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Qantas first-half financial result

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Record performance; share buy-back; investment for customers, employees
Key points:
• Underlying profit before tax: $921 million, up $554 million
• Statutory profit before tax: $983 million, up $694 million
• Revenue: $8.5 billion, up 5 per cent
• Operating cash flow: $1.4 billion, up 95 per cent
• Free cash flow: $770 million, up $576 million
• Rolling 12-month ROIC: 22.8 per cent
• Earnings per share: 31.9 cents, up 22.7 cents
• $500 million on-market share buy-back
• New investment in lounges, wi-fi and pilot recruitment
Qantas today reported an underlying profit before tax of $921 million and a statutory profit before tax of $983 million for the six months ended 31 December 2015.
The underlying result is a record first-half performance and means Qantas’ 2015 calendar-year performance was the best in its 95-year history.
Every part of the Qantas Group contributed strongly to the result, with record underlying profits for Qantas Domestic, the Jetstar Group and Qantas Loyalty.
The Group continues to expand margins through both revenue growth and cost discipline. Revenue increased by 5 per cent to $8.5 billion, while total unit costs were down by 7 per cent compared with the first half of last year.
The $2 billion Qantas Transformation program is reshaping the Group into a more agile and innovative business. In the half, the Group unlocked $261 million in cost and revenue benefits through transformation initiatives, with $1.36 billion in total benefits now realised since 2014. Total transformation benefits in the full year are expected to be $450 million. Volatility in the global economy underlines the importance of transformation as the key to building shareholder value and sustainable returns over the long term.
The Group secured a first-half benefit of $448 million through effective fuel hedging, which enabled it to participate in lower global fuel prices.
CEO COMMENTS
Chief Executive Officer Alan Joyce said the national carrier was ready to make the most of an exciting future.
“This record result reflects a stronger, leaner, more agile Qantas,” Mr Joyce said. “I’m extremely proud of our people, who are working hard to transform the Qantas Group and make flying with Qantas and Jetstar better than ever for our customers.
“Without a focus on revenue, costs and balance sheet strength, today’s result would not have been possible.
“Both globally and domestically, the aviation industry is intensely competitive. That’s why it’s so important that we maintain our cost discipline, invest to grow revenue, and continue innovating with new ventures and technology.”
REWARDING SHAREHOLDERS – $500 MILLION BUY-BACK
In line with the Group’s financial framework and commitment to enhance long-term shareholder value, the Qantas Board has approved an on-market share buy-back of up to $500 million. The buy-back will start in early March.
“The strength of our performance and balance sheet means we can continue to reward our shareholders for their confidence in our business,” Mr Joyce said.
“We’re pleased to be able to build on last year’s $505 million capital return with the buy-back we announce today.”
Qantas will continue to assess its capital structure ahead of its full-year results and determine whether and how to distribute surplus capital at that point.
INVESTING FOR CUSTOMERS – HEATHROW LOUNGE & WI-FI
Qantas has invested in aircraft, product, service and technology as a core principle of its transformation program, enabling the Group to earn record customer satisfaction, maintain its lead in key markets, and grow revenue at the same time as reducing cost.
Following the announcement in August 2015 of a milestone order for the Boeing 787-9 Dreamliner, the Group today announces new customer-focused investments.
“Our record performance is the platform to keep investing in the experiences that matter to our customers and take Qantas’ service to new levels,” Mr Joyce said.
Heathrow Lounge
Having launched premium lounges in Singapore, Hong Kong and Los Angeles over the past three years, Qantas will create a new lounge in London Heathrow to be opened in the first quarter of 2017 (see Qantas Newsroom for separate release).
The lounge will be designed in collaboration with Woods Bagot and Rockpool Group and will offer significantly more space and views of the airfield
“The Kangaroo Route is at the heart of Qantas’ network and London remains one of our most important destinations,” Mr Joyce said. “Heathrow is the right location for our next flagship global lounge and we think customers will love what we’ve got planned.”
