Qantas announces strong full year profit, shareholder return & dreamliner order

Sydney | Published on 20th August 2015 at 8:49
  • Underlying Profit Before Tax: $975 million
  • Statutory Profit Before Tax: $789 million
  • Return on invested capital: 16 per cent
  • Statutory earnings per share: 25.4 cents
  • Proposed capital return and related share consolidation: $505 million, 23 cents per share
  • Boeing 787-9 Dreamliner order for Qantas International

Qantas today announced its strongest profit since before the Global Financial Crisis, a $505 million capital return to shareholders and a Boeing 787 Dreamliner order to start a new era for Qantas International.

For the 12 months to 30 June 2015, Qantas reported an Underlying Profit Before Tax of
$975 million and a Statutory Profit Before Tax of $789 million. The underlying result is a turnaround of $1.6 billion compared with financial year 2014, including Qantas’ best ever second half performance, with all segments of the Qantas Group reporting robust profits and returning their cost of capital.

The driving force behind the result was progress with the Qantas Transformation program, which realised $894 million in transformation benefits during the year and saw Qantas meet its target of paying down more than $1 billion in net debt. As a result, Qantas has reached its optimal capital structure – enabling it to resume shareholder returns while continuing to invest in growth and renewal.

Chief executive Alan Joyce said the milestone acquisition of the next-generation Dreamliner for Qantas International marked the scale of Qantas’ turnaround and signalled a new phase of renewal and growth.

“We are halfway through the biggest and fastest transformation in our history,” Mr Joyce said. “Without that transformation, we would not be reporting this strong profit,
recommencing shareholder returns, or announcing our ultra-efficient Dreamliner fleet for Qantas International.

“We have reshaped our business for a strong, sustainable future – and because we moved quickly and made tough decisions early, we have strong foundations to build on.”

A capital return of $505 million, equivalent to 23 cents per share, is proposed to be paid to shareholders in early November 2015. The payment is subject to shareholder approval at the Qantas Annual General Meeting on 23 October 2015 of the capital return and the related share consolidation (see separate release).

“The financial discipline we have applied means we can reward our shareholders, who have been both patient and supportive throughout our transformation,” Mr Joyce said. “We’re delighted to make this announcement today.”

Qantas will acquire eight Boeing 787-9 aircraft, to be delivered from calendar year 2017 and gradually replace five older Boeing 747s (see separate release).

“New aircraft types have always unlocked opportunities for Qantas,” Mr Joyce said.

“When our red tail Dreamliners start arriving in two years’ time, their incredible range and fuel-efficiency will create new possibilities for our network.

“For customers, the Qantas Dreamliner’s improved cabin pressure, larger windows and
technology to reduce turbulence will deliver the world’s best travel experience.”

“I want to thank our people, who have driven this transformation forward with such
determination,” Mr Joyce said.

“No other company in Australia has people with more pride, more belief and more
commitment than those who go to work each day for Qantas.

“Everyone at Qantas made sacrifices as we worked through changes across our business.
That sacrifice will be recognised with the $90 million in bonus payments to employees
covered by agreements that include an 18-month pay freeze.

“Our people have always been proud of Qantas’ history and its legacy. Today that pride is coupled with a new sense of focus and dynamism. We need to keep evolving and
transforming to shape a truly sustainable future – but our people should take great
satisfaction in what we are achieving together.”

Drivers of FY15 Turnaround
The $2 billion Qantas Transformation program was announced in December 2013.

To date, $1.1 billion of transformation benefits have been realised, including the $894 million of benefits realised in financial year 2015, and the Group has met every scheduled target for the program.

Other factors that had a positive impact on Qantas’ performance in financial year 2015 were lower fuel prices, depreciation savings from the Qantas International fleet impairment, higher revenue per available seat kilometre (excluding foreign exchange), and the repeal of the carbon tax.

Group Performance
All segments of the Qantas Group reported strong profits with record results for Jetstar,
Qantas Loyalty and Qantas Freight on an Underlying Earnings Before Interest and Tax
(Underlying EBIT) basis. The combined Qantas Domestic and Qantas International result was the best since 2008. Combined Group domestic Underlying EBIT – Qantas and Jetstar – was more than $600 million and Qantas International was profitable on a full-year basis for the first time since before the GFC.

Qantas Domestic
Qantas Domestic reported Underlying EBIT of $480 million, compared with $30 million in financial year 2014, driven by $302 million in transformation benefits and a 4.5 per cent increase in revenue per available seat kilometre.

The Group’s dual-brand model is enabling it to adjust to shifts in economic conditions and demand, with capacity reductions in mining-intensive Western Australia and Queensland and the introduction of new routes in east coast markets.

Comparable unit costs were cut by 4 per cent as Qantas Domestic completed its fleet
simplification with the retirement of the B767 fleet and increased utilisation of aircraft in the second half of the financial year.

Customer satisfaction reached record levels in financial year 2015, while Qantas Domestic also achieved its best on-time performance in over 10 years.

Qantas International
Qantas International reported Underlying EBIT of $267 million, a turnaround of $764 million compared with a loss of $497 million in financial year 2014. This turnaround was driven by transformation benefits of $408 million, with a 6 per cent increase in revenue per available seat kilometre and a 4 per cent reduction in comparable unit costs.

The business continues to pursue growth opportunities through increased aircraft utilisation, with capacity increases implemented or announced in markets including Los Angeles, Dallas, Vancouver, San Francisco, Santiago, Tokyo and Singapore, and plans to expand partnerships with American Airlines and China Eastern (subject to regulatory approval). Overall, aircraft utilisation has been increased by 15 per cent since financial year 2012.

