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Qantas focused on repair and recovery

Qantas provided a comprehensive business update this week, with Australia's national airline noting it is focused on the repair and recovery of the company.

While progress on vaccines is providing confidence that the worst of the COVID-19 crisis has passed, Qantas intends to maintain strong liquidity to protect against additional, unexpected shocks. At 30 November 2020, Qantas had $3.6 billion in available liquidity, which is to be increased by another $500 million before 31 December. Net debt has risen to $5.9 billion, although there are no material debts maturing until April 2022 and no financial covenants on the group’s debt. Qantas remains one of only a handful of airlines in the world to retain an investment-grade credit rating through the pandemic.

Qantas expects to start repairing its balance sheet during the second half of FY21, as the impact of domestic borders re-opening, progress on cost reduction programs and the continued strong performance of Loyalty and Freight divisions help it move into recovery mode.

While the group will post a substantial statutory loss for FY21, it expects to be close to break even at the Underlying EBITDA level for the first half and net free cash flow positive (excluding redundancies) in the second half – allowing the repair process to begin. This assumes no material domestic border closures. It also assumes no material international travel until at least the end of June 2021 beyond an increase in Trans Tasman flying to New Zealand, although this could improve depending on the speed of vaccines rolling out.

Qantas announced a recovery plan in June this year, which is now on track to deliver $600 million in structural cost benefits in FY21, and tipped to reach at least $1 billion in annual cost improvements from FY23 onwards. Part of this included a review of Qantas’ ground handling operations, with a decision made to outsource the remainder of this function and deliver savings of $100 million a year. Combined with changes at Jetstar, has resulted in 8,500 job losses across the group due to COVID.

Group Domestic capacity continues to increase, rising to nearly 80 per cent of pre-COVID levels for the third quarter. Changes in the broader domestic market have seen a number of large corporate customers move to Qantas this year, a trend that has accelerated in the past few months. Qantas continues to work with travel agencies to reduce its selling costs while also creating better selling opportunities for these important partners. New multi-year agreements have so far been finalised with 10 of the top 12 agencies.

International operations remain largely grounded, with the exceptions being ongoing repatriation services and a limited number of flights to New Zealand under a one-way bubble arrangement. In October, Qantas restarted repatriation flights from India, South Africa and the United Kingdom, bringing the total number of these services run on behalf of the Australian Government to almost 150 since the start of the pandemic. A further 24 flights, operated by its fleet of 787 Dreamliners, are planned in December and January, including direct services from France and Germany. Additional services are expected as quarantine capacity becomes available.

Qantas Freight continues to perform well due to the spike in e-commerce volumes across its domestic freighter network and higher yields on the international freighter network. Additional services have been added between Los Angeles, Sydney and Hong Kong and several passenger aircraft are currently being operated as freighters to provide more capacity. Qantas Freight is also doing preliminary work on logistics for transporting COVID-19 vaccines at cold temperatures.

Qantas Loyalty has shown a high level of resilience and continues to generate cash flow. Financial services and retail partners were the two main earnings drivers, followed by Loyalty’s own ventures.

Qantas Group CEO Alan Joyce said:

“We’ve seen a vast improvement in trading conditions over the past month as many more people are finally able to travel domestically again.

“There’s been a rush of bookings as each border restriction lifted, showing that there’s plenty of latent travel demand across both the leisure and business sectors.

“Bringing domestic capacity back to almost 70 per cent in December is very positive compared to where we’ve been.

“It’s unclear what shape the domestic economy will be in next year, particularly once broader government support winds back. Until a vaccine is rolled out, the risk of more outbreaks remains.

“International travel is likely to be at a virtual standstill until at least July next year and it will take years to fully recover, which means we’re carrying the overhead for billions of dollars worth of aircraft in the meantime. We’re also facing a revenue drop of at least $11 billion this financial year alone compared to preCOVID.

“Overall, we’re optimistic about the recovery but we’re also cautious given the various unknowns.

“That’s why we remain focused on delivering on our recovery program, which unfortunately involves following through on some hard decisions.

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