Tuesday 03 September 2013 by FIIG Research Legacy

Qantas FY13 results

A mixed result overall but with some positives from a credit perspective including improved cashflow, lower capital expenditure (capex) guidance and a modest improvement in leverage. This offset some of the growing concerns about foreign currency (FX) and fuel costs on the company’s operating costs.

The company reported underlying pre-tax profit of $192m but this included an accounting change which boosted pre-tax profit by $134m. The accounting change reflects a change in the way that tickets which have passed their travel date are recognised as revenue.

Operationally, group capacity increased by a marginal 0.3% yoy with capacity cuts in International (-5.6%) offset by a 12% increase in capacity for Jetstar Domestic. The large increase in domestic capacity was expected given the capacity additions from Qantas’ key competitor Virgin and Qantas’s goal of defending its 65% market share. The result was that load factors fell by 0.8pts to 79.3% and passenger yields fell by 2.4%.


Source: Qantas FY13 results presentation

Free cash flow was positive for the first time in three years (FY13: $399m). Management said that its goal is to maintain positive free cash flow. Overall debt levels were down $300m compared to December 2012. Overall liquidity was $3.4bn consisting of cash of $2.8bn and undrawn bank lines of $600m, providing comfort to bondholders. There are no major debt maturities until FY15.

Management has flagged a lower level of capital expenditure going forward. Following a period of accelerated fleet renewal, the group’s average fleet age is 7.9 years which is younger than management’s goal of 8-10 years. As a result, management has said that they are confident that capex will return to more “sustaining” levels. This will provide benefits in the form of better cashflow and firmer support for yields and load factors.  Partially offsetting the positives from lower capex, management has decided to continue its on-market share buyback program of up to $100m in FY13.

Management provided limited hedging disclosure except to note that 87% of fuel costs and operating FX exposure have been hedged for 1H14. No specific hedge ratio was provided for 2H14. In terms of outlook, 1H14 underlying fuel costs are expected to increase some $160m to $2.34bn.   This does not take into account potential FX movements and the impact of potential fuel surcharge increases. No further specific FY14 guidance was provided due to management’s view of the uncertain outlook.

Investors in Qantas bonds enjoy stronger returns than bonds from similarly rated corporates in the Australian market, whilst maintaining an investment grade exposure.