Qantas Airways Limited - Result Coverage

• The airline announced its results for FY 2015 and revealed their strong platform for sustainable growth by delivering on their commitment for an earnings turnaround of $ 1.6 billion for the year. Qantas Transformation is driving their long-term permanent shift in their cost base and their competitive position. The optimal capital structure has been achieved and a debt reduction in excess of $ 1 billion has been accomplished. The superior dual brand position in the domestic markets has been strengthened and record results have been achieved for Qantas Loyalty, Jetstar Group and Qantas Freight. Qantas International has been successfully turned around and all the segments are delivering the targeted ROIC. The airline proposes to return $ 505 million in surplus capital to its shareholders and a disciplined investment programme to enhance value for shareholders by investing in fuel-efficient B 787-94 Qantas international after ensuring that strict investment hurdles are met. External volatility is proposed to be managed by robust hedging and flexibility in capacity and capital expenditure.

• The company has announced an underlying profit before tax of $ 975 million which represents the turnaround of $ 1.6 billion compared to the previous year. The major force behind this turnaround is the $ 2 billion Qantas Transformation Program which has unlocked cumulative transformation benefits including the $ 894 million achieved in FY 2015 alone. Return on invested capital was 16% which is well in line with the target of more than 10% throughout the cycle. The target of paying down debt in excess of $ 1 billion has been achieved and the leverage metrics are now investment grade which is the strongest balance sheet since the global financial crisis of 2008.

Business segment performance
 

• Qantas International was profitable on a full-year basis for the first time since the global financial crisis with an EBIT of $ 267 million which is a turnaround of $ 764 million from the previous year. The business has pursued opportunities for growth with the smarter use of aircraft to add capacity to several routes. It has also announced enhanced partnerships key partners like American Airlines which could provide valuable growth. Qantas Domestic showed underlying EBIT of $ 480 million compared to $ 30 million in the previous year. Combined with Jetstar, the profit from domestic flying operations was over $ 600 million. Network changes were made and capacity managed in line with the changing Australian economy. The Jetstar Group reported record underlying EBIT of $ 230 million compared to a loss of $ 116 million in the previous year. There were strong performances in both the domestic and international markets and New Zealand and Asia showed satisfactory results. The airline has written of its stake in Hong Kong with an impact of $ 21 million following the decision of the Hong Kong regulators not to approve the operating licence. Costs were reduced by 2% to support low fares. Qantas Freight reported record underlying EBIT of $ 114 million compared to $24 million in the previous year. Australia Post was renewed as the biggest domestic freight customer and a new major customer Toll Group was added. Finally, Qantas Loyalty reported record underlying EBIT of $315 million compared to $ 286 million in the previous year. Qantas Frequent Flyer added 33 new partners and expanded its membership to 10.8 million. At the same time, Qantas Loyalty continues to diversify with other businesses adding around 30% of total earnings growth.

Capital management and customer investment
 

• The group has achieved its optimal capital structure and the financial discipline will enable new investment as well as the opportunity to reward shareholders. This is why the company is proposed a capital return of $ 505 million amounting to $ .23 per share and a related share consolidation. Consolidation will provide shareholders with an earnings per share result similar to a share buyback. Customers have always been at the heart of any strategy and the transformation program has been implemented side-by-side with investment in aircraft lounges, training and technology. For instance, the refurbishment of the A330 fleet is approaching the halfway mark and new lounges for first class and business travel have opened in Los Angeles and will soon open in Perth. Brisbane is scheduled to open in 2016. Jetstar will move to a brand-new terminal in Melbourne airport later this year to provide better facilities to thousands of customers.

 
New aircraft investment
 

• The company has finalised a milestone acquisition to mark the turnaround by announcing that 8 new Boeing 787-9 airliners will join the fleet from 2017 and will gradually replace 5 of the 747s. Because the 787 is a smaller plane, this provides the flexibility of more aircraft while retaining the same carrying capacity. The other advantage of these state-of-the-art airliners include improved cabin pressure, large windows and the technology for reduced turbulence. The most significant benefit will be the much higher efficiency which will reduce fuel consumption and reduce heavy maintenance requirements. The deal is expected to deliver productivity gains of 30% and is expected to deliver over the next 20 years and beyond. This will ensure a well balanced fleet with the flexibility to respond quickly to changing market conditions.

• The domestic areas of focus will be to earn revenue premiums through the delivery of superior customer experience, recognition for operational excellence and delivering at the right cost through the transformation process. Networks will continue to be enhanced and the unit cost gap vis-a-vis the competition will be reduced from 11% in FY 2015 to less than 5% by FY 2017. Among the international areas of focus will be ownership of the high yield customer through cabin configuration and leveraging technology. Other priorities will include transforming the cost base and maximising productivity, overcoming gaps in the network to improve connectivity and launching new routes. The strategic outcomes targeted by FY 2017 include a reduction of more than 10% in fuel expenditure, reduce Qantas Domestic unit cost gap to less than 5%, make the unit cost gap for Qantas International comparable to competitors, maintain lowest seat cost and yield advantage for Jetstar and achieve consistent and improved levels of customer service.