QANTAS GROUP FIRST HALF 2017 FINANCIAL RESULT

Sydney | Published on 23rd February 2017 at 8:29
  • Underlying Profit Before Tax: $852 million
  • Statutory Profit Before Tax: $715 million
  • Statutory Earnings Per Share: 27.3c
  • Rolling 12-month Return On Invested Capital: 21.7%
  • $219 million shareholder return: 7c ordinary dividend, plus remaining $91 million of share buy-back
  • Clear margin advantage against competitors in domestic, international markets
  • New Premium Economy product unveiled; Wi-Fi rollout starting.

Qantas today reported an underlying profit before tax of $852 million and a statutory profit before tax of $715 million for the six months ended 31 December 2016.

The underlying result was down 7.5 per cent compared with the prior corresponding period, but above the guidance range provided in October last year.  It reflects a strong performance in a mixed global aviation market, with the national carrier’s integrated Group strategy and ongoing transformation enabling it to keep delivering value for shareholders while investing for customers.

The fall in statutory profit compared with the first half of financial year 2016 largely reflects the inclusion in last year’s result of a $201 million gain from the sale of Qantas’ Sydney Airport terminal.

 

SUMMARY OF RESULT

All parts of the Qantas Group were profitable in the half.  Combined domestic airline earnings across Qantas and Jetstar were $522 million, while Qantas Loyalty had a record result, giving the Group a strong, profitable core in an improving Australian economy.  The Jetstar Group as a whole also had a record result.  Qantas International’s profitability is impacted by the high levels of capacity growth affecting all major airlines, but it achieved significantly higher margins than the industry average.

The Group met all the objectives of its financial framework, reporting a rolling 12-month return on invested capital of 21.7 per cent.  A further $212 million of transformation benefits were unlocked in the half, taking total benefits since 2014 to $1.9 billion. The Group remains on track to reach its goal of $2.1 billion by June 2017.

With net debt within the Group’s target range, Qantas is able to continue rewarding shareholders – including with an interim dividend – and investing for the future, revealing an industry-leading Premium Economy product for its Boeing 787-9 Dreamliner fleet.

CEO COMMENT

Qantas CEO Alan Joyce said Qantas was one of the best performing airline groups in the world.

“Our transformation program has built a strong, sustainable business that generates returns throughout the economic cycle,” Mr Joyce said.

“Qantas and Jetstar’s domestic operations produced an outstanding result and Qantas Loyalty continued to thrive. It’s a combination that keeps delivering and sets us apart from our competitors.

“The international market is tough because of capacity growth and lower fares, and Qantas International is not immune from those pressures. But the work we’ve done on removing costs and making the business more efficient means Qantas International is outperforming its peers in the region.

“Our focus is to stay disciplined on capacity, keep downward pressure on costs, and introduce game-changing improvements like the Dreamliner and high-speed Wi-Fi.

“This result is a credit to the hard work and dedication of our people, who have helped deliver high levels of customer satisfaction right across Qantas, Jetstar and Loyalty.”

REWARDING SHAREHOLDERS

The Qantas Board has declared an interim dividend of 7 cents per share, 50 per cent franked, to be paid on 10 April 2017.  This is in addition to completing the remaining $91 million of the $366 million on-market share buy-back announced in August 2016.

Once these distributions are complete, Qantas will have returned more than $1.6 billion in capital to shareholders since July 2015 – and reduced the number of Qantas shares by approximately 18 per cent.

Where Qantas has surplus capital available, it intends to continue paying a dividend every six months – to be supplemented with other capital management initiatives should additional surplus exist.

INVESTING FOR THE FUTURE

The Group’s transformation program has been accompanied by disciplined capital investment, focused on creating world-class experiences for customers and maintaining a competitive edge.   Around 100 Airbus A330 and Boeing 737-800 aircraft have been upgraded, and new lounges have opened in Singapore, Hong Kong, Los Angeles, Brisbane International, Perth and Darwin.

That investment will continue in 2017, with new lounges to open in Brisbane Domestic and London Heathrow, as well as the entry into service of the Qantas Boeing 787-9 Dreamliner, which will enable the retirement of older 747s.

Qantas today revealed the Premium Economy experience for the Dreamliner – a design unique to the national carrier and intended to the set the benchmark for the class globally (see Qantas Newsroom).

Qantas also confirmed that successful test flights during February mean it expects to operate its first commercial service with free Wi-Fi in the next few weeks.  Wi-Fi will ultimately be rolled out to about 80 domestic aircraft, and later to Qantas’ international and regional fleets, as part of a broader focus on new technology to improve how information is provided to customers and unlock operational efficiencies.

GROUP PERFORMANCE

Qantas Domestic reported Underlying EBIT of $371 million, down $16 million compared with the same period last year.

The business’ consistent profitability and stable 12.7 per cent margin represent an outstanding performance in a market that saw negative GDP growth in the first quarter and ongoing softness in resources sector travel.  Operating conditions strengthened in the second quarter, while the revenue decline from resources sector travel is beginning to slow and the market is expected to be stable by financial year 2019.

Careful capacity management underpinned the performance, as Qantas Domestic maintained a clear lead in the business travel market and grew in the small-to-medium enterprise sector.

Qantas Domestic’s network reach and high levels of on-time performance and service earned record customer satisfaction.

Qantas International reported Underlying EBIT of $208 million, down $62 million.  Competitor capacity growth in the half was 11 per cent, which saw the business’ unit revenue decline by 8.9 per cent.

