Can Qantas afford to buy all the new aircraft it needs?

By Bloomberg News, February 15 2018
Can Qantas afford to buy all the new aircraft it needs?

After delaying spending on its fleet for too long during a turnaround program, Qantas faces a possible funding squeeze when it’s time to buy new planes, according to S&P Global Ratings.

Qantas needs to increase investment in its aging fleet of 309 planes before the sum required is too large to handle, S&P said in a report released on Thursday. Shareholder returns may have to be reduced to pay for fleet renewal, the ratings company said.

The average age of a Qantas plane is just shy of 10 years, older than a typical aircraft at Singapore Airlines and almost double the figure at Emirates, S&P said.

Qantas doesn’t plan to increase capital expenditure this year or the next, creating a “sizable funding task” from 2020 onward, S&P noted in its report. But Qantas may be restricted by its own target for net debt as well as an Australian law that limits foreign ownership of the carrier’s shares. The carrier has said it will spend A$3 billion on capital expenditure in the 12 months ending June 2018, and the same amount the following year.

“It’s a big task that needs to be addressed sooner rather than later,” Graeme Ferguson, a Melbourne-based credit analyst at S&P, said in an interview. “Their current level of investment is inadequate.”

Ferguson declined to say what Qantas should spend, but said it should be a “step change” from the current rate. Qantas said in its 2017 annual report it has “significant flexibility” around fleet management to respond to competitors and changes in the market.

Dreamliner options

Chief Executive Officer Alan Joyce launched a three-year transformation in 2014 that involved cutting jobs and expenses, delaying plane deliveries and axing unprofitable routes. His program delivered record profits and allowed Qantas to hand back more than A$2 billion of capital to shareholders.

With plans to start the first non-stop services between Australia and Europe next month, Qantas is buying eight Boeing 787-9 Dreamliners. It has options and purchase rights for a further 45. The carrier is also looking to replace its Boeing 747 aircraft at some stage.

Qantas’s net debt at the end of June 2017 was A$5.2 billion. That’s at the lower end of the airline’s targeted range of between A$4.8 billion and A$6 billion. Qantas has a credit rating at S&P of BBB-, the lowest investment grade.

The longer Qantas delays higher spending, the less room it has to remain in its targeted debt bracket, Ferguson said. The company may also have to tap equity markets.

That task is complicated by a law capping foreign ownership of Qantas shares at 49 percent. Overseas investors owned 43.6 percent of the stock at the end of 2017. That threshold limits the pool of investors that could buy Qantas shares in any fundraising equity sale.

Qantas

19 Apr 2012

Total posts 1409

It is a tricky balancing act with A330s and 737s not to mention 717s and remaining 747s all needing replacement at much the same time just after the A380 refurb. There may be a lot of leasing happening to manage it, not to mention more share issues.

24 Aug 2011

Total posts 1021

QF will go for a mix of purchases and leasing options. This is not unique with most major airlines using this method.


Given QF will probably agree to long lease terms (at least 15 years), they should have no issue in getting this lease finance from the major global aircraft leasing companies who can basically amortise the entire cost of the aircraft over the lease term.

QF

11 Jul 2014

Total posts 711

I'm not knocking anyone but this stuff happens when you pay big bonuses to staff to make the balance sheets look good, they start thing of bonuses rather then what is good for the company.

21 Apr 2017

Total posts 35

Couldn't agree more. And nowhere is this more evident than in Asia where investment in network, fleet and ground facilities has been inadequate.

Joe
Joe

03 May 2013

Total posts 653

If airlines stuck primarily to one model type say airbus or boeing they would save millions. Airbus cockpits for example have an amazing commonality. Never understood why airlines fly so many different types and have different interiors and fit outs with pax playing russian roulette choosing. Emirates has done an amazing job here. Either a 777 or A380 with almost same seating except for J class where the A380 is miles ahead.

