Fighting Fit

Qantas understands all this of course.
Hence the slow tease in the lead-up to first delivery, which is currently forecast to take place in 12 months’ time.

Away from the headlines about onboard Wi-Fi, the “luxury suites” of business class and a “revolutionary” premium economy seat, for Qantas the Dreamliner represents an opportunity for growth, career advancement for staff and the intangible excitement that a new fleet type inevitably brings for the 30,000 employees in Australia and overseas.

And just as the 787-8s yielded a 10 per cent ex-fuel unit cost improvement for Jetstar in 2015/16, the larger 787-9 looks set to do the same for Qantas’s bottom line.

“That is a big step change and an important one,” Joyce tells Australian Aviation in an interview at Qantas’s Mascot headquarters on August 25, the day after handing down the largest full year profit in the history of the company.

Bumper Profit Ends Dividend Drought

That record net profit after tax of $1.
03 billion for the 12 months to June 30 2016 – up 85 per cent over the 2014- 15 result – was achieved amid low fuel prices, a decline in costs and the improved performance of all the Qantas Group operating businesses bar freight.

Underlying profit before tax (PBT), which removes one-off items and Qantas regards as the best indication of its financial performance, came in at $1.53 billion, up from a reported $975 million in the prior year.

Revenue, meanwhile, rose 2.4 per cent to $16.2 billion.

The biggest news for investors from the record result was the resumption of dividends, with Qantas announcing a seven cents per share fully franked final ordinary dividend to shareholders (for a total outlay of about $134 million).
A $366 million share buy-back is also planned.

Paying dividends demonstrated “management’s confidence in the outlook going forward”, according to Macquarie Securities analyst Sam Dobson.

“This is the first dividend since FY09 and in our view sends a strong signal to the market around ongoing sustainability,” Dobson wrote in a research note.

International Leads The Way

Qantas International was arguably the standout performer with a near doubling of underlying earnings before interest and tax (EBIT) to $512 million, up from $267 million.

The stunning lift in profitability on Qantas’s international network represented the fruits of many previous projects, from the improvement in fleet utilisation (block hours per aircraft per day rose five per cent in 2015/16, according to Qantas’s results presentation), to schedule improvements to Asia such as new capacity to Tokyo, Singapore and Hong Kong, and the benefits of its partnerships with the likes of Emirates, American and China Eastern.

However, there were signs towards the end of the financial year some of the recent growth in capacity both from Qantas and other carriers was starting to put some pressure on unit revenues – Qantas International’s revenue per available seat kilometre (RASK) fell five per cent in the second half of 2015/16.

However, an operating margin of 8.
9 per cent for the full year was still an outstanding return.

And with Qantas’s cost base continuing to come down and fuel remaining low, Joyce says there are still plenty of opportunities out there in the international market for profitable high-margin flying.

“If you are losing money and you are adding capacity that’s crazy, but if you are making good returns like Qantas is internationally and you are adding capacity and if yields are taking a bit of a hit but your bottom line and your margins are improving, then that does make sense,” Joyce explains.

“Particularly if you consider the extra flying is out of improved utilisation of aircraft that would have just been sitting around.
It brings down the unit costs.”
The combined Qantas and Jetstar international flying out of Australia is forecast to grow four per cent during the first half of 2016/17.
Elsewhere in the airline group, Qantas Domestic lifted underlying EBIT 20 per cent to $578 million despite a two per cent decline in revenue, while underlying EBIT at the Jetstar group of airlines rose 97 per cent to $452 million.

Qantas Loyalty had a 9.
8 per cent improvement in underlying EBIT at $346 million.
However, Qantas Freight suffered a 44 per cent drop in underlying EBIT to $64 million, which the company said reflected flat cargo demand amid a six per cent increase in global cargo capacity.

Qantas said its total fuel bill for 2015/16 was $3.
2 billion, down $664 million from the prior year.
And it expected underlying fuel costs to be “no more than $3.
2 billion” in the current year.

In terms of the outlook, Joyce says the domestic and international markets are “still mixed”, given ongoing softness in the resources sector.

While Qantas did not provide profit guidance for 2016/17, citing the volatility of oil prices, currency movements and the global economy, Joyce did say the airline group expects to “continue its strong financial performance in the first half of financial year 2017, in a more competitive revenue environment”.

“We are focused on preserving high operating margins through the delivery of the Qantas transformation program, careful capacity management, and the benefit of low fuel prices locked in through our hedging,” Joyce says.

“Unit revenue is expected to be below the first half of financial year 2016, with competitive industry pricing and resources sector weakness.”

787 Destinations Dictated By Route Economics And Infrastructure

Negotiations with airports and state governments are continuing as Qantas narrows down the list of potential new routes for the aircraft, with the likes of Perth-London, Melbourne and Brisbane to Dallas/Fort Worth and Sydney- Chicago regularly mentioned as among those being evaluated.

