Qantas Airways: Financial Modelling

and Dividend Policy

Group: Power Point

Group members: Xinru Zhou 938278 Jia You 1102904
Chunyu Fan 800327 Yumeng Sun 805492
CONTENTS
1 Industry Analysis

2 Company Analysis

3 Model and Assumptions

4 Financing Gap

5 Dividend Analysis
/01 Industry Analysis
1) Characteristics
2) Existing Competitors
1.1 Characteristics of the Australian Airline Industry

Characteristics of the Airline Industry The Australian Market for Travellers

Few winners over long term Australia’s position

• High fixed cost • End-of-line destination
• Strong labor union • More exposed to the economic
• Vulnerability to commodity cycles conditions within Australia
• Preponderance of state owned
airlines Reluctance of the Australians
• High cost
Reliance on economic conditions • Foreign exchange rate
• Fuel costs • Competitive standing of airline
• GDP growth
• Foreign exchange rates
Trip per Capita per Year
1.8
1.6
1.4
1.2
1
0.8 1.6
0.6
0.4
Uncertainty of future performance 0.2
0
0.4
Australia Swedes
1.2 Existing competitors

• market cap: AU$726m
• Australian-based airline
operates both domestic
and international flights
• market cap: AU$174.03m • market cap: NZ$1.93b • market cap: MYR3.81b
• Flag carrier airline of New Zealand • Malaysian low-cost airline
• Operates scheduled
• Operates scheduled flights to 20 • Operates scheduled domestic
regional services
domestic and 32 international
and international flights to
destinations in 20 countries,
more than 165 destinations
primarily around and within the
spanning 25 countries
Pacific Rim

Virgin Australia Regional Express Air New

Text here
Airlines
Text Zealand
here AirAsia
Holdings
/02 Company Analysis
1) Operations of the Qantas Group
2) Performance
3) Capital Management
2.1 Operations of the Qantas Group
Revenue Segmentation (AU$ Million)
Qantas Domestic (35%)
01
premium full-services to domestic airlines

Qantas International (32%) 1084

02 1307
premium full-services to international airlines Qantas Domestic
5848 Qantas International
Jetstar
3222 Qantas Loyalty
Jetstar (19%) Qantas Freight
03
domestic low-fare airline

Qantas Loyalty (8%) 5297

04
frequent flyer business

Qantas Freight (6%)

05 more than half of the Qantas
the independent air freight service business
revenues came from its domestic
premium and low-fare brands
2.2 Performance
Earnings Performance ($AU Million)
FY2010 - FY2014 18,000
16,000 15,902
• new entrants into the domestic routes 14,000 14,367 14,913
14,069 14,031
15,155
14,372
13,312 13,197
• new competition international 12,261
12,000

• soaring oil prices 10,000

8,000
• debt problem 6,000
4,000
2,000
1,511 1,697 1,655 1,871
980
0
FY2010 FY2011 FY2012 FY2013 FY2014
FY2014 operating revenue operating expense EBITDA

• corporate loss of $2.84 billion Depreciation Charge and Abnormals ($AU Million)
• government refuse to guarantee its debt 3,500
3,330

• downgrade in credit rating 3,000

2,500

2,000
• transformation plan 1,500 1,450
1,325 1,351
• $2B cost saving by FY2017 1,199
1,000
1,249

• $1B debt reduction by FY2015 500 444

217
059 12
FY2010 FY2011 FY2012 FY2013 FY2014
depreciation abnormals
 2.3 Capital Structure
Gearing Ratio
250%

226% FY2014
200%
• surge in gearing ratio up to 226%
150%
161%
• soaring oil prices
121% • heightened competition from other
111%
100%
86%
95% 95% 96% 98% 102% premier carriers
83% 82%
73% 77%

50% 54% 55%

47%
33% 34%
41% Capital Structure
28% 27%
100%
0%
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 90%
2,866
Gross gearing Net gearing 80%
5,981 6,151 5,889 5,954
70%
60%
��������� FY2005 - FY2013
G ross gearing rati �= 50%
����������� ������ 40%
• stable capital structure 30%
6,031 6,549 6,080
6,483

��� ���� • average gross gearing ratio of 93% 20%

5,718
N et gearing rati�=
��������� �� ������ 10%
• Qantas is publicly traded 0%
FY2010 FY2011 FY2012 FY2013 FY2014
Debt Equity
2.3 Capital Structure
Quick Ratio Interest Coverage Ratio
80.00% 8000 2.00 500
448
7,525 421
76.78% 400
1.50 1.47
7,118 357 1.42
75.00% 7000
312
1.22 305
271
296 286300
72.54% 256
1.00
6,370
6,241 6,235 200
70.00% 6000 0.76

