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Cost reductions lead Qantas on the path to profitability

written by australianaviation.com.au | August 20, 2015

Qantas’s turnaround from an eye-watering $2.853 billion loss to a $557 million statutory profit represents one of the largest rebounds in Australian corporate history.

And the return to profitability, along with lower debt levels, has given the airline the confidence to order new Boeing 787-9 Dreamliners, offer a $505 million capital return to shareholders and brought a smile back to Qantas chief executive Alan Joyce’s face.

“It is a good feeling to be at the helm of this great company as it begins the first phase of a remarkable turnaround,” Joyce said while handing down best full year result since before the global financial crisis in Sydney on Thursday.

“As a national carrier, Qantas has historically reflected the best of Australia, a sense of optimism and pride. I believe the Qantas of 2015 is recapturing that spirit.

“We want Australians to feel proud not just of this great airline’s history, but also in where were are going and I believe were are advancing rapidly down that path.”

A smiling Qantas chief executive Alan Joyce. (Seth Jaworski)
A smiling Qantas chief executive Alan Joyce in August 2015 (Seth Jaworski)
More grim times in August 2014. (Seth Jaworski)
More grim times in August 2014. (Seth Jaworski)








So how did it happen?

First, the airline’s $2 billion three-year cost-cutting initiative launched in February 2014 (the company has labelled it the Transformation Program) has delivered $576 million in 2014/15, thanks to job losses, 18-month wage freezes under new collective bargaining agreements with staff and heavy maintenance changes.

Joyce said the transformation program had reshaped the business for a strong, sustainable future.

“Without those numbers, Qantas would have been producing a loss today, Qantas wouldn’t be ordering the 787s and Qantas wouldn’t be making return to the shareholders. Transformation is the biggest driver,” Joyce said.

Second, Qantas said its 2014/15 fuel bill was about $600 million lower in 2014/15 compared with the prior year, as the airline benefitted from the sharp fall in global oil prices.

While the likes of Singapore Airlines and Cathay Pacific in the region have recently reported losses from their fuel hedging program, Joyce said Qantas had got its fuel hedging right.

The total fuel bill for 2015/16 was expected to be no higher than the A$3.90 billion in 2014/15, and could potentially be up to $300 million lower depending on how the price of fuel moved in the year ahead.

“Everybody has benefitted from the lower fuel price. Not everybody has fully participated. We have because we got our hedging right,” Joyce said, adding that the Qantas hedging program was a “strategic advantage” for the airline.

“Our management of hedging is I think the best out of any airline around the globe. Only the airlines that are unhedged are participating more in the falling fuel prices.”

Qantas chief executive Alan Joyce presents the 2014/15 full year results. (Seth Jaworski)

The removal of the carbon tax has also boosted underlying profit before tax by $116 million in 2014/15, while increased fleet utilisation and other revenue measures yielded $182 million in benefits and reduced depreciation charges contributed $195 million.

Those measures helped lift the performances across all of Qantas, with every one of its operating businesses profitable in 2014/15.

Qantas Domestic reported underlying earnings before interest and tax (EBIT) of $480 million, compared with $30 million in the prior year.

Meanwhile, Qantas International posted underlying EBIT of $297 million, a turnaround from an underlying EBIT loss of $497 million in 2013/14.

Underlying EBIT for the Jetstar group of airlines came in at $230 million, a turnaround from a loss of $116 million in the prior corresponding period.

And Qantas Loyalty, its frequent flyer unit, posted underlying EBIT of $315 million – the third largest contributor to earnings – from $286 million a year earlier.

Finally, Qantas freight had $114 million underlying EBIT, a strong increase from $24 million in 2013/14.

Overall, underlying profit before tax, which the airline regards as the best indication of financial performance, rebounded strongly in 2014/15 to $975 million, compared with the $646 million pre-tax loss in the prior corresponding period.

“To put the relative comparison together, Qantas this year with these results will make more than Virgin, Air New Zealand, Singapore Airlines and Etihad put together and it is the first time in our history we have achieved that,” Joyce said.

Air NZ hands down its full year report on August 26.

The Qantas result was a touch below market expectations, which is perhaps why some investors chose to cash in with the share price dipping six per cent on Thursday to close at $3.53. Qantas shares have risen about 50 per cent so far in calendar 2015, compared with a two per cent decline in the S&P/ASX200 index.

Revenue grew only three per cent to $15.816 billion, returning to levels last seen in 2007/08 when Qantas posted sales of $15.627 billion.

And although market conditions in both the international and domestic markets were more stable in 2014/15, airlines continue to face challenges.

Qantas Domestic recorded a 1.5 per cent fall in passenger numbers to 21.493 million in 2014/15, compared with a 1.3 per cent decline at rival Virgin Australia.

However, with capacity measured by available seat kilometres declining by 3.1 per cent and revenue passenger kilometres falling by a smaller 1.9 per cent, Qantas Domestic managed to lift load factors 0.9 percentage points to 74.2 per cent.

Jetstar’s Australian operations fared better, with passenger numbers up 4.6 per cent to 12.859 million.

Joyce described the local market as “patchy”, adding that the airline group was continuing to look at switching capacity out of weak resources-related markets such as intra-WA flying and into to more leisure routes.

While Qantas did not offer profit guidance for the first half of 2015/16, the company did provide some capacity forecasts for the period ahead.

Qantas and Jetstar’s domestic capacity was expected to increase between zero and one per cent in the first half of 2015/16, reflecting the flat capacity growth from all of the nation’s domestic carriers in recent times.

Overall, the airline group expected to boost capacity by between three and four per cent in the first half 2015/16.

“We still see moderate growth in the Australian market overall,” Joyce said.

“It is growth in leisure markets and declines in some of the resources markets getting you to that overall figure.”

Qantas said it would conduct a $505 million capital return to shareholders, equivalent to 23 cents per share, by November. The payment was subject to shareholder approval at the company’s annual general meeting in October.

Chief financial officer Tino La Spina, presenting his first full year results since taking over from Gareth Evans earlier in 2015, said the capital return was the most efficient way of returning surplus capital to shareholders.

The company said the airline’s financial metrics were now “within an investment grade range”, having paid off $1.1 billion in debt since 2012/13.

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