Value of Qantas air fleet in doubt

An article in today’s Sydney Morning Herald by Scott Rochfort has exposed that fuel prices my not be Qantas’ only problem, with Macquarie analyst and broker Paul Huxford having raised concerns that the airline could be forced to massively write down the value of its fleet of 213 aircraft.

While the ongoing recent rises in fuel prices continue to put pressure on Qantas’s profits there is speculation that Qantas fleet is estimated to be valued at around $3 billion more than market value.

Qantas 2004 annual report says that the $9.4 billion value of its fleet was $2.6 billion above market value, but a recent Macquarie Equities note has said that the carrier’s weak profit outlook “could challenge in-use valuations” if this continued

The SMH report says that Qantas has provided no valuation of its aircraft in its 2005 Annual Report but Macquarie analyst Paul Huxford estimates the gap could be about $3 billion, given the rise in the Australian dollar.

“The justification for the higher carrying value was supported by ‘in-use valuation’,” Mr Huxford said in a note. “However, over the longer term, it is possible that the carrying value of the aircraft could be reduced.”

Mr Huxford said, “It might not be unrealistic to suggest that as a result of changing market conditions for oil and [foreign exchange] rates over the medium term” that Qantas could accelerate the depreciation of its aircraft or opt for a massive write-down”.

He added that Qantas could have an even tougher time justifying the book value of its planes given it has a much older and less fuel efficient fleet than many of its competitors such as Virgin Blue, Singapore Airlines and Emirates.

Qantas’s apparent fleet over-valuation also appears to have blown out in recent years, with in its 2001 report, the airline undervaluing its fleet by $1.7 billion against market value.

Mr Huxford was the first analyst to predict the massive non-cash write-down in Qantas’s frequent-flyer scheme last year, when due to the introduction of International Financial Reporting Standards, Qantas had to write down the value of its loyalty scheme by $749 million in June 2005.

Mainly as a result of oil prices, the market expects Qantas will report a 27% drop in full-year net profit to $560 million next month with the coming year looking even tougher, with analyst consensus tipping a $520 million net profit in 2006-07.

Qantas has warned that it expects its fuel bill to rise a further $1 billion this fiscal year and the airline’s share price is set to be tested today, after oil prices hit new highs in New York markets at the weekend, with continuing geopolitical concerns over North Korea and Iran helping oil reach a high of $US75.78 per barrel in New York, but it did close $US1.05 lower at $US74.09 per barrel.

Report by The Mole