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Qantas and Air New Zealand see recovery despite 1H losses

National carriers say international travel to be down even after borders reopen

Qantas Airways saw a sharp turnaround in its freight division as the lack of international flights created a temporary shortage of cargo space due to increased demand.   © Reuters

SYDNEY -- Qantas Airways and Air New Zealand said separately on Thursday that they were confident international travel would return later this year, led by a rollout of coronavirus vaccines, even as the two carriers reported hefty losses as travelers stayed home for much of 2020.

Australia's flag carrier signaled a likely resumption in international air travel by the end of October, in line with the time frame for completion of vaccinations in the country, which began this week. The airline expects domestic capacity to increase to 80% of pre-pandemic levels by the fourth quarter of 2021.

"The COVID vaccine rollout in Australia will take time, but the fact it's underway gives us more certainty," Qantas CEO Alan Joyce said in a statement.

Qantas swung to an underlying loss -- its most closely watched financial measure -- of 1.03 billion Australian dollars ($816.7 million) for the six months ending Dec. 31, the airline's fiscal first half, compared with an underlying profit of AU$771 million in the same period a year earlier. Revenue for the six months slid 75% to AU$6.9 billion as international travel collapsed and domestic flying was restricted to 30% of capacity.

On a statutory basis, Qantas reported a net loss of AU$1.08 billion for the six-month period, compared with a net profit of AU$445 million a year earlier.

Air New Zealand Chairman Therese Walsh said she was optimistic the changes made to the company over the past year had set up the airline well for when borders reopened.   © Reuters

Qantas said it remains on track to deliver at least AU$1 billion in permanent annual savings in its fiscal year starting July 1, 2022, after laying off 8,500 of its staff last year. It had AU$4.2 billion in cash and undrawn facilities at the end of December, which will help the airline weather ongoing uncertainty.

"The delivery of strong cash flow performance, coupled with additional liquidity, further removes the risk of an equity raising," Jefferies analysts Anthony Moulder and Amit Kanwatia said in a report. "We believe Qantas remains well positioned for the recovery of domestic travel in the near term and international travel in the next few years, supported by a leaner cost base," they said.

Like its peers in the Asia-Pacific region, Qantas also saw a sharp turnaround in its freight division as the lack of international flights created a temporary shortage of cargo space because of increased demand.

Meanwhile, Air New Zealand also benefited from strong cargo demand. Its cargo revenue in its fiscal first half ending Dec. 31 jumped 91% compared with the same period a year earlier to 373 million New Zealand dollars ($275.6 million).

Still, that was not enough to make up for the loss of international passenger capacity, resulting in the national carrier swinging to a net loss of NZ$72 million, compared with a NZ$101 million net profit a year earlier. Total revenue for the six months slumped 59% to NZ$1.2 billion, largely due to the impact of border restrictions on international travel.

Air New Zealand, which in August reported its first annual loss in 18 years for the 12 months ending June 30, 2020, said it has cash and undrawn facilities of more than NZ$700 million, thanks to a loan from the New Zealand government -- its majority shareholder. It also previously announced a potential capital raising before the end of June.

The airline said it had burned through more than NZ$1 billion in cash reserves since the start of the pandemic, but it expects the spending rate to slow down in the second half of the current fiscal year ending June 30. It already has laid off a third of its 12,000 staff, grounded aircraft and subleased office space.

Air New Zealand Chairman Therese Walsh said she was optimistic the changes made to the business over the past year had set up the airline well for when borders reopened.

"This will be pivotal as we enter recovery mode as it means we will not only be highly cost-effective but with the changes we have made to our fleet, we will also have one of the most modern, efficient fleets in the world," she said in a statement.

Both Qantas and Air New Zealand indicated that international travel would likely remain subdued even after borders open. That means their medium-term prospects will largely be determined by domestic operations.

Air New Zealand already has taken a lead over the larger Qantas. The airline said its domestic capacity has reached 76% of pre-pandemic levels, resulting in 1,800 flights during the six months ending Dec. 31, which helped move 4 million passengers across the country.

Qantas, which earns the bulk of its profit in the domestic market, has been particularly affected by state border closures in Australia amid a second wave of COVID-19 infections in Victoria and smaller outbreaks in Queensland and Western Australia.

The airline said that state-border restrictions will continue to be an overhang on its fiscal second-half financials. It is estimating that its earnings before interest, taxes, depreciation and amortization, or EBITDA, will be lower by AU$350 million to AU$450 million due to domestic border closures since the end of December.

The airline also is facing increased competition on some of its main domestic routes from a restructured Virgin Australia -- now under the stewardship of U.S. private equity company Bain Capital and local carrier Regional Express Holdings -- which will start operating flights on the lucrative Sydney-Melbourne route starting on March 1.

In a nod to the tough market conditions, all three domestic carriers have been offering tickets at promotional prices ranging from AU$50 to AU$150 over the past few weeks.

In an effort to put pressure on its smaller rival, Qantas also has started operations on several regional routes previously operated only by Regional Express, prompting the smaller airline to raise the issue with Australia's competition regulator earlier this month.

Shares of Qantas were up 2.9% to AU$5.16 in afternoon trading on the Australian Securities Exchange, while Air New Zealand's shares were up nearly 1% to NZ$1.59.

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