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Executive Summary

COVID-19 pandemic has adversely affected business organization in different sectors. One of the industries that have been hit by the pandemic is the transportation sector, especially the aviation industry. Qantas is one of the specific airlines in Australia whose domestic operations have been reduced to only 60 per cent. Additionally, the company’s passenger capacity for international travels has been completely halted. Also, the company has declared one-third of its employees redundant. To surmount the impact of COVID-19, Qantas corporate financing has been gravely affected. For instance, the company has pushed forward its $13 dividend per share it was to pay to its shareholder from May to September. Additionally, it has obtained a debt financing of $1.05 billion against some of its planes. Moreover, Qantas has restructured its operations by requiring the executive directors to receive a pay cut and forfeit their bonuses for the current financial year. These aspects have arisen from the uncertainty surrounding the COVID-19 pandemic.

Introduction

The novel coronavirus pandemic has affected all the sectors of the economy in Australia and other countries across the globe. However, one of the industries is that has been massively affected by the COVID-19 pandemic is the aviation industry. Specifically, the travel restrictions by different countries have resulted in a slump in the demand for air travel among travellers (Iacus et al., 2020, p.104791). The significant reduction in the number of passengers and the cancellation of flights has led to reduced revenues for the airlines and even forced others to declare bankruptcy (Forsyth, 2020, p.2). One of the airline companies in Australia that has felt the effect of the COVID-19 pandemic is Qantas Airways Limited (Qantas). Notably, Qantas is an Australian flag carrier, which has the largest airlines by the size of their fleet as well as international destinations. This paper will provide a discussion on how the COVID-19 pandemic has affected Qantas operations and corporate financing.

Impact on Operations

            The operations of Qantas were highly disrupted by the novel coronavirus pandemic. Specifically, the company suspended all its international flights completely due to the effects of the COVID-19 pandemic. Additionally, Qantas cut its domestic capacity by around 60 per cent (McIlroy, 2020, p.3). Also, around 150 aircraft from the company were grounded. More importantly, two-thirds of the carrier’s (more than 30,000) employees were stood down (Forsyth, 2020, p.1). The interruptions in the operations of the carrier arose from the capacity cuts that were quickly snowballed by the travel restrictions and the stringent measures that have been taken by different countries to prevent the spread of the COVID-19. Moreover, the company was about to launch “Project Sunrise,” which has to be delayed because of the circumstances that were orchestrated by the pandemic. Moreover, the company experienced service reductions in accessing its domestic network such as the key Sydney-Melbourne market. Since the company is more depended on domestic market dominance and a strong balance sheet, the disruption of its operations was felt across its different sectors.

 On the international scale, COVID-19 forced Qantas to cut its operations on a very large scale. Specifically, a majority of the capacity reduction for the company is on Asia is at 31 per cent followed by the US at 19 per cent, and the UK at 17 per cent (Baird, 2020). Moreover, the company has resorted to the use of smaller aircraft because of the reduction in the frequency of flights and the need to continue maintaining connectivity. In the past several weeks, the company’s international capacity and operations have continued to decrease, which is a clear demonstration that the novel coronavirus pandemic has hit the company hard (McIlroy, 2020, p.3). The demands for both domestic and international travel has fallen away partly due to government restrictions and also reduced corporate travel as well as the fear of the members of the public to travel. Figure 1 below provides a graphical representation of how the international capacity for Qantas dropped in March.

Figure 1: Qantas international capacity in the month of match 2020. Source: Bloomberg.

Impact on Corporate Financing

COVID-19 has led to a decline in economic activity because of reduced consumer activity and slowed business activities. The persistence of lockdowns in different parts of the world where Qantas operates has affected not only its divided purchase, capital raising, and risk management but also its corporate restructurings and capital budgeting.

