Qantas has announced that it will cut 4,000 workers (6,000 planned) in order to try and survive the COVID-19 crisis after it posted an annual loss of A$2bn ($1.43bn).
Alan Joyce confirmed what we all know to be true; “trading conditions are the worst in the airline’s 100-year history”, and yet this record loss only covers a few months at the start of the pandemic.
If you look closer at the results, you will note that Qantas has moved quickly (again) to write-down the value of assets, by a staggering A$1.4bn, primarily due to inflated valuations on its A380 fleet. On top of this, Qantas had A$642m of costs associated with restructuring due to the pandemic, primarily redundancy costs. Underlying profit, excluding the write-downs and one off costs, was A$124 million, down 91% from A$1.33 billion the year before. That was caused by just a few months of lockdown at the start of this pandemic and towards the end of the accounting period, the effect is staggering and we have to wonder what the next set of accounts will look like.
With Australia all but shut down – like so much of the world – it is becoming clear that losses at airlines are going to be overwhelming and nothing short of government assistance will save most. The US majors have been efficient at raising cash buffers. Outside of the USA other great airlines such as AirAsia X, Lion Air, AirAsia and at least 100 others that I could mention, are struggling to survive this pandemic. It really is a case of mind the gap – the funding gap. Strong large airlines have the depth to keep cutting their staff and fleet and raise capital; flag carriers have governments to fall back on; everyone else is in serious trouble. What I wrote in April remains valid: the longer this pandemic rattles-on the further back in time the clock will be wound. If we suffer further COVID-19 spikes during the coming winter then we might well recognise the global airline market as resembling the size and depth (outside of China and the Middle East) of the market just prior to 9/11 and SARS. It is also the case that many airline managers we speak to are now resigned to between a three or four year slog back to pre-COVID-19 levels, with a business travel rebound being very slow in the short term.
For those that see hope in the rising markets in the USA and beyond, a word of caution: for many years, we have seen the growing disparity in valuations of the tech giants and, on the main, the rest of the market. Who would have thought when Apple reached the $1tr valuation mark that it would double in value to $2tr in just two years and be worth more than Aramco? The market rising on the back of a few giants hides the stark reality of our situation. The world is changing fast, but for the airline market the best description would be contraction. The airline market, with its narrow margins and colossal cash requirements is a market that cannot take forced lockdown for long periods, and that has been laid bare in 2020. Will this turn away investors for another decade, and will that in turn take airlines back to the days when finding investors and growing share price value was ever-so hard? It points to a need for airlines to go back once again to share-buybacks to get stock trading up, but will they be able to do that in a meaningful manner before 2024?
When airlines have problems leasing companies have problems, there might be a lag of six months or more in some cases for lessors to experience real pain. Extending lease terms with payment deferrals during this crisis period has been the mainstay of 2020, but with airlines again requesting forbearance, many lessors are considering seriously if and when they will have to seize assets to protect their investment(s). The law firms are going to do well as are asset recovery firms (who now have no shortage of pilots). The one silver lining lay in the delay of the 737Max and the huge reduction in production rates at both Boeing and Airbus, which will help keep asset values higher than they might have been otherwise.
What we need is demand to come back into the market, which will make this whole thing a hiccup in the cycle – let us hope that just like after 9/11 and 2008 financial crisis, the demand will come back.
Today marks the 10th anniversary of Airline Economics & Aviation News. It should be a day of celebration, especially on the back of winning a Queen’s Award for Enterprise in 2019, but I find myself with very little to celebrate save for maybe good health (I hope), and the thought that we will be back up and running as usual at some point in the not-too-distant future. I looked through some of the features and reports from ten years ago and it really is the case that the market, be it airlines, lessors, finance houses, OEMs or traders, is so much larger today, so much more dynamic and so much more resilient than many give it credit. The past decade has seen the market mature beyond measure and this pandemic will not set back or change that underlying fact, it will inevitably make what remains on the other side of all this far stronger. We will be there waiting, may that time come soon.