Inflight Wi-Fi
Qantas also confirmed today that it will partner with ViaSat to develop an industry-leading wi-fi service across its domestic fleet, harnessing the nbn™ network. The nbn network opens up the potential for fast, high-quality connectivity that will enable Qantas customers to stream live sports, movies and TV shows on board.
On-board trials are expected to begin in late 2016 with a full roll-out across domestic passenger services planned from early 2017 (see Qantas Newsroom for separate release).
“Bringing high-speed on-board wi-fi to the Australian domestic market has been an ambition of ours for a long time. What we’ve been waiting for is the ability to deliver the same speeds in flight that people expect on the ground – and we now have access to the technology to make it happen,” Mr Joyce said.
INVESTING IN EMPLOYEES – PILOT RECRUITMENT
As it continues to improve scheduling efficiency, respond to market opportunities and prepare for the arrival of the B787-9, the Qantas Group is reviewing its crew recruitment needs.
The entry into service of the B787-9 in late 2017 creates the opportunity for promotions of current Qantas pilots as well as new positions to be filled through external recruitment.
This is Qantas’ first significant pilot recruitment program since 2009 and is expected to see 170 new pilots join the pilot workforce over the next three years. It follows recruitment for cabin crew to help meet the demand created by additional international flying.
“I’m delighted that we can announce new possibilities for our current flight crew as well as the ability for aspiring Qantas pilots to join us,” Mr Joyce said.
“The applicants that meet the Qantas standard will join the world’s most trusted group of pilots.”
GROUP PERFORMANCE
Qantas Domestic
Qantas Domestic reported underlying EBIT of $387 million, compared with $227 million in the first half of last year. The business achieved strong operating margin growth of 5.4 percentage points for a 12.9 per cent operating margin in the half.
Unit revenue increased by 2 per cent across all domestic routes and by 4 per cent across non-resources routes. This reflects an approximate $50 million decrease in resource-related revenue in the half.
In total, Group domestic underlying EBIT (Qantas and Jetstar) was $556 million, and the Group maintained a profit share of around 80 per cent in the domestic market.
While demand continues to be weak in the resources sectors, other sectors are healthy, including financial services and government.
Qantas Domestic is managing capacity in response to the transitioning economy, deploying smaller aircraft in markets such as Western Australia and intra-Queensland. A lower dollar has seen steady growth in domestic tourism, which both Qantas and Jetstar are supporting with targeted capacity increases.
Qantas Domestic also continues to improve operational efficiency, with a significant rise in on-time performance on a 5 per cent increase in aircraft utilisation, and unit costs down 1 per cent.
Customer satisfaction was up 7 percentage points compared to the same half last year, and reached an all-time record in January.
Qantas International
Qantas International reported underlying earnings before interest and tax (EBIT) of $270 million, compared with $59 million in the first half of last year. This marks its best performance since before the Global Financial Crisis.
The business increased operating margins by 7 percentage points for a 9.1 per operating margin in the half. Unit revenue was up by 3 per cent in the half while unit costs fell by 2 per cent.
As the lower dollar drives more inbound tourism, Qantas International is adding flights and seats on Asian and North American routes, including Tokyo, Singapore, Hong Kong and San Francisco. Aircraft utilisation was up by more than 5 per cent in the half, building on a 15 per cent increase between financial years 2012 and 2015.
Qantas International’s growing global network is complemented by three cornerstone partnerships – with American Airlines, China Eastern and Emirates – and a broader network of alliance partners in all regions.
Customer satisfaction saw a 7 percentage point increase in the half, reflecting continued investment in lounges, catering and new A330 cabins.
Jetstar Group
The Jetstar Group reported record underlying EBIT of $262 million, compared with $81 million in the first half of last year.
