Qantas stuck on the tarmac in pandemic recovery journey

Qantas boss Alan Joyce made a typical boast this week: that his airline was in a better position than any other in the world to recover from the COVID-19 pandemic.

If true, it’s a case of being the best in a bad bunch. Just a day earlier, the peak body representing airlines globally warned that the industry remained in a “perilous” position.

Forward bookings for February and March are still down 80 per cent, more airlines are set to collapse and passenger numbers are not set to recover to 2019 levels until 2023, the International Air Transport Association said.

Qantas shut down its international operations and cut its domestic flying to just 5 per cent of normal levels when the crisis struck last year.

Australia’s almost unparalleled success in stopping the spread of coronavirus should have set the country’s biggest airline up for a rapid return to the skies. But the mammoth task of repairing its finances is facing severe delays, as state governments continue to slam their borders shut at the first sign of any COVID-19 outbreak.

Qantas is also rebuilding itself in a dramatically different landscape. Its main rival Virgin Australia has been revived from administration and reshaped as a leaner and meaner competitor with the backing of private equity giant Bain Capital, while country carrier Regional Express is trying to muscle in on the lucrative capital city market.

Investors also appear to be realising that Qantas’ recovery will take longer than previously expected. Its ASX-listed shares have fallen 15 per cent since late November.

The stock, trading at $4.80 on Friday, has recovered from $2.14 in March when COVID-19 put markets in a tailspin. Despite that boost, its shares remain down 30 per cent from a year ago compared to a decline of only 4.6 per cent across the benchmark ASX200 index.

Joyce told a Reuters event on Wednesday that the Sydney northern beaches outbreak before Christmas, which prompted all other states to block travellers from Greater Sydney, set Qantas’ recovery back by three months.

The group had planned to be flying at 80 per cent of its pre-COVID domestic capacity in the first three months of this year, but Joyce said it will now only be flying at 60 per cent.

Joyce also told the event he still hoped to hit 80 per cent in the June quarter this year but acknowledged the situation remained “volatile”, and hit out at the states’ “inconsistent” border policies.

“We have to wait to see what happens with the borders – we’re still waiting for Sydney to open up to states like Victoria and Queensland,” he said.

Sondal Bensan, an analyst at Pendal Group, Qantas’ largest shareholder, says the airline’s short-term fate is effectively out of its control.

It finds itself at the mercy of state governments deciding when to open and close borders, and its outlook hinges even more critically on how quickly Australia can roll out COVID-19 vaccines.

“There’s still the opportunity to get the full domestic schedule back up before the vaccine is rolled out, but the risk of panic border closures will remain,” Bensan says. “Vaccinating and getting herd immunity will be the key turning point”.

There’s a human cost to the delayed recovery too. Around Qantas 13,500 staff remain stood down from work and receiving JobKeeper payments, which are set to expire in March. Qantas has announced 8,500 redundancies – almost a third of its workforce – since the pandemic hit, part of a cost cutting drive designed to save $15 billion over three years and lower its annual cost base by $1 billion after that.

Qantas quickly raised $1.4 billion in fresh equity and $2.7 billion of new debt early in the pandemic to ensure it had sufficient liquidity to survive a long shut down of its operations.

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After burning around $40 million a week during the depth of the crisis, Joyce reaffirmed his view that Qantas should stop bleeding cash in the first half of this year (excluding redundancy payments) provided borders are reopened. That will allow it to start paying down its $5.9 billion debt pile.

The group expects a $11 billion drop in revenue this year and is heading for another substantial statutory loss this year after ending 2020 $1.9 billion in the red. Despite this horror forecast, Joyce is optimistic Qantas can still break even this financial year on an underlying level (a measure which strips out one-off costs).

Andrew Peros, the deputy head of equities research at Ausbil Investment Management, which owns about $14 million worth of Qantas shares, said the stop-start recovery was “not ideal”.

“However, Qantas has a high degree of flexibility in its scheduling and fleet to move aircraft around and partly mitigate the impact,” he said. “The profit recovery and balance sheet repair story gets pushed out, but this is just a timing issue.”

While Qantas’ finances are in the worst shape since 2015, Peros said its balance sheet risk has reduced materially since the vaccine roll-out was brought forward and it had more than enough cash to survive until herd immunity was achieved.

There have been positive signs whenever borders have reopened, with Australians rushing to book tickets to visit friends and family after spending most of 2020 separated.

Qantas was set to be flying at 70 per cent capacity at Christmas but that fell to 60 per cent after the Sydney cluster threw travel plans into disarray for tens of thousands of people in what could be a cautionary lesson for many.

You probably need a good two or three months of zero new cases for that confidence to come back into air travel.

Aviation consultant Tony Webber

Qantas’ domestic business generates two-thirds of its profits, while its profitable frequent flyer business and freight arms have continued to deliver earnings throughout the crisis.

