Qantas Airways Limited (QAN) Earnings Call Transcript & Summary

Okay. Thank you, everybody, and good morning, everybody. Hopefully, you've had a chance to read through our announcement. So rather than going through this in detail, I'd like to make some broader comments and then Vanessa Hudson, our group CFO, and I will be happy to take your questions. A lot has happened since we updated the market 3 weeks ago. We've seen coronavirus and the amazing levels of coverage around it shift from China to also include the Middle East, Europe and now North America. That's led to a very sudden drop in demand for air travel. All of this can be summed up by IATA's, the International Air Transportation Association's, assessment of the situation. Three weeks ago, they estimated that the revenue hit to airlines would be at USD 29 billion. And in the past few days, they said it could be over USD 113 billion. When we made our first round of capacity cuts, we said it was based on what we could see at the time, the facts that we had in front of us. Since then, we've been getting daily updates on forward bookings. And it's fair to say these facts have changed significantly. We've seen a very sudden drop in those forward bookings. Asia has deteriorated further and so has the trans-Tasman. Broad markets that were previously not impacted like the U.S. have dropped away very quickly. We've also seen more weakness domestically. Some of this is a flow on from less international traffic, but there's also some softness, which we think reflects the nervousness in the Australian economy more broadly. And this has been reflected in weaker crude oil prices, which are a welcome offset to the demand weakness that we are seeing. Now this brings us to the announcement that we are making today. In summary, we are cutting international capacity by about 25%. The details of this are in the release. And domestic capacity, we're closing by 5%. In total, we are deepening the group capacity cut by 13 points and from 4 to 17 points and grounding the equivalent of 38 aircrafts. We're also doing this to mid-September, 6 months from now, for a few reasons. We think that this outbreak has still some time to play out. We want to give certainty to the market, to our people and to our customers. And we want to make sure that we get the maximum cost benefit of flying less. But we also have flexibility. If demand comes back faster, then we can bring back the aircrafts. We're planning 6 months for intrude, no one knows how long the recovery will take. That's why we're also announcing some cost-control message today, designed to conserve cash and protect our position. This includes canceling the buyback, which concerns $150 million in cash. That's not something we do lightly, especially given the pain our shareholders have already had, but we think it's prudent. The zeroing management bonuses. The Chairman and I won't be taking any pay in the fourth quarter. We think that's appropriate given the circumstances. And the rest of the Board members are taking a 30% pay cut for the same period. My direct reports will take a 30% pay cut for the same period. And other measures like a recruitment fees and a pause on nonessential projects. We're also asking our people to help by taking leave because we know this is temporary. And we want to avoid job losses where possible. So we're asking people to take paid leave and if they're unable to do so, some unpaid leaves. This won't suit everybody's circumstances, and we understand that but we know that a lot of the airlines around the world are doing the same thing and their staff have rallied to help in what is an unprecedented situation. So let me close by saying the Qantas Group has entered the situation in extremely strong shape. We maintain an investment-grade credit rating, cash balance of $1.9 billion. Higher than where we closed out the last half of the financial year, another $1 billion in undrawn facilities and in unencumbered aircraft valued at $4.9 billion. Our net debt is at the lower end of our target range, and our focus is absolutely on ensuring we maintain our financial strength to our focus not only on profit, but on cash flow. And we're taking very decisive action to make sure that we remain in a very strong position. We also know that this will end. Travel demand will bounce back. And when it does, that will be -- we will be very well placed to take advantage of these opportunities. Thank you, and we'll now open it to questions.

[Operator Instructions] Your first question today comes from Matt Ryan with UBS.

Just with the 5% reduction to domestic, is that reflective of what you're seeing in demand?

Yes. The -- so what we have done is maintain flexibility on that, Matt. So we're seeing demand particularly weak at the leisure ramp, so Jetstar is a little bit higher than that. We're taking 8% of the capacity out for Jetstar in the last quarter. It's still some weakness in SME and in the corporate market, but still strength in the resource sector in WA. So that's where we're still seeing some growth occurring there. And that reflects where our forward bookings are, but we are maintaining a close watch on that with the ability to take out more capacity if needed. We can easily take out a lot more capacity if we had to or if we think things improve or we're worried about our strategic position, we would put capacity back in.

