So why does Qantas need $500 million or more now, even though earnings are weak and falling?
The airline, which yesterday chopped interim dividend by two third to just 6 cents a share, said the new money (and that to be raised from shareholders later on) would be used to:
- Support the fleet renewal program;
- Increase diversity of funding;
- Reduce net debt; and
- Support Qantas’ investment grade credit rating.
The airline did warn of a downgrade last November, but the result is at least in the black, unlike its one time merger partner, British Airways. The result was a profit down 68% in the December half year.
The result also showed Qantas’s net debt had blown out by $1.5billion in the 2008 calendar year while interest cover had fallen sharply. That could have seen its credit rating cut, increasing its costs.
Qantas said it planned to raise $500million through an institutional placement, with up to a further $100 million to come from small shareholders. The price could end up in the range of $1.80 to $1.95 offered to fund managers.
What made the timing even more curious is that CEO, Alan Joyce was overseas and wasn’t available to talk to the media until late yesterday. That seems odd when he should have been here doing a hard sell on local institutions.
Perhaps it’s also a feeling that it is easier now, in interim reporting time, with the likes of Westfield, Newcrest and Tabcorp, warming up the market, to be asking for an easy half bill, when it might get tougher in May, as the end of the financial year approaches.
The airline said in a hurriedly rushed out statement (because it was telling the institutions all about the plunge in earnings and dividend and had put them out after the shares fell by 6.5% non Monday as a bit of advance info got around the market) that:
"Qantas today announced a profit before tax of $288 million for the half-year to 31 December 2008, a 68.2 per cent decrease on the prior comparative period and reaffirmed its full year profit before tax (PBT) outlook of around $500 million for the 12 months to 30 June 2009.
(That’s down from the $1.4 billion in 2008).
"The Chairman of Qantas, Mr Leigh Clifford, said that while Qantas was affected by the global economic downturn and the volatility in currency and oil prices, the Group remained strong and profitable, benefiting from the structural flexibility of its two-brand strategy, its diversified portfolio of businesses, and prudent financial management.
“Our revenues have come under pressure, but through calibrating our network, stimulating demand through attractive pricing, maximising the performance of our diversified businesses, and restraining costs, we have achieved a very good result in challenging times,” he said"
The figures that the Qantas group, excluding Jetstar, dropped its PBT by 76.2% to $199 million in the six months even after including an $86 million profit from the sale of its Qantas Holidays wholesaling division.
Jetstar fared comparatively better. Its PBT for the period was down by only 48.2% to $72 million.
Qantas’ variable costs in aircraft operations increased 13.7% and the airline said these rose, "reflecting increases across all categories, particularly in engineering heavy maintenance as the Group focused on reducing maintenance backlogs and improving on-time performance".
In other words, the airline had to spend more because of all the bad publicity about poor maintenance and aircraft problems in the half year.
But other costs were a pain and up sharply (and the Aussie dollar fell 31% against the US dollar, adding to the cost woes).
"Total operating expenditure increased by 13.4 per cent or $802 million to $7.6 billion, excluding depreciation and non-cancellable operating lease rentals.
"This was higher than the impact of capacity growth and inflationary price rises.
"Employee related costs increased by $219 million or 12.7 per cent.
"Wage and salary increases, as well as recovery from industrial action, contributed to the increased costs.
"The reduction in long term bond rates has had an adverse impact on employee benefit provisions.
“Redundancy costs totalled $55 million, with approximately 1,000 managed redundancies affected or announced during the half year.
"Total fuel costs of $2.2 billion for the half-year were $486 million, or 28.5 per cent, higher than the previous half-year.
"The underlying into-plane fuel price was 40 per cent higher, increasing costs by $536 million.
“Hedging benefits reduced the impact of higher market fuel prices by $179 million, resulting in a net fuel price increase of $357 million.
"Unfavourable foreign exchange rate movements increased fuel costs by $151 million.
“Fuel costs would have been $38 million higher had it not been for fuel conservation initiatives delivered under Sustainable Future Program."
The airline is in a cost bind: Revenue rose just 1.7% to $7.9 billion, an increase of $134 million on the prior half-year.
Net passenger revenue including fuel surcharge recoveries decreased $45 million or 0.7% to $ $6.4 billion.
Revenue from other categories increased by $179 million to $1.5 billion, primarily reflecting improvements in Frequent Flyer and Freight revenue as well as the profit on sale of Qantas Holidays.
And finally, it might have been a tough half year and Qantas is under pressure, but just imagine is it had traded through that half with $11.1 billion in debt from the takeover by the Macquarie Bank and management led buyout group, wi
