Qantas chief executive Alan Joyce is predicting brighter skies ahead for the airline group after handing down a full year loss in excess of $2 billion for 2013/14.
The $2.843 billion statutory net loss for the 12 months to June 30 2014, was impacted by writedowns to the carrying value of the Qantas’s Airbus A380, Boeing 747-400 and Airbus A330 aircraft in preparation for a proposed split of its domestic and international operations.
Underlying profit before tax, which Qantas regarded as the best indication of its financial performance, fell to a loss of $646 million, from underlying profit before tax of $186 million in the prior year.
Despite what he described as a confronting set of numbers, Joyce said they represented the past given the transformation plan that was announced in February was creating a “leaner, more focused, and sustainable Qantas group”.
“We have now come through the worst,” Joyce told reporters in Sydney on Thursday.
“Our work is on track and we will see accelerating benefits in the coming year.”
Joyce said the Qantas Group – the Flying Kangaroo’s domestic and international operations, Jetstar, Qantas Loyalty, Qantas Freight – was expected to return to underlying profit before tax in the first half of 2014/15, from a $252 million loss in 2013/14.
“There is a clear and significant easing of both international and domestic capacity growth, which will stabilise the operating environment,” Joyce said.
“We therefore anticipate a rapid improvement in the group’s financial performance in financial year 2015.”
Qantas said capacity increases in both the local and international markets had hurt yields – an industry measure of average airfares per passenger.
On the domestic front, Qantas said its mainline – aircraft with the white kangaroo on the red tail – and Jetstar brands posted a combined $50 million in earnings in 2013/14.
By contrast, Qantas domestic alone had $365 million in underlying earnings before interest and tax (EBIT) in the prior year.
“Domestic market yields and revenue seat factor were adversely impacted by market capacity growth running ahead of demand for the second successive year,” Qantas said.
“Business and leisure demand remained weak throughout the year, with corporate account revenue impacted by softening resources sector demand, particularly in the Western Australia and Queensland markets and reduced government spending.”
Figures from the Bureau of Transport, Infrastructure and Regional Economics showed domestic capacity, measured by available seat kilometres, rose by 2.3 per cent in 2013/14.
However, revenue passenger kilometres was up by just 1.3 per cent, resulting in load factors dropping 0.7 percentage points to 76 per cent.
Qantas said in May it would have have flat capacity growth in the domestic market across both its Qantas and Jetstar brands and on Thursday extended that capacity freeze for a further three months, meaning no capacity growth for the first half of 2014/15.
“We believe this to be appropriate given underlying market conditions,” Joyce said.
Qantas’s international operations had another difficult year, with capacity increases and higher fuel costs hitting hard and leading to an underlying EBIT loss of $497 million, compared with a loss of $246 million in 2012/13.
On that front too things were looking more positive, with international competitor capacity growth in Australia expected to be below three per cent for the first half of 2015, compared with an average growth rate of eight per cent over the past four years, Joyce said.
“Earnings recovery in Qantas international will continue to be driven by removing costs from the business, and the easing back of capacity oversupply,” he said.
Joyce described Qantas International as a great airline with a great reputation, but one saddled with a cost base that was too high.
“That business is growing in areas where it can make money,” Joyce said, citing recent announcements of extra frequencies to the USA and South America.
Qantas said the transformation plans had resulted in 2,500 jobs being made redundant, with a further 1,000 to go in the current financial year and another 1,000 in 2015/16 and 2016/17.
Qantas also announced on Thursday it would not sell its Loyalty business, which improved underlying EBIT by 10 per cent to $286 million.
“We have decided there was insufficient justification to do it,” Joyce said.
“That has been the outcome of this review.”
Qantas shares rallied on the profit guidance and were up nine cents, or seven per cent, at $1.385 on the Australian Securities Exchange at 1330 Sydney time.
However, one fund manager was less optimistic than the broader market, given conditions were still tough.
“To me the industry is not improving and indications are there is still a lot of excess capacity in the local market,” White Funds investment manager Peter Borkovec said.
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