Okay. And is it possible for you to talk about any deferral of CapEx over the next 12 months?

Yes. Matt, it's Vanessa. We are actively looking at deferring CapEx, particularly we are stopping all nonessential and nonoperational CapEx across customer. We've deferred some investment that we've had in the plan on lounges. We're also looking more broadly. We're speaking with Airbus and also with Boeing as we speak, to look at deferring payments as well into the forward months. We haven't yet concluded that right now, but we are looking at all levers to defer CapEx.

We've -- now we've also asked Airbus for a delay on the decision on Project Sunrise, which was due at the end of March. Airbus were off to believe that those slots will be sold to other airlines given with the situation, the entire world aviation industry is in, we're assuming that, that's unlikely now. And we've asked them for a request to delay that decision until we see a recovery on the coronavirus impact.

Your next question comes from Cameron McDonald with Evans & Partners.

So just an extension of the question around CapEx, noting that the A380 fleet is effectively being grounded. And where are you with the cabin refurbs and refresh on some of the larger international aircraft? And you never really want to waste a good crisis. Is there an opportunity here to rebase the costs in any way like by impairing some of the assets?

I think in the first instance, as Alan said earlier, is that we do expect that this will come to an end and demand will recover. So in terms of the A380 staying on the ground, we think that, that is temporary. What we have -- and we do have all intention to continue to complete the reconfiguration. What we have looked at is, can we have different timing around any of those reconfigurations. And at the moment, there is very little flexibility that we can to either accelerate or actually slow down. So at the moment, our programs, the A380 is tracking as it was a month ago.

And I'd say, Cameron, obviously, we are looking at every individual cost. We're talking to suppliers. We're talking to our employees about taking a number of actions that we think will minimize the impact as best we can. We're grounding the equivalent of 38 aircraft. That's 2,000 employees that we would have surplus, if they were to stay on the ground indefinitely, obviously, we don't believe that's the case. We're trying to avoid redundancies, and that's why we're taking these other actions and significant actions to minimize that. I will say, one of the advantages we have now with the 787s is we are maintaining as much of the network as we can and replacing the 380s to places like Dallas and to London with the 78s (sic) [ 787s ], which is a big advantage. Particularly taking the advantage of flying a double daily now from Perth to London, which has actually been very strong demand as some corporates are not putting people through Asia. And using the 787 in order to do that is a big advantage. So I think our intention is to still take delivery of those with remaining 787s. If things were to expand in terms of demand weakness, we would retire the 747s earlier. And there would be significant cost reduction as we get rid of the fleet side, which we could always bring forward if we felt that this was going to be extend towards the end of the year.

Can you talk a little bit about what the demand environment is having in terms of yield or RASK?

I think it's very similar to where we were 3 weeks ago on that question. It's become more dynamic, and it is -- we've got lots of levers that we're pulling, including capacity and also the other cost levers. So in terms of the RASK outlook, it's not something that we're giving specific guidance on right now.

Your next question comes from Paul Butler with Crédit Suisse.

If I could just ask that question slightly differently, perhaps. I mean the 25% cuts that you're making to international capacity, is that based on what you're seeing now with demand? Or are you trying to get a bit ahead of the ball in terms of expecting that demand that you're seeing now might weaken?

So it is -- as we said, we've seen a significant drop in bookings in the last week or so, and we're getting daily updates on intakes. So we're projecting that continuing to occur. We've always said we will make the decisions on what we're seeing at the time. So that significant drop, we're planning to continue until September essentially and taking the capacity out to manage that. We have plans -- as we've said before, if it does get worse, we can take more capacity out. For example, we're still flying 2 of the A380s out of the 10, we are still flying the 747. So we have the ability to be very aggressive, what we need to be on capacity. Similarly, we're trying to maintain the flexibility if a recovery did occur to put the capacity back in. But this is respondent to the significant drop that we've seen recently. We're obviously keeping a close eye on the domestic market. We've seen that weakness linked to international and broader weakness in the economy occurred there. So taking 5% out for the domestic market is significant. And we also maintain the ability to take more out. But there is growth in some parts of that at the moment. But we -- it's all about flexibility at the moment.

