The Qantas Group today reported Underlying Profit Before Tax of $192 million, Statutory Profit Before Tax of $17 million and Statutory Profit After Tax of $6 million for the year ended 30 June 2013.

The result demonstrates the progress of the Group’s strategy against a challenging backdrop, with high fuel costs, excess capacity in the domestic market and intense competition in the international market.

Qantas Domestic, Jetstar and Qantas Loyalty were all profitable, while Qantas International halved its Underlying EBIT1 losses.

The Group’s comparable unit cost was improved by 5 per cent, reflecting cost reduction and productivity improvements.  Qantas Transformation initiatives delivered $171 million of strategic benefits in FY13, and a further $257 million in ongoing cost management to offset annual inflation.

The result reflects a number of positive and negative impacts to Underlying PBT in FY13.  Negatives included the Dubai hub transition, the carbon tax, pilot back-pay and additional start-up losses in Jetstar’s new ventures in Asia.  Positives included the Boeing settlement disclosed at 1H13 and a $134 million change in accounting estimates, applied in the second half, for the recognition of passenger revenue when tickets have passed their scheduled travel date.

Overall, these factors resulted in a net positive impact to Underlying PBT of $40 million.

The Group has strengthened its financial position, with positive net free cash flow of $372 million at 30 June and liquidity of $3.4 billion, comprising $2.8 billion in cash and $630 million in undrawn debt facilities.  Gross debt [3] was reduced by $1 billion during the year.

The Group intends to continue the on-market share buyback program of up to $100 million initiated in December 2012.

Net capital expenditure was $1.4 billion in FY13, a reduction of $200 million compared with previous guidance [4].  Planned capital expenditure has been reduced by $300 million to $1.2 billion in FY14 and is expected to be $1.5 billion in FY15. After a period of accelerated fleet renewal, the Group’s average scheduled passenger fleet age is now 7.9 years – the lowest since privatisation.

With fleet renewal substantially complete, the Group has moved into a period of lower capital expenditure.  However, investment continues to improve the customer experience and operational efficiency.

CEO Commentary

Qantas Group CEO Alan Joyce said the level of activity and achievement across the Group over the past 12 months had been immense.

“We have launched a global partnership with Emirates – shifting our hub for Europe flights to Dubai – maintained our strong domestic market position with the Qantas-Jetstar dual brand strategy, continued building Jetstar in Asia, and achieved another record result with Qantas Loyalty[5],” Mr Joyce said.

“The market is very tough.  But we are focused on the elements we can control.  We have Australia’s leading airlines and loyalty business – and we have a clear strategy to build an even stronger business for the future.”

In the domestic market, Qantas and Jetstar retained the Group’s profit-maximising 65 per cent share.

“Over the 12 months, the domestic market grew at its fastest rate in the past eight years,” Mr Joyce said.  “We responded to aggressive levels of competitor capacity growth, with the Group’s domestic operations holding our strong position and contributing more than $450 million to Underlying EBIT.

“Our financial position has been strengthened by the actions we have taken over past 12 months: reducing debt, extending our maturity profile and taking a prudent approach to capital expenditure.

“We have also continued our policy of selling non-core assets where appropriate.  During the year we sold our stake in StarTrack to Australia Post and our Cairns and Sydney Riverside catering centres to Gate Gourmet – and today we have announced the sale of Qantas Defence Services to Northrop Grumman for a price of $80 million for the business and other related assets.

“Our focus remains on building long term shareholder value.  We will continue to be disciplined in managing capital expenditure and costs, while improving the customer experience and engaging our people to provide the best possible service.

“Customer satisfaction is strong across all our businesses and at record levels in Qantas Domestic, Qantas International and Qantas Domestic.  This is a tribute to the skill and dedication of our people, and reflects the investment we are making in aircraft, training and technology.”

Qantas Domestic

Qantas Domestic reported Underlying EBIT of $365 million, down 21 per cent – the clear profit leader in a market that saw 8 per cent capacity growth.

