Qantas Airways Limited (QAN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qantas Airways Limited Analyst Call. I would now like to hand the conference over to Mr. Alan Joyce, CEO. Please go ahead.

Thanks, Izzy, and good morning, everyone. I'm joined here by Vanessa and Fran, and hopefully, all of you have had a chance to read through our announcement outlining the customer and employee impacts of the coronavirus-related network cuts. I'd like to make some broader comments first, and then Vanessa Hudson and I will be happy to take your questions. Obviously, the impact of the coronavirus public health crisis is unprecedented with the aviation sector probably the hardest hit. In response to the government advising against all overseas travel and the falling demand for air -- for travel, earlier this week, we announced a 90% cut to international capacity and 60% cut to domestic capacity. With the government advising against, again, all overseas travel in the middle of this week, we've now suspended all scheduled international flights from the end of the month. We are in ongoing discussions with the Federal Government about some flights continuing in order to maintain some key strategic links. This will mean that we'll have at least 160 aircraft on the ground, including all of our A380s, all of our 747s and all of our 787s. As a national carrier, we'll still maintain key transport links for people and freight in the domestic market and we'll still fly to our capital cities and major regional centers as well as key remote communities as frequencies of flights will drop on busy routes like Melbourne and Sydney. We've also now established a cash task force reporting to Vanessa and [ together with ] the finance team to focus on cash preservation. The task force meets daily, reinforcing the level of importance and attention this has within the business. We've also taken steps to protect our revenue received in advance and give our customers confidence to book future travel. Most of our corporate customers have already put canceled flights into credit. And we have taken additional steps so that all canceled travel now defaults into credit while we are increasing the attractiveness of retaining that credit. We are extending the rebooking period through September and allowing another year for them to take that travel. As a result, a large proportion of our customers are taking this option, helping withstand any revenue outflows. In addition, we are ensuring we are collecting all receivables. We are actively reviewing all categories and are working hard to make most costs variable. This has been made more urgent due to the level of capacity cuts and pain will be shared across the entire value chain. We are requesting late cuts from suppliers, addressing demand management and seeking rent holidays to help withstand cash outflow. Unfortunately, these times require drastic action. And as we have no work for most of our workforce, we will be standing down 2/3 of our employees. We want to preserve as many jobs as possible, so people can use their annual leave and will continue to be paid while that leave lasts. However, for many, unpaid leave seems inevitable. We know this will be incredibly hard on our people. So we think it's appropriate and as a prudent financial management, we will defer the interim dividend for our shareholders. This was previously scheduled for payment from the 9th of April 2020. It's now scheduled for the 1st of September 2020. We entered this crisis in a strong position. We maintain our investment-grade credit rating, now have low net debt, a cash balance of around $1.9 billion, undrawn facilities of $1 billion and $4.9 billion of unencumbered aircraft. We have already proactively refinanced our financial year '20 debt maturities in the first half of '20 and have no major debt maturities until June 2021. We are currently in the market securing additional cash liquidity as we work through the current period of restricted travel and we have received strong support from our lenders. The relief package the government announced yesterday is helpful and Qantas will receive its share of that relief, including the refund of costs paid from the 1st of February. Let me close by saying this. Our focus is absolutely on ensuring we maintain our financial strength and we're taking very decisive actions to make sure we remain in a strong position. Travel demand will bounce back and when it does, we'll be very well placed to take advantage of the opportunity. Thank you, and we'll now open for questions. Questions?

[Operator Instructions] Your first question today comes from Cameron McDonald with E&P.

Can you hear me?

Yes, we can hear you. Go ahead, Cameron.

Yes. So a couple of questions for me. How much cash does this save you through to the end of 2020?

Sorry, Cameron. I didn't quite hear that. You're breaking up.

Sorry, sorry. How much cash do you think will this save you through to the end of the financial year?

Well, the way to look at it, Cameron, and the way we've been looking at it is that we've been variabilizing all of our costs. So if you look at now, our largest cost is labor. And unfortunately, as I mentioned there, with the demand drying up, we have no work for 2/3 of our workforce. So once we burn through the leave balances, and I'll get Vanessa to talk about how much we have in leave balances, once we work through leave balances because that will save us cash, but then when that's gone, we won't be paying those 2/3 of the people because there is no work. And it will mean that we have to take any further capacity cuts and increase that number of people on stand-down, and that will also variabilize that labor cost. Our fuel cost is obviously variabilized and then all of our other major costs, air navs, airport costs are all variable. And with the government's announcement yesterday, the air navs, essentially a lot of our duties on the company are no longer applicable for at least the next 6 months. So we've been working very aggressively and very hard to take every effort to make sure we match our schedule to demand we're seeing out there, doing it before any other airline's doing it, doing it aggressively to make sure that we're not burning cash. And now with the announcement today and what we're doing with stand-down, we variabilize our largest cost after leave balances. Vanessa, do you want to talk?

