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financial analysis

Mar 4, 2014

Did liquidity risk make Qantas seek $6-7 billion debt deal?

Another reason for Qantas urgently but unsuccessfully seeking $6-7 billion in a government debt guarantee might be found in major shorter term debt repayments and billions of dollars in

Another reason for Qantas urgently but unsuccessfully seeking $6-7 billion in a government debt guarantee might be found in major shorter term debt repayments and billions of dollars in capital that are variously buried in the accounts or do not appear in the group’s balance sheet.

These obligations are highlighted in a Crikey Daily Mail exposé by Glenn Dyer and Paddy Manning which is available to subscribers.

It is understood that these matters are of concern in the investment community, which is already turning on Qantas over the poor management of the company under group CEO Alan Joyce and chairman Leight Clifford.

The disclosures might also give Labor reason to back the Coalition refusal to grant Qantas a debt guarantee given the sums and risks involved, although they cover areas that Opposition leader Bill Shorten doesn’t want exposed by a proposed Senate inquiry into Qantas finances.

According to the Crikey subscriber story:

All up Qantas has around $12 billion of capital and other commitments that do not appear in the balance sheet. That’s allowed under current accounting rules, but when you add it to the $5.4 billion-plus of various bits of debt and interest-bearing debt, plus the $4.2 billion in pre-payments from people intending to fly on Qantas or Jetstar, the “strong liquidity” of $3 billion looks pretty weak.

The authors canvas some of the likely scenarios should Qantas falter for any reason in meeting substantial scheduled payables or continuing to pay interest, at rates adversely affected by its loss of investment grade financial ratings, in the nearer term.

The story adds to the pressing need for a parliamentary inquiry into Qantas finances, and the removal of an inadequate and incompetent management.

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10 comments

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10 thoughts on “Did liquidity risk make Qantas seek $6-7 billion debt deal?

  1. chris turnbull

    Hang on .. Am I reading this right ? Could it be the case that QANTAS attempted to outmuscle Virgin on the basis that QANTAS’ (liquid) pockets were deeper, but it was a gigantic bluff because of the off-balance sheet realities? Does that mean that Joyce is (now) telling a story closer to the truth re not being able to continue without a debt guarantee ? QANTAS would have known that they couldn’t bluff the opponent because he knew how they operated. Tell me these guys didn’t simply gamble with a terrible hand and lost. They’re not that stupid are they ?

  2. Scott

    It’s certainly not 12 billion debt.

    Firstly, hire purchase agreements are capital leases not operating leases and so appear in the balance sheet (check out note 7 in the half yearly report) So ignore the 1.2 billion there.

    As for the non-cancellable operating leases, always good to account for those in debt, but always present value them at the discount rate of debt. (Qantas discount at 7%)
    Works out to be around 2.5 billion.

    Add the 2.5 billion to the 6.2 billion in on balance sheet debt and you get an adjusted debt total of $8.7 billion. A little high, but certainly not $12 billion.

  3. Leon Kernan

    I’m absolutely not going to panic until I see Alan Joyce in TV ads walking through Sydney Airport with a whole lot of celebrities.

  4. reeves35

    [quote]I’m absolutely not going to panic until I see Alan Joyce in TV ads walking through Sydney Airport with a whole lot of celebrities.[/quote]

    Apparently he tried but he couldn’t get anyone to agree to appearing anywhere near him except Bill Shorten!!

  5. comet

    So Alan Joyce is the new Gary Toomey.

    Is Qantas about to the same way as Ansett?

  6. Dan Dair

    Comet,
    I’m pretty sure right now the issue is one of confidence.

    So long as passenger (business & private) confidence remains, people will buy tickets & their cash payments will maintain the airlines cash-flow.
    So long as business confidence remains, Qantas can continue to transact its aviation business on credit.

    However, if passenger confidence falls away, the cash flow situation could get problematic very quickly.
    And,
    If business confidence in the ability of Qantas to actually meet its debts falters, QF will be asked to pay for future business in cash.

    IF that should happen, it will have a massive & instant impact on QF’s cash-flow.

    IF it came to that point, I’d expect the end very quickly.

    So long as it DOESN’T come to that point, Qantas can continue reasonably comfortably until someone competent is able to take-up-the-reins & change direction.

    (Personally, I’d be happiest if it did not come to that point)

  7. Allan Moyes

    Dan Dair

    Please excuse what might be an silly question as I am not an accountant, but I read somewhere that bookings made via credit card could not be “cashed” until the flight was actually taken. If that is the case then I’m sure there are many forward bookings via credit card (I have a few myself). I imagine they are counted somewhere on the account books but it all sounds a bit hairy to me.

    Judging by what Scott said above, accounting seems to be more a “sleight of hand” skill than anything – sorry to all accountants out there.

    Of course I may have read the article wrongly – it’s been known to happen! 🙂

  8. Dan Dair

    I’m not an accountant either,
    But I would expect these bookings to be accounted for as an asset yet to be realised.
    The purchase has been made and effectively the cash is ‘at hand’, but until the flight actually takes place the payment doesn’t come to the company.

  9. Scott

    Accounting has to adhere to various standards. Every country has their own standards, but generally they will be based on the two biggies (IFRS) or (US GAAP). Neither of which require Operating leases to be part of the Balance sheet. However they are required to report on them and most analysts make the adjustments mentioned above.

    In regards to your credit card stuff…that is more about the credit card company. When you have an investment grade rating, the credit card companies give you the cash immediately (so it becomes a cash sale). If you lose it, it means that it is an Accounts Receivable and only payable after the flight is taken.

  10. Allan Moyes

    Thanks to both Dan Dair and Scott