Qantas announces profit result, response to economic conditions

Sydney | Published on 16th February 2012 at 2:39

Highlights:
– Strong portfolio performance:
– Continuing record results for Jetstar and Qantas Frequent Flyer.
– Revenue growth of 6 per cent.
– Yield and unit cost improvements.
– Offset by industrial action and record high fuel costs.
– Improvement in net operating cash flow of 5 per cent.
– Strategic initiatives to transform Qantas International and grow Jetstar in Asia.

The Qantas Group today announced underlying profit before tax of $202 million for the half-year ended 31 December 2011, a decrease of $215 million compared with the prior corresponding period. Statutory profit before tax was $58 million.

The result reflects the $194 million financial impact of industrial action during the first half, as well as increased fuel costs compared with the prior corresponding period. Total fuel costs in the half were $2.2 billion, up $444 million (or 26 per cent).

The Group also today outlined measures that respond to global economic conditions and the structural challenges facing Qantas, including the European finance crisis, the changing Australian economy and the need to increase efficiency and competitiveness. These steps will position the Group for a strong, sustainable future and build long-term shareholder value.

They include a reduction in capital expenditure of $700 million over 2011/12 and 2012/13; a review of Qantas’ heavy maintenance footprint in Australia; and changes to Qantas’ catering and engineering operations.

Qantas Chief Executive Officer Alan Joyce (opens in new window)said the first-half result was a good performance in challenging circumstances.

“The termination of industrial action on 31 October 2011 brought operational certainty for the Qantas Group, our customers and our shareholders,” Mr Joyce said.

“While the impact of the dispute was severe, our portfolio of businesses once again demonstrated its resilience in difficult conditions. Improvements in operating cash flow, revenue, yield and unit costs, and record results for Jetstar and Qantas Frequent Flyer, helped offset the financial effect on the Group.”

Qantas Chief Executive Officer Alan Joyce said the Group was taking decisive action to meet the challenges of the changing global economy and aviation industry.

“We have a clear strategy for the future based on our strong domestic airline businesses, transforming Qantas International and other business areas, the continued growth of Qantas Frequent Flyer and growing Jetstar in Asia.

“With a volatile world economy, disciplined financial management remains vital. Today we have set out a package of initiatives appropriate both to the current conditions and our long-term goals.

“At Qantas we know we must continue to adapt to the complex economic and competitive environment. That means taking hard decisions today to ensure that we can secure jobs and success for the future.”

Segment financial performance

Qantas’ underlying EBIT in the first half was $66 million, compared with $165 million in the prior corresponding period.

“Qantas was hit hard by industrial action,” Mr Joyce said.

“However, by late November bookings had recovered well – particularly in the domestic market. Qantas’ on-time performance was the best of any major domestic airline in December and we have retained and grown major corporate accounts as well as winning important new business. Our brand and customer satisfaction ratings have improved significantly since the fleet grounding.

“After the grounding we prioritised the timely compensation of affected passengers and a series of initiatives to restore customer confidence in the airline. These included free air fares for affected Australian residents, travel vouchers for affected international residents and a range of special offers for Qantas Frequent Flyer members and premium customers.

“With QantasLink recently being named the world’s best regional airline by Air Transport World and Network Aviation increasing our presence in mining regions, Qantas is very well-positioned domestically.

“We continue to work towards returning Qantas’ international performance to profitability in the short term. Our long-term goal is to ensure that the Qantas business – domestic and international combined – exceeds the cost of capital on a sustainable basis.”

Jetstar achieved record underlying EBIT of $147 million, up $4 million on last year’s first-half earnings.

“Jetstar continues to increase capacity both domestically and internationally,” Mr Joyce said.

“As well as the ongoing growth of Singapore-based Jetstar Asia, Jetstar Japan passed a number of milestones as it moves towards commencing operations in July 2012.

“This joint investment with Japan Airlines and Mitsubishi will deliver true low-cost air travel across the Japanese market and further expand the Jetstar franchise in the world’s fastest-growing region.”

Qantas Frequent Flyer delivered normalised EBIT of $119 million (up from $107 million), continuing its strong contribution to Group earnings.

“Qantas Frequent Flyer now has 8.3 million members and continues to add new ways of earning points through strong partner relationships,” Mr Joyce said. “The program is an outstanding asset for the Group and is fundamental to our customer relationships. External billings have grown 16 per cent to $600 million.”

Underlying EBIT for Qantas Freight was $38 million, down $3 million compared with the prior corresponding period.