Yes. So the leave balances that we have on our balance sheet is approximately $700 million, and obviously, that is not spread evenly across our workforce. There is a large group of staff who have longer balances, but there's also a proportion of our people that have very low balances. So as Alan said, that our focus will be to burn through our leave balances, but also it is inevitable that we will see quite quickly from this stand-down that a number of our employee groups will be on stand-down without pay and so moving, as Alan said, our payroll to a position where it becomes much more variable much more quickly. And we're also looking very aggressively right across all spend categories to variabilize those. We've had some amazing support from our supply base who are standing shoulder to shoulder with us and not applying commitments in contracts as it is a shared approach. And we have just been overwhelmed with the support that we've also got from our supply chain. So it really does give us confidence that we've got the focus but also the support to do what we need to work through. And as Alan said, we're managing to a 6 months plan right now and we also have levers that go beyond that if we needed to.

I should say, we'll have plenty of cash to survive at least 6 months and a lot longer than that. We don't know when this is going to end. We are looking at, could this last a year? Could this last 18 months? Could this get worse in terms of capacity put down? And as we say at Qantas, we're in a great position to withstand that environment. We're making sure that we take all of the actions now, taking them upfront, take them early so that we minimize our cash burn. We will minimize our cash burn to the lowest levels possible with the initiatives we're making today, which will give us the longest period of time. So if this lasts a year, 18 months, we're well equipped to try and get through that. Any other questions?

[Operator Instructions]

We don't have any other questions at the moment. So if you need to ask a question, that would be great. If you don't, we've still got to do a media call at 10:00. And so if anybody has any further questions, you can ask them now. Otherwise, if you have questions offline, you can ask them to Fran and Vanessa will be happy to help with that if people don't have anything else they want to ask. I'll give it 2 more minutes. We're seeing -- we're still seeing 0 questions come up. Cameron was the only one today. That's unusual.

We're still showing no further questions.

I would say the conference call isn't working.

We're hearing the conference call isn't working.

[Operator Instructions]

The question was not registered.

[Operator Instructions] We're hearing that people may not be able to register questions. I suppose this is the trouble with everybody working from home. Telstra can't handle it. The sooner the better we get -- we've got another question. Good. Next question.

Your next question comes from Stuart Welch with Fidelity.

It's Stuart Welch from Alphinity. I've got the old details. That's okay. So I was -- a quick question for me in terms of, obviously, pretty major changes. I mean what is the expectations in terms of traffic coming back and the government relaxing the restrictions? And any conversations that you've had with government around that side of things? And then, I guess, the other piece that I'd be interested to understand is how long do you anticipate you will be able to sustain the current state of affairs, given the changes that you've made.

So Stuart, look, and I don't think anybody knows. So I think the government is saying that this could last 6 months. It could last longer. I think you look at other jurisdictions, and you can see the Chinese seem to have got it under control less than that. The Koreans seem to be doing something that's very similar. So it depends on what happens. And the measures the Australian government are taking are early on. So they're getting ahead of the curve to try and flatten the curve, which is the approach that's here. And so given that, I don't think anybody could pick a time frame on it. We are giving ourselves the ability to survive at the maximum amount of time. So we will easily get through 6 months, 12 months and beyond that, and that's the intent. We're variabilizing our cost base. We're making sure we take the dramatic actions very early on. We don't let cash burn. Vanessa went through all of those initiatives there. So we have plenty of time. We think we have more time than this will be around. And when it recovers, it will recover quite significantly and that will be a huge benefit to us because we think there'll be a lot of pent-up demand, both domestically and internationally. And we have plans if it does get worse. There are potentials for the domestic travel to get worse and we have the plan for that and we are setting ourselves on. So I think all of the actions we're doing will give us a significant length of time beyond any time anybody's forecasting this crisis to last.

And so, Alan, people are texting me questions. So I have a question. Can you talk about the cash flow impact from the cancellations?

So I think that the cash flow impact from the cancellations are -- is both -- as we spoke about or as Alan spoke about earlier, the waivers and the approach that we're taking to managing revenue received in advance associated with those cancellations, we've got and have seen a lot of our corporate customers have moved that revenue into credit. That's a very typical thing that we've seen corporates do, and that behavior is continuing. From a customer perspective, the way we structured the waivers is to be very generous in the amount of time that we're giving customers to replan their travel. We're giving them at least 6 months. We then serve a 12-month leeway to take that travel and so that is essentially an 18-month time frame. What we've seen because of that, customers have been happy to put a large proportion of that travel into credit. And we're also doing that auto -- in an automated way now rather than letting the customer specifically choose. Even though you have the option to refund, what we're seeing is that customers are taking that up in a large proportion. Obviously, with the capacity reductions, the cash flow in terms of outflows will decrease substantially. Our fuel will decrease. All of our variable costs will decrease. And the decisions that we're taking today around labor, we are now in a position where we've variabilized our labor as well. So we are managing to a cash flow that, as Alan said, will provide us with at least a minimum of 6 months, but beyond that, to reach 12 months and longer than that as well. I think what we do anticipate that our cash flow on a net basis will look like, what I've described as a bath tub where we will probably see variations over that time. And as we come out of the recovery phase, what we've seen in the past is that when that demand comes back and that revenue comes back, we'll be in a situation where we'll have substantial revenue and cash inflows flowing in the latter part of the period.

