Qantas result impress

Eleanor Steed
By Eleanor Steed August 25, 2017 09:40

Qantas result impress

Today, Qantas continued its positive run with the announcement of its full year 2017 results. With an underlying profit before tax of $1.401bn for the 12 months ended 30 June 2017, this is the second highest performance in the airline’s 97-year history, which represents an 8.5% decline compared to the previous year. The group’s statutory profit before tax was $1.181bn, with statutory earnings per share of 46cents. The reported return on invested capital was 20.1%, with Net free cash flow of $1.309bn.

Qantas’ results are slightly above the guidance range provided in early May this year, mainly due to strengthening of the Group’s domestic businesses. A drop in statutory profit before tax of $243 million reflects that the FY16 result included the gain on sale from the Sydney Domestic Terminal.

Qantas states that all parts of the Group delivered strong returns in FY17.

In the domestic market, Qantas and Jetstar combined reached a record $865 million Underlying EBIT, making them again the two most profitable airlines in Australia with around 90 per cent of the total domestic profit pool.

Qantas International, which has faced high levels of capacity growth in the broader market, saw an improvement of conditions in the second half; it posted an Underlying EBIT of $327 million. Continued strength in its core markets helped the Jetstar Group deliver the second highest profit in its 13 years of operation.

Qantas Loyalty booked a record $369 million Underlying EBIT on a 4 per cent increase in revenue as it continued to diversify its earnings.

The Group met all the objectives of its financial framework, reporting a 12-month return on invested capital of 20.1 per cent.  Another $470 million in transformation benefits were delivered, completing the three-year program and outperforming the $2 billion target by $125 million.

The airline credits the Qantas Transformation Program for these results, which has enabled the Group to outperform its key domestic and international competitors.

CEO Alan Joyce said the result marked completion of a turnaround plan that has repositioned Qantas as one of the most profitable airline groups in the world.

“Three years ago, we started an ambitious turnaround program to make the Qantas Group strong and profitable. We tackled some difficult structural issues, became a lot more efficient and kept improving customer service,” said Joyce. “Today’s announcements show this plan has well-and-truly paid off. It’s delivered $3.5 billion in cumulative underlying profit, record customer satisfaction and the opportunity for Qantas to grow.”

The Qantas Board has declared a dividend of 7 cents per share (unfranked) to be paid on 13 October 2017 with a record date of 11 September 2017.

A further on-market buyback of up to $373 million has been announced. Once this latest buyback is completed the number of Qantas shares is expected to have been reduced by more than 20 per cent since October 2015.

Qantas states that it will continue to invest in new aircraft, upgrading cabins and lounges, and extending its network of destinations.

The airline’s fleet of 12 Airbus A380s will receive a significant upgrade to improve passenger comfort as well as route economics, which will included replacing Skybeds in Business Class with the latest version of the Business Suite; increasing the size of the Premium Economy cabin and installing the same all-new seats as the Dreamliner at the end of this year; and refurbishment of the Economy and First Class sections. Work will begin in the second quarter of calendar year 2019.

Jetstar will will start a new route from Melbourne to the Central Chinese city of Zhengzhou from December 2017.

Qantas Domestic reported Underlying EBIT of $645 million up $67 million compared with the same period last year, with unit revenue up 3 per cent and margins of 11.5 per cent. The business market strengthened in the second half, while the impact of the resources sector decline on the Group slowed to $55 million in FY17 compared to a decline of $120 million in FY16.

Qantas International reported Underlying EBIT of $327 million. The decline of $185 million was largely driven by 8.5 per cent capacity growth in the broader market, which saw a 6.5 per cent reduction in unit revenue. These pressures moderated in the second half, with the decline in unit revenue slowing to 4 per cent.

Qantas International continues to review network opportunities created by the 787’s arrival, including the ability to deploy some of its existing wide-body fleet differently.

Qantas Freight reported Underlying EBIT of $47 million, down $17 million compared with last year due to weakness in the international market caused by increased wide-body aircraft capacity. The domestic freight business was broadly stable.

The Jetstar Group reported Underlying EBIT of $417 million, down $35 million and still the second highest in its history. Jetstar’s domestic Australian operations posted another strong profit and its international routes to-and-from Australia also performed well. A cabin upgrade to the airline’s A320s during FY18 will deliver a 3 per cent capacity increase per aircraft with limited capital outlay.

Qantas has announced it is investigating direct flights from the east coast of Australia to London and New York by 2022.

Joyce said: “From next year we’ll be flying direct from Perth to London, which is a huge leap forward. We believe advances in technology in the next few years will make Sydney to London direct a possibility and Qantas is well placed to be the airline to do it.

“Any aircraft purchase would have to meet strict financial thresholds, but these direct flights would be revolutionary for air travel in Australia.”

Qantas International will take delivery of two Dreamliner 787-9s in the first half of FY18, with all eight to join the fleet by first half FY19.

Qantas retired one 747-400 in July this year with another to leave the fleet around mid-2018. A total of five older jumbos will be retired to make way for the eight Dreamliners. The remaining six extended range 747s are expected to remain until the early 2020s.

Three Fokker F100 aircraft joined the Qantas Domestic fleet in the first half of the year, providing flexibility to reduce capacity but maintain frequency on resources routes. Jetstar added two Airbus A321 aircraft to meet demand in short-haul leisure markets.

Qantas has further strengthened its capital position through sustained positive free cash flow. Net debt has fallen by $434 million to $5.2 billion compared to FY16, which is at the lower end of the target range. More than 60 per cent of the Group’s fleet is now debt-free, representing an unencumbered asset base of around US$3.8 billion. Short term liquidity remains strong at $1.8 billion, plus another $1 billion in undrawn facilities.

For the coming year, Qantas expects overall group capacity to increase by around 3 per cent in the first half. Group Domestic capacity is expected to decrease by around 1 per cent compared with the same period last year; unit revenue is expected to increase on stronger demand. Group International capacity is expected to increase by around 5 per cent, driven by previously-announced new routes into growing Asian markets. Unit revenue declined by 2 per cent in the second half of FY17 on competitor capacity growth of 5 per cent; competitor capacity growth is expected to slow to around 4 per cent in the first half of FY18.

Given its hedging program, fuel costs are expected to be no more than $3.16 billion and are tracking at $3.11 billion at current forward AUD prices. Net capital expenditure is expected to be $3.0 billion for FY18 and FY19 combined. Impact of inflation on costs, including wage growth, is expected to be $250 million. Gross benefits from the next wave of ongoing transformation (including cost, revenue and fuel efficiency improvements) are expected to be $400 million per year.

Eleanor Steed
By Eleanor Steed August 25, 2017 09:40