Joyce says the support of local airports, particularly with suitable infrastructure to handle the connecting traffic needed to support such ultra long-haul routes, cannot be underestimated.

“The viability of the routes are very much dependent on some of the airport infrastructure issues,” Joyce says.
“That makes all the difference in the business case.

“Take Perth as an example.
If international was still on the other side of the field and all of our domestic flights that are creating the hub to connect are on the domestic side of the field, that doesn’t work.

“If you are travelling from Adelaide to Perth to London or Adelaide to Singapore to London, the minimum connection times determine which routing you take and if Perth is not attractive it kills it.

“So unless you fix that infrastructure problem there is no way that you can make those long-haul flights work.
”
Figures from CAPA – Centre for Aviation and the OAG Traffic Analyser show Perth represented 14 per cent of the Australia-London origin and destination (O&D) market, the same as Brisbane but below Sydney (35 per cent) and Melbourne (26 per cent).

CAPA said in a research note dated August 26 a Perth-London nonstop would allow a Qantas customer from any major Australian city to fly all the way to London on a Qantas aircraft.

Currently, Qantas passengers from Adelaide, Perth and Brisbane have to fly at least one leg on alliance partner Emirates to reach London via Dubai, unless they choose to make their journey a two-stop itinerary by backtracking to pick up Qantas’s services to London via Dubai from Sydney or Melbourne.

“The market can be picky, and can prefer Qantas-operated flights for a variety of reasons,” the CAPA research note said.

“Qantas-operated nonstop/one-stop Australia-London itineraries could be applicable to 95 per cent of the O&D market, up from Qantas’s current 61 per cent share.”
“London’s strong component of Australia-Europe traffic is undeniable, and the market is a flagship.

“A nonstop to London, and carrying more O&D traffic all the way on Qantas metal, could be a strategic priority to ensure that Qantas maintains or even gains relevancy as the Australia-Europe competitive outlay intensifies.”
Joyce says a Perth-London service would have no potential implications on Qantas’s partnership with Emirates, just as the Gulf carrier’s nonstop Dubai- Auckland flight did not affect the three-year-old alliance.

The extra flying is out of improved utilisation of aircraft that would have just been sitting around.
ALAN JOYCE

Both carriers are aware of the other carrier’s potential plans, he notes.

“There’s 40 destinations to Europe.
Qantas is not going to have 40 787s sitting in Perth flying to every destination in Europe, that’s not going to happen.
”
Tickets for the first 787 services will be on sale by Christmas, with confirmation of which new destinations the aircraft will serve for Qantas to be announced shortly after that.

This suggests the cabin configuration – what type of and how many seats will be in each of business, premium economy and economy – will be made before the end of the year.

While the sense of anticipation on what Qantas will do with its initial batch of Dreamliners is growing, Joyce says options being discussed within the company cover everything from replacement to growth and a mixture of both.

“Depending on how the markets are going, those are aircraft that could be growth aircraft, they could be completely replacement aircraft and they could be a combination in between,” Joyce explains.

“So if the world goes to hell in a hand basket do you replace eight 747s with just eight 787s and just do the exact same network we have today or do you have half and half or do you have them all as growth?”

Fleet Changes To Be Kept To A Minimum In 2016/17

The airline group is due to take delivery of six aircraft in 2016/17, comprising three Fokker 100s for its fly-in/fly-out and charter operator Network Aviation (which operates under the QantasLink brand) as well as two Airbus A321 narrowbodies to be added to Jetstar’s Australian domestic fleet via operating leases and one Boeing 737-400F freighter for Qantas Freight.

The eight 787-9s due to arrive in the 2017-2019 window represent the only firm aircraft orders for the Qantas mainline fleet in the immediate future.

Looking further ahead, Qantas also holds 15 remaining options, which have firm delivery dates and a fixed price, and 30 remaining purchase rights, which have a fixed price but no firm delivery date, for the 787 family that have to be exercised between now and 2024/25.

Although there have been calls for Qantas to pull the trigger for more orders ahead of 787-9’s induction, Joyce says the plan is to “bed down” the first eight 787-9s into the airline’s operations before any move to add more Dreamliners to the fleet.

And he reiterated that Qantas saw no need to expand its Airbus A380 fleet beyond the 12 now flying.

“The 12 current aircraft we’re happy with and the eight that we have on order from Airbus we don’t see a need for them and we will keep pushing them out,” Joyce says.

In 2015/16, the company purchased 29 aircraft off operating leases, mostly narrowbodies such as 737s, A320s and 717s, which are now owned and debt free.

Qantas Group chief financial officer Tino La Spina said the $778 million transaction would improve fleet and maintenance flexibility and reduce its exposure to US dollar-denominated lease rentals.

