Sunday, June 7, 2015

Qantas still on track to buy new planes, says Joyce

The borrowed Headline from Australian Business Review says it better than what could be said in Winging It. However, on June 4th I pondered what Qantas will do for its 50 optioned 787 before it expires. Winging It has referenced back to its "Article" about those 50 787 Qantas options just days before the "AB-Review"  (alert: Australian Business Review Link needs a access subscription after first free viewing is used).

Joyce has reaffirmed in a manner of speaking that Qantas is going after those same 50 options, hinting, they will take them on without waiting for financial ratings catching up with its purchase intent for the 50 787 ladies in waiting. They have already structured a plan for this case. The important clue is the 50 on option are 50 separate options where a purchase commitment can be crafted with Boeing holding to its original option price it had secured at the beginning of the 787 program.

"But Mr Joyce said the suggestion the airline might have to choose between regaining its investment credit rating and the 787s was flawed."

"Mr Joyce said the company would qualify for an investment grade rating if it got the debt down and improved performance to where it needed to be.

 
Paying down debt by $1 billion to get the company back into the position where it would re-qualify for its investment grade credit rating is among three criteria Mr Joyce on several occasions has said need to be met before the airline would exercise its 50 purchase rights and options on the 787-9s."
"If they had a strong financial rating at this time, they could do fleet renewal with the 50 787-9's it needs. However putting money down from banked gains destroys the Qantas financial portfolio and rating. They may have to wait and lose the option window with Boeing."

"What can Qantas do? Parse out the order out in segments of 10 units a time over the next 10 years, keeping the low price for the first ten and then ordering from options on the next ten at a higher price."

This supposition wasn't far from what Alan Joyce is moving towards concerning the 50 individuals he has available through individual options.

Joyce Indirectly answers Winging It thinking with this nugget:

As found in the AB Review:

"The first opportunity to order a 787-9 for delivery in 2017 comes up this year but Qantas has a flexible order stream with fixed pricing and delivery slots. This allows it to individually address each of the 50 options and purchase rights and decide whether or not to exercise them."

Key to the options closure comes flexibility with Boeing. Joyce can parse out the 50 787 options in some kind logical and financial way circumventing its financial wall of ratings over a period of time, during Qantas optimal operations and debt reductions process. He can squeeze a few 787 through each year until the Qantas financial picture stabilizes long enough for gaining a premium rating. 

The problem is told in the old story line. What comes first? The chicken or the egg? Joyce needs the 787-9 to make it work well. He can't get the 787-9 in numbers until Qantas works well. Qantas is exploring getting a few 787-9 through the back door, by making its one by one options into a stream of separate orders until the financial rating for Qantas rises. Then it will option out with the remaining 787-9's into one big order, covering years of fleet renewal. The egg will hatch because of the game of financial chicken favors Qantas.”