0.50
100
66.95%

65.00% 5000 0.00 0

63.35% FY2010 FY2011 FY2012 FY2013 FY2014

-100
-0.50
60.00% 4000
3704 -200
3496 3398 -1.00
55.77% -300
55.00% 30013000
2829
-1.50 -1.55-400
-442
50.00% 2000
FY2010 FY2011 FY2012 FY2013 FY2014 -2.00 -500

Quick ratio Cash (AU$) Current liability Interest Coverage Ratio EBIT (AU$) Interest expense (AU$)

���ℎ+���������� ����������+�������� ���������� ����

Q ���� �����= � ������� �������� �����=
������� ����������� �������� �������
/03 Model and Assumptions
1) Initiative Scorecard
2) Assumptions in the model
3) Forecasting
4) Three most important assumptions
3.1 QANTAS AIRWAYS LIMITED INITIATIVE SCORECARD

Cost Reduction Satisfaction Debt Reduction Greater Benefits

• From 11 fleet types to seven
• 10% ex-fuel expenditure
reduction
• 5,000 FTE reduction (2500
actioned)
• Customer satisfaction • More than AU$1 billion debt • AU$2 billion gross benefits
• Most on-time domestic reduction. • Positive free cash flow
carrier • Already achieved AU$96
million reduction
• Debt/EBITDA less than 4

FY2016 Ongoing FY2014 FY2015 onward

3.2 Income Statement Assumption

• Average of Historical Revenue Growth Rate and stay constant

• Lower rate of Operating Ratio
• Constant Depreciation Rate, Tax Rate, Interest Revenue and Interest Expense
• Constant pattern of Amortization Rate

Income Statement Assumptions FY2015E FY2016E FY2017E

Revenue Growth Rate % 0.03 0.03 0.03
Operating Ratio % 0.88 0.87 0.76
Depreciation Rate % 0.10 0.10 0.10
Amortization Rate % 0.00 0.13 0.00
Tax Rate % 0.30 0.30 0.30
Interest Revenue % 0.03 0.03 0.03
Interest Expense % 0.05 0.05 0.05
3.2 Balance Sheet Assumption
• Average of Historical Cash as % of Revenue, Days Sales Outstanding, Days Inventory Outstanding,
Days Payable Outstanding
• Lower rate of Short-Term Debt from FY2016
• AU$1 billion debt reduction in FY2015 and a lower amount reduction in FY2016E and FY2017E
• FY 2015 and FY 2016 CAPEX reduced by $1.3 billion