“Qantas Freight has been affected by high fuel costs and weaker demand across the cargo sector, resulting in loads declining,” Mr Joyce said. “However, a good performance in the domestic express freight market and increased contract revenue helped minimise the overall drop in earnings.”

Response to global economic volatility and operational changes

The European debt crisis and weaker global growth forecasts have resulted in a significant deterioration in the aviation operating environment.

Fuel prices remain high and the Qantas Group faces pressure from strong competitor growth and cost disparity with competitors, in addition to the uncertain economic environment.

While the Group’s financial position remains strong, with significant cash reserves and an investment-grade credit rating, this outlook requires disciplined financial management and a continued focus on maximising productivity.

Capital expenditure in 2011/12 will be reduced from $2.5 billion to $2.3 billion and capital expenditure in 2012/13 will be reduced from $2.8 billion to $2.3 billion with further cuts to be identified in 2012/13.

These savings will come from a range of initiatives including reductions in non-aircraft capital expenditure, the deferral of Boeing 787-800 deliveries because of manufacturer delays, a reduction in planned domestic capacity growth in line with long-term estimates and a capital-light model for any premium airline investment in Asia. Any further capital expenditure savings will come from appropriate changes to the Qantas Group fleet plan.

The Group will continue to actively manage capital spend to support measured growth, manage the business in uncertain times and maintain an investment grade credit rating, and will review the potential for capital returns in the future in that context.

The following network changes will be made in order to adjust capacity to market conditions and route performance:
– Withdrawal from the Singapore-Mumbai and Auckland-Los Angeles routes, effective 6 May 2012. This is in addition to previously-announced withdrawals from the Hong Kong-London and Bangkok-London routes, effective March 2012.
– Aircraft changes on the following international and domestic routes: Sydney-Bangkok (Boeing 747 replaced with Airbus A330 from 10 June), Sydney-Perth (Boeing 747 replaced with Airbus A330 on certain services from 6 May) and Melbourne-Perth (additional A330 services added from 6 May).
– Capacity increases on the Los Angeles-New York route from 6 May (Airbus A330 replaced with Boeing 747) and Sydney-Tokyo route from 10 June (one Airbus A330 service per week replaced with a Boeing 747 service, resulting in daily Boeing 747 services).
– Early retirement of two further Boeing 747 aircraft (in addition to the four early B747 retirements announced in August 2011).

In addition, changes will be made in Qantas’ engineering and catering businesses to ensure that they meet the needs of the Group’s long-term strategy.

A number of steps will be taken to help build a more competitive engineering operation and close the cost gap between Qantas and its competitors.

– 60-day pre-decision consultation process on Qantas’ Australian heavy maintenance footprint, to address declining work volumes resulting from new aircraft technology and work processes.
– Changes to line maintenance processes with the introduction of a more tailored system for next-generation aircraft operating domestically.
– Consolidation of a range of engineering functions for greater efficiency.

Qantas’ catering business will consolidate to focus on four core facilities in Sydney, Melbourne, Brisbane and Perth, through the following actions.

– Qantas will not invest in a new catering centre for Adelaide when the current facility’s lease expires in March 2013. Consultation will take place with employees and other stakeholders about future catering options in Adelaide.
– Discussions on the potential sale of one of Qantas’ two Sydney catering centres (Riverside) and its Cairns catering centre.
– Changes to work processes in Q Catering Brisbane ahead of the move to a new centre.

The workforce planning team in Qantas’ airports department, currently dispersed around individual airports, will also largely be consolidated (in Sydney).

Job reductions are expected as a result of aircraft retirements and operational changes. Qantas will provide maximum support to affected employees, including opportunities for redeployment, voluntary redundancy and external employment.

Outlook

The operating environment and economic outlook for the second half of 2011/12 remains challenging and volatile.

Seasonal factors typically drive stronger revenue in the first half of the financial year compared with the second half of the year (ending 30 June).

Following fare increases and fuel surcharges announced in February 2012, Group forward bookings continue to indicate higher yields in the second half of 2011/12 compared with the second half of 2010/11.

The Group expects to increase capacity by 7 per cent in the second half of 2011/12 compared with the second half of 2010/11, while maintaining flexibility (equivalent to approximately 5 per cent after adjusting for the impact of natural disasters and the A380 grounding in second half of 2010/11).

Underlying fuel costs are expected to increase by approximately $250 million from $1.95 billion in the second half of 2010/11 to approximately $2.2 billion in the second half of 2011/12, due to higher forward market jet fuel prices and increased flying.

No Group profit guidance is provided at this time due to the high degree of volatility and uncertainty in global economic conditions, fuel prices and exchange rates, as well as the major transformational change agenda underway.