Half year result
Today I announce that Qantas reported an Underlying Loss before Tax of $252 million for the six months to December 31 2013, in line with guidance, and a Statutory Loss after Tax of $235 million.
Qantas Domestic reported a profit of $57 million, down from $218 million in the first half of 2013.
Qantas International saw a loss of $262 million, compared with a loss of $91 million in the comparable period last year.
The Jetstar Group reported a loss of $16 million, down from a profit of $128 million.
And Qantas Loyalty reported a record profit of $146 million.
This performance by our airlines is unacceptable.
And the current situation is unsustainable.
It reflects a substantive change in our circumstances.
This morning I want to outline how these circumstances occurred, and what we are doing about them.
Our response will be unprecedented in scope and depth, but we must do this for the long-term future of the Qantas Group.
For the past five years Australia has been hit by a giant wave of new airline seat capacity from foreign airlines.
- Qantas International capacity has grown by 2.9 per cent since 2009.
But competitor capacity into Australia has grown by 46 per cent over the same period, in contrast to global growth of less than half that rate.
In this full financial year alone, international market capacity growth in Australia will be nine per cent.
- Domestic capacity has also surged, with capacity growth of 18 per cent by the Virgin Group since July 2011, compared to eight per cent by the Qantas Group.
This deluge of capacity reflects Australia’s very open aviation environment.
The capacity growth in both our international and domestic markets is led by state-owned airlines.
Many have far lower labour and other costs.
They are often spurred by national economic development goals rather than profit targets.
And they have the backing of their governments to raise capital.
High fuel prices and foreign currency movements have exacerbated the problem, costing the Group over half a billion dollars more in 2013 than in 2009.
The fuel bill for 2014 is expected to be a record $4.6 billion.
Five years of transformation
Over the past five years, Qantas has achieved the biggest transformation since the company was privatised:
- We’ve reduced unit costs by 19 per cent over four years.
- We have renewed our fleet with 130 aircraft, giving us an average fleet age of just 7.6 years.
- Consolidated our engineering bases from three to one.
- Modernised numerous maintenance practices.
- And sold non-core assets.
Over the past five years, no company has fought harder to transform in response to new economic realities.
And still we’ve been able to achieve record on-time performance and customer satisfaction – thanks to our continuing investment in aircraft, product and improvements in our customer service.
This includes our innovative partnership with Emirates, which allows us to give our customers wide global access, while restraining our costs.
Our tie-up with Emirates has had an overwhelming positive customer response, and the Sydney and Melbourne to Dubai routes have the highest satisfaction levels of our international network.
Distorted playing field
But in the circumstances we now face, all this is not nearly enough.
In the domestic market, three foreign airlines – Singapore Airlines, Air New Zealand and Etihad, again all totally or majority government-owned, have progressively taken majority ownership of our competitor.
Yet Virgin Australia retains all the international traffic rights and benefits of an Australian-designated carrier.
In our view, that equates to a majority foreign-owned company getting benefits designed for majority Australian-owned and controlled companies.
Qantas can compete in any fair fight.
We have even been able to compete with one hand tied behind our back by the Qantas Sale Act.
But late last year, the three foreign-airline shareholders of Virgin Australia invested more than $300 million into the airline at a time when, as Virgin Australia has since reported to the ASX, it was losing money.
That capital injection has facilitated a continuation of capacity growth by Virgin Australia into the Australian domestic market, despite its growing losses.
The combined capacity increases in the market, in turn, have put downward pressure on fares, degraded market revenues, and ultimately contributed to the loss of the Qantas investment grade credit rating.
Seen in that light, Qantas is entitled, we believe, to question the motives of an apparently loss‑leading strategy by our domestic competitor funded by three of our largest international competitors, each backed by their home government.
The impact of this unlevel playing field on our domestic airlines cannot be ignored.
The domestic profit pool was over $700 million in 2012: in the first half of this year we know it was less than $100 million.
Tomorrow, when Virgin reports, we’ll know by exactly how much. Probably a lot less.
Qantas has been raising these matters with the Australian Government of the day for more than two years, especially since the fundamental shift brought about by the Virgin capital raising late last year.
Senior politicians on both sides have recognised the distortion of fair competition in the Australian aviation market.
The talks with the Government continue.
We must act now
But we must act now.
Last December, I announced that we would achieve $2 billion in cost reductions by the end of financial year 2017.
Today I announce details of that commitment.
But first, let me stress that our guiding principles will not change:
- Safety is always our number one priority, along with…
- Being the first choice for customers in every market we serve
- Maintaining our dual-brand strength in the domestic market
- Continuing to transform Qantas International
- Maintaining the Jetstar opportunity in Asia
- And broadening Qantas Loyalty for strong, diversified earnings
While the guiding principles won’t change, however, the way we implement them will.
We have to make tough decisions and hard choices.
We will be deferring growth and working our existing assets harder; deferring or selling more than 50 aircraft; accelerating the modernisation of work practices; adopting efficient new technologies across the business; and disciplining our capital outlays in line with our financial circumstances.
We will cut where we can, in order to invest where we must.
We will be a far leaner Qantas Group.
And it should be clearly understood that we are taking these actions – we must take these actions – irrespective of any decision which the Government may or may not take in relation to levelling the playing field.
Our priorities are to strengthen the core of our business and protect the sources of our long- term competitive advantage.
They are the customer experience whether it’s on the ground, in the air, or our Frequent Flyer program; and our domestic two-brand strength.
That is how we will preserve as many jobs as possible, and ensure the return of the Group to profitability.
Let me outline key elements of our response.
Network, fleet and utilisation
Having undertaken a detailed review of our networks and schedules, we will exit under-performing routes, re-assign aircraft to better match current demand, sell aircraft and defer deliveries, and increase utilisation through improved turnaround times.
