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Ratings agency report compares Qantas and Virgin Oz

February 19, 2018 Headline News No Comments Email Email

Qantas has been highly profitable over the past two years following its financial turnaround but it faces massive outlays on new aircraft, according to a detailed report by one of the world’s foremost ratings agencies, which compares Qantas and its rival Virgin Australia.

S&P (Standard and Poor’s) suggests Qantas may have put off spending on new aircraft for too long and says its rival Virgin Australia has a newer and simpler fleet.

Over the three years to fiscal 2017, the average age of the Qantas fleet increased by two years despite a constant  level of invested capital, it says.

“Aircraft investment within the Australian airline industry has been subdued since the bloody and protracted capacity war that ended in May 2014,” the report states.

It says lower investment has eased funding pressures while improving domestic market fundamentals, which has let Qantas and Virgin Australia “lick their wounds and restore profitability”.

The report says a sizable funding task potentially looms for Qantas and it may start when the airline starts paying company tax again. It says the Qantas Sale Act and the airline’s financial framework may restrict funding sources. According to S&P, Qantas has not paid company tax since fiscal 2011 despite record profitability. It says the remaining AUD 951 million of tax losses carried forward should offset tax for another year or two, then the resumption of company tax payments may coincide with a fleet renewal from fiscal 2020.

The situation facing Virgin Australia is somewhat easier, according to the analysis, giving that airline scope for a capital holiday. S&P says solid cash generation should provide Virgin with much-needed financial headroom that will give it “room to take a breather”.

S&P notes that neither Qantas nor Virgin Australia seems to be in any hurry to add new capacity.

Any cash windfall would help Virgin’s financial self-sufficiency, the analysis says.

“It may also provide Virgin Australia with additional balance sheet capacity to repurchase the 35% economic interest in its Velocity frequent-flyer business sold to private equity in August 2014, should it choose to do so.”

The report, entitled “Can Qantas Or Virgin Australia Afford To Take A Capital Holiday?” has plenty of comparative charts and is highly readable. It can be read on the S&P Global Ratings site here.

Qantas, however, is critical of the S&P conclusions. A report in Melbourne’s Age quoted a Qantas spokesman saying the report ignored the fundamentals of its business and its fleet strategy, which includes eight B787-9 Dreamliners for delivery this year, letting the airline retire its five oldest B747s. Qantas also retains options on 45 more B787s, as well as 99 A320 NEOs.

Written by Peter Needham

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