The Qantas Airways Limited (ASX: QAN) share price could soar higher today after announcing an FY21 update to the market.
Qantas trading update
The airline business said that it’s expecting to make a substantial statutory loss in FY21. However, it expects to be close to breakeven at the underlying EBITDA (EBITDA explained) level for the first half and net free cash flow positive (excluding redundancies) in the second half, which will allow the repair process to begin.
That guidance includes no important domestic border closures, but also assumes no material international travel until at least the end of June 2021 apart from an increase in flights with New Zealand, though this could improve depending on the speed of vaccines being rolled out.
Qantas has cleared a backlog of supplier payments and refunds. By 31 December 2020 it expects to have paid approximately half of the redundancy payments associated with 8,500 job losses.
At 30 November 2020, Qantas had $3.6 billion of liquidity, made up of $2.6 billion in cash and $1 billion in an undrawn revolving credit facility. That facility is expected to increase by approximately $500 million before the end of the first half of FY21.
Since 30 June 2020, it has raised approximately $715 million of additional debt and a further $72 million from finalising its capital raising.
There are no further material debts maturing until April 2022 and no financial covenants on the group’s debt. Net debt has risen from $4.7 billion at 30 June 2020 to $5.9 billion at 30 November 2020.
Qantas boasted that it remains one of the only airlines in the world to retain an investment grade credit rating through the pandemic.
Cost savings
Qantas said that it’s on track to deliver $600 million in structural cost reductions in FY21, with a plan of reaching at least $1 billion in annual cost improvements from FY23 onwards.
Part of this includes outsourcing the remaining ground handling operations to save $100 million a year. Combined with job losses at Jetstar, this is expected to mean another 2,500 losses from Qantas, taking the total job losses to 8,500.
However, the recent increase in domestic travel has seen the number of full time equivalent roles ‘stood up’ (rather than stood down) increase from around 9,000 in October to 11,500 in December. This is expected to increase to around 14,000 in the third quarter.
Activity
Qantas said that domestic capacity will increase to 68% of pre-COVID levels for December, rising to nearly 80% for the third quarter of FY21. This compared to 20% in the first (September) quarter and around 40% for the second (December) quarter.
Qantas expects its market share of more than 70% to be maintained. A number of large corporate customers have moved to Qantas this year. It’s working to reduce its selling costs with travel agencies with new multi-year agreements.
International flights are still largely grounded, apart from bringing Aussies home and New Zealand flights.
Qantas Freight continues to perform extremely well because of the rise of e-commerce demand and higher yields on the international freight network.
Qantas Loyalty has shown a high level of resilience and generates significant cashflow.
Summary thoughts
Qantas isn’t letting off the fireworks yet for a full recovery. It made the point about reducing government stimulus in the coming months and it’s not expecting an international recovery until at least July next year. Revenue still hasn’t recovered.
However, the Qantas CEO did say that there has been a “vast improvement” in trading conditions over the past month, which is promising.
If you’re brave, then it could be time to consider Qantas shares (if you haven’t already) because of its strong domestic prospects and the prospective higher profit margins next year. But there are other ASX growth shares I think would make better ‘recovery’ ideas such as EML Payments Ltd (ASX: EML).
