Qantas says it will have an “increased focus” on cost reduction efforts in the second half of 2019/20 amid challenging market conditions and higher fuel costs.
The airline group said in a trading update on Thursday the domestic market was mixed, with unit revenue across the Qantas and Jetstar operations in Australia down 0.9 per cent in the three months to September 30 2019.
While the resources-related markets improved, there was weaker demand for corporate travel in the financial services and telecommunications sectors.
Further, demand for travel among small businesses also slowed and was weaker among price-sensitive leisure travellers.
It was also a mixed picture on the international front, with the political unrest in Hong Kong resulting in a $25 million impact on the bottom line and capacity reductions to the Special Administrative Region.
However, Qantas’s international unit revenues were up six per cent in the quarter in response to network and fleet changes, as well as a reduction in capacity from other carriers.
There were also some bright spots for Jetstar’s international flying out of Australia, with strong demand reported for routes to Asia helping offset reduced demand in some markets due to a higher US dollar.
And ongoing trade tensions, fuelled by a dispute between China and the United States, was expected to have a $25-30 million impact on the company’s freight business in 2019/20.
Qantas said revenue had risen 1.8 per cent to $4.56 billion for the three months to September 30 2019, from $4.49 billion in the prior corresponding period.
Looking ahead, Qantas said it was on track to achieve $400 million in transformation benefits, or cost savings, in 2019/20, noting there would be an “increased focus on cost reduction initiatives in the second half”. The target was unchanged from the company’s 2018/19 full year results presentation in August.
“Given the slower revenue environment, we have a strong focus on cost reduction to make sure we keep delivering on our transformation targets,” Qantas chief executive Alan Joyce said in a statement.
“Part of this is about taking opportunities to reduce complexity and constantly improving how efficiently we manage our business.”
Qantas said at its 2018/19 full year results presentation in August it achieved $452 million in “gross transformation benefits” during the year.
This comprised $38 million in fuel efficiency benefits, $149 million in net revenue benefits and $265 million in non-fuel cost reduction, according to a slide presentation accompanying the full year results.
Qantas said the airline group’s total fuel bill for 2019/20 was expected to be $3.98 billion. This was an increase from the $3.95 billion it forecast for the current year in August and from $3.85 billion in the prior year.
The worst case total fuel cost was $4.05 billion, Qantas said.
In terms of the outlook, Qantas said group capacity was expected to be up between 0.5 per cent and one per cent in the first half of 2019/20, with increases in both the domestic and international networks.
“The Group continues to perform well, with strength in key parts of our portfolio helping to offset softness in other areas,” Joyce said.
“Qantas International has seen significant upside from competitor capacity contracting more than anticipated, which is expected to continue for at least the remainder of the first half.
“Domestically, published competitor capacity is set to increase despite the weakness in the market. The Qantas Group will maintain its strategic position in all parts of the market and therefore our total domestic capacity is expected to grow by up to 1 per cent in the second half.”
Traffic statistics published alongside the first quarter trading update showed Qantas grew domestic capacity, measured by available seat kilometres (ASK) 0.6 per cent in the three months to September 30 2019. Revenue passenger kilometres (RPK), an indication of demand, was up 0.1 per cent.
With capacity growing ahead of demand, load factors fell 0.4 percentage points to 78.8 per cent.
Meanwhile, Jetstar grew domestic ASKs 0.6 per cent in the quarter, with RPKS improving 1.8 per cent. Load factors improved 1.2 percentage points to 88.5 per cent.
Qantas international reduced ASKs by 2.5 per cent in the quarter, while RPKs fell 0.1 per cent. As the capacity reduction was greater than the drop in RPKs, load factors improved 2.1 percentage points to 86.4 per cent.
Finally, Jetstar’s international flying out of Australia grew ASKs by 4.4 per cent and RPKs by 4.7 per cent in the quarter, as the low-cost carrier increased flights to Denpasar and had aircraft return to service from heavy maintenance compared with the prior corresponding period.
Jetstar international’s load factors improved 0.2 percentage points to 87.1 per cent.
Qantas was due to hold its annual general meeting in Adelaide on Friday.