Balance Sheet Assumptions FY2015E FY2016E FY2017E

Cash as % of Revenue 0.21 0.21 0.21
Days Sales Outstanding 29.06 29.06 29.06
Prepaid Expenses as % of Expenses 0 0 0
Days Inventory Outstanding 9.41 9.41 9.41
CAPEX -700 -600 0
Days Payable Outstanding 48.03 48.03 48.03
Short-Term Debt as % of Revenue 0.07 0.05 0.05
Long-Term Debt Changes -1000 -200 -200
 3.3 Income Statement Forecasting
Historical Forecast
(AU$ million, June year end) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Income Statement
Operating Revenue 13312.0 14367.0 14913.0 15902.0 15155.0 15672.5 16207.7 16761.2
Other Revenue 460.0 527.0 811.0 0.0 197.0 0.0 0.0 0.0
Total Revenue 13772.0 14894.0 15724.0 15902.0 15352.0 15672.5 16207.7 16761.2
Operating Expenses -12261.0 -13197.0 -14069.0 -14031.0 -14372.0 -13791.8 -14100.7 -12738.5
EBITDA 1511.0 1697.0 1655.0 1871.0 980.0 1880.7 2107.0 4022.7
Depreciation -1199.0 -1249.0 -1325.0 -1450.0 -1351.0 -931.0 -920.0 -920.0
Amortization 0.0 0.0 -59.0 0.0 -71.0 0.0 -71.0 0.0
EBIT 312.0 448.0 271.0 421.0 -442.0 949.7 1116.0 3102.7
Interest Revenue 181.0 192.0 181.0 109.0 82.0 95.5 128.9 148.7
Interest Expense -256.0 -305.0 -357.0 -296.0 -286.0 -261.8 -239.3 -230.8
Pre-tax Profit 237.0 335.0 95.0 234.0 -646.0 783.5 1005.7 3020.6
Tax Expense -62.0 -74.0 105.0 -11.0 1133.0 0.0 11.3 -894.9
Net Profit after Tax before Abnormals 175.0 261.0 200.0 223.0 487.0 783.5 1016.9 2125.7
Abnormals -59.0 -12.0 -444.0 -217.0 -3330.0 -183.0 -183.0 -1043.5
Outside Equity Interests (Minorities) -4.0 1.0 -1.0 -1.0 0.0 0.0 0.0 0.0
Reported NPAT 112.0 250.0 -245.0 5.0 -2843.0 600.5 833.9 1082.2
3.3 Balance Sheet Forecasting
Historical Forecast
(AU$ million, June year end) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Current Assets
Cash 3,704.0 3,496.0 3,398.0 2,829.0 3,001.0 3229.3 3339.6 3453.6
Excess Cash 267.2 1,435.2 2,054.0
Receivables 1,088.0 1,027.0 1,111.0 1,436.0 1,196.0 1,247.9 1,290.5 1,334.6
Prepaid Expenses 138.0 148.0 107.0 102.0 0.0 0.0 0.0 0.0
Inventories 319.0 372.0 376.0 364.0 317.0 355.6 363.6 328.5
Investments 233.0 318.0 88.0 180.0 172.0 172.0 172.0 172.0
NCA Held Sale 91.0 20.0 73.0 42.0 134.0 134.0 134.0 134.0
Other 259.0 260.0 307.0 292.0 112.0 112.0 112.0 112.0
Total Current Assets 5,832.0 5,641.0 5,460.0 5,245.0 4,932.0 5,518.1 6,846.9 7,588.8
Non-current Assets
Receivables 407.0 423.0 472.0 174.0 158.0 158.0 158.0 158.0
Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Investments 483.0 546.0 474.0 217.0 177.0 177.0 177.0 177.0
PP&E 12,516.0 13,652.0 14,139.0 13,827.0 10,500.0 9,800.0 9,200.0 9,200.0
Intangibles (Excludes Goodwill) 449.0 429.0 464.0 517.0 546.0 546.0 546.0 546.0
Goodwill 219.0 164.0 146.0 197.0 195.0 195.0 195.0 195.0
Future Tax Benefit 0.0 0.0 0.0 0.0 548.0 313.0 11.3 0.0
Other 4.0 3.0 23.0 23.0 262.0 23.0 23.0 23.0
Total NCA 14,078.0 15,217.0 15,718.0 14,955.0 12,386.0 11,212.0 10,310.3 10,299.0
Total Assets 19,910.0 20,858.0 21,178.0 20,200.0 17,318.0 16,730.1 17,157.2 17,887.8
Current Liabilities
Account Payable 1,750.0 1,738.0 1,876.0 1,859.0 1,851.0 1,814.7 1,855.4 1,676.1
Short-Term Debt 619.0 577.0 1,119.0 835.0 1,210.0 1,057.9 810.4 838.1
Overdraft
Provisions 448.0 456.0 939.0 644.0 876.0 876.0 876.0 876.0
NCL Held Sale 4.0 0.0 12.0 0.0 0.0 0.0 0.0 0.0
Other 3,420.0 3,464.0 3,172.0 3,032.0 3,588.0 3,588.0 3,588.0 3,588.0
Total Current Liabilities 6,241.0 6,235.0 7,118.0 6,370.0 7,525.0 7,336.6 7,129.8 6,978.2
Non-current Liabilities
Account Payable 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Long-Term Debt 5,099.0 5,454.0 5,430.0 5,245.0 5,273.0 4,273.0 4,073.0 3,873.0
Provisions 1,275.0 1,414.0 1,605.0 1,445.0 405.0 405.0 405.0 405.0
Other 1,314.0 1,604.0 1,136.0 1,186.0 1,249.0 1,249.0 1,249.0 1,249.0
Total NCL 7,688.0 8,472.0 8,171.0 7,876.0 6,927.0 5,927.0 5,727.0 5,527.0
Total Liabilities 13,929.0 14,707.0 15,289.0 14,246.0 14,452.0 13,263.6 12,856.8 12,505.2
Shareholders Equity
Share Capital 4,675.0 4,657.0 4,687.0 4,650.0 4,614.0 4,614.0 4,614.0 4,614.0
Reserves 109.0 85.0 36.0 128.0 -81.0 -81.0 -81.0 -81.0
Retained Earnings 1,155.0 1,405.0 1,162.0 1,171.0 -1,671.0 -1,070.5 -236.6 845.6
Outside Equity 42.0 4.0 4.0 5.0 4.0 4.0 4.0 4.0
Total Equity 5,981.0 6,151.0 5,889.0 5,954.0 2,866.0 3,466.5 4,300.4 5,382.6
3.3 Ratio analysis
Debt/EBITDA
Debt-to-EBITDA 7.0 6.6