Ongoing transformation helped the business achieve an operating margin of 7.3 per cent, down 1.8 points on last year but significantly higher than the industry average.[1] (opens in new window)

Qantas International’s growth was directed towards Asian routes that are performing strongly, while its exposure to weaker European markets remained limited.   Using existing aircraft, the airline added capacity to Hong Kong, Japan, Singapore, Indonesia and the Philippines, and operate seasonal flights to Vancouver.

As in the domestic market, customer satisfaction was at record levels.

The introduction of the more-efficient Boeing 787-9 in late calendar 2017 will cut Qantas International’s costs further, improve the experience for customers and create new network options, including the first regular direct connection between Australia and Europe with Perth-London services from March 2018.

The Jetstar Group reported record Underlying EBIT of $275 million, up $13 million.  Its strong performance was driven by a record result for Jetstar’s international operations to-and-from Australia, while the Jetstar Group in Asia continued to improve its profitability.  Like Qantas Domestic, Jetstar Domestic remained strongly profitable.

Jetstar’s operating margin grew by 1.1 points to 14.8 per cent and the business continues to invest in service training, new products – including for the small business market – and technology.

Qantas Loyalty reported record Underlying EBIT of $181 million, up $5 million.

Revenue growth in the half was affected by cutover to a revised partnership with Woolworths, which is now making good progress with fast take-up by customers.

Qantas Frequent Flyer members grew from 11.2 to 11.6 million, helped by the addition of 13 new partners, including AirBnB.  At the same time, Qantas Loyalty’s new ventures grew their revenue as the business continues to diversify successfully.

The Qantas Business Rewards program will strengthen Qantas’ presence in the small business market, while Loyalty also continues to invest in big data services.

Qantas Freight reported Underlying EBIT of $27 million, down $11 million.  Freight conditions remain challenging worldwide, but there are signs of stabilisation and Qantas Freight is well-placed.

The business holds more than 80 per cent of the domestic air freight market, with dedicated freighter operations for Australia Post launched in July 2016, and is pursuing new opportunities in the international market – including an agreement to freight Tasmanian milk to China.

FLEET UPDATE

Qantas and Jetstar continue to adapt their fleet plans in response to market conditions and expectations.  In the first half, Qantas purchased three Fokker F100 aircraft for routes previously operated by larger aircraft to enable capacity reductions in its resources sector operations. Jetstar added two leased Airbus A321 aircraft to meet demand in short-haul leisure markets.

The Group will defer delivery of Jetstar’s first Airbus A320neo aircraft until financial year 2019.

The arrival of Qantas International’s first two Boeing 787-9 Dreamliner aircraft in late calendar 2017 enables the retirement of Qantas’ two oldest 747s by mid-2018.  A total of five 747s will be retired as eight Dreamliners enter the fleet.

FINANCIAL FRAMEWORK

Qantas remains in a strong capital position.  Net debt is $5.97 billion, with capital expenditure weighted to the first half.  The Group’s commitment to stay within its target range of $4.8 to $6 billion is unchanged.

Debt maturity has been extended through a $425 million bonds issuance, while short-term liquidity remains strong at $2.7 billion – including $1.7 billion in cash.  Almost 60 per cent of the Group’s fleet is now debt-free, giving it an unencumbered asset base valued at more than US$3.8 billion.

Rolling 12-month return on invested capital was 21.7 per cent.  All parts of the Group are delivering ROIC above their weighted average cost of capital.

 

OUTLOOK 

Second Half 

In the second half of financial year 2017, Group capacity is planned to increase by approximately 1 -2 per cent compared with the second half of financial year 2016.

  • Group Domestic capacity is expected to decrease by approximately 2 per cent in the second half.
    • Unit revenue in the second half is expected to increase despite continued softness in resource markets.
    • Resource sector revenue in the second half is expected to be down by approximately $30 million.
  • Group International capacity is expected to increase by approximately 3 per cent in the second half, driven by the impact of previously-announced changes (e.g. Melbourne-Tokyo, Sydney-Beijing) using the existing Group fleet to target growing Asian markets.
    • Unit revenue declined by 7 per cent in the first half; this trend is expected to moderate in the second half on 6 per cent competitor capacity growth.
  • Qantas Loyalty is expected to return to double-digit growth in the second half, with a full six-month contribution from the Woolworths partnership.

The short term outlook remains subject to variable factors, including oil price movements, foreign exchange movements and global market conditions.

Full Year

The Group’s current operating expectations for the full year are as follows:

  • Underlying fuel cost is expected to be no more than $3.2 billion, or $3.13 billion at current forward Australian dollar prices.
  • Depreciation and amortisation expense is expected to be approximately $170 million higher than in financial year 2016.
  • Non-cancellable aircraft operating lease rentals are expected to be approximately $100 million lower than in financial year 2016.
  • Transformation benefits (across cost, fuel efficiency and revenue) are expected to be approximately $450 million.
  • The impact of inflation on expenditure is expected to be approximately $250 million.
  • Net capital expenditure is expected to be $1.5 billion (with $1 billion in the first half).

 

Having regard to industry and economic dynamics, no Group profit guidance is provided at this time.

[1] (opens in new window) IATA’s December 2016 profit outlook (opens in new window) forecasts an average industry margin for 2017 of 4.1 per cent.  Forecast average margin for Asia-Pacific carriers is 2.9 per cent, putting Qantas International at more than double the average.

 

Refer to the Review of Operations for definitions and explanations of non-statutory measures. Unless otherwise stated, amounts are reported on an underlying basis.