Alan Joyce Speech Qantas Group Full Year Financial Results
Sydney, 23 August 2012
Good morning everyone.
The Qantas Group’s full year results are in line with the guidance we provided to the market.
We delivered an underlying profit before tax of $95 million, which represents a statutory loss after tax of $244 million.
This result reflects three things:
* A record fuel bill, up $645 million to $4.3 billion, 18% higher than the previous year
* The costs incurred by the prolonged industrial dispute last year of $194 million
* And transformation costs of $376 million (approximately half of these non-cash), as we continue to address our legacy cost base and turn around our Qantas International business.
As previously disclosed, Qantas International made a loss of approximately $450 million (based on underlying earnings before interest and tax).
However Qantas Domestic and Jetstar Domestic combined delivered a profit of more than $600 million by the same measure.
Clearly we have been through an exceptional period.
Yet over the course of the past year we made significant progress in advancing our overall Group strategy.
We are now coming off a period of high capital expenditure that has given us the youngest fleet since Qantas became a public company in 1995.
At the time we had 135 aircraft.
Today we have 308 aircraft, with an average fleet age of 8.3 years.
This is a significant milestone.
A younger fleet is more efficient, attractive to customers, and internationally competitive.
We are now positioned to stay within our target average fleet age of eight to ten years, and to do so with lower ongoing capital requirements.
We will spend $1.9 billion for each of the next two years.
As you know we are looking forward to the arrival of 15 of the new Boeing 787-8s for Jetstar towards the second half of next calendar year.
As planned, this will enable the transfer of Airbus A330 aircraft from Jetstar to Qantas Domestic, and the phased retirement of the Qantas Boeing 767 fleet.
These aircraft will arrive as planned.
However, given lower growth requirements in this uncertain global context, firm commitments for 35 B787-9s will be cancelled.
Fifty B787-9 options and purchase rights will be brought forward by two years to 2016.
Effectively this constitutes a delay of the first 787-9 delivery by two years, from 2014 to 2016.
This fleet change will result in a reduction in our forward capital expenditure commitments.
While the details are in-confidence, these would be valued at US$8.5 billion if we were paying list prices.
Total cash inflow from this restructure is US$433 million, with US$355 million in 2012/13.
This will result in a net benefit to underlying and statutory profit before tax of approximately US$140 million, to be recognised in the first half.
At our half year results, I referred to the prospect of being free cash flow positive.
We achieved that for the second half of the year at $206 million.
We remain focused on generating positive free cash flow for the full year 2013.
We have liquidity with $3.4 billion in cash, and $300 million available via an undrawn facility.
We now own more of our aircraft outright.
With lower capital requirements and substantial liquidity, we are now turning our attention towards debt reduction to strengthen the balance sheet.
Let me turn to our strategic performance.
Our domestic position is pre-eminent and our domestic earnings outperformed the previous year.
We have the two most profitable airlines in Australia.
We lead the market in both business and leisure with 65% market share.
We hold an estimated 84% of Australia’s corporate customer base (despite three months of industrial action), with double digit corporate travel revenue growth on last year.
We are the major aviation provider to the resources sector through charter and passenger services.
And over the course of the past year it was pleasing to see customers – large customers - who have tried out the competition but returned to us.
They came back to Qantas because we are best for business, with our superior network, frequency and product.
From October this year, we will fast-track the upgrade of our domestic Boeing 767 aircraft with fresh interiors.
I have no doubt customers will be delighted, as they are with our refurbished 747s.
Sixteen of our 22 domestic 767s will be upgraded, with the first to be completed this October.
Our iPad/Q Streaming initiative is also being rolled out to all domestic 767s.
The total capital expenditure on these two initiatives will be approximately $20 million.
The remaining 767s are progressively being retired, and all 767s are scheduled to retire by the end of 2015.
Our domestic and international Qantas fleet will offer more consistent high quality product and in-flight entertainment for our customers.
It will keep getting better with initiatives such as the roll-out of Q Streaming to customers on their own smart phones or tablets from 2013.
Our Qantas Frequent Flyer program keeps delivering, with earnings up 14% to a record normalised earnings before interest and tax of
$231 million, membership up 9%, and redemptions up 16%.
