upright and manage to win the race.

Interestingly he only made it to the final because the 2nd placed skater in the quarter-final was disqualified. Then in the semi-final the 3 skaters ahead of him crashed out allowing him through to the final where luck was once again on his side.

“Luck can be defined as when preparation meets opportunity.” Always liked that quote.

I like it too. At the end of the day a whole lot of dudes trained and tried their best to get around the track first. He succeeded. Not crashing is pretty important.

Rated De.
Indeed,NZ has done well (however the new government is going to make a dent in that with wider policies). Also not far away FJ is doing well, in fact should be contributing to QF's results as they are a major shareholder.
Role of the CEO and MD
AJ does not act in isolation.
To think he is solely responsible would be naive.
Whilst unionisation has had success and failure in Australian industrial relations, as a Kiwi that endured nz rail holding the country to ransom every school holidays, are unions pro or anti business?
What is the role of a union in a global (aviation) market and publicly listed company?
For the dislikers, AJs bag of tricks is nearly empty. Everything is a cycle. The terms of the current Board will expire. AJ will move on. But when that happens where to next for QF?
If a 'corporate raider' snapped up a majority of shares 6 years ago what do you think they would have done to QF to drive a return on investment?

Funny, nobody mentioned the group-wide pay freeze.

I have given this a great deal of thought. Whilst I am certainly not inside the Qantas tent, I offer an opinion, but probably a plausible view of many of the functions and offer an alternative path.
I would consider board composition to be a valuable insight into intentions. The Qantas board has more than a smattering of Freehills lawyers. Those lawyers are industrial in posture and advise many of the same corporates. Chris Corrigan was a great mate of James Strong at Qantas. Leigh Clifford knows rocks pretty well, is fiercely anti-union. Freehills advised Chris Corrigan at Patrick Stevedores. Correlation is not causation, Maybe a new Fair Work Act had provisions that changed the balance between labour and management, perhaps a plan was in the making when Mr Joyce got the nod to re-establish the status quo promised under Work Choices.

Mr Joyce possesses mathematical prowess, but that discipline is not necessarily optimal where dynamic complexity of airlines render models obsolete. Mr Joyce may be better suited to assessing decisions. I recall an interview where Leigh Clifford commented that Mr Joyce knew the’ cost down to a paperclip’ whilst that is an impressive talent and to someone with little aviation knowledge, like Mr Clifford may seem a fantastic choice, it ignores the fact that airlines are dynamic and models are just approximations.

I suspect that in 2011, with three big enterprise agreements up for negotiation, the stage was set. Qantas International was said to be in ‘terminal decline’ Lucinda Holdforth worked on her speech and the management worked on Project ‘whatever’ setting the scene with Freehills. Salivating at the prospect to test the Fair Work Act . Clipping the wings of Qantas international would mean stepping around the Sale Act, and growing Jetstar was a pet project for Mr Joyce. How would Qantas convince the community to accept JQ at the expense of Qantas, if Qantas wasn’t terminal?

To my mind, the supposition that Mr Joyce organised it all on a Saturday morning is as implausible as Tesla living on Mars in 2020. Why was Ms Holdforth gagged? Did she actually work on that speech for months?

I consider the role of unions to be partners of the company with which they work. I do not know of one airline pilot that wished to leave an airline they proudly worked for; most airline pilots want only one employer. I would hazard a guess that most engineers, starting as apprentices would feel the same; the ones I know do. Are Qantas unions destructive? I am not persuaded specialist unions are. Whether they are well led is another question. The trick for labour unions is to abandon their world view. Ironically the same challenge Qantas faces.

As detailed in the Southwest Way, one manager said ‘we have our disagreements, but ultimately we realise the unions are invested in the business, so we remember to disagree but we have an empathy and maintain respect.’ (I paraphrase) This view is simply not supported by Qantas. There is too much adversarial infrastructure supporting the posture for that to ever change. Sadly those who promote the conflict and distrust also profit from it. Mr Joyce from humble beginnings in Ireland at the edge of the tenements would have understood the value of community, Survival in those times depended upon it. People needed people and airlines are a big team sport. Former Qantas Chief Pilot Chris Manning alluded to this opportunity when quoted by Matt O’Sullivan in the lightweight read ‘May Day’ Mr Joyce is a very wealthy man, and he chose another path. The environment at Ryanair secures lower labour unit cost but also much lower productivity than Southwest.
Qantas may count the grounding and lockout, the pay freezes and job losses as efficiency dividend, I guess if you look at a spread sheet, people aren’t important. The bag of tricks is empty.

Mr Joyce and Clifford should have left when they broke the employees, that trust once spent isn’t recovered.

What could have been done is an easy question: We have 20/20 hindsight. However recognising the role of staff, which is beyond money, required a CEO to abandon that adversarial staff model. It needed a big man and to my mind it isn’t Mr Joyce. With board acquiesce, or directive he did what he did. On the way he got wealthy, but I would expect most of the staff have no desire to embrace him like they did Herb Kelleher. Had the 14 788 came to Qantas as originally proposed, instead of JQ, mainline domestic would have had a great product differential compared to VAH. I see a complimentary role for JQ, many managers in Qantas saw it as the answer. Reducing their fuel included CASK with a long range twin was a no brainer. Yet without it, same contract same fleet and Qantas is ‘transformed’. Insiders got rich along the way. Qantas gets its first 787 when the LN was 615. Hardly forward thinking, game changing or insightful. All pilots know that, but perhaps running an industrial campaign was what Clifford wanted, he got his man with Mr Joyce. It may have been different.