Tourism will be the main driver of the recovery, Joyce said this week, with hopes many off the 11 million Australians who normally travel abroad every year will holiday at home.

That means Qantas’ budget arm Jetstar will be coming back to full capacity much faster than its full-service “red-tail” jets. And Joyce acknowledged for the first time that video conferencing, which has become ubiquitous during the pandemic, would take a bite out of travel demand from Qantas’ lucrative business travellers.

Tony Webber, an aviation consultant and former chief economist at Qantas, said the rush of bookings pre-Christmas may not continue because of the snap state border closures. More damaging than the loss of ticket revenue, Webber said this had destroyed the public’s confidence in booking any travel in the future.

There are around 70,000 Victorians stuck in NSW and trying to return home after the state enforced a hard border in response to the Sydney outbreak.

“The second we get an outbreak the borders are closed and there’s either a mad dash to get home, and if you can’t get home you’re stuck,” Webber said.

“You probably need a good two or three months of zero new cases for that confidence to come back into air travel. That will be a deeper impact, I think, on Qantas’ domestic profits.”

The outlook for international travel is even more uncertain. Qantas’ entire international network is suspended beyond New Zealand and a handful of government funded long-haul repatriation flights.

Qantas has now reopened bookings on most of its international network from July 1 in the belief that the rollout of vaccines will make it possible for people to travel overseas again.

That move prompted a firm reminder from Deputy Prime Minister and Transport Minister Michael McCormack last week that the government would only lift its ban on citizens leaving the country when it was safe to do so.

There had previously been a hope that Australians could start travelling overseas once they were immunised, armed with a “vaccine passport”.

But Joyce agreed this week with leading epidemiologists who say the fact vaccinated travellers might still catch COVID-19 and bring it home and spark a new outbreak means Australia needs to achieve herd immunity before international travel can resume safely.

With Australia’s vaccine rollout not set to finish until October, Joyce acknowledged that its July start date for international flights could change but said it was “still our hope”.

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Qantas has parked all 12 of its Airbus A380 superjumbos in the Californian desert until 2023, which is how long it thinks it will take for international demand to recover to 2019 levels.

Even when quarantine-free travel between countries is possible, international travel will be severely challenged in 2021.

The well-respected aviation industry intelligence firm CAPA-Centre for Aviation this week forecast that the number of corporate travellers – who fill airlines’ money-making business class cabins and underpin the economics of long-haul flying – will be perhaps 50 per cent lower in the second half of 2021 compared to pre-COVID.

“Most trunk routes will not be commercially viable,” CAPA chairman Peter Harbison said.

Pendal’s Bensan says Qantas opening up international ticket sales, which are typically booked six months in advance, will help reverse the flow of working capital that gushed out of its coffers when it was hit by an avalanche of refund requests early in the pandemic. This was a more important measure than profitability for the next two years, as it was key to it repairing its balance sheet.

“If you look at it on balance from six months ago, realistically the domestic situation has gotten a little bit worse with the domestic COVID cases,” he says. “But the offsetting component of that from a liquidity point of view is that the time frame for international travel has been pulled forward a lot.”

Qantas’ will also be contending with a very different domestic market than before the pandemic.

Virgin has stripped its domestic fleet back from around 80 jets to just 56 Boeing 737s after it collapsed into administration in April as the pandemic hit, and has repositioned itself in the middle of the market.

This may allow Qantas to become even more dominant in the lucrative corporate travel sector. But Virgin says it is now a serious player in that market after an extensive restructure under the leadership of former Jetstar boss Jayne Hrdlicka and with the deep-pocketed backing of Bain Capital.

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Meanwhile, country airline Regional Express’ bold move to launch jet services between Sydney and Melbourne in March, to be followed by other capital cities, is predicted to trigger a new airfare war between the three groups.

Joyce this week predicted only two of the three airlines would remain standing in the long term – and Qantas would be one of them. But some company watchers believe Rex’s entry and a revived and restructured Virgin will cause serious headaches for Qantas.

Credit Suisse analyst Paul Butler thinks Bain will do a better job at running the perpetually loss making Virgin and will be able to take a bigger share of the domestic profit pool, while Rex’s entry will chip away at Qantas’ market share.

With Qantas’ balance sheet in its worst condition in five years and international travel being grounded for at least another six months, it was “perplexing” why Qantas’ average annual market cap remained at an all-time high, Butler told clients in a note last month.

Qantas’ market value is currently sitting at around ten times its book value, he said, which was an “extreme all-time high” compared to its 25 year average of 1.6 times.

Joyce, already in the top job for 12 years, committed last year to sticking with the carrier until at least 2023 to steer it through its unprecedented crisis. For all his confidence, a smooth touchdown is far from guaranteed.