FIIG Research
Qantas Airways Ltd
4 September 2014
Qantas Airways Ltd
Key financials ($m)
Executive summary
FY13
Revenue
EBITDA






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

Qantas was founded in 1920 and has grown to become Australia’s
largest domestic and international airline. Whilst the key business
remains the transport of airline passengers, the group has grown to
include a number of complementary segments: Qantas Domestic,
Qantas International, Qantas Freight, Jetstar and Qantas Loyalty
(Frequent Flyer)
Qantas retains a dominant position in the Australian domestic
airline sector with a market share of circa 65% through its Qantas
and Jetstar brands
The company has adopted a dual branding strategy between
Qantas, which offers a full cost service and Jetstar, its low cost
carrier airline which has driven significant growth over recent years
including its international expansion
The successful differentiation allows Qantas to hold the largest
market share in both the business and low cost ends of the
Australian market simultaneously however the group has come
under increasing pressure from its key competitor domestically,
Virgin, and increased competition on international routes
The company announced a significant cost cutting program at the
same time as delivering its 1H14 results, reflecting the increasingly
challenging nature of the airline industry. Total savings of $2bn over
three years have been flagged by management
With $3.0bn in cash and a further $630m in available facilities
Qantas maintains a very strong liquidity position. Its ability to defer
significant capital expenditure can also provide further capacity over
the short term
The company has pursued a significant expansion program in Asia
through its Jetstar brand and is now the largest low cost carrier in
the Asia-Pacific region. With the recent poor result this expansion
will be slowed, freeing up cash flow
Qantas was downgraded by the rating agencies to sub-investment
grade at the beginning of the year. According to the rating agencies,
the downgrade reflected a worse than expected impact on Qantas’
credit profile of a deterioration in the company’s core domestic
business
Despite the downgrade, Qantas was able to issue the first subinvestment grade bond in the domestic market in May and June,
reflecting both the continuing quality of the Qantas name as well as
the buoyancy being experienced in credit markets in 2014

Approximately 70% of Qantas’ total debt is senior secured debt.
Certain aircraft and engines act as security against related
financings

The nature of the airline industry presents a risk for bond holders
due to it being cyclical, competitive, capital intensive and exposed
to the cost of jet fuel and significant foreign currency exposure
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FY14 FY15e FY16e
15,902 15,352 15,561 16,020
1,990
1,042
1,488
1,882
5
-2,843
-20.0
298.1
3,251
3,455
3,186
2,425
1.6x
3.3x
2.1x
1.3x
1,417
1,069
1,010
1,513
372
0
108
599
NPAT
Net Debt
Net Debt / EBITDA
Operating Cash Flow
Free Cash Flow
FY15, FY16 based on average Bloomberg broker consensus estimates
A$m
Operating Performance
25,000
NPAT
EBITDA
20,000
15,000
Revenue
15,902.0
15,724.0
11,759.0
15,352.0
12,884.0
10,000
5,000
0
1,827.0
1,617.0
250
112
1,770.0
1,990.0
5
1,042.0
-245
-2843
FY14
-5,000
FY10
FY11
FY12
FY13
Interest Coverage Ratios
8.0x
7.0x
6.0x
5.0x
4.0x
3.0x
2.0x
1.0x
0.0x
-1.0x
-2.0x
7.5x
7.0x
6.8x
5.3x
3.6x
2.2x
1.7x
2.0x
1.2x
EBITDA/Interest Expense
EBIT/Interest Expense
-1.3x
Financial Leverage
Total Debt / Total Assets
Total Debt / Total Capital
80.0%
70.0%
60.0%
50.0%
40.0%
69%
30.0%
20.0%
10.0%
29%
53%
50%
49%
29%
51%
31%
30%
37%
0.0%
FY10
FY11
FY12
FY13
FY14
Source: Bloomberg
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Qantas Airways Ltd
4 September 2014
Background
Qantas was founded in 1920 and has grown to be Australia’s largest domestic and international airline. Whilst the key
business remains the transport of airline passengers, the Group has grown to include a number of complementary
businesses. The Qantas Group consists of five business segments:

Qantas Domestic – where the company is a market leader in both the business and leisure markets through its
duel brand strategy (Qantas and Jetstar) with the Qantas premium brand maintaining its dominance in its home
territory

Qantas International –Qantas’ traditional international business including its new strategic alliance with Emirates
Airways

