Why Qantas' $2.8 billion loss isn't such a scary number

By David Flynn, August 29 2014

OPINION | Two point eight billion dollars. The sheer size of Qantas’ reported loss is a number so large that it bears repeating, slowly. Two point eight billion dollars.

It’s a jaw-droppingly big number. It's quite possibly the largest loss ever posted by any airline airline anywhere in the world. And a seemingly bottomless black hole for an airline which only three years ago declared an annual profit of $552 million.

But $2.8 billion is not the number that should be taken away from the airline’s recap of the 2013-2014 financial year.

Yes, $2.8 billion was the Big Scary Number featured in every headline, the opener of every news bulletin and the start of every conversation yesterday about Qantas and by extension the performance and fate of CEO Alan Joyce, a man who probably feels like Australia’s favourite punching bag.

But most of that number, and therefore most of the loss, isn’t real.

$2.6 billion of it comes from a ‘write-down’ of the value of the aircraft belonging to Qantas’ international fleet – a devaluation intended to reflect their actual worth in today’s market, in the same way that your house might be devalued in a slump.

And this $2.6 billion found its way onto the books only because of Qantas’ decision to effectively spin out its international arm into a new company – a move aimed at attracting foreign investment on the back of recent changes to the Qantas Sale Act.

In short, that $2.6 billion is a paper loss. It doesn’t represent cash. It’s an accounting finesse. It’s a number in a column on an Excel spreadsheet.

The real loss – what’s for obvious reasons called the underlying loss – turns out to be $646 million.

That’s still the biggest loss in Qantas’ modern history since the airline was privatised almost two decades ago.

And while $646 million remains a challenging number, it’s a far cry from $2.8 billion.

Nobody is saying that turning around that $646 million loss, and getting the books to balance, will be easy.

But Qantas is only partway through to run on its ambitious ‘transformation program’ charged with carving out a total $2 billion in savings. There are already signs that this wide-reaching program is paying its first dividends, with Qantas reporting $440 million in ‘transformation benefits’.

The airline has in fact accelerated the scheme, beginning with front-loading the job-losses to shed around 2,200 staff positions by the end of June 2014 – almost half the target of 5,000 jobs to go over the next three financial years.

The first five Boeing 787-9 Dreamliners earmarked for Qantas proved another casualty of a fast-tracked recovery, with purchase options on those fuel-efficient jets being pushed back another year.

The gameplan is that these and other moves, combined with greater efficiencies in using the existing Qantas fleet – and a freeze in the domestic capacity war with Virgin Australia which proved so costly to both airlines – will right the ship.

Joyce has made a brave but measured forecast that Qantas as a group – which includes the now loss-making Jetstar division – will return to an underlying pre-tax profit by the end of this year.

There are ample caveats to this. Hitting  cost-saving targets, stable fuel costs, the repeal of the carbon tax and rising demand against stable capacity are all listed on Joyce’s Get Out Of Jail card.

But there are signs that the rising tide of red ink has turned and Qantas is on the way back from the brink.

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David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

12 Jun 2013

Total posts 744

Hey David, did you know that there's only two paragraphs in this story with more than one sentence? It's a really grating tabloid style.

19 Aug 2014

Total posts 3

That 646 million is still such a huge number. Means just under $2 million dollars a day. You seem to think it is nothing and trying to defend Qantas for some reason.

Thank you David!!!

Sorry for my rants in the earlier messages on this topic! Appreciate the clarity!!

29 Aug 2014

Total posts 5

The fact that writedown of the value of the aircraft is taken into account on the books represents the fact that this loss IS a tangible loss to QF. 

It's no different to having the actual selling value of your house substantially lowered.

You've incurred a sizeable loss in your asset base. Yes, it doesn't show up until you actually sell the house, but it's still a real and tangible loss.

The same goes for the QF aircraft. It means that there's serious deficiency in cash return to QF when they are sold or scrapped. That translates to less cash in the bank for QF.

Given that many equipment operators, be they airlines, earthmovers, or truckers, simple lease equipment as required for the current demand, then perhaps the capital loss is not such a worrying thing. However, the capital loss still translates as a loss of value in QF's asset base, and its ability to have cash on hand to meet contingency outlays.