21 Apr 2017

Total posts 35

Well, because different manufacturers offer different models with different specifications, because airlines run competitive RfP processes for the requirements that can yield substantial upfront capex differences offsetting the commonality issues you mention, because it is is no airline's interest to lose the leverage associated with being not committed heavily to one manufacturer only etc etc

AJW
AJW

16 Nov 2011

Total posts 620

Couple of points. If you have sufficient mumbers of each model then commonality becomes a non issue. If you have a shall fleet then commonality does allow flexibility which reduces overall costs.


Secondly there are so many different products and firouts because the market has moved so fast the past 25 years. Whilst it would be nice for all aircraft to have the latest and greatest simple fact is that is not economically viable. Even airlines with hobby fleet turnover have big differences, SA for example bSteve

Look to for the airlines with the youngest fleet sbd more alighted product and you will find heavily subsidies/state owned airlines.

Qantas - Qantas Frequent Flyer

18 Oct 2012

Total posts 123

So true Joe. Try working on them also .

Qantas - Qantas Frequent Flyer

26 Oct 2017

Total posts 83

Can someone please explain how replacing the A380 QF9 and QF10 flights with a 787 Dreamliner will not affect seat availability. I often need to book late for Europe and already find my self often having to fly on QF1/2 (via Sydney). The capacity shortfall with this smaller aircraft in Melbourne surely will exacerbate this problem.No?

31 Mar 2014

Total posts 377

You can fly via Singapore and connect to QF1. You actually have more options now than before

Qantas - Qantas Frequent Flyer

08 Jul 2017

Total posts 24

Not sure how you artists be at that conclusion. The Mel London flights are nowvia Perth with fewer seats.

Qantas - Qantas Frequent Flyer

26 Oct 2017

Total posts 83

You are correct and for late bookers like me that means less opportunity to fly QF, less ponts, less status points, less points upgrade, less lounging etc etc

Qantas - Qantas Frequent Flyer

26 Oct 2017

Total posts 83

I hear what you"re saying however it is still reduced capacity from the current situation and partner airlines from Singapore on to London or Europe, may be difficult if not impossible to points upgrade or obtain other benefits when flying QF metal.

AJW
AJW

16 Nov 2011

Total posts 620

No one can explain that because there are less seats.


But Qantas being s business is not interested in that, they are interested in how much money they can make from their asetts which includes planes and finite landline slots.

15 Feb 2018

Total posts 46

Looking at UpUp and Away, he is right. Many companies are paying big bonuses to executives and pay8ng shareholders before the long term good of the Company. By looking at forward bookings, Qantas should see whether the PER to LHR is going to be a success. If so, further orders to replace aging aircraft should be being decided on now.

29 Jan 2012

Total posts 109

How long as Joyce been at the helm - and they wonder why the airline is floundering. When a brand focus is shareholders and not the product it is marketing, all is lost. So Allan, when will you focus on the airline and passengers needs as time is running out before you are locked into a corner, or do you intend on handing over a 2nd Ansett to your replacement..

AJW
AJW

16 Nov 2011

Total posts 620

Who said it is floundering? Reality is it in the best place for s very long whilst.

QF

11 Jul 2014

Total posts 711

I'd be selling my shares after the next dividend, Qantas is close to the point of no return.

04 Dec 2017

Total posts 71

Cmon...besides its obsession with alcohol the inflight service / product is generally lacking compared to its main 1st rate competitors. The new business class seat is however a saving grace.

06 Jan 2017

Total posts 12

Who said QFA is floundering?

QF

11 Jul 2014

Total posts 711

I would say it is floundering from a customers marketing point of view, each week someone tells me how disappointed they are with QF or I read an article on the chaos of Qantas. Borghetti has a passion for VA, has Joyce got a passion for QF?

I read articles on the chaos at VA. So each has got its bag of issues. I think QF has turned around in the last few years, while VA has stagnated.