“Qantas Domestic is the first choice for Australian business and premium leisure travellers,” Mr Joyce said. “We have retained an 84 per cent share of the corporate travel market and won important new accounts.

“We continued to invest in our domestic fleet during FY13, taking delivery of 10 new aircraft and upgrading 15 Boeing 767s with new interiors and iPad entertainment. Today we have unveiled our new A330 interiors, including lie-flat beds in business class, which will operate for both Qantas Domestic and Qantas International.

“Supporting the resources market and regional Australia remains a priority.  We have a clear network advantage in the key resource states of Western Australia and Queensland through Qantas Domestic, including QantasLink and our Network Aviation charter business.

“We have also maintained our significant advantage in on-time performance among major domestic airlines for the fourth consecutive year, outperforming the competition in 10 out of 12 months during FY13.

“Customer satisfaction with Qantas Domestic has been at record levels throughout the year.”

Qantas International

Qantas International reported an Underlying EBIT loss of $246 million in FY13, halving its losses compared with FY12.  The business achieved an improvement in comparable unit cost[6]of 5 per cent, reflecting a $148 million benefit from strategic Qantas Transformation initiatives, and is now free cash flow positive.

“We have made considerable progress with our turnaround plan for Qantas International and we remain on track towards our target for the business to return to profit in FY15,” Mr Joyce said.  “This progress has come in a tough competitive environment with high fuel costs and rapid capacity growth from competitors.”

“The Qantas-Emirates partnership gives the Group a strengthened position on routes to Europe, the Middle East and North Africa, via the global hub of Dubai.  Bookings have been very positive, running at about twice the level of Qantas’ previous codeshare arrangements for flights to Europe.  However, while the early signs are very promising, much of the partnership will be bedded down during FY14 – and we expect full benefits to flow from FY15.

“The partnership has also allowed us to strengthen our network in Asia and over the Tasman.  We have reworked our schedule on services between Australia and Asia to provide better connections to the region’s major hubs, and expanded our alliance with China Eastern – part of a long-term strategy for the world’s biggest aviation market.

“Our services to North and South America continue to perform well, and we see good prospects for our partnerships with American Airlines and LATAM in those markets.

“We have reduced Qantas International’s cost base by 5 per cent, having withdrawn from loss-making routes, retired ageing aircraft and completed the reconfiguration of nine Boeing 747s and all 12 of our A380s, resulting in improved fleet economics.

“Customers have welcomed the Emirates partnership, upgraded aircraft and our new premium lounge in Singapore.

“Qantas International’s record customer satisfaction ratings are a great endorsement of our strategy, but we cannot be complacent.  The international market remains intensely competitive, as the response to the Emirates partnership has shown – with market capacity growth of 5 per cent in FY13.  Our focus remains squarely on making Qantas International a competitive and sustainable business that can ultimately grow again.”

Jetstar

Jetstar reported Underlying EBIT of $138 million, down 32 per cent, reflecting the competitive domestic market and additional start-up losses in Jetstar Japan and Jetstar Hong Kong.

“Jetstar continues to generate strong earnings for the Group through our domestic dual-brand strategy and successful ancillary revenue model,” Mr Joyce said.  “At the same time, we are building Jetstar in Asia, positioning the brand for future success across the region.”

“In FY13 Jetstar carried its 100millionth passenger and took delivery of its 100^th aircraft, a remarkable achievement for an airline that began operations in 2004.  It has been named the best low-cost carrier in the Asia-Pacific region and the second-best in the world.  In FY13 we saw significant improvements in customer satisfaction across all Jetstar airlines, including some record results.

“Jetstar Japan was launched in July 2012 and is off to a strong start, having carried over 2 million passengers since launch, grown to 13 aircraft in just 13 months and earned some of the highest customer satisfaction ratings anywhere on the Jetstar network.  The business has huge growth potential, with low cost carriers accounting for just 5 per cent of a market that is six times the size of Australia.  It is also likely to benefit from recent consolidation in the market.