Right. And I mean, with the data on new cases of people infected with the virus. I mean we've seen a significant slowing of the -- of that rate in China. How do you sort of think about when it makes sense to bring services back online after the crisis has passed in some regions?

Yes. So that could vary by region. So the government obviously still have a travel ban on with China, Korea and Iran. We stopped the Jetstar services to Korea as well very recently. So if the China ban was to be lifted, would be the first stage, and then we will be talking to our partner, China Eastern, about how we coordinate capacity reintroduction of that market. There will be -- there be potentially a lot pent-up demand there. So once we believe the ban is lifted and there is the demand for the services, we can have the flexibility to put it back in. I think we've suspended the services until July. So the expectation is it won't be in before then, but July is a likely time for it to -- we're assuming, if the control of the virus continues the way it is in that market.

Okay. And just one final one, if I may. You're asking staff to take paid leave. How much paid leave on average the staff have owing? Like how much time off does that use up?

That will vary depending on work groups. So in terms of average, where we saw that 2 weeks ago, we had 6 months available leaves. So we, as Alan said, with these deeper cuts, will be having that accelerates a bit further by a couple of months. The other thing, though, which is looking at the leave without pay as an option, we're seeing that a number of airlines, like us around the world are calling the staff to take unpaid leaves. We've recognize that, that is going to be difficult to some of our people. But in the context of the engagement across Qantas when we've asked or when we call upon our people to lean in, in a crisis, I think that I personally feel always pleased to see how many people step up, like we had with the recent [ Wuhan shortage ], which were all volunteers as well. So we believe that we will see a take-up of that.

And we do have attrition in a number of different areas that we will -- we have a recruitment phase on at the moment. So attrition over the next few months will also save significant amounts of money. We're also terminating some contractor work that we would have had in the organization are nonessential projects, any projects that we believe need to be stopped. And there's some balances that are very high of leave, that could last a lot more than 6 months, like in the A380 and some of our senior pilots and the senior cabin crew there, so grounding that aircraft, which is the right aircraft to ground, also has the biggest leave balances that will last a long time.

[Operator Instructions] Your next question comes from Anthony Moulder with Jefferies.

Just a quick question on the A380s, obviously, the 747s and some of the A380s were written-down back in 2014, and that $2.6 billion write-down. How much is the invested capital base of these 380 fleet now?

So Anthony, I mean, there's no intention to retire these aircraft. The aircraft are going to go through the reconfigurations. And our intent is that this will recover and they will be operating for another 10 years. So -- and we're looking at the aircraft believe that they are at the appropriate levels of the books, so it's not going to be write-off there. We're going to continue the aircraft for the full 10 years, at least 10 years, given that we're reconfiguring them at the moment. This will recover, those aircraft will be needed, and those aircraft work very well on a lot of the routes that we operate to, when the demand is there.

Obviously, conscious of the fact that the 787s now flying, but cannot fly through Perth, could that prove to be a bit of route for traveling to linking Sydney into -- via Perth into London?

I think it's a temporary solution. It's -- the A380 to Sydney, Singapore and London before the coronavirus was doing exceptionally well. And Singapore for us was performing exceptionally well. Obviously, there are temporary travel bans for a lot of major corporates flying into Singapore. And we're hearing from a lot of our customers that people have been directed, to Gulf, London via Perth. So we knew that demand was there. We see this as temporary. And certainly, we see the operation of 2 787s as too little capacity when the market recovers. And so when it does recover, we have every intent to put the A380s back on to Sydney, Singapore and London. And we think that's the right long-term move for us. It balances off our exposure to different ways of getting to Europe via Perth, via Singapore and via the Middle East, where our partnership with Emirates, and nothing's changed on that, Anthony. And the same with Dallas, I mean, Dallas is a temporary movement, down as we see the loans being hit. Our intention is to bring it back to an A380, when this is over. In the long term, we may restructure the Dallas operation to have more 78s (sic) [ 787s ] in there, but we also see the Melbourne, L.A. as a route that needs the 380. So there's nothing we're seeing at the moment that changes our position on keeping the A380 fleet for its full life.

