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Politicians have no time to lounge about

Qantas has to be one of the more active benefactors among Canberra politicians. Whether it's automatic upgrades on flights, free iPads or tickets to football grand finals, Qantas does seem to be generous.

Just last October, outgoing House speaker Anna Burke was urging incoming federal MPs to sign up to the airline's exclusive Chairman's Lounge. ''You are allowed to do it. My other advice is declare it on your member's interests,'' she said.

For those that don't know, the Chairman's lounge is an invitation-only club in select airports with no sign on the door but where the drinks are self-serve and the food reminiscent of Sydney's Rockpool.

Qantas chairman Leigh Clifford gets to tick off on each membership application, which lasts for two years. Membership is offered to a bag of politicians, celebrities, judges, CEOs and board members of major corporates.

''Membership is very sought-after and it's a great asset for Qantas to utilise for our commercial endeavours,'' Qantas CEO Alan Joyce has said.

Recently there have been reports that Qantas has sought a federal government guarantee of at least part of its $6 billion in gross debt along the lines of what was granted to the banks during the GFC, as it attempts to better compete with Virgin Australia which is majority owned by three state-backed airlines: Etihad, Air New Zealand and Singapore Airlines.


Federal Treasurer Joe Hockey said last week that he does not like the precedent of a debt guarantee, which would result in a substantial reduction in Qantas' $300 million interest bill but would also expose taxpayers to the risk of default. ''If you think we are being dragged kicking and screaming on this one, you're right,'' Mr Hockey said.

Insiders now say some sort of debt guarantee is inevitable as part of a restructuring deal and eventual modification of foreign ownership restrictions on the airline. The Qantas Sale Act limits total foreign ownership of Qantas to 49 per cent and prevents foreign airlines from holding more than a 35 per cent stake.

Relaxation of those rules would allow Qantas better access to the global capital pools available to other major Australian corporates on an unrestricted basis and raise the possibility that another carrier that has the benefit of cheap fuel such as Emirates would take a major shareholding in the company.

Before we go further let's look at what taxpayers would be exposed to if the government entered some form of debt guarantee.

First up, Qantas is likely to report a first-half pre-tax loss of at least $300 million next week. There is next to no prospect of conditions improving in the second half and therefore the full-year losses should eclipse $600 million. Market consensus is for Qantas to be loss-making again in FY2015, perhaps generating another $200 million loss at the pre-tax level. In short, passenger yields are continuing to fall, capacity is continuing to grow and Qantas' cost base is excessive, which makes for a pretty ordinary investment scenario.

As at June 30 last year Qantas had $5.2 billion of non-current debt on its balance sheet and another $835 million of current debt which would typically need to be paid back in the subsequent 12 months. When cash on the balance sheet is added back, net debt is expected to be around $3.4 billion at June 30 this year and is expected to continue to deteriorate in subsequent years unless some major asset sales take place.

Potential items up for sale include the partial spinoff of its frequent flyer business, its offshore Jetstar ventures or even some leases at Sydney Airport. All of these scenarios are complicated and would impact the longer-term prospects of the business.

Meanwhile, shares in Qantas are trading just above record lows. Some traders have been promoting QAN as a short-term buy on the grounds that its shares are selling at less than half the value of the net assets reported on its balance sheet and it has already aired its dirty linen for the first half in a market update in early December.

But even they acknowledge that the airline's underlying issues are not going to go away any time soon.

Stewart Oldfield is a research analyst at Wilson HTM. The views expressed are not investment advice.