The other problem is, that Joyces move to push the current aircraft harder, to "improve efficiency" means that he's putting reliability at risk (reliability of the aircraft, plus reliability of OT performance) and if anything goes wrong in a high-pressure "efficiency" environment, then that tranlates as a bigger mess - as compared to when aircraft scheduling and useage levels have more leeway in the planning.

12 Jun 2013

Total posts 744

>The same goes for the QF aircraft. It means that there's serious deficiency in cash return to QF when they are sold or scrapped. That translates to less cash in the bank for QF.

True, but the fact that this is all happening in one year rather than gradually over many years is the bit that's artificial, since as I understand it this "loss" comes from no longer pretending that the AUD is worth 68 US cents.

This is weird since the AUD has been going down over the past year and a bit and is likely to continue in that direction. If I didn't know better I'd swear that Joyce was planning to do yet another re-valuation next year with the AUD a bit lower and use it to show a massive turnaround from this year's figures to next.

Although I wonder why exactly a write down needs to occur when the international arm is spun off? 

Wouldnt PPE be depreciated from the beginning resulting in any write down upon exit to be modest? Or perhaps the depreciation charges to date were not appropriate and a fair value adjustment was required at exit?

I suppose KPMG has given the numbers their blessing. So it has to correct, am I right?

Any IFRS technical experts out there who can help with these questions?

29 Aug 2014

Total posts 16

I think I know.

2013 AR: QFi and QFd grouped under "Qantas Brands" https://www.qantas.com.au/infodetail/about/investors/2013AnnualReport.pdf#page=134 -  any deficit from the long-haul fleet is allowed to be aggregated with the surplus from the domestic fleet, thus relieving Qantas of the need to impair the long-haul fleet.

2014 AR: QFi confirmed to be a separate structure https://www.asx.com.au/asxpdf/20140828/pdf/42rt768vx1f7lc.pdf#page=35, which means the long-haul deficit no longer qualify to be aggregated with the surplus on the domestic fleet, and the deficit must be taken to profit.

What is a CGU is very judgemental, but directors and auditors pay lots of attention to it. And a lot of disclosure has to be made allowing analysts and shareholders to second guess directors and auditors. 

Thanks for that percysmith. I'm well impressed by that explanation!

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1381

Yes, It's a real loss, but it isn't all attributable to this year,

And it isn't a CASH impact.

To me the most important number in the whole presentation was barely touched on.

And that is Operating Cash Flow was positive - at about $1 billion, and was equal to the Capex.

29 Aug 2014

Total posts 5

Sorry, a typo slipped into my last post. The line should read "simply lease equipment as required for current demand".

Qantas - Qantas Frequent Flyer

29 May 2013

Total posts 42

Didn't AJ indicate that high fuel prices were one of the issues contributing to the reported losses and that if these continued then it could threaten the return to profit. If that is the case why do they continually delay the purchase of fuel efficient aircraft and continue to fly the gas guzzlers? I understand the capital cost involved in purchasing would be hefty (but you claim depreciation of that over a number of years). Surely a more fuel efficient fleet would make up for that over the years?

17 Feb 2012

Total posts 121

Because they own those gas guzzling planes, the same reason that American only just retired their last MD80 in May(!!!). In comparison Qantas' 747ER's are dreamliners and are still great planes to operate. 

GM
GM

Air NZ Airpoints

12 Mar 2014

Total posts 36

Glad to hear those MD80s have finally gone to the boneyard! Every time I flow AA (which wasn't often admittedly) I got delayed by those crates.

And while I agree that the 744 is a great plane (having done many long-haul trips on them, and I found even Delta's awful service couldn't ruin the ride) it has had its day. When Air NZ is retiring the last of its 744s and going all-777 for its large size long haul fleet you know it's time for a change...

in other words, not making further fleet investments now (or leasing newer jets) is a classic false economy. Alan Joyce needs to revisit his strategy.

Qantas - Qantas Frequent Flyer

17 Aug 2012

Total posts 2221

I think what was meant was that the older 744s, like OJA, are gas-guzzling heaps, but the newer 744ERs like OEG are still okay for the time being (they're only 12 years old).

Still, the 789 would be nice. Hell, even new long-haul 333s and 332s would be nice...

The truth is that there is so far little need to panic about Qantas losing $$. Red Roos will keep flying and somehow make it. 


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