Airlines around the world are desperate to find sources of funding to keep their companies afloat. Qantas Group is no different. On March 25th, the Australian flag carrier put out a press release announcing the completion of a new round of debt funding. The new deal has the airline securing A$1.05 billion (US$647 million) in additional liquidity “to strengthen its position as it manages through the Coronavirus outbreak”.
“Over the past few years we’ve significantly strengthened our balance sheet and we’re now able to draw on that strength under what are exceptional circumstances. Everything we’re doing at the moment is focused on guaranteeing the long term future of the national carrier, including making sure our people have jobs to return to when we have work for them again.” -Qantas Group CEO Alan Joyce
Details of the deal
According to the Qantas Group, the debt has been “secured” against part of the Group’s fleet of “unencumbered aircraft”. To be more specific, the unencumbered aircraft consist of seven wholly-owned Boeing 787-9 aircraft. What this means is that these seven aircraft have been put up as collateral in the agreement. Should Qantas fail to pay back its debt according to the agreed-upon terms, then generally speaking, the lender has the right to seize the aircraft.
The seven Boeing 787-9s were purchased with cash in recent years. Doing the math, we can calculate an average value of roughly A$150 million per aircraft. This would equate to just over US$103 million. Given the fact that list prices are rarely adhered to, combined with the age and usage of the aircraft, this number seems to make sense.
The loan has a 10-year term with an interest rate of 2.75%. This funding raises the Group’s available cash balance to A$2.95 billion with an additional $1 billion in “undrawn facility remaining”.
Overall, Qantas Group says that its debt position remains at “the low end” of its target range, at A$5.1 billion, with no major debt maturities until June 2021
What Qantas Group is really doing by securing additional funding and debt, is buying itself more time. It needs this time to ride out the worst of the COVID-19 pandemic, with enough funds at the other end to resume operations.
The airline has already been aggressively cutting costs as revenue slows to a trickle. On March 19th, we saw news that most of its employees would stop working due to operations cutbacks. The Qantas Group, which includes Qantas and low-cost carrier Jetstar, said it would “stand down” two-thirds of its 30,000 employees until at least the end of May. This was being done to preserve jobs for the long term. According to the New York Post, workers will be able to use up various kinds of paid leave during the furlough. However, Qantas Group says that it is “inevitable” that some will temporarily go without pay.
“The reality is we’ll have 150 aircraft on the ground and sadly there’s no work for most of our people,” -Qantas Group CEO Alan Joyce
We can only hope that Qantas won’t need to burn through the entirety of this funding as the COVID-19 pandemic progresses.
Do you think borrowing against its unencumbered aircraft was a smart idea? Let us know your thoughts in the comments.