As a result, we will see a major change in our fleet profile:
- Our remaining domestic B737-400s are being retired this month.
- The retirement of the remaining 15 B767s in the fleet will be brought forward to early 2015.
- The retirement of six older B747s will be brought forward to early 2016.
- Three of the remaining 11 B787 aircraft on order will be deferred.
- Eight A380s on order will be deferred, and will be subject to ongoing reviews of future requirements.
- And the A320 order book will be substantially restructured.
These measures will dramatically streamline and simplify our Group fleet.
More than 50 aircraft will be deferred or sold.
From eleven aircraft types, the fleet will be down to just seven by the end of June 2016.
This will be more efficient and cost-effective, while offering a consistently high quality experience for our customers.
Impact on our employees
Taking out $2 billion in costs by the end of financial year 2017 requires difficult decisions across all aspects of our business.
Today I regret to announce that we will be reducing our employee numbers by the equivalent of 5,000 full time staff over three years.
This number includes the 1,000 we announced last December.
This will be managed through reductions right across the Group, including:
- Reduction of management and non-operational roles by 1500
- Operational positions affected by fleet and network changes
- Restructure of line maintenance operations
- Restructure of catering facilities, including the closure of Adelaide catering, as previously announced.
- The closure of Avalon maintenance base, as previously announced.
We will continue the current wage and bonus freeze for all Group executives, and we will be implementing a wages freeze across the entire Qantas Group.
I will be meeting with the unions tomorrow.
We will not be contemplating pay increases or bonuses until Qantas is profitable again.
I want to say how much I regret the need for these wide-ranging job losses.
This is not a reflection on the hard work and commitment of our employees, but a result of the stark realities we face.
We will be working with our employees to manage this process in a compassionate way.
This is an unavoidable decision if we are to safe guard the core of the Qantas Group, and preserve a long-term future for the business.
Capital expenditure and financial position
In terms of capital expenditure we will be matching our capital outlays to our financial circumstances.
With the changes to our fleet, we expect to see our net capital investment reduced to an average $800 million per annum over the next two financial years, a total reduction of a billion dollars over the two years.
Jetstar in Asia
Turning to Jetstar in Asia.
Over recent years, Jetstar has been a pioneer Australian brand in Asia.
It has achieved unprecedented acceptance in the Asian marketplace, which is the fastest growing aviation market in the world, with a huge and growing middle class that loves to travel.
The prospects for Jetstar in Asia are a major opportunity that we continue to believe in.
But we need to take the right decisions in accord with current market circumstances and our balance sheet.
In Singapore, growth has been suspended by the Jetstar Asia Board, until such time as conditions improve.
The over-arching focus in Asia continues to be profitably bedding down existing businesses and partnerships.
Today our focus is on transforming our cost base for earnings recovery.
We have also been working through a structural review of the Qantas Group to unlock value.
Qantas has valuable and desirable assets across our diversified portfolio, and we are working through the options to make the right strategic decisions for the future.
Today we announce that Qantas has reached agreement on the disposal of its Brisbane terminal lease to Brisbane Airport Corporation, with a cash value of $112 million to be recognised in the second half of this financial year.
No final decisions have been made about other assets with the Group’s portfolio.
We will update the market as, and when, there are further announcements to be made.
Strengthening our core and our long-term competitive advantages
I said that our priorities are to strengthen the core of our business and protect the sources of our long term competitive advantage.
Our customers are at the heart of all that we do.
I know how satisfied our customers are with our service and product.
Customers tell me and our research tells us that we have reached record advocacy levels.
That won’t change, and indeed we will keep investing to improve.
We will continue our A330 reconfiguration project to deliver best-in-class experience in the domestic and international product.
Wonderful new lounges will open over the next few months in Hong Kong and Los Angeles to complement the success of our Singapore lounge.
We will maintain our customer service training and business-wide commitment to excellence in both Qantas and Jetstar.
And we will continue to strengthen Qantas Loyalty for our customers.
Quite simply, Qantas will remain the best premium domestic airline in the world, and a top tier international carrier.
Jetstar will remain the leading low fares airline in Australia and in all the markets it serves.
And, our domestic strategy has not changed.
We remain absolutely committed to maintaining the strength of our two brand domestic position.
We will be maintaining our network, product and frequency share advantage in the premium market, and our scale advantage in the leisure market.
We do not step back from our commitment to keep Qantas and Jetstar the most profitable and successful domestic carriers.
Finally, let me say this.
There are many examples of Australian companies that have failed because they have not been prepared to make the hard decisions.
But Qantas isn’t one of them.
Over our 93 year history Qantas has a record of resilience and adaptation.
We’ve survived through war and crisis, boom and bust.
Over the past five years we’ve shown yet again that we can take the tough decisions to adapt to a changing world.
We are now enduring some of the toughest conditions we’ve ever faced.
So we are doing what is right and necessary.
And we draw upon deep resources as a company.
We have a young fleet, and state of the art product, technology and service.
We have superior on-time performance and customer satisfaction ratings.
We have two outstanding brands in Qantas and Jetstar, plus Qantas Frequent Flyer which is going from strength to strength.
And most of all, our people, who are skilled, committed and passionate about Qantas.
At the end of this transformation the Qantas Group will still be an employer of more than 27,000 people, the vast majority based in Australia.
Qantas will still be one of the world’s great airlines, recognising and rewarding its loyal customers.
And Qantas will still be a strategic asset for Australia.
We will be representing the best of Australia at home and in the world; caring for Australians in times of natural disaster and crisis; and sharing the spirit of Australia from rural and regional Australia to our cities and the world.
We must – and we are – making the hard but necessary decisions that will protect this great company, and ensure its return to a profitable and sustainable future.