Qantas Freight – air freight business including Australia Air Express

Jetstar – the largest low cost carrier in the Asia-Pacific with targeted investments in key markets in the world’s
fastest growing region

Qantas Loyalty (Frequent Flyer) – Australia’s leading customer loyalty program with more than 10 million members
Operations
At the same time as the release of the 1H14 result, the company announced a three year operational review which would
seek to deliver $2bn in cost savings. Drivers of this $2bn cost saving will include:

Head count reduction of 1,000 within 12 months (including 300 already announced)

CEO and board pay cuts

No bonuses for executives and pay freeze

Review of suppliers - expect Qantas to take a Woolworths/Coles approach to suppliers

Network optimisation - already Qantas has announced reduced services to Darwin, and increases in Adelaide to
better align fleet utilisation

Other overheads
International turnaround
The turnaround of the international operations business includes the exiting of unprofitable routes, rationalisation of
catering and engineering operations, more efficient capital allocation, reconfiguring the fleet to enhance profitability and
building better alliances including the continued strengthening of the Qantas-Emirates alliance.
For the 2014 full year, underlying EBIT for Qantas International was a $497m loss (compared to a $246m loss for FY13).
A slower global economy has seen considerable passenger seat volume moved to Qantas’ key international routes as
has the addition of significant low cost and government backed competitors. This additional passenger seat volume has
had the effect of lowering yields across the industry and placing significant negative pressure on pricing.
Jetstar
The Jetstar brand made an EBIT loss of $116m for FY14 compared to a $138m EBIT gain for the prior comparable
period as the international Jetstar business was affected by the same supply/demand dynamics as the Qantas
International business. All of Qantas’ business units were also affected negatively by unfavourable movements in fuel
pricing and FX. In response, Qantas has slowed its growth program for Jetstar as it realigns its fleet with route demand.
Jetstar’s domestic business remains profitable and is the largest low cost carrier in the Australian domestic market.
Qantas-Emirates
The Qantas-Emirates tie up, a 10 year alliance, has a number of benefits to Qantas and its customers. For its customers,
it provides one stop access to 33 European destinations (compared to five previously) and 31 one stop services to the
Middle East and Northern Africa (none previously) as well as broader access for its frequent flyer program through a
single partner.
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Qantas Airways Ltd
4 September 2014
For the company, the benefits extend beyond the traditional code sharing model with commissions also available on nontrunk routes as well as providing a significant feeder for Qantas’ domestic business. The development of the alliance also
allows Qantas to restructure its Asian business, an area of great potential growth, but also subject to increasing
competition. This restructure will include fleet management (ensuring the most efficient aircraft for the route is utilised)
and schedule management, with better timing of flights to suit customer requirements rather than designing flight
schedules to meet end destination requirements in Europe.
Debt Structure
Qantas’ debt structure includes both secured and unsecured facilities, using a combination of bank debt and the bond
markets to meet its debt funding needs. In addition, Qantas’ recognises its obligations under its aircraft operating leases
(which are not recognised on the balance sheet) for the purposes of its own reported gearing calculation.
Reported Gearing Ratio
$m
Adjusted Equity
FY14
2,938
Current debt
Non-current debt
Cash and cash equivalents
Other
Net on balance sheet debt
Operating lease liability
Net debt incl. operating leases
1,210
5,273
-3,001
-27
3,455
1,296
4,751
On balance sheet gearing
Total gearing ratio
54%
62%
FY13
5,717
835
5,245
-2,829
-25
3,226
1,621
4,847
36%
46%
Change %
-49%
45%
1%
6%
8%
7%
-20%
-2%
18%
16%
Source: Qantas; FIIG Securities
The increase in Qantas’ reported gearing ratio from 46% at FY13 to 62% at FY14 above is largely as result of the
reduction in balance sheet equity value at FY14, which was due in large part to the $2.6bn write-down in the value of the
international fleet.
Despite the downgrade of Qantas’ credit rating to sub-investment grade at the beginning of the year, Qantas has been
active in the debt capital markets, recently issuing the following $A bonds:

On May 12 – A$300 million of 7.75% eight-year notes, at a yield of 400 basis points over the swap rate; and