Dividend/Stock Repurchases

Although a majority of other airlines have suffered from the COVID-19 pandemic and reduced the dividends paid to their shareholders, Qantas is so far withering the storm. However, the company’s shareholders have halved the market value for their shares. Additionally, according to Baird (2020), a A$150 million share buyback scheme remains to be axed. Also, the company has now decided that its $13 per share will now have to be paid in September 2020, which will be four months later than initially scheduled (Raszkiewicz, 2020). These activities are aimed at ensuring that the company’s coffers are bolstered amid uncertainty surrounding the pandemic. Figure 2 below shows the share price performance of the organization since January 2020.

Figure 2: Qantas’ share price performance from January to June 2020. Source: ASX.

Capital Raising (Debt/Equity)

To raise additional capital to sustain its operations, Qantas has an undrawn $1 billion of loan facility in its back pocket. This amount is in addition to the $1.75 billion of money that the organization has in the bank from its balance sheet of December 31, 2019 (Forsyth, 2020, p.2). However, due to the effects of the pandemic, Qantas has secured debt of $1.05 billion of funding against the 787 planes that it fully owns (Baird, 2020). Notably, this capital raising measure was adopted on March 23, 2020. According to the company, such debt financing aimed to raise its available cash balance to a whopping $2.95 billion. Figure 2 below shows the share price for Qantas since the start of the pandemic.

Figure 2: Qantas share price in the months between January and April 2020.

Risk Management (Hedging)

To manage the financial risks that have come with the COVID-19 pandemic, one of the risk management strategies that Qantas has adopted is fuel hedging. Specifically, once demand resumes, the company is expecting that the demand for jet fuel would increase and has thus, over-hedged its jet fuel (Freed and Tan, 2020). This hedging aims to protect the company against any sharp rises in the prices of jet fuel after the coronavirus pandemic has been defeated. However, since the company is not operating at full capacity, the hedging is resulting in some financial costs (Mhalla, 2020, p.96). Nevertheless, the company remains flexible and thinking about how it will recover from the pandemic.

Corporate Restructuring (M&A, Bankruptcy Etc.)

            There are various forms of restructuring that the Qantas has made to ensure that it survives the pandemic. One of this is for the CEO and the Chairman to forfeit their pay for the rest of the year and the directors and senior executives to take a pay cut of a third of their salaries (Baird and Wiggins, 2020). Additionally, the annual bonuses of the company for the directors have been cut to zero. Also, the organization has cooperated with the Australian government to offer support. Specifically, the Australian government has promised to pay Qantas up to $165 million to ensure that the company survives through the pandemic (Baird and Wiggins, 2020). However, unlike other companies such as virgin who are contemplating on bankruptcy because they cannot sustain themselves in the face of the pandemic, Qantas remains strong and has continued to rely on debts and other forms of funding and is not even contemplating any merger; at least until 2021, when its cash reserve will run out.

Capital Budgeting

            Qantas is now focusing on investments that make sense, especially because of the high level of uncertainty as to when the company will be back to full capacity and operations. For instance, the company is still planning for its much-hyped “Project Sunrise” that will see it have direct flights to both New York and London (Hatch, P., 2020). Additionally, to cut on unnecessary costs of maintaining some aircraft, the company is making a consideration to offload some of its 12 Airbus superjumbos. These capital budgeting strategies have been necessitated by the need to survive the COVID-19 pandemic.

Conclusion

Despite Qantas being the largest airline operator in Australia, it has felt the effect of the novel coronavirus on both its operations as well as in its corporate financing. Specifically, the company’s operations have been reduced to around 60 per cent domestically and completed halted intentionally. The passenger capacity has drastically decreased due to restrictions in cross-border movements as well as the fear of the customers from contracting COVID-19. The company has also been forced to push its payment of dividends to the shareholders to September 2020, four months later than previously planned. Also, it has engaged in debt financing against some of its airlines. The company’s CEO, Chairman, and executive directors have all had to take a pay cut to ensure that the company survives the pandemic. These aspects demonstrate that COVID-19 has adversely impacted organizations.