Okay. And on to fuel hedging, obviously, you've talked to the impact for fiscal '20 without a reduction in flying capacity. But the markets open to hedge deeper into fiscal '21? And do you have an ability with the Board to push that hedging, given current pricing of oil beyond the 2-year maximum that you have in the Board flexibility?

Yes. Look, absolutely, we've been actively hedging into next year for the last, at least 6 weeks. So we are continuing to do that even now with the significant reduction in the fuel price the last 24 hours. We're also reassessing opportunities to do that. I think the -- one of the points is that the forward price of Brent is not as low as we're seeing currently in the spot price now. But we have the capacity to -- and also the Board's support to continue to take a stronger hedge position in that forward view.

Your next question comes from Anthony Longo with CLSA.

Just a quick question for me. I mean obviously, you guys have done a fantastic job generating returns over time, well and truly over and above the cost of capital. With respect to the announcement today, I mean, can you make -- and I do appreciate the strength of your balance sheet. Could you perhaps make some comments on how you're seeing the balance sheet over the next little while given the extent of the cuts coming through?

Yes. Look, absolutely. And I think that at the outset, our priority is absolutely to retain balance sheet strength as we managed through this coronavirus impact. We're absolutely focused on maintaining our credit-rating position and managing within the metrics that will preserve that. We will do this by applying the financial framework that we have been managing with for the last 3 years. In that, and obviously, the capacity and the additional actions that we've taken to preserve cash is a key example of how we are acting and how we're going to behave, not just now, but also going forward. If I talk specifically about our cash position, as Alan said, our cash balance has increased from where we were at the half to $1.9 billion. We haven't needed to draw on the $1 billion we have in undrawn lines of credit. But if we needed to, we would do that. We are also looking at some -- maintaining a cash position that will give us the necessary headroom to manage through this period. And we have been a net debt range that enables us to be able to flexibly move in that. Plus also we have no covenants and flexibility in our forward debt book that enables us to repay debt without carrying significant costs when we move through and get to the other side of this impact, which we believe is temporary.

And we're very focused and this will be the survival of the fittest. We go into this as one of the strongest airlines on the globe. We've one of the strongest balance sheets. One of our handful of airlines with investment grade. We're in a very strong position. And we have every intent to maintain that. And I think airlines will fail in this environment. We're already starting to see it happening in Europe. We will make sure that we maintained our strength to take advantage when those opportunities arise for us.

Your next question comes from Ian Myles with Macquarie.

Just a quick question. How much capacity have you seen come out of the -- from other airlines through the airports across the Australian market?

Yes. So everybody is in a different stage of announcing it and we've seen capacity coming down across the board with various different airlines. Let me give you a total of it. And so this is of the 5th of March. We think there'll be more coming out at this stage. But in Asia, there's a 9% drop in total. And in North America, at the moment, it's only 3% before our cuts, but we're expecting more to come out with the announcements being made by other airlines. And I think everybody is seeing a hit on this. Our partner, American Airlines, have seen the exact same hit that we're seeing on forward bookings. They're going to reduce their capacity on the North American market. We expect other airlines to do the same. We've seen around 27% out of Hong Kong, 8% out of Singapore, 40% out of China. And so there's quite significant and more to come in the capacity reductions.

Your next question comes from Jakob Cakarnis with Citi.

I know that you said that you'd like to maintain yields and RASKs where they are. Can you just speak to some of the competitors' impacts that you're seeing? And whether there's been a shift in the promotional mix at all? Or should we think about these capacity changes will basically preserve yield moving forward from here?

I think that the best way to think about it right now is that we are taking capacity action to bring that in line with what we're seeing as the forward intake trend. At the moment, we're absolutely focused on making sure that we preserve cash and also drive as much kind of revenue outcome on that new capacity profile as we can. We have seen a lot of tactical activity in the market to try and drive load. We ourselves, a couple of weeks ago, had a double status credit across Qantas, which was very successful, actually. I think that we did talk a couple of weeks ago, how successful that was, and we're continuing to see that, even Jetstar has got some very competitive fares in the market, particularly for domestic. So I think there's a lot more to play out over the next coming months, and we will see that activity occur in -- I believe continuously.

Vanessa, just while I've got you, any changes to the outlook on transformation? Obviously, the capacity changes will have an impact on the variable cost there. But are we sticking to the kind of $200 million-ish that we should expect in the second half? Or is there an acceleration of that potentially?