6.0
• Capability of Qantas paying its debt
5.0

• 6.6 in FY2014(peak) 4.03.8 3.6

4.0
3.2
2.8
• Successfully achieved less than 4 from FY2015 onward 3.0
2.3
2.0
1.2
1.0

0.0
FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E

Fund From Operation (FFO) To Net Debt Ratio FFO to Net Debt
100.0%
• Ability of Qantas to pay off its debt using NOI alone 80.0%
78.3%

• Net debt of AU$3482m with AU$-1503m FFO in FY2014 60.0%

41.4%
40.0% 30.4%
• Successfully achieved more than 45% in FY2015 20.0%

0.0%
FY2012 FY2013 FY2014 FY2015E
-20.0%
Target -40.0%
-43.2%
• Return to investing grade status -60.0%
 3.3 Free Cash Flow Forecasting

FFCF
• Qantas' ability to generate cash 2000

1500
• Positive free cash flow from 2015 1000

• The amount could be used for expansion, 500

0
2015 2016 2017
dividends or reducing debt.
• The signal of HEALTHY company FFCF
2015 2016 2017

Sales 15,673 16,208 16,761

Costs of Goods Sold -13,792 -14,101 -12,739

Depreciation -931 -920 -920
EBIT 950 1,116 3,103
Tax -285 -335 -931
NOPAT 665 781 2,172
Plus Depr 931 920 920
Minus CAPEX -651 -331 -920
NWC -355 -120 -302
FFCF 590 1,250 1,870
 3.4 Three Most Important Assumptions

Revenue
01 Operating Expense
02 Debt
03
Number of Passengers Cost of Labour for Airlines (around 22%) Short-term Debt
Reputation of Qantas Cost of Fuel for Airlines (around 21%) Long-term Debt
High load factor vs Low load factor (PLF) Other Expense

Scenario Analysis: Impact on Financing Requirement (AU$ millions)

Change in Assumption FY2015 FY2016 FY2017
1% Increase in Revenue Growth 5 9 39
1% Increase in OPEX / Revenue 191 110 87
10% Increase in Maturing Debt Being Rolled Over -97 -115 -136
/04 Financing Gap
1) Estimated Excess Cash
2) Scenario analysis
3) Estimated Gearing Ratio
4.1 Estimated Excess Cash

Plug figure = Trail liabilities and owners’ equity - Trial assets

Historical Forecast
(AU$ million, June year end) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Trial Assets 19,910 20,858 21,178 20,200 17,318 16,463 15,722 15,834
Trail Liabilities + Owners' Equity 19,910 20,858 21,178 20,200 17,318 16,730 17,157 17,888
Plug 0 0 0 0 0 -267 -1,435 -2,054

No financing gap based on assumptions

4.1 Estimated Excess Cash

AU$1,435 million Sustainable excess cash

• CAPEX reduced by $1.3 billion in 2015 • Stable capital expenditure, net profit
and 2016 and debt level after transformation plan
• Slight lower long-term debt

2015 2016 2017 Onward

AU$267 million AU$2,054 million

• more than $1 billion debt reduction • Positive retained earnings
• CAPEX reduced by $1.3 billion in 2015 • Slightly lower long-term debt
and 2016
4.2 Scenario Analysis
EXCESS CASH (AU$ millions) FY2015E FY2016E FY2017E

Base case 267.2 1435.2 2054

Best case 565.6 1777.1 2570.9

Worst case -124.4 897.9 1557.4

• Strong economic growth

• Low fuel cost
Best Case
• A falling Australian dollar
• Competitive and Efficient Labor market
Possible Events
• Increasing cost of Labor cost or fuel cost
• Economy recession
Worst Case
• Low credit rating with a higher cost of debt
• Failure of Transformation Plan
4.3 Estimated Gearing Ratio