“This financing is at a lower cost, uses surplus liquidity and results in minimal change to our net debt,” La Spina told analysts during the company’s investor presentation.

“The benefits of purchasing the aircraft are however clear.
It provides greater flexibility for fleet planning and ensures ongoing access to core fleet.
”
Even clearer, notes La Spina, are the benefits of adding the 787 to the fleet.

“The 787s, we’ve said previously, [will be] 20 per cent more fuel-efficient than the 747 and we are also going to expect to see about a 15 per cent advantage in the maintenance costs, which is huge considering where we want the international business to go forward,” he told investors.

“And we’ve seen some of these benefits already materialised in the Jetstar international business which has been great.
”
The other aircraft soon to join the Qantas Group fleet that promises a step change improvement in efficiency is the A320neo, with the first of 99 A320neo Family aircraft powered by LEAP-1A engines due to start arriving from the end of calendar 2017.

The neos are ostensibly destined for Jetstar as older A320s are paid off and to cover growth, although the company has not ruled out operating the aircraft on Qantas mainline domestic services to replace its 737-800 fleet.

La Spina told analysts the A320neo promised a 14 per cent fuel burn advantage over the current generation A320ceo.

Elsewhere in the fleet, the reconfiguration of the Boeing 737-800 with an extra row of seats, slimline lavatories and smaller galleys is also due for completion shortly.

And by December, the 18 Airbus A330-200s and 10 A330-300s that fly to Asia, Honolulu and on domestic trans-continental routes will all have been refitted with the Thompson Vantage XL business class seat and a refreshed economy cabin.

Asian Jetstars To Grow

Qantas’s Asian ventures appear poised for growth in the period ahead.

Jetstar Japan, which delivered a maiden full year profit, is growing from 20 A320s at August 2016 to a proposed 28 of the type by 2019.

Meanwhile, Jetstar Pacific, a partnership between Qantas and Vietnam Airlines, plans to expand to 30 aircraft by 2020, compared with 13 A320s currently.
The airline recently signed an order for 10 new current model A320s, its first direct purchase from Airbus.

While publicly there are no plans to expand Jetstar Australia’s fleet of 11 787-8s, the arrival of the A320neo and/or its longer A321neo variant could allow the airline to switch to the next generation narrowbody on some Australia-Bali services, freeing up 787s to pursue growth in new markets.

Joyce says Jetstar Australia’s transition from Airbus A330-200s, which had either 303 or 310 seats depending on configuration, to the 335-seat 787-8 represented a big step up in capacity.

“It’s gone through a huge growth spurt over the last few years,” Joyce says of Jetstar’s widebody operations.

“We’ve been focusing at digesting that capacity growth which is important.

“The second thing I’d say is there are all sorts of growth opportunities as well across the Jetstar business.”

Transformation “Never Ends”

By the time the 787-9s reach Australia, Qantas will have concluded its three-year, $2.
1 billion cost-reduction transformation program.

It is, by most measures, a much leaner organisation, with Qantas saying its cost base is now “competitive” with some of its Asian rivals, a prospect that seemed unlikely only a few short years ago.

Joyce speaks highly of the efforts of every one at the company in getting the airline to that position, implementing hundreds of projects that in many cases were initiated by the men and women on the front line of customer service, maintenance, engineering and flight operations, just to name a few.

And while the three-year transformation formally ends on June 30 2017, efficiency is unsurprisingly an ongoing focus.

Despite the targeted 5,000 job cuts as part of the transformation plan, the 2015/16 financial results show the airline group is growing staff numbers – the number of ‘full-time equivalents’ (FTE) was at 29,204 at June 30, up 582 from 28,622 a year ago.

This reflected some positions being made obsolete through the use of new technologies and changed work practices.

While there are more FTEs, the workforce, by at least one measure, has become more efficient at what it does – Qantas’s figures show revenue passenger kilometres per FTE was up 3.
7 per cent in 2015/16, while available seat kilometres per FTE rose 2.
4 per cent.

The fuel sipping 787s and A320neos are not the only things to boost the bottom line and reduce costs from 2017/18 onwards.

Equally important is Qantas’s increasing use of technology across the business, from the ongoing rollout of the new disruption management system and optimisation of the PROS revenue management system, to leveraging the data held in its Loyalty business and the increasing use of online distribution channels such as the website and app.

“That technology change is going to be huge for us, it’s going to make a big difference and is part of that ongoing transformation,” Joyce says.

“Every time that we look at our business and figure out how we can do things more efficiently, there are new ideas that are coming out all the time.
There are projects that we haven’t even thought of today that will come out.

“The transformation never ends.

” There are all sorts of growth opportunities as well across Jetstar.
ALAN JOYCE