Qantas

03 Feb 2016

Total posts 11

Borghetti has a passion for VA...seriously, have a look at their balance sheet over the last few years...it's gone backwards.

Qantas - Qantas Frequent Flyer

27 Jan 2016

Total posts 18

@UpUpAndAway: and JB's 'passion' for VA has delivered consistent profits - not. JB has done three notable things, all of which have failed - 1) Create a 'virtual' network via partners with night and day product differences that serious flyers don't like (eg: SQ vs DL) 2) Created a mini-QF in Australia by duplicating product and routes 3) Deliberately kept Tigerair small and let JQ flourish (JB was anti JQ/LCC when he was at QF). The results speak for themselves irrespective of any feelings to the business.

29 Jan 2012

Total posts 109

QF is a legacy airline and has fallen from its standing in the 70's and 80's to that of a dinosaur which is losing its battle and market share to the current day competition. It is still running with old world attitudes and budgets in a new world which does not have the patience for this floundering relic.

It is top heavy in management, running costs and antiquated ideas. Customers now are looking for the bright new products, and their loyalty lasts as long as their last flight experience.

QF still feels the CEO's of the 80's are still with us, but they are not and nursing homes are now their office of choice along with their corporate ideas. New fuel saving aircraft will not save the day, the experience and attitude of the carrier is the focus point now for the new corporate FF.

Qantas - Qantas Frequent Flyer

27 Jan 2016

Total posts 18

@traveller90: if that's the case then why does QF make $1bn a year and VA loses money? So many comments on here just QF-bashing for the sake of it. And no, I don't work for QF - but yes, I fly them regularly and although I think there's room for improvement, there's many worse choices you can make when you fly.

29 Jan 2012

Total posts 109

Thanks for you reply. I did sound rather focused in my response to the topic, mostly the frustration of being a long term QF loyalist and seeing the recent decade of changes and decisions slowly eroding away a once spectacular and proud product.

Not all "modern competition" is a winner as you mentioned using VA as very good example, I was more focused on the introduction of the ME3 competition and NZ's dramatic restructuring and profitable product development following their near share collapse in the early 2000's, just to mention a few. I see QF as running along side LH and BA with their standing in the modern avaiation arena as they are also being left behind with their old corporate ways rather than moving with the times. They are flying yes, but how solid are they really..

There is much creative accountancy going on at the moment with airlines, QF included, which makes the surface look good but the foundation is rocky.

So please do not see it as QF bashing, just voicing my views and experiences. I am not employed in the airline or travel industry, just a paying passenger sharing my experiences and views.

31 Mar 2014

Total posts 377

I can see 797 and 777X being a good fit for Qantas. However one hasn't been announced and the other I am sure they have concerns over ordering at this early stage considering they got burnt with delays and problems with 787. They certainly need to make a decision soon but the possible best planes are still on the horizon

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1393

I agree QF is somewhat waiting for the right aircraft at the moment across both widebody, narrow body and even prop


But with a fleet of 122 aircraft (Qantas mainline - not the 309 quoted) it should be buying/leasing 6-9 new aircraft a year (if you take a 15-20yr life) and 15-20 over the total operation (inc NZ, Link and Jetstars)

They certainly aren't doing this at the moment - limiting 787s to 4 per year.

AJW
AJW

16 Nov 2011

Total posts 620

That’s mainly because little is to be gained by turning the fleet over at the momebt. So yeah they are waiting for an aircraft to jystify replacing older aircraft. Not that Qantas’s fleet is that old

Qantas - Qantas Frequent Flyer

08 Jul 2017

Total posts 24

I’d say the queens are getting tired. And old.

12 Dec 2012

Total posts 1026

Not sure where the 309 number came from either.
QF mainline + QLink + Jetstar Group + Jetconnect = 335 aircraft.

Qantas - Qantas Frequent Flyer

28 Sep 2012

Total posts 132

Just go ahead and order the A321Neo. Perfect fit for many legs through to some Asian ports, NZ and TransCon.


