Qantas Swings Back Into Profit After An Aggressive Restructuring

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Written by: Zina Aziz
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Following dark financial times during the 2014 fiscal year, Qantas Airways has proved many skeptics wrong and reported a turnaround in its fortunes for the 12-month period ending 30-Jun-2015. The national carrier of Australia reported an underlying profit before tax of AUD975 million (USD699.2 million), representing a turnaround of AUD1.6 billion (USD1.1 billion) compared with the previous financial year.

The carrier has not always been in financial trouble. It reported an underlying profit before tax of AUD1.4 billion (USD973 million) in FY2008. Following that, however, its financial position began a downward fall. By FY2014, the airline was experiencing unprecedented losses. During that year, it posted a AUD2.8 billion (USD2 billion) net loss, which it attributed to weak demand in Australia, subdued consumer and business confidence and higher fuel prices.

Following this dent in its financial books, CEO Alan Joyce said, “Doing nothing is not an option” and followed by introducing the Accelerated Qantas Transformation Program. This aggressive restructuring effort sought to reduce costs by AUD2 billion in all parts of the Qantas Group through to FY2017. To realize the financial benefits, the program called for fleet and network changes, productivity improvements, consolidation of business activities, introduction of new technology and procurement savings.

With the aim “to strengthen the core of the Qantas Group business” cost-cutting measures began across the entire group, including the well publicized and not so popular workforce reduction of 5000 full-time employees by FY2017.

The program saw the carrier defer growth and improve utilization of its existing assets to improve productivity. Thus far in the game, the program has delivered on its objectives. To date, AUD1.1 billion of cumulative transformation benefits have been realized, including the AUD894 million of benefits unlocked in FY2015. This is split between AUD712 million (USD524 million) in cost reductions and AUD182 million (USD133.9 million) in revenue benefits. The program has allowed the Group to paying down more than AUD1 billion in debt and returned its leverage metrics to be within investment-grade range.

Qantas selects the 787 Dreamliner for its fleet renewal plan

A rendering of the new Qantas 787-9 Dreamliner. Image courtesy Qantas.

A rendering of the new Qantas 787-9 Dreamliner. Image courtesy Qantas.

In addition to lower fuel prices, depreciation savings from fleet impairment and higher revenue per available seat kilometer (RASK) due to a low Australian Dollar, the carrier is certainly getting its mojo back, and is now opening its wallet to spend on a few new things; one of which is the purchase of new aircraft.

Although it is the last major airline in the Asia-Pacific to fly the 787, Qantas has firmed an order for eight 787-9s with delivery commencing in FY2018. The Dreamliners will join the Qantas International fleet to gradually replace five of its older Boeing 747s. The carrier has retained 15 options and 30 purchase rights spanning the 787 family of aircraft “with significant flexibility over the timing of delivery” said Mr Joyce.

The 787 will provide “longer-term flexibility to increase frequencies on existing routes or add new services to longer, thinner routes” including growth into markets currently not served directly from Australia. The 787 is expected to be configured with approximately 250 seats across a business, premium economy and economy class cabin. In a comparison with the 747, the 789 will offer a 20% lower fuel consumption and reduce maintenance cost by 15%, with no heavy maintenance check required for 12 years. The new aircraft also offers increased direct range, which would be “opening up new destinations around the globe”.

All Qantas Group business units are performing strongly

The group reported all operating segments achieved higher return on investment capital (ROIC) than weighted average cost of capital (WACC) in FY2015. Jetstar Group and Qantas Loyalty achieved record earnings before interest and taxes (EBIT).

The Jetstar Group reported a record underlying EBIT of AUD230 million (USD159 million), up from a loss of AUD116 million (USD80.2 million) in FY2014. This was driven by strong performances in the Australian domestic and international market. Jetstar International also achieved a record profit as it introduced additional 787-8s into its fleet.

The most successful business of the group, Qantas Loyalty reported a record underlying EBIT of AUD315 million (USD217.7 million), up from AUD286 million (USD198.4 million) in FY2014. This was driven primarily by a 5% increase in billings and significant growth in adjacent businesses, including Qantas Cash. Qantas Frequent Flyer added 33 new partners and grew its membership to 10.8 million.

Qantas is not yet out of the woods, but it is on its way

Although it may seem like it will be smooth sailing from here on in, it is not entirely true given the highly competitive domestic environment and weak global macro economy. This high degree of volatility and uncertainty is reflected in Qantas’ decision to only confirm eight 789s, which is very tentative and conservative. The return to shareholders of AUD0.23 cent per share payout is also conservative and Mr Joyce has given no hint of a more permanent dividend.

Despite the fact, Qantas is now in a strong position to continue the transformation program, which it is now halfway through. With the recent approval of its alliances with American Airlines and China Eastern Airlines, its future certainly looks bright.

As of now, Qantas is a very profitable airline. The future remains ambiguous, but for me the glass is half full rather than half empty. One only needs to take a quick look at its major competitor’s recent performance – Virgin Australia – to realise that Qantas has certainly played its cards well.

Zina Aziz is an aviation analyst and enthusiast from Australia. Having been fascinated by the airline industry for as long as she can remember, she greatly enjoys writing and analyzing the latest news and developments. Be sure to join her on Twitter, LinkedIn and Facebook.

(Top Image courtesy jeremyg3030 (Qantas Boeing 737-800 VH-VXP) [CC BY 2.0], via Wikimedia Commons)

About the Author

Zina Aziz



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