Maybe QF shareholders should consider a dividend / share buyback penitent for the sins of the past.
I suspect the purchase of four additional 787's for the purpose of growth (new international markets) and funded from a reduction in dividends / share buybacks could substantially change QF's debt profile. The added advantage of increased revenues could in turn be used to invest in new aircraft.
In suggesting this I suppose the question revolves around which new international markets to enter and what sort of profits / free cash flows can be reasonably expected / generated.
Increasing its presence in the New Zealand market including increased Jetstar Trans-Tasman flights and the commencement of Jetstar international flying from Auckland to the Americas could be a reasonable future growth opportunity. This is a growth market with additional opportunities for forwarding traffic to SE Asia (like Australia).
The more Air New Zealand reduces its JV commercial arrangement with Virgin Australia, the more opportunity there will be for the QANTAS group as a whole. For Air New Zealand, a reduced VA commercial arrangement JV business model could simply revolve around a one for me and a one for you (QANTAS) affair. Obviously QF would need Jetstar to invest in new aircraft to undertake this type of expansion.
Even though the Australian domestic market is mature, it is possible the misadventures of Virgin Australia will represent an opportunity for QANTAS to grow its share of the market by an additional 2-3%.
To date we haven’t seen the consequences of the Virgin Australia restructure and its effect on market share. I would suggest there could be 1-2% of market share associated with VA’s reduced regional flying and maybe 0.5% from its mainline operations. From a business perspective this could be a fairly easy market share grab.
If we consider growth in market of 2-3% per year and every 1% of the market requires three additional 737 sized aircraft, growth in market and increased market share could necessitate the purchase of 10-20 737MAX over the next five years. I suspect this type of scenario could self-fund the purchase of new aircraft as it would allow the existing 737NG fleet to be leveraged for their full economic lives (22 years). The 13-20% fuel efficiency advantage and added revenue opportunity of a 737-10MAX over a 738NG would probably be enough for these aircraft to self-fund.
With a current fleet of 75 737’s and an assumed economic life of twenty years QF should be replacing 3.75 aircraft per year. If we add in 3% organic growth we have another 2.25 aircraft. In other words QF should be purchasing 6 new 737 size aircraft each year or committing $330 million per annum of CAPEX to its domestic fleet.
With the Jetstar Asian partner airlines seeming to be reluctant to invest in the Jetstar franchises, the short term prospects for growth in these businesses seems to be limited. These airlines have been in a holding pattern for many years now.
I suspect for Jetstar to fund growth it will need to be structurally separated from the QANTAS group and capitalised through the introduction of new shareholders.
This type of scenario could revolve around a situation where QANTAS receives cash for the sale of a share in Jetstar, which in turn could be used to fund new QANTAS aircraft purchases.
A larger QANTAS group of airlines could see the QANTAS and Jetstar domestic operations generating sustainable profits in excess of $1B per year, the international airline generating profits of $0.6-0.8b per year and the Jetstar Asian franchises placed back into growth mode to ensure critical mass and sustained profits for the future.
A QANTAS generating year on year profits of $2b annually and substantial free cash flows combined with future growth prospects from the Jetstar Asian franchises and QANTAS International ticks all the boxes as an excellent investment.
As the analyst mentioned in the article, the road forward revolves around funding. I’d suggest QANTAS’s future debt profile could in part be addressed by:
1. Reviewing the current dividend and share buy-back strategy with the intent of committing additional free cash flows to CAPEX spending on new aircraft (three years).
2. Review of the buy-out of existing aircraft lease and financing strategy with the intent of increasing funding for CAPEX on new aircraft.
3. Restructure of current 737 aircraft leases to simplify and reduce finance costs on older aircraft
4. Committing to an order for 15-30 737MAX aircraft as soon as practically possible. Use of self-funding / short term debt to ensure maximum ownership flexibility for the aircraft.
5. Committing to additional 787-9 aircraft for the purpose of entering new international markets and growing market share.
6. Committing to an order for 10-15 787-10 aircraft for replacement of A330-300 and early build A330-200 aircraft and growth in market using a combination of free cash flows, syndicated loans and leasing finance arrangements.
7. Development of the Brisbane and Perth airport bases for increased 787 flying and growth market opportunities.
8. Retain three 747 (non ER) aircraft for an additional two years for seasonal flying / development of growth market opportunities.
9. Sale of four A380-800 aircraft to reduce the commitment to the type.
10. Purchase of six 777-9X for replacement of A380-800 aircraft
11. Deferral of the Project Sunrise project including aircraft purchases till 2024.
12. Review of Jetstar New Zealand strategy including:
a. Committing additional A320 and Q300 aircraft to the Jetstar New Zealand operation.
b. Committing 3-4 787-9 aircraft based at Auckland airport for new Jetstar LCC markets in the Americas and Asia.
c. Development of Auckland airport as a hub for increased International flying.
13. Review of QANTAS New Zealand strategy with the intent of taking advantage of Virgin Australia weakness in market including:
a. Committing 8-10 A321NEO aircraft to the New Zealand JetConnect business for QANTAS Trans-Tasman flying.
b. Committing additional A330-200 aircraft to dedicated Trans-Tasman flying.
c. Development of Auckland airport as hub for increased International flying.