“Qantas is going to face a domestic competitor that’s leaner and recapitalised and has the benefit of tearing up unfavourable deals through administration, so we need to be in the best shape possible to compete.”
Investors, if not the unions who are upset at the airline’s decision to announce the job cuts without any warning and ahead of a government decision on extending JobKeeper for the aviation industry, welcomed the deep cuts, particularly savouring the three-year plans to keep the cost base lower as conditions return to normal.
“We believe that the ongoing savings justify the actions taken,” Morgan Stanley analysts wrote, noting that the $1 billion to fund cutting costs – mainly through redundancies – would represent a very strong return.
Firetrail Investments’ Blake Henricks said the three-year plan would allow Qantas to compete in a smaller market.
“I don’t think not being able to fly international impairs the Qantas thesis,” he said. “Qantas can be delivering similar PBT [profit before tax] to history without flying internationally.
“It is predicated a lot on the decisions and actions of Virgin, but that’s what we can see a nice profitable domestic airline with a very valuable frequent flyer business and we’ve seen the strength of their freight business over time.”
At 1am Friday, underwriters JPMorgan and Macquarie Capital were locked in spiky video discussions with Qantas executives and Luminis Partners’ Simon Mordant and Richard Marques about which fund managers would be granted which chunk of the new equity the airline was issuing.
Some 94 per cent was allocated to existing shareholders on a pro-rata basis, while the remainder introduced some new investors.
This was not an ordinary equity raising for many reasons.
It is the second-largest equity raising this year, after National Australia Bank, and in volatile markets, JPMorgan and Macquarie Capital agreed to underwrite the deal with no market soundings.
Most of all, the capital raising was only one prong of a detailed, three year rethink of strategy that a group of key airline executives had been thrashing out since Easter about how the airline could best manage its own armageddon-scenario – no international flights, and very limited domestic activity.
The team on the capital raise included Mr Joyce, chief financial officer Vanessa Hudson, general counsel Andrew Finch (a former ECM partner at law firm Allens), group treasurer Greg Manning, corporate affairs officer Andrew McGinnes and investor relations head Fran Van Reyk.
Qantas had bought itself time to work out how best to handle evaporating revenue and a high-cost base with two swift debt deals in March and May, raising more than $1.5 billion.
As global airlines were bailed out one by one, and countries and states shut down more quickly than anticipated, it was clear the uncertain environment was gnawing at everyone.
At Qantas’ virtual weekly town hall meetings, which regularly attracted 3000 people, the most frequent question was “when will the job losses start?”
At weekly board updates, and the group’s increasingly frequent management meetings, that question was also high up the list. By June, it had become clear that the airline need to do more, though there were no covenant issues. An equity raise – something Qantas hadn’t done since 2009 – would make sense, particularly with a strengthening share price, and long-term adviser Luminis Partners was drafted in to review various financial scenarios and the best way to raise capital.
Within weeks, a capital raising was on – last Friday night, Macquarie and JPMorgan were approached after market close and asked to disclose they had no conflicts with Qantas, then sign a confidentiality agreement. On Saturday, they each received a dossier, including financial models and an investor presentation, and were asked to come back individually with their views on the market, discount for the capital raising and fees. Each firm was told Qantas had spoken to up to three firms.
By Wednesday, both JPMorgan, a lender, and Macquarie Capital had been appointed and agreed to underwrite the deal. One important factor giving comfort in taking that risk, sources said, was Joyce’s decision to extend his term as chief executive until at least 2023.
The original plan was to launch the deal in the coming week, but the Finacial Review’s Street Talk column broke news of the raising on Wednesday night.
It was a tough night in international markets airline stocks were off by as much as 8 per cent and there were fears that investors might be spooked watching images of the army being called into Melbourne, and the risk of another state closing borders. But there was no choice – the deal was launched Thursday.
But however successful the placement, it is only just the start. And unions are just one of the challenges.
Transport Workers’ Union Michael Kaine said the union, which represents more than 5000 Qantas employees, described the airline’s recovery plan as “unwelcome and unnecessary”. The union says it will press the airline to hold off on redundancies until the government makes an announcement about whether it will extend JobKeeper.