The A350 will do the long haul.

Virgin Australia - Velocity Rewards

15 Jul 2016

Total posts 13

Maybe Alan could take a pay cut to help with Qantas' reinvestment. I wouldn't mind doubling my income in a year! (From a miserable roughly $12m to $24m!)

Qantas - Qantas Frequent Flyer

28 Sep 2012

Total posts 132

Given his salary is only a few million at best, that's not going to make any difference to capital investment funds.


You do know how much a new aircraft costs, right?

12 Dec 2012

Total posts 1026

Once the current firm order 787-9s arrive, the QF fleet will be:

8 787-9
10 A330-300
18 A330-200
12 A380-800
6 747-400ER
69 737-800

A380s were delivered between 2008 and 2011
A330-300 were delivered between 2003 and 2005
A330-200 were delivered between 2007 and 2015 (6 pre 2011, 10 after 2013)
744ERs were delivered in 2002 and 2003

33 737s arrived between 2002 and 2006 while the bulk of rest arrived after 2011 (and a handful in 2008).

They are looking at 1/3 of the 737s, the 747ERs and the A330-300s needing replacement around the same time in the early-mid 2020s, with some of the 737s and A330-200s and A380s needing replacement not long after in the late 2020s.

The majority of the Jetstar A320 fleet (JQ, BL, 3K and GK) and the Jetconnect 737s look to good through to the early 2030s, but there are some that will need looking at in the mid 2020s.

Essentially almost the entire Qantas Group fleet (besides the 787s, some 332s and a small amount of narrow bodies) will need replacing between 2023 and 2032.

Meanwhile, the only current orders Qantas Group has are 12 A380s (8 firm, 4 options), 45 787s (15 options, 30 rights) and 99 A320NEOs.

Qantas

19 Apr 2012

Total posts 1409

On that list of dates Himeno it seems to me that QF will go something like another 4 789s in 2020, 6 A359LR or 778LR in 2022-23, 8 78-10s in 2023-25 (regional plane for Asia A333 replacement); 20 797 MOM and 30 737s from 2025. A380 replacements and rest of the 737s from 2030.

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1393

330-200s started in 2002. EBA-EBD are all 2002/2003 although some went to JQ for a period, then came back. So those four are probably on a shorter timeframe

24 Aug 2011

Total posts 1021

Qantas has an average fleet age of 10.5 years which is towards the top end of their stated band but not amazingly high by world standards (UA 14.4, DL 16.8, BA 13.5, SQ 8.1)


For comparison VA is 7.2 years which reflects that they have already rolled over a number of their older 738s (VO* series) whilst the original VX* series all remain in the QF fleet.

Qantas - Qantas Frequent Flyer

12 Jun 2011

Total posts 153

Being such a capital intensive segment, its probably prudent that QF isn't continually burning through cash to buy new planes. Whilst we would all love to sit in shiny new planes, QF have good hard products and refurbishes their interiors when needed (again, some may complain not frequently enough).

 
At the end of the day, QF need to make money and continually buying new planes isn't the way to do it.

15 Dec 2017

Total posts 3

Potential for some sale-and-lease-back arrangements?

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1393

Borrowings versus lease are essentially still counted as debt by the analysts.

You should have a mix of both

09 Jul 2017

Total posts 2

In my book QANTAS should have disposed of some of the early (or probably later) A330-200's and brought in new 787-9/10's.


At a guess the economics of the 787-9 including its added revenue opportunity (more seats) would have created enough savings / extra revenues to offset the additional finance costs associated with owning the aircraft.

Eight aircraft purchased between 2017-2020 would have amounted to an extra $300m pa of CAPEX or $10.8m pa in finance costs per year per aircraft. We aren't talking big dollars here.

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1393

But instead they refurbed them at a much cheaper cost.
It's a trade-off between the cost of the new aircraft and greater fuel consumption but far lower holding cost (in either lease or interest) in an older one


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