Look, we are sticking to that. As I said, that we are using every lever internally to drive and preserve cash. Transformation though is defined very specifically for us. It has to have a continuous impact on the business going forward. So we will -- when we talk about transformation, we will use that definition very specifically, like the example that we took before Christmas, where we did an efficiency driving head office and we exited a number of senior roles. That's contributing $30 million to $40 million in the second half, that will ongoing. When we talk about some of these other measures that we're taking to preserve short-term cash, the focus of those is not structural, designed to have a fixed duration with maximum effect, that when we move into the recovery phase, we would expect those actions to start to unwind. So we are keeping those 2 quite separate in the way in which we think.

[Operator Instructions] Your next question comes from Michael [ Bose ] with [ CGS ].

It's from Challenger. I just wanted to get some color on when you'd actually decide to draw upon the bank lines as opposed to just leaving them undrawn apart from actual necessity? What would cause you to draw them down preemptively?

Well, I think that we are managing and have set for ourselves, a cash balance that we believe we need to maintain as we manage through this period. So if that cash balance was to get to below that level, we would look to draw down on that. But we've also got some -- and are paying the market at the moment to secure some additional 787s preemptively. We think that, that is a prudent step to take. So initially, our cash balance will be supported through that mechanism before drawing down on the lines of credit. So I think that we're feeling very confident in our cash position where we are now.

And could you just provide any color on how, like, size that cash balance, for the minimum?

Alan, sir?

So I think the way to look at it is, I mean, we -- our cash balance is up to $1.9 billion, we have a lot of flexibility on that cash balance. We do believe the undrawn facility, she should regard as cash. They're absolutely secured, and we can draw them down at any time. So that takes our total cash position in our minds to $2.9 billion. In any of the crisis that we've gone through, a global, financial crisis, any of the stuff in the past, we've never needed anywhere near that. So we think there's plenty of liquidity and flexibility for us going forward. And as Vanessa says, we have $4.9 billion in unencumbered aircraft. The market is still open for that. We're taking advantage of that, going to raise a few hundred million dollars on it. So there's going to be a huge amount of liquidity. And if we start dipping into that to anywhere where we need to use to the undrawn facility, I think a number of other airlines are going to go broke well before then.

Your next question comes from Melinda Baxter with Bank of America.

Just in terms of the cancellation of the buyback, how should we think about the dividend going forward in terms of a way to preserve cash?

I think that, as we've always said, that the financial framework is going to guide our decisions, and we'll look on a forward-looking basis every 6 months based on what that outlook suggests and where our surplus sits. So I think that, that's the best way to contextualize that in terms of where we're at, where we are in the cycle of this coronavirus impact.

And I think, obviously, everything depends going forward and where the outlook is and where we stand at the time. I think, well, by the time we get to the full year in August, I think everybody's of the view, we'll have a very good understanding of where coronavirus is, everybody knows that it is like at the end of the tunnel, this will end. Question is, just what's the timing on that? And I think by August, we'll have a very good position, and our position on the financial framework is always very clear, when we have surplus capital, we will distribute it back to the shareholders. I think we finished on questions. So can I thank everybody for coming onto the call at such late notice this morning. As we've said, indeed, this is a stage where there are a lot of developments, a lot of things are changing. The great thing about the Qantas Group is that it is in the strongest position, I think it's been in its history. We have the strongest balance sheet, strongest cash balance, investment-grade credit rating, a lot of unencumbered aircraft. We have huge amount of flexibility and adaptability. We're an organization that takes action when it's needed. And we take aggressive action when it's needed to maintain that strength. We are in a great position to cope with this evolving coronavirus issue. We will manage that very effectively. And I think we are in the phase where it is probably going to be the survival of the fittest, and Qantas, I think, is one of the fittest airlines group in the world. We will continue to manage this aggressively and as need be. So thank you again for being on the call this morning. We'll continue to give you updates as we get through the year. We have a quarterly update in April. Obviously, that will give us a full update on where we stand at that stage, and we'll continue to monitor this on a daily basis. Thank you very much, everybody.

That does conclude our conference for today. Thank you for participating. You may now disconnect.