On June 4 - A$400 million of 7.5% seven-year notes, at a yield of 385 basis points over the swap rate
Qantas has embarked on a strategy of extending the overall duration of its debt facilities, by cutting the amount of
unsecured debt it must repay within three years by 47 percent, paying down A$724 million of bonds and loans earlier this
year after raising A$700 million via the nation’s first sub investment grade domestic note sales. With the recent high yield
issues, Qantas has rebalanced its debt profile towards the Australian dollar. The figure below reflects Qantas’ unsecured
debt profile before and after the extension of the debt maturity profile.
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Qantas Airways Ltd
4 September 2014
Source: company presentation
Following the extension of Qantas’ debt profile, more than half of the company’s debt won’t come due until after 2019,
leaving it freer to focus on an operational overhaul aimed at reversing recent losses and a declining market share.
With the focus for Qantas being the restructuring of its business over the next couple of years, the recent terming out of
their debt profile allows Qantas to ease the pressure of refinancing challenges in the near term whilst credit markets
remain buoyant.
Approximately 70% of Qantas’ total debt is senior secured debt. Certain aircraft and engines act as security against
related financings. Under the terms of certain financing facilities, the underwriters to these agreements have a fixed
charge over certain aircraft and engines to the extent that debt has been issued directly to those underwriters.
Trading results – Full year to 30 June 2014
Qantas Airways Limited (Qantas) announced a $646m underlying loss and a $2.9bn statutory loss after tax for FY14. The
statutory loss includes an impairment charge of $2.6bn, relating to a non-cash write-down of Qantas’ international fleet.
In spite of very challenging conditions, Qantas was able to generate positive operating cash flows of $1.1bn in FY14
despite being engaged in a domestic price war with arch rival Virgin Australia. In addition, whilst Virgin has declined to
provide any guidance to the market, Qantas has forecast it will return to profitability in 1H15. In addition, management
has stated that it is focused on regaining the company’s investment grade credit rating.
Following the results announcement, the rating agencies have maintained their negative outlook on Qantas, but have
chosen not to downgrade its credit rating further. While the outlook remains negative, S&P has in particular noted there
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FIIG Research
Qantas Airways Ltd
4 September 2014
are early indications that some key drivers are moving in Qantas' favour: revenue yields are expected to improve through
more manageable capacity additions in both domestic and international markets, and the improved unit costs provide
evidence of progress with Qantas' transformation program
A number of industry fundamentals affected Qantas’ performance (which also affected its competitor Virgin, which
announced its own loss for FY14) including increased capacity in the domestic market placing pressure on pricing;
uncompetitive cost base and work practices; high AUD and fuel costs and a distorted market place (ie: Virgin’s foreign
government ownership structure).
In response Qantas announced it was accelerating its business transformation including staff cuts of up to 5,000 full time
equivalents, adjusting its existing fleet including removal of older, less efficient aircraft and removal of unprofitable routes
and a reduction in capital expenditure by delaying new aircraft acquisitions. The company is also exploring/undertaking a
number of other options including the sale and lease back of terminal space.
Revenue for the full year was 3% down on the prior comparable period as continued competition and increased fleet
capacity in the market led to subdued passenger yields for FY14.
Summary financials
$m
Net passenger revenue
Net freight revenue
Other revenue
Total revenue
Operating expenses (excl fuel)
Fuel
Depreciation and amortisation
Non-cancellable aircraft operating leases
Total expenses
Underlying EBIT
Net finance costs
Underlying profit before tax
Items not included in underlying profit
Tax
Net profit after tax
FY14
13,242
955
1,155
15,352
9,354
4,496
1,422
520
15,792
-440
206
-646
-3,330
1,113
-2,863
FY13
13,673
935
1,294
15,902
9,318
4,243
1,450
525
15,536
366
180
186
-175
-9
2
Change %
-3%
2%
-11%
-3%
0%
6%
-2%
-1%
2%
-220%
14%
-447%
n/a*
n/a*
n/a*
Source: Qantas; FIIG Securities
*Percentage changes not meaningful in the context of the relative results
Liquidity
Qantas maintains a strong liquidity positing with cash of $3.0bn and available facilities of $630m available at the end of
the financial year. Further, the company has continued to adopt a proactive approach to refinancing ahead of schedule to
maintain this liquid position as well as flexibility in its approach to capital expenditure with a proposed $1.3bn in total
reductions in planned capital investment over FY15 and FY16, all of which are positives for credit investors.
Net on balance sheet debt for the period increased to $3.46bn up from $3.23bn in the prior comparable period with
gearing increasing similarly. The company has publically stated its intention to decrease its level of debt, a process which
has been backed by recent actions, in particular the deployment of proceeds from the group’s asset swap with Australia
Postal Corp (swapping Australian Posts share of domestic freight company Australia Air Express for Qantas’ share of
StarTrack) and the cash benefit from the late delivery of Boeing Dreamliners to reducing debt ($650m).
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4 September 2014
Strengths