“We continue to work through the regulatory approval for Jetstar Hong Kong.  Our third major shareholder, Shun Tak Holdings, joined the Qantas Group and China Eastern in June 2013, and we are working to support the Jetstar Hong Kong team as they seek regulatory approval by the end of 2013.  Last week Jetstar Hong Kong reached an important milestone, with formal gazettal by Hong Kong’s Air Transport Licensing Authority.

“With ACCC approval for coordination between the Jetstar businesses received earlier this year, we are building the scale necessary for long-term success in Asia.”

Qantas Loyalty

Qantas Loyalty reported Underlying EBIT of $260 million, up 13 per cent – another record result[7]and the business’ fourth consecutive year of double-digit growth.  It achieved record customer satisfaction in FY13.

“The Qantas Frequent Flyer program is vital to the Group,” Mr Joyce said.  “It is a leading loyalty business and a strong, stable source of revenue.”

“During the year Qantas Frequent Flyer reached 9.4 million members and we are targeting 10 million during FY14.

“The new Emirates partnership has greatly increased the options and benefits available to members, driving a 50 per cent increase in redemptions on partner airlines in the final quarter of FY13.  We have also opened up better opportunities for members to earn and redeem points on the Jetstar network.

“Yesterday we officially launched our next-generation loyalty card featuring Qantas Cash, which enables members to withdraw money and make purchases, as well as providing access to the usual Frequent Flyer member benefits.  And we continue to generate new revenue streams for Qantas Loyalty through partnerships in the fast-growing loyalty services market.

“Qantas Loyalty’s success reflects the strength of the Group’s airline businesses, and it will remain at the core of our strategy, delivering sustainable earnings growth over the coming years.”

Freight

Qantas Freight reported Underlying EBIT of $36 million, down 20 per cent on FY12, driven by a decrease in international capacity and the sale of StarTrack.

“Our domestic freight business was fundamentally restructured in FY13, with the sale of our stake in Star Track and the acquisition of Australian air Express (AaE),” Mr Joyce said.

“While freight market conditions are challenging, the steps we took during FY13 will strengthen our position both domestically and internationally.

“The integration of AaE into Qantas Freight – expected to be complete in 1H14 – will create Australia’s leading independent air freight provider.  Internationally, Qantas Freight will benefit from a partnership with Emirates’ SkyCargo division.”

Outlook 

The operating environment for the Qantas Group in 1H14 remains challenging and volatile.

Group capacity is expected to increase by 1-2 per cent in 1H14 compared with 1H13. Group domestic capacity is expected to increase by 1.5-2.5 per cent in 1H14 compared with 1H13, while maintaining flexibility.

Underlying fuel costs for the Group are expected to be approximately $2.34 billion in 1H14 at current market rates, which is approximately $160 million higher compared with 1H13.[3]

No Group profit guidance is provided at this time due to the high degree of volatility and uncertainty in the competitive environment, global economic conditions, fuel prices and foreign exchange rates.

[1] Underlying Profit Before Tax (PBT) is the primary reporting measure used by the Qantas Group’s chief operating decision-making bodies, being the Chief Executive Officer, Group Management Committee and the Board of Directors, for the purpose of assessing the performance of the Group. The primary reporting measure of the Qantas International, Qantas Domestic, Jetstar Group, Qantas Loyalty and Qantas Freight operating segments is Underlying EBIT as net finance costs are managed centrally. The primary reporting measure of the Corporate/Unallocated segment is Underlying PBT.

For a reconciliation of Underlying PBT to Statutory PBT and further explanations of non-statutory measures, refer to the Review of Operations, attached as an appendix.

[2] Net Underlying Unit Cost is the primary measure of unit cost used by the Qantas Group. It is measured as Underlying PBT less passenger revenue and fuel per ASK. Comparable unit cost is also provided as a measure of net underlying unit cost adjusted to aid comparability between reporting periods. Comparable unit cost is calculated as Net Underlying Unit Cost adjusted for the impact of industrial action (2011/2012), Boeing settlement, change in estimate of passenger revenue received in advance, carbon tax (2012/2013) and movements in average sector length.

[3] Net financing cashflows excluding share buyback.