Even a cursory examination of Qantas's balance sheet reveals a horror show. So the question is: can it survive without taxpayer assistance? Ian Verrender writes.
Can Qantas recover? Alan Joyce reckons it can, given another three years.
But he wasn't so sure in February when he first put the feelers out for Federal Government help. And the company's financial position has only deteriorated since then.
The more prescient question is: can it survive without taxpayer assistance?
With all the hullaballoo over its shock $2.8 billion loss last week, few analysts have bothered to dig any deeper into the accounts, preferring instead to rely on the assurances of a board and management that so far has done very little to inspire confidence.
Unfortunately, even a cursory examination of Qantas's balance sheet reveals a horror show. Virgin Australia isn't much better. But at least it has well heeled backers that include the governments of Singapore and Abu Dhabi.
Both companies are illiquid. That's not as bad as insolvent. In terms of financial health, it means you've been delivered to the casualty ward rather than intensive care.
Qantas, however, has a serious liquidity problem. According to the accounts it filed last week, it has debts and other bills totalling more than $7.5 billion that need to be paid within the next 12 months.
But it doesn't come close to having enough cash - or assets that can be easily converted to cash - to cover that. With just $4.9 billion, even a financial alchemist would have trouble making that stretch.
Liquidity problems in any industry can quickly lead to insolvency. Airlines, however, are uniquely vulnerable.
Unlike almost any other industry, airlines rely on forward ticket sales to bankroll their daily operations. That's a practice that is banned in many other sectors, and for good reason.
Buy a concert ticket, or rent a holiday apartment and your money must be placed in a trust account and can only be accessed by the vendor when the service is provided.
In the airline business, the amounts of money are huge. Qantas, for instance, has $4.59 billion sitting on its books, the proceeds of pre-sold tickets. It has been using the cash but has yet to provide the flights.
In good times, or even ordinary times, this isn't a problem. But when a company is using the proceeds of forward sales for working capital at a time when it is losing money hand over fist, then warning bells should start ringing.
Just to be plain, Qantas directors and management are acting entirely in accordance with the law on this. The same goes for Virgin Australia.
But this turned into a huge issue in 2001 when Ansett collapsed. And it is something the Treasurer, Joe Hockey, as a member of the exclusive Qantas Chairman's Lounge, needs to keep in mind the next time he bumps into chairman Leigh Clifford or Alan Joyce over a quiet pinot noir.
While the Flying Kangaroo's army of spin doctors would vehemently deny it, it could be argued that for the past year, an unsuspecting public has been covering both Qantas and Virgin's trading losses without any idea that their cash was at risk.
Many consumers would be protected either through separate insurance or through merchant facilities such as credit providers.
It is worthwhile harking back to the events of 2001. When Ansett hit the wall, taking its owner Air New Zealand with it, those who had bought tickets lost their cash as they were classed as unsecured creditors.
In some cases, insolvent firms can be resuscitated by administrators or receivers. That proved impossible with Ansett.
Its fate was sealed by a complete loss of confidence from the public when customers refused to pay for seats a second time and the administrators were forced to wind up the company.
Modern airlines largely are marketing businesses. Many routine operations such as baggage handling are outsourced and a large proportion of the fleet often is leased.
In the event of an insolvency, aircraft and equipment leases are subject to repossession and redundancy payments are triggered. Given Qantas has a staff of almost 30,000, that bill alone would be astronomical, and most likely borne by taxpayers.
A formal insolvency would destroy so much value that it would be nigh on impossible for a corporate reconstruction without Federal Government assistance, similar to that provided by the Kiwi government to Air New Zealand.
(It is worth noting that Air New Zealand now is a commercially viable operator, last week announcing a 45 per cent profit lift and, as a major shareholder in Virgin Australia, has played a large role in Qantas's current predicament.)
Such an event would create a major headache for the Federal Government, cause a serious disruption to the economy and would cripple a tourism industry already struggling under the weight of a strong Australian dollar.
As a private company, Ansett was deemed expendable. For Qantas it was a financial boon, laying the foundations for years of enormous profits.
Loading...Despite the current board and management's best efforts to destroy the esteem in which Australians once held Qantas, few could countenance the idea of a Qantas collapse. There is still the remnants of a sentimental attachment to the airline.
Six months ago, Alan Joyce announced a restructuring plan to slash $2 billion worth of costs. That involved the elimination of 5000 jobs, a process that now is almost halfway completed. So far, that has cost the best part of half a billion dollars in redundancy payments.
At that stage, the full year loss was estimated at about $500 million. Instead, it has come at $2.8 billion. The spin doctors dismiss the bulk of that - about $2.2 billion - as nothing more than an accounting treatment.
They miss the point. Accounting is what it is all about. The company is illiquid and while it is solvent, its balance sheet is nowhere near as strong as this time last year.
The difference between assets and debts, what's known as total equity, has been whittled down to just $2.86 billion. Last year, it was a far more comfortable $5.84 billion. You can now see water through that ice, so best to skate lightly.
Put simply, the Flying Kangaroo cannot afford further heavy losses, particularly given its debt now carries junk status.
Still, someone out at the Mascot headquarters still has a sense of humour. In a hilarious sequel to last week's disastrous results, the company triumphantly declared the two main debt rating agencies kept their ratings unchanged! Er, there's not too much room to fall.
Is Qantas too big to fail? Leigh Clifford and Alan Joyce clearly hope the Federal Government thinks so. That's why they went cap in hand to Joe Hockey begging for a Government guarantee on its debts early this year.
The Treasurer may have ruled out a taxpayer-funded bailout in February, but perhaps it is time he perused the latest set of accounts.
Ian Verrender is the ABC's business editor. View his full profile here.