Jetstar increased margins by 9.1 percentage points for an operating margin of 13.7 per cent in the half. Unit revenue in the domestic Australian market was up by 10 per cent while controllable unit costs across Jetstar’s domestic and international network were reduced by 2 per cent in the half. Jetstar’s all-Dreamliner long-haul fleet has resulted in significant efficiency gains across international routes.
The Jetstar Group in Asia was profitable in the half, including a first profit for Jetstar Japan since its start-up in 2012. Jetstar’s pan-Asian network and brand strength are competitive advantages for Qantas that few other major airline groups can match.
Qantas Loyalty
Qantas Loyalty reported record underlying EBIT of $176 million, compared with $160 million in the first half of last year.
Revenue was up 10 per cent, with almost 40 per cent of revenue growth now coming from new ventures as Loyalty diversifies its earnings.
The core Qantas Frequent Flyer and Aquire SME loyalty programs continue to grow, with record customer satisfaction, 24 program partners added in the half and a new agreement reached with Woolworths. There was 5 per cent growth in the number of Qantas Frequent Flyer co-branded credit cards and 6.3 per cent growth in Frequent Flyer Members to 11.2 million.
In adjacent businesses, the Qantas Cash travel money card saw a 20 per cent increase in currency loaded to reach a cumulative total of $1.5 billion. The Qantas Assure health insurance joint venture with NIB will extend the loyalty business into a new sector, rewarding customers with Qantas Points for staying physically active.
Qantas Freight
Qantas Freight reported underlying EBIT of $38 million, compared with $54 million in the first half of last year.
As forecast in the Group’s financial year 2015 results announcement, the global cargo market remains challenging, with lower demand domestically and in key international markets contributing to a 5 per cent fall in revenue in the half.
Qantas Freight’s focus is on increasing efficiency through transformation, investing in customer service, and maximising the new markets opened up by Qantas International’s expansion.
FLEET UPDATE
The Group today confirmed the following changes to its fleet plan:
• Two Qantas Boeing 747-400 aircraft that were previously scheduled for retirement by the end of financial year 2016 will be retained, helping meet demand requirements in the strong international market as Qantas International transitions to the Boeing 787-9.
• Three Fokker F100 aircraft will be acquired for Qantas Domestic’s intra-WA market, freeing up Boeing 737-800s to be used on international routes, including Perth-Singapore and Brisbane-Christchurch.
FINANCIAL POSITION
Qantas met the objectives of its financial framework in the half, including regaining an investment-grade credit rating from Standard & Poor’s, achieving ROIC above 10 per cent and returning surplus capital to shareholders. The Group’s credit metrics are expected to remain materially above investment-grade thresholds for the remainder of financial year 2016.
Total short-term liquidity of $3.3 billion includes $2.3 billion in cash and $1 billion in undrawn facilities. Fifty per cent of the Group’s fleet – valued at over US$3.5 billion – is now unencumbered, adding to a strong total liquidity position.
Net capital expenditure in the half was $490 million and forecast capital expenditure over the full year is expected to be approximately $1 billion.
Total net capital expenditure for financial years 2017 through 2019 is expected to be between $3.6 billion and $4.5 billion.
OUTLOOK
The Group’s current operating expectations are follows:
• Group capacity is expected to increase by 5 per cent in financial year 2016 compared with financial year 2015. In the second half of financial year 2016:
o Group domestic capacity is expected to grow by approximately 2 per cent.
o Qantas International capacity is expected to grow by 9 per cent.
o Jetstar International capacity is expected to grow by 12 per cent, with the higher seat count of the Boeing 787-8.
• Underlying fuel costs in financial year 2016 are expected to be no more than $3.4 billion, $3.3 billion at current forward Australian dollar prices.
• Depreciation and amortisation expense in financial year 2016 is expected to increase to $1.25 billion.
• Transformation benefits (fuel efficiency, cost and revenue) in financial year 2016 are expected to be $450 million.
• Net capital expenditure in financial year 2016 is expected to be approximately $1 billion.
Having regard to industry and economic dynamics, no Group profit guidance is provided at this time.

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