All eyes will be on the Qantas Airways Limited (ASX: QAN) share price this morning after the release of a market update.
What did Qantas announce?
This morning the airline operator provided investors with an update on its expectations for the first half and the full year.
Management advised that it expects to move into recovery mode in the second half of FY 2021 and will start repairing its balance sheet. This is thanks to domestic borders re-opening, cost reduction programs making progress, and the continued strong performance of its Loyalty and Freight divisions.
And while Qantas will report a significant statutory loss in FY 2021, it is expecting to be close to breakeven for underlying EBITDA in the first half and then net free cash flow positive in the second half.
However, as you would expect, this forecast assumes no material domestic border closures. It also assumes no material international travel until at least the end of June 2021.
How strong is the Qantas balance sheet?
The good news for shareholders is that Qantas still has significant liquidity.
As of 30 November, the company had $3.6 billion in available liquidity. This is made up of $2.6 billion in cash and $1 billion in an undrawn revolving credit facility. This facility is expected to be increased by ~$500 million before 31 December to provide additional standby liquidity
Management also notes that a significant backlog of supplier payments and refunds have now been cleared. By 31 December, approximately 50% of the redundancy payments associated with 8,500 job losses will have been made.
Capacity update.
With domestic borders reopening, Qantas is responding by increasing its capacity.
It advised that group domestic capacity will increase to 68% of pre-COVID levels for December, before rising to nearly 80% in the third quarter. This compares with 20% capacity in the first quarter and around 40% in the second quarter.
Management expects this to maintain its current domestic market share of above 70%.
Qantas' CEO, Alan Joyce, commented: "We've seen a vast improvement in trading conditions over the past month as many more people are finally able to travel domestically again. There's been a rush of bookings as each border restriction lifted, showing that there's plenty of latent travel demand across both leisure and business sectors."
"Between Qantas and Jetstar, there were over 200,000 fares sold for flights to Queensland in 72 hours after the border openings with Sydney and Victoria were announced. We're also seeing people booking several months in advance, which reflects more confidence than we've seen for some time," he explained.
Mr Joyce concluded: "Overall, we're optimistic about the recovery but we're also cautious given the various unknowns. We also have a lot of repair work to do on our balance sheet from the extra debt we've taken on to get through the past nine months. That's why we remain focused on delivering on our recovery program, which unfortunately involves following through on some hard decisions to restructure and respond to the new set of circumstances we're faced with."