We’ve made it easier to get and confirm upgrades, right up to departure for domestic travellers.
Jetstar achieved record underlying earnings before interest and tax of $203 million, up 20% on the previous year.
Ancillary revenues were up 27% and unit costs were at record lows.
We are now progressively embedding the Jetstar brand and the two-airline model in Asia.
Jetstar is already the largest low cost carrier in Asia-Pacific measured by revenue.
We have launched Jetstar Japan five months ahead of schedule, we’ve already flown 110,000 passengers, load factors are high at 86%, and this afternoon we will be announcing a second base for the Japanese domestic network.
Pending regulatory approval, Jetstar Japan will begin international services in the first half of next year.
Planning for Jetstar Hong Kong continues with our partner China Eastern: the AOC application has now been lodged.
Jetstar Asia is the most profitable low cost airline based in Singapore, and Jetstar Pacific has been strengthened with new partner Vietnam Airlines.
Our biggest challenge is Qantas International, but its transformation is on track.
Our goal is to return it to profit and ensure it remains Australia’s iconic flagship carrier.
We have cut loss making routes.
We’ve successfully used gateways and partnerships to extend our reach and create better options for customers, while restraining our costs.
We’ve reconfigured aircraft so that by October we will have 21 aircraft with Marc Newson interiors, and we have established better fleet economics.
We’ve attacked our legacy cost base, aligning our workforce to new technologies and better processes.
We are rolling out the measures that we have previously announced, including consolidation of heavy maintenance bases, and updating maintenance procedures, with the effect of reducing the full time equivalent of an estimated 2800 roles.
The benefits of our transformation program have started to come through, and when all the measures we have announced so far are fully implemented, we anticipate ongoing savings of $300 million per year.
And there is more to come.
So let me turn to our outlook.
Clearly we confront very difficult and uncertain trading conditions in Britain, Europe and the United States.
The fuel price is also uncertain.
The high Australian dollar will continue to create ripple effects throughout Australia as retail, manufacturing and tourism adjusts.
But Asia will continue to offer high growth potential as the middle class grows and travels.
With this volatility in global conditions, fuel and foreign exchange rates, as well as the ongoing internal transformation we have underway, it would be imprudent to offer profit guidance at this time.
But I can make a few comments about operating expectations for first half of FY13.
Overall Group capacity is expected to increase by 3% to 4% in the first half compared to the first half of FY12.
In the domestic environment we aim to maintain our profit-maximising 65% market share.
Given current conditions, domestic capacity is expected to increase by around 9% to 11% in the first half, compared to the first half of FY12.
As always we have the flexibility to adjust capacity should conditions change.
With higher forward market jet fuel prices and increased flying, underlying fuel costs for the Group (excluding carbon tax) are expected to be approximately $2.3 billion in the first half of FY13 compared to $2.2 billion in the first half of FY12.
Finally, I note that our circumstances are often compared to those faced by the many legacy airlines that are going through hard times.
But we have a unique aviation model that is increasingly fit for the future.
We have a very successful two airline strategy in Australia, with a premium and low fares model that spans most aviation customers and mitigates risk over economic cycles.
It is widely recognised as a winning formula, and is now being extended into the world’s fastest growing aviation markets in Asia, with low capital outlays from us.
We have the iconic Qantas brand which continues to attract a premium.
This is reinforced by a successful frequent flyer program that continues, year-on-year, to deliver more innovations and strengthen customer loyalty to Qantas.
We are financially strong, profitable on an underlying basis, and have retained an investment grade credit rating.
While we are executing an aggressive strategy for Qantas International, we continue to invest in excellent product and service for our domestic and international businesses.
Today we are a diverse yet integrated Group of aviation businesses.
Where we have challenges, we are addressing them.
This past year we have made a series of right but tough decisions in order to secure a sustainable future for Australia’s Qantas and the Qantas Group.
Over coming years we will reap the benefits of these decisions.
A stronger and better Qantas, and a platform for growth for the entire Qantas Group.
We said we would return Qantas International to profit in three years, and that over five years our Qantas flying businesses combined would exceed their cost of capital.
We are on track, and we stand by our commitment.
Issued by Qantas Corporate Communication (5441)