Steve Bradbury was tipped for a medal 4 years earlier.
He fell over.... guess he learnt from his mistake

a corporate raider would have sold off every division they could make money out of and trousered the lot. Step 2 is to load the company up to its eyeballs in debt, float the company back onto the exchange selling the shares at hugely inflated shares and trousering the the rest after maybe a year or so in private hands.
When the proverbial hit the fan they'd be long gone (sop for foreign restructures).... Indamiddle

I alluded to this earlier. A private equity play would do just that; pay themselves off, asset strip, refinance, float and run! My connections at the Silver doughnut let slip that ultimately it mattered little what happened as the public were on the hook anyway, national interest and all that!

• The Frequent Flyer business was segmented by Mr Dixon in 2004,

My suspicion is that although the liability for a Frequent Flyer business is in the airline seats, sold off to another 'investor' the loss was borne elsewhere, should the airline collapse

• APA consortium use the money from this sale (FF) to pay themselves out, further reducing their exposure.
• The covenants on the short term debt would likely have required refinancing within twelve months or so.
• Debt load increases as new debt is higher priced
• Cash flow demands are higher to service debt load.
• Business 'management' chainsaw workers conditions
• A chopped down version refloated
• They all run away with wheel barrows full of money.

Sitting on the outside of this transaction is hard to gauge the debt load and cash flow projection. Suffice to say any negative impact on cash flow, say like a GFC may have destroyed the company.



As they are fond of saying in private equity '
Privatise the profit and socialise the loss'

In other words "The Assets go Private and the Debt goes Public"

From my Broker's Newsletter:
Qantas Airway's short term (1 year) commitments are greater than its holding of cash and other short term assets
Qantas Airway's long term commitments exceed its cash and other short term assets

In other words it is cash flow that is servicing debt.

Maybe that is why Mr Clifford is asking the Government to lift the ownership limits!

According to my calculations the Debt to Debt plus Equity is now at 75% which is the highest it has ever been.

According to the CASA website Qantas is buying A320s at a rapid rate before the Accounting changes kick in.

IFRS 16 is making big waves in many transport oriented companies.

It is exactly why Qantas is bringing the aircraft on balance sheet.

To students of airline finance, it is really interesting the structure of the so called 'Low Cost Carrier' versus the more traditional approach.

Depreciation comes out before a net profit is declared. If you only lease a fleet and don't need to depreciate it, before this change you had the asset value on balance sheet (if you so chose) without the pesky debt associated with ownership...

Perhaps the tide has gone out on the shell game?

Any analyst/ investor worth their salt in airlines always effectively brought leases back on balance sheet anyway. (same with the big retailers who often have long term leases)

You'd compare airlines on a pre-lease basis using
MCap + Debt + PV leases (or 8x shortcut) / EBITDAL (where the L is leases).

Note that the Lease Payment consists of both an Interest Component (as someone else is financing the purchase) and a Depreciation Component (as that asset becomes less valuable through age and use)

--

The share price is also now down almost 25% from its $6.40 highs in October, although I suspect this is mostly driven by jet fuel and a general global sentiment that the recent high profitability of airlines will turn (combination of fuel up and greater competition)

Or the smartest guys in the room have run out of company funds to buy back more company shares to boost the P/E ratio now that their latest share options have vested ! :sad:

Bradbury has stated that he realised he wasn't as quick as the other 4, so his tactic was to hang back and see if a couple fell by the wayside (quite common in speed skating) and he would get a podium finish - pretty smart tactics if you asked me. The bonus for him was all 4 fell over and he won gold.

This



Perhaps Delta airlines thinks differently...



Yep the smartest guys in the room....

Stupid metrics.

I daresay most peoples mortgage is greater than cash on hand.

The amount of debt you can have is measured according to your income, Debt/EBITDA or Interest Cover ratios

Thanks for the insight moa999.

Qantas uses selective metrics to weave fanciful tales of JQ..Nothing wrong of course with Qantas buying the aircraft and leasing to JQ The interesting quesiton is what JQ pay for the leases..Again Qantas can do what it likes, however to use it industrially (if the leases as mate's rates) is disingenuous. .No depreciation helps a lot carry the narrative when the depreciation sits almost entirely in the Qantas segment; an important distinction when comparing use and control of assets.

The stunning 'transformation turn around' consisted of when I read the P and L:

• Fuel down $597 million (due lower fuel prices)
• Depreciation down $326 million (bought about by fleet impairment the previous FY)
• A few sundry items

There is the stunning turn around 'profit', anything i missed moa999?

'

Although off topic a bit what is not talked about is the urgent need to upgrade the fleet.
12 A380s probably Max another 8 years
10 747s passed their used by date IMO max 8 years
28 A330s I don’t know what their use by date is but suspect some must be close to it.
73 737s I suspect the oldest of these are close to retirement.

All in all a lot of new Aircraft are needed, the reality is they are desperately short of wide body Aircraft both for domestic use and to reduce utilisation internationally and try and get some reliability back in the system. Currently it is a shambles. IMO the place at the moment is a house of cards going from one crisis to another every day. Breakdowns, no Captains, no FOs, staff flogged Aircraft flogged , customers treated appallingly.

Sounds like someone hasn’t been reading their weekly Friday flyer. It’s all good remember?

Dragon man, jetlikespeeds is quite correct,

Please head to The Street at QCC, find the Coolaid dispenser and drink liberally from it until you see the light. We have the youngest fleet of any airline and always use "the right aircraft for the right route". This is why our CEO is the highest paid of any airline in the region (world??)