Qantas retains a dominant position in the Australian domestic airline sector with a market share of circa 65%
across both its Qantas and Jetstar brands. Qantas maintains its dominance in the lucrative business passenger
segment and continues to grow its corporate account numbers

The company has introduced a dual branding strategy through the differentiation between Qantas, which offers a
full cost service and Jetstar, its successful low cost carrier airline which has driven significant growth over recent
years including its international expansion. The successful differentiation allows the Group to hold the largest
market share in both the business and low cost ends of the Australian market simultaneously

With $3.0bn in cash and a further $630m in available facilities Qantas maintains a very strong liquidity position. Its
ability to defer significant capital expenditure can also provide further capacity over the short term

Despite the recent negative result, Qantas remains an asset rich business, with a number of significant entities and
opportunities to reduce debt levels through asset sales available to management

In the recent FY14 results announcement, Qantas indicated that it was not intending to sell the profitable Qantas
loyalty (frequent flyer) business. Overall, whilst a sale of the frequent flyer business could generate significant cash
which could be used to pay down debt, retaining this business within the group is a positive given it provides a
stable, quality earnings stream to supplement the underlying airline business

Despite the downgrade, Qantas continues to retain significant flexibility in its financial position, funding strategies
and fleet plan which has allowed it to continue to raise funds and generate liquidity in the face of changing market
conditions. Qantas is the first Australian corporate to issue a sub-investment grade, high-yield bond into the
domestic A$ debt capital markets. It was able to successfully raise bonds twice this year in the space of two
months.
Risks

Following the ratings downgrade at the beginning of the year, Qantas is now considered to be a sub-investment
grade credit by the rating agencies. In the description of one of the rating agencies, an obligor rated in the
corresponding sub-investment grade category faces major ongoing uncertainties and exposure to adverse
business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its
financial commitments

Qantas is in the midst of restructuring its business. As such, Qantas is exposed to the execution risks of
implementing change on a number of fronts and transitioning its business to profitability

The nature of the airline industry presents a risk for bond holders due to it being cyclical, capital intensive, being
exposed to ‘force majeure’ events (eg: terrorism) as well as the cost of jet fuel which fluctuates with movements in
the underlying commodity. Offsetting this is the long history of Qantas’ operations, its diversity across its two
brands as well as the continued ownership of the frequent flyer business (which is separated in a number of its
peers) and most importantly its dominant position in its home market

The airline industry remains highly competitive with competition increasing both on the company’s domestic and
international routes. In particular Qantas’ international business faces strong competition from government backed,
or significantly government owned competition. Despite this Qantas has maintained its position in the domestic
market and in fact has seen off a long list of domestic competitors. The sector increasingly looks like a duopoly with
Virgin and we would expect to see some easing on the domestic competition front (with sporadic outbursts of
competitive activity) as both Qantas and Virgin suffered losses over FY14, a position which is unsustainable in the
longer term for both competitors.

Qantas’ international business has underperformed financially in recent years due in large part to the increase in
competition which has come with the deregulation of routes and has been a financial drain on the group as a
whole. The company has undertaken a significant process of transformation in this business, delivering more than
half the expected $300m in improvements to date. The Group will need to continue to deliver on this transformative
program in order to return this division to profitability
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
Approximately 70% of Qantas’ total debt is secured senior debt, which ranks ahead of Qantas’ unsecured debt in
the event of a default and liquidation scenario
Conclusion
Despite a weak FY14 result, with the general media attention focussing on the large headline losses, there were still a
number of positives for Qantas’ bondholders to take away from the FY14 results. Of particular note were the better than
expected underlying earnings, an increase in group liquidity of $600m to $3.6bn, positive management comments on
market conditions, progress on the cost reduction initiatives and confirmation that Qantas Loyalty (Frequent Flyer) will not
be sold.
Qantas remains one of the strongest brands in Australia and one of its best known internationally. Notwithstanding the
recent poor result the company retains a significant asset base and a market capitalisation (at time of writing) of over
$3.3bn which provides comfort for investors in the company’s ability to meet its commitments.
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An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital
when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts
contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate
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