With a government debt guarantee now off the table, investors are beginning to worry that Qantas’ claim that it is in a “strong financial position” may be more spin than substance.

According to last Thursday’s half-year accounts and presentation, at the end of December Qantas had available liquidity of $3 billion, including $2.4 billion cash and cash equivalents, and $630 million in undrawn loans.

But the Qantas accounts bury the most pressing problem for the airline: three major debt repayments due from April 2014-15 through 2016-17, valued at close to $1.5 billion. The first, in April of next year, is more than $400 million in a syndicated loan, while around $500 million in bonds are due to be refinanced in a 2015-16 loan, and the loan repayable in 2016-17 is a $500 million syndicated facility. The banks and other lenders will want higher interest rates when these loans are refinanced, especially after the airline’s credit ratings were cut last year, to Ba2 (negative watch) and BB+ (stable) by Moody’s and Standard and Poor’s respectively.

That’s not all, however. Qantas’ report says it has a total of $5.431 billion of “interest-bearing liabilities”, up from $5.245 billion a year ago. Of that $844 million ($835 million a year ago) is current (that is, due within a year). The key $400 million repayment, which will set the rate for the the following refinancings, becomes current at the end of next month.

Qantas insists it doesn’t have a liquidity problem, but this is had to square with its demands for a debt guarantee. Which is why the statements in the December 31 accounts are so important. The accounts summarise Qantas financial position as:

  • Cash and cash equivalents, $2.395 billion;
  • Bank loans (secured) $3.072 billion;
  • Bank loans (unsecured) $994 million; and
  • Other loans (unsecured) $1.009 billion.

Qantas noted that last year’s ratings downgrades:

“… may increase the price of new debt funding and/or reduce the Group’s access to some sources of unsecured credit (including certain operational and working capital facilities) over time.”

Qantas’ accounts also reveal there’s actually more debt not recognised in the balance sheet (for various accounting reasons). Qantas has $1.2 billion of hire purchase (which boosts interest-bearing debt to more than $6.6 billion). The company’s gearing ratio rose to more than 49.5% at December 31, from 46.5%.

Qantas’ biggest asset is its number of debt-free aircraft. The airline’s half-year report said 30% of total passenger aircraft were debt free, including 31 new planes since 2010, and 20 mid-life planes will become debt free in this half year.

“The real problem will be if financial markets get worried about Qantas’ capacity to repay these debts or make continuing interest payments …”

But also hidden in the notes to the accounts (as are the debt details) was another worrying set of figures — “Non-cancellable operating lease commitments not provided for in the Consolidated Financial Statements” — totalling aircraft and engine payables of $1.819 billion at the end of December ($1.982 billion at June 30) and non-aircraft payables of $1.183 billion ($1.257 billion in June). That’s a total of $3 billion ($3.2 billion at June 30). These are being paid — they fell more than $200 million in the six months to December.

What is not stated, however, is what happens if Qantas’ credit rating falls — we know its cost “could” rise, the question is by how much. Then there’s the billions of dollars in fuel hedges in place (a normal part of business) and currency hedges (to protect income or to maximise it). They will also cost more if Qantas’ credit rating falls further because the airline will have to put up more capital.

All up Qantas has around $12 billion of capital and other commitments that do not appear in the balance sheet. That’s allowed under current accounting rules, but when you add it to the $5.4 billion-plus of various bits of debt and interest-bearing debt, plus the $4.2 billion in pre-payments from people intending to fly on Qantas or Jetstar, the “strong liquidity” of $3 billion looks pretty weak.

Now, not all of these debts will fall due if the airline continues to trade. The real problem will be if financial markets get worried about Qantas’ capacity to repay these debts or make continuing interest payments to keep them in place. Another downgrade in the credit rating could very well trigger those concerns.

Qantas insists it has many assets, including unencumbered aircraft and airport terminal leases, plus a frequent flyer scheme that analysts have valued at between $2.5 billion and $3 billion.

Qantas can ease the problems by selling equity to a new cornerstone investor — but will that happen with the airline’s future up in the air? An interested buyer will wait to see if it can get the equity cheaper or grab control of part of Qantas for a bargain basement price. Qantas’ board wants to guard against that, but the changes proposed by the federal government could force the airline into selling off its best businesses for next to nothing, leaving it with an weak, underperforming rump bound for collapse.