We have another question online?

So our next question is, is there any more transparency on government initiatives overnight?

So the government has announced initiatives that helps us with the airport, that helps us with aviation-related charges like excise duty and air navigation fees. That's a package for the entire industry, which is the right way of doing this. It's industry-related and it's across the industry. What we see the government doing now overnight is talk about a social package for people that are stood down or people that are made unemployed. I think that's the right way for the government to spend their money. And we will have up to 20,000 people stood down from the company, and eventually, when leave runs out, they want to get paid. So the government supporting them and supporting the general economy, I think, is absolutely the right thing to do and that's where they should focus the money. We have got plenty of bandwidth, we've got plenty of cash and we've got plenty of time. And I think when we look ahead, this crisis is going to last and what we can see happening with the rest of the world, it gives me great confidence that we can get through it. We're the healthiest airline, I think, in the world. We've got a big, strong balance sheet. We've got a lot of unencumbered aircraft. We're raising more money and getting a good -- a positive reaction from the markets today. We have a lot of runway here, and that doesn't worry me in the least. So we've got the right set of things to get through this, and I am very comfortable with where we stand. Next question?

Can you talk about the potential for CapEx deferral?

Yes. So as we said before, we are -- have a cash focus and that focus is looking at all elements that are driving our cash outflow, including CapEx, but also initiatives that otherwise would be a P&L effect. So we are actively in conversations with Boeing and Airbus to see whether we can defer CapEx. We are also looking right across the spectrum of activity of items that would have been capitalized, so to speak, but cash through that lens is what is the priority for us. And I think that the point that I wanted to say today is that we are looking at everything, as Alan said, to bring our cash flow to the minimum that we believe is required to sustain us through this process.

I can say we're also going to be working -- as Vanessa said, we're stopping any unnecessary capital expenditure, looking at everything from delaying lounges, work on them, to the reconfiguration of aircraft. We're talking to the manufacturers about pushing their paid repairs. We're looking at some suspension of some of the aircraft programs that are there. So there may be some delays on aircraft, which may be helpful. And we -- as we announced before, we pushed out the decision around Sunrise. That won't happen for later in the year. We've got confirmation from Airbus that they will hold the slots in 2023, and we'll make that decision at the end of this calendar year. Next question?

We do have a question on the line and it comes from Michael Maughan with Nikko AM.

I just had a -- can you hear me?

Yes, I can hear you. Go ahead, Michael.

You can hear me? All right. Sorry. Just a question on the fuel hedging [ strategy for the business that was done ]. The fuel hedging, can you just talk about what the cost you'll incur even if you don't fly a single mile in terms of fuel hedging costs? And also maybe what the strategy is going forward for hedging in this environment where you're not sure about exactly what flying you're going to be doing?

Yes. So given the substantial reduction in our capacity, we do have an overhedged position, and that will come at a cost that will be -- that we'll realize in the next couple of months. That's going to be a key part of how we manage our cash inflows and cash outflows. So in terms of a specific number, that's just going to be a part of our fuel consumption and cost that we have in this quarter but also into next quarter. As we look going forward, we are going to continue to think strategically about the way in which we hedge, both in terms of making sure that in the first half of next year is we believe that this lower demand profile will continue with a much higher participation. We've got a much larger proportion of outright options, but we've got an ability to participate more effectively in the lower fuel price. And beyond that, we are thinking around how to structure our hedge profile to ensure that we've got both our participation but protection as well from a higher fuel price because what we've seen in the past is that when demand returns and recovers, that fuel price most likely will increase. So we are staying flexible and thinking about both sides of the recovery process.

We have no further questions, I think. [Operator Instructions]

That's correct. We are showing no further questions at this current time. [Operator Instructions] We are showing no further questions at this time. I'll now hand back to you, Mr. Joyce, for closing remarks.

So thank you very much for that, Izzy, and I thank everybody for being on the call. As we said, we are in a position where Qantas is taking probably the most dramatic and drastic action of any airline. We're getting ahead of the curve and we're getting ahead of where other airlines have been around the world. With today's announcements, we are taking the capacity out in advance of this burning of cash. We're taking the capacity out and, unfortunately, having to stand down 2/3 of our workforce, which means that we variabilize a lot more of our costs, which gives us a lot more time in order to make sure that we survive whatever period of time that this virus impacts the economy and impacts on travel. We'll probably fare better than any airline in the world with the cash we have, with the financing that's available to us, with the runway that we have going forward. We're very comfortable in our position. We continue to be comfortable in our position. And I will give further updates as this evolves, and I'm sure it will evolve. And -- but this will end, and when it does end, Qantas will be well positioned to take advantage of it. We will have the aircraft and have the people that are being stood down. They are not being made redundant. They are being stood down because we believe we will need them again. We believe that we will need to get the aircraft back in the air. We believe that there's a big rebound of demand when that happens, and that will be fantastic for the company and its people. So thank you very much. We will -- if there's any further questions -- I know some people couldn't get questions through because of the technology, so feel free to ring Fran and she will answer your questions with Vanessa. Thank you.

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