The Qantas Group says that it has been able to accelerate the repair of its balance sheet and expects to finish the first half of FY22 with a materially better net debt position than it had prior to the start of Delta variant lockdowns in June. The Group has also selected the Airbus A320neo and Airbus A220 families as the preferred aircraft for the long-term renewal of its domestic narrow-body fleet.
A firm commitment for 40 aircraft – 20 A321XLR (extra long-range) and 20 A220 aircraft – is expected to be placed with Airbus by the end of FY22. Qantas will also have a further 94 purchase right options on aircraft over a 10-plus year delivery window as its existing Boeing 737-800s and 717s are gradually phased out.
The order is in addition to Jetstar’s existing agreement with Airbus for over 100 aircraft in the A320neo family. Part of this new deal includes combining these two orders so that the Group can draw down on a total of 299 deliveries across both the A320 and A220 families as needed over the next decade and beyond for Qantas, QantasLink and Jetstar.
The initial firm order concentrates on the larger, single-aisle A321XLR, and the mid-size A220-300 with purchase right options for the smaller A220-100, giving Qantas a fleet mix that can deliver better network choices and route economics.
The small and medium size A220s provide the Group with flexibility to deploy these aircraft throughout most of its domestic and regional operations. They could be used during off peak times between major cities and on key regional routes to increase frequency.
Both aircraft types will be powered by Pratt & Whitney GTF
Qantas Group CEO Alan Joyce said the airline had called the renewal of its domestic fleet Project Winton after the town where the national carrier was born 101 years ago, because it’s a key strategic decision for the future of Qantas Domestic.
“This is a long-term renewal plan with deliveries and payments spread over the next decade and beyond, but the similarly long lead time for aircraft orders means we need to make these decisions now.
“Qantas is in a position to make these commitments because of the way we’ve navigated through the pandemic, which is a credit to the whole organization.
“This is a clear sign of our confidence in the future and we’ve locked in pricing just ahead of what’s likely to be a big uptick in demand for next-generation narrow-body aircraft. That’s good news for our customers, our people and our shareholders.
“We’ll be having discussions with our people to ensure we have the arrangements necessary to support such a large investment.”
“The Airbus deal had the added advantage of providing ongoing flexibility within the order, meaning we can continue to choose between the entire A320neo and A220 families depending on our changing needs in the years ahead. The ability to combine the Jetstar and Qantas order for the A320 type was also a factor.”
Qantas balance sheet improvement was made possible by the $802 million sale of land in Mascot that was not core to the Group’s long-term strategy and strong sales that flowed once firm opening dates for international and domestic borders were announced.
Continued strength from Qantas Freight and Qantas Loyalty have also made significant contributions to cash flow.
Collectively, these positive factors helped to partly offset trading conditions that were heavily depressed for most of the first half due to prolonged lockdowns in Melbourne and Sydney and compounded by border closures in other states that brought domestic flying down to a low of around 30 per cent of pre-COVID levels.
Based on current forecasts, the Group expects net debt to be approximately $5.65 billion by the end of December 2021.
Liquidity levels continue to remain strong and are forecast to be approximately $4.2 billion by the end of the current half. This includes cash of $2.6 billion and $1.6 billion of undrawn debt facilities. The Group has maintained its Baa2 investment grade credit rating.
While the recent boost in travel activity has partially offset the material impact from months of lockdowns, the Group nonetheless anticipates a significant loss in the first half. Assuming no further lockdowns or significant travel restrictions, the Group expects an Underlying EBITDA loss for the first half of FY22 in the range of $250 million to $300 million.
When compared to the prior corresponding period, this reflects stranded costs due to sudden lockdowns and a lower level of aircraft hibernation to facilitate a faster ramp-up based on the national recovery roadmap.
Once non-cash depreciation and amortisation costs are included, the 1H FY22 Underlying EBIT loss is expected to exceed $1.1bn.
The Group expects to incur additional ramp-up costs in the second half of FY22. This reflects the decision to return all Australian-based employees to work earlier than expected and ahead of demand to ensure capability is maintained and to end a long period of stand down for employees.
The Group’s fuel cost for 1H22 is expected to be around $495 million. The Group is highly hedged for the second half of FY22 primarily in options and a significant portion of those are participating at current forward prices.
Across both Qantas and Jetstar, the Group states that it is holding significant levels of domestic bookings over the Christmas and summer holiday period. Demand momentum slowed in late November due to uncertainty regarding the Omicron variant but there has been recent improvement.
With almost all states and territories now open, the Group expects domestic flying to be about 75 per cent of pre-COVID levels by the end of December rising to more than 100 per cent in February 2022.
Domestic demand is being driven by leisure travel as Australians visit family and friends or take long-awaited holidays. Travel for business purposes continues to be underpinned by the resources, government and construction sectors, with initial signs of a broader recovery in other parts of the corporate market that is expected to gather pace after the summer holidays.
Domestic competition is expected to intensify in the second half of FY22.