Gearing Ratio
250%
226%

200% • Gearing ratio falling

154% back since 2015
150%
111% 121% 114%
100%
86%
95%
82%
95% 96% 98% 102%
88% • Around previous
73%
83%
61%
average gross
50% 54% 55%
47%
28% 27% 33% 34% 41% 36%
23%
gearing ratio of 93%
0%
5 6 7 8 9 0 1 2 3 4 ) ) )
200 200 200 200 200 201 201 201 201 201 ated
ated
ated • Relatively stable
FY FY FY FY FY FY FY FY FY FY im im im
st st st
5(
e
6(
e
7(
e capital structure
201 201 201
FY FY FY

Gross gearing Net gearing

/05 Dividend Analysis
1) Competitors’ dividend policy
2) Should Qantas issue a dividend this year?
3) Recommendation
4) Reality
 5.1 Dividend Policy Compared with Competitors

No dividend paid since 2009

Qantas Virgin Air New
Airways Auatralia Regional Express Zealand Air Asia
2005 $0.2 $0.25 0.047
2006 $0.22 0.05 0.045
2007 $0.3 $0.04 0.066 0.159
No dividend paid since 2013
2008 $0.35 $0.02 0.066 0.073
$0.06
2009 (interim) 0.053
2010 0.066 0.054
2011 0.071 0.039 Sustainable dividend
2012 0.09 0.036 0.24
2013 0.067 0.04
2014 0.181 0.03
2015 0.148 0.04 Sustainable dividend since 2012
5.2 Should Qantas issue a dividend this year?

Reasons to issue:
a) Shareholders’ expectation:
“We want them. We should get them. You’ve got $4 billion in cash that’s our money. We should get a dividend next
year.”

FY2015 results:
$2.9b Cash
$1b Undrawn facilities
$2b Operating cash flow

b) Signaling:
“The Transformation Plan worked well, and we’re at a point now where we think we’ve structurally changed this
business and it can now support ongoing dividends.”

- management’s positive perception of the firm’s future earnings

- differentiate Qantas from its main competitor, Virgin Australia
5.2 Should Qantas issue a dividend this year?

Reasons to retain:
a) More financial flexibility:

- the capital requirements of strategic actions to return to investment grade status were contrary to
any immediate resumption of capital returns and particularly to sustained dividend payment

b) Support completion of the Transformation Plan:

- the Transformation Plan placed targets in firm performance and structure, including network and
fleet optimization improvements
- they also made commitment to investment in aircraft, lounges, technology and service
5.2 Should Qantas issue a dividend this year?

Reasons to retain:
c) High volatility in airline industry:

- High uncertainty in the airline industry and Australia market for travelers makes it difficult for
management to offer stability and surety of future returns to shareholders

d) Few alternative sources of capital:

- Equity: limited amount of foreign capital it could raise, largely depended on the domestic investors
- Debt: downgraded to the level of junk grade stock in FY2014, Australian government also rejected
to publicly guarantee Qantas’s debt
 5.3 Recommendation
Do not issue a regular dividend

－ Franking credit
balance: $84m
－ Shares
outstanding:
2.192b
－ Franked
dividend: $196m
($0.01 per share)
X Regular Dividend X Special Dividend or X Stock Split or DRP
Share Buyback

- being cautious on giving long-term commitment under the high uncertainty and unstable firm’s
future earnings
- unsustainable generation of new franking credits in the next few years
- unfranked dividends were significantly less attractive in Australian market
5.3 Recommendation

Do not issue a special dividend or share buyback

X Regular Dividend X Special Dividend or Share

X Stock Split or DRP
Buyback

- Qantas didn’t have too much excess cash ($267m) in FY2015

- its gearing ratio remained very high, and cash balance was very critical to supporting the gearing
- large pressure pressed on its balance sheet, and its return to investment grade status would also
be more challenging
5.3 Recommendation

Do not issue a stock split or DRP

X Regular Dividend X Special Dividend or

Share Buyback X Stock Split or DRP

- Stock split: theoretical increase in price after the split is not guaranteed; Qantas’s share price
was not very high and its liquidity was not a problem
- DRP: franking credits are dealt with in exactly the same manner with cash dividend; depleted
franking credit balance of only $84 million in FY2015
5.3 Recommendation

Conclusion:

• We don’t believe that Qantas should issue a dividend this

year.

• Instead, we think it should issue a dividend in the end of

FY2017 when the Transformation Plan is completed.

• Because Qantas will have more capacity for shareholder

return at that time.
5.4 Reality

Since Qantas made an extremely outstanding

performance in FY2016, they returned $1 billion to
shareholders, which comprised of a $505 million capital
return in the first half of FY2016 and a $500 million share
buyback that was concluded in mid June.

And they also issued a dividend in August 2016. That’s

$0.07 fully franked dividend per share.
Q&A

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