The industry that has been most damaged by COVID-19 is travel – yet Qantas shows all the signs of having a good war.
At Thursday’s market close, Australia’s biggest welfare recipient was also by far the wealthiest, valued at $10.2 billion, up from $8.5 billion at the end of the 2019 financial year.
That’s the reward for scooping up $1.2 billion of corporate welfare, guiding government policy and pushing through work place reforms it has long wanted.
As Matthew Elmas reported here, many Qantas staff have not been as fortunate as the shareholders, with thousands laid off and the jobs of thousands more outsourced while JobKeeper and multiple other government benefits have rolled in.
Some $1.4 billion of that rise in Qantas’ market cap did come from a capital raising. The institutions and the few retail shareholders who took up the offer in the middle of last year have been richly rewarded for their risk – the shares are up close to 50 per cent from the discounted offer price.
The government, on the other hand, is writing off its donation.
“Privatising the profits and socialising the losses” used to be the cliché for the agricultural sector. Now Qantas fits the bill more closely.
And therein lies the great lost opportunity of the taxpayers’ Qantas bailout – giving the money, one way or the other, rather than investing it to share the upside of recovery.
The rescue of General Motors and Chrysler by the Bush and Obama administrations during the GFC cost American taxpayers some US$80 billion – but they ended up getting nearly all of it back. Washington gave loans and took equity in GM, rather than donate cash. It paid off.
The neoliberal chorus might shout “socialism” if the government were to partially get back into the airline business, but the reality is that it has never left it.
Qantas, like the banks, is considered too important to fail. The government remains exposed on the downside without anything to show for its contribution on the upside.
And being able to rely on a chat with the Prime Minister and Treasurer for expensive favours represents moral hazard for Qantas. Management knows it can take greater risks, run down its capital buffer and underinsure as the government will rescue it if all goes awry.
The airline industry is notoriously risky. The greater the risk, the greater the need for a capital buffer – but the Qantas board, in keeping with the global investment bank MBAs’ infection, is a big fan of share buybacks, reducing the capital it holds.
In the last “normal” financial year, 2019, Qantas spent $637 million buying back its own shares, compared with paying just $363 million in dividends.
Buybacks have two primary purposes:
1. Somewhat artificially boosting the share price. The higher share price in turn tends to feature heavily in the total shareholder return (TSR) metric that the Qantas annual report highlights and is a major part of executive bonuses.
2. A means of compensating investors who don’t have the advantage of franking credits. That’s always the case for foreign investors, but Qantas has few franking credits to offer domestic shareholders since it manages to pay very little tax while recording that strong TSR growth.
A common problem with buybacks is that companies often do them when their shares are already quite high. The $637 million in the 2019 year was done at an average price of $5.63 a share.
Then, when the airline struck ‘Rona turbulence last year and needed more capital, the $1.4 billion placement was at $3.65 a share.
Buying high and selling low is not capitalism’s usual mantra.
Of course Qantas was far from alone in not thinking for a moment of the risk to its survival posed by a virus. Some Asian countries learned from the SARS outbreak in 2002 and were better prepared for the next version, and the All England Tennis Club famously took out an expensive insurance policy that paid off very handsomely last year when Wimbledon was cancelled, but that was about it.
Nonetheless, it’s arguable that Qantas should have been a little smarter than the average dopey government. If there’s any corporate memory in the airline, it should be aware of the fragile nature of travel when people feel threatened.
The last pre-pandemic annual report states: “The Board is responsible for reviewing and overseeing the risk management strategy for the Qantas Group and for ensuring the Qantas Group.”
So the board failed.
The 2019 annual report goes into considerable detail about all the usual financial risks, but doesn’t mention anything that could stop planes flying.
The moral hazard in being able to rely on taxpayers for a bailout means the board doesn’t have to deal with such very hard questions and what they would mean for capital management.
It’s reasonable that taxpayers should be compensated with some equity upside for allowing that to happen, for effectively underwriting Qantas.
Meanwhile, CEO Alan Joyce and his board have been heeding Machiavelli’s advice, “don’t waste a good crisis”, with flicking its baggage handlers only the most obvious opportunism.
Nudge nudge, wink wink
As Qantas said when seeking a capital top-up from shareholders last year: “The pace of recovery is a clear focus for Qantas and represents an opportunity to restructure the business.”
The stock exchange announcement of the June capital raising was ripe with management-speak euphemisms:
- Recovery Plan tasked with ‘right sizing’ and ‘restructuring’ the business to accelerate recovery and to partially offset revenue lost as a result of the impact of COVID-19.
- Targets $15 billion in benefits over three years, comprising $2.4 billion of ‘restructuring’ benefits, with some benefits to continue to flow in future years; initial $2.6b ‘right sizing’ initiatives to reduce the workforce and supplier costs whilst activity is low; $4.0 billion in direct savings as a result of activity reductions; $6.0 billion of activity-based fuel savings.
- Annual ongoing ‘restructuring’ benefits estimated to be $1.0 billion from FY23 onwards.
- Estimated total costs of $1.0b to deliver ongoing ‘restructuring’ and ‘right sizing’ benefits mostly realised during FY21.
Yes, they really did put “right sizing” and “restructuring” in inverted commas. Did someone mean to do the equivalent of a “nudge nudge, wink wink” or did they just forget to take out the quote marks?
The end result promised at the time was that the airline expected to breakeven or make a small underlying profit during the worst calamity to hit aviation since World War II.
Missing from the Qantas’ annual report’s list of “key indicators of performance and drivers of shareholder value” for executive remuneration was the most important KPI for 2020 – government relations.
Maybe that’s quietly left in the “nudge nudge, wink wink” basket.