Qantas International also received record customer satisfaction ratings in financial year

Jetstar Group
The Jetstar Group reported record Underlying EBIT of $230 million, up from a loss of $116 million in financial year 2014, driven by strong performances in the Australian domestic and Australian international market. Jetstar International achieved a record profit as it introduced more B787-8s into its fleet.

Jetstar’s New Zealand business was also profitable and all the Jetstar-branded airlines in Asia improved their performance compared with financial year 2014, with losses halved:

  • Jetstar Asia (Singapore) was profitable in the full year.
  • Jetstar Pacific (Vietnam) was profitable in the second half.
  • Jetstar Japan significantly improved its performance on the prior year. Qantas and its fellow shareholder Japan Airlines will each commit an equity injection of up to JPY 5 billion (AUD$55 million) to Jetstar Japan. This investment will support Jetstar Japan as it continues to expand its international operations and maintain its leading position in the growing and competitive Japanese domestic market.
  • Qantas has written off its stake in Jetstar Hong Kong, with an impact of $21 million outside of Underlying EBIT, following the Hong Kong regulator’s decision not to grant an operating license to the airline. Qantas will make no further investments in Jetstar Hong Kong.

The Jetstar Group’s controllable unit costs were reduced by 2 per cent, underpinning low fares.

Qantas Loyalty
Qantas Loyalty reported record Underlying EBIT of $315 million, up from $286 million in financial year 2014, driven by a 5 per cent increase in billings and significant growth in adjacent businesses, including Qantas Cash.

Qantas Frequent Flyer added 33 new partners and grew its membership to 10.8 million. At the same time, Qantas Loyalty continued to diversify its earnings profile, with new and adjacent businesses contributing 30 per cent of earnings growth.

Around $1.1 billion has been loaded on the Qantas Cash travel money card, the Aquire
small business loyalty program is performing strongly, and the marketing, analytics and
research services venture Red Planet was profitable within its first year of operation.

Qantas Loyalty achieved record customer satisfaction, maintaining a clear lead over
competitor loyalty programs.

Qantas Freight
Qantas Freight reported record Underlying EBIT2 of $114 million, compared with $24 million in financial year 2014, driven by transformation benefits of $38 million and high load factors.

The business renewed Australia Post as its biggest domestic freight customer as well as
adding a new major customer, Toll Group.

Customer Focus
Customers have always been at the heart of the Group’s strategy, which is why the Group has invested in aircraft, lounges, training and technology throughout transformation. Major customer initiatives completed, underway or beginning soon include:

  • Refurbishment of Qantas’ A330 fleet of 28 aircraft for international and domestic
    operations, now approaching the halfway stage.
  • Refurbishment of Qantas Domestic’s B737-800 fleet of 67 aircraft, now underway.
  • Renewal of Jetstar International’s fleet with 11 B787 Dreamliners, all in service by
    September 2015.
  • New first and business class lounges now open in Los Angeles.
  • New Perth business lounge, to open in late August, and new Brisbane lounges, to open from 2016.
  • Re-launched websites for both Qantas and Jetstar in 2016.
  • Moving Jetstar into the all-new Terminal 4 terminal in Melbourne by the end of 2015.

Operating cash flow in financial year 2015 was $2 billion, up from $1.1 billion in financial year 2014.

Qantas’ net debt has been reduced by $1.1 billion since financial year 2013 and the Group’s leverage metrics are now within an investment-grade range, with debt-to-adjusted-EBITDA of 2.9x, compared with 5.1x in financial year 2014 (based on Moody’s methodology).

The Group retains access to diverse sources of funding, including $2.9 billion in cash, $1
billion in undrawn facilities and over US$3 billion of debt-free aircraft.

Group return on invested capital (ROIC) in financial year 2015 was 16 per cent, above the Group’s target of ROIC above 10 per cent through the cycle.

Net cash capital expenditure in financial year 2015 was $944 million, in line with guidance.

Current Group operating expectations:

  • Qantas Group capacity expected to increase by 3 – 4 per cent in the first half of
    financial year 2016 compared to the first half of financial year 2015.

    • Group Domestic capacity expected to increase by 0 – 1 per cent in the first
      half of financial year 2016 compared to the first half of financial year 2015.
    • International capacity increase driven by utilisation, new route launches,
      B787-8 transition.
  • Underlying fuel costs in financial year 2016 expected to be no more than $3.94
    billion3, $3.64 billion4 at current forward Australian dollar prices.
  • Depreciation and amortisation expense expected to increase by approximately $100 million to $1.2 billion in financial year 2016.
  • Transformation benefits (cost, fuel and revenue) expected to be $450 million in
    financial year 2016.
  • Net capital expenditure to be between $900 million and $1 billion in financial year
  • 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 FX rates.

1 Refer to the Review of Operations for definition and explanation of non-statutory measures, including Underlying PBT, Underlying EBIT, return on invested capital, net debt, utilisation, comparable unit cost, controllable unit cost, yield, load, and billings. Unless otherwise stated, amounts are reported on an underlying basis. Refer to the Investor Presentation.

2 Since separate segmentation of freight result in financial year 2008.

3 Worst case total fuel cost based on a 2-standard deviation move in Brent forward market prices to A$100/bbl, for the remainder of FY16.

4 Current forward market price total fuel cost based on a Brent forward market price of A$71/bbl for remainder of FY16.