Spread the love
Post Views: 1

Qantas has notched up an impressive first quarter with continued revenue growth, but chief executive Alan Joyce has warned that “domestically, published competitor capacity is set to increase despite the weakness in the market”.

The Qantas result, posted yesterday, was hit by headwinds from foreign exchange expenses, impact from Hong Kong unrest and the effect on the international freight market of the USA/China trade war.

Even so, the result showed that Qantas Group revenue continued to grow in the first quarter of FY20, up 1.8% to a record AUD 4.56 billion compared with AUD 4.49 billion in the prior corresponding period.

Group Unit Revenue increased 2.1% versus the prior corresponding period.

Total Group capacity was down 0.2%. This was driven by a 0.6% decrease for Group International while Group Domestic increased by 0.5% due largely to growth in the resources market.

SEGMENT UPDATE

Group Domestic Unit Revenue fell by 0.9% due to mixed market conditions. Resources industry traffic continued to strengthen, helping to offset weaker demand in other parts of the corporate sector such as financial services and telecommunications.

Overall, corporate travel demand was flat and small business travel demand growth slowed – but Qantas’ market share in both these segments continued to increase. Premium leisure demand remained steady.

Demand in the price sensitive leisure market weakened. Jetstar’s Unit Revenue fell by 2.6% and accounted for most of the RASK decline in Group Domestic.  However, Jetstar did benefit from higher load factors that supported ancillary revenue growth.

Group International Unit Revenue increased by 4.4%. This was led by a reduction in competitor capacity as well as benefits of network and fleet changes in Qantas International, which had its own capacity decrease of 2.5% and a Unit Revenue increase of over 6%.

Protests in Hong Kong will negatively impact the Group’s first half profit performance by AUD 25 million, with ongoing capacity reduction in place to minimise the second half impact.

Jetstar International revenue also grew in the quarter, led by strong demand on leisure routes to Asia that offset weakness in markets impacted by the strength of the US Dollar. Jetstar International grew capacity with increased short haul flying to Bali and the return of aircraft from heavy maintenance compared with the corresponding period.

Further deterioration in global trade conditions has impacted freight demand with an expected profit impact of AUD 25-30 million for the full year.

Qantas Loyalty continued to see strong revenue growth in line with expectations, with improvements to the Frequent Flyer program delivering increased member engagement during the period. New growth-focussed ventures will be announced shortly.

CAPITAL MANAGEMENT UPDATE

A fully franked 13 cent dividend (increased from 12 cents) was paid to shareholders on 23 September 2019, representing a AUD 204 million return.

An off-market buyback of up to 79.7 million shares, will shortly commence with the tender period closing on 1 November 2019 and the buy-back to occur on 4 November 2019. This will take returns to shareholders to more than AUD 600m for the half.

FUEL AND OUTLOOK UPDATE

The Qantas Group has fully hedged its fuel for FY20 with the ability to benefit from significant price falls. Based on a jet fuel forward market price of AAUD 109 per barrel for the remainder of FY20, the Group’s full year fuel cost is now expected to be AUD 3.98 billion with a AUD 29 million increase in the first half versus the same time last year. The worst-case total fuel cost is AUD 4.05 billion.

Group capacity is expected to grow by between 0.5 to 1% in the first half, with increases in both domestic and international flying.

The Group remains on track to deliver at least AUD 400 million in transformation benefits in FY20, with an increased focus on cost reduction initiatives in the second half.

Recent currency movements will increase non-fuel costs by a further AUD 25 million in the first half.

As at 30 September 2019, bond rate movements due to changes in interest rates since 30 June 2019 would result in an estimated adverse AUD 40 million non-cash impact to the full year Underlying Profit Before Tax[4].

CEO COMMENTARY

Qantas Group chief executive Alan Joyce said the record revenue result for quarter one showed the national carrier was positioned well to respond to continued mixed market conditions

“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% in the second half.

“Given the slower revenue environment, we have a strong focus on cost reduction to make sure we keep delivering on our transformation targets. Part of this is about taking opportunities to reduce complexity and constantly improving how efficiently we manage our business,” Joyce added. 

ADDITIONAL DEVELOPMENTS 

Key developments across the Qantas Group since 1 July 2019 include:

  • In-principle approval of a second Haneda slot for Qantas International, with additional Australia-Japan services starting in April 2020.
  • Arrival of the ninth Qantas Dreamliner and the retirement of another 747, leaving six in the fleet. Two more Dreamliners will be added to Qantas International by the end of calendar 2019.
  • Regulatory approval for a new joint business with American Airlines, and announcement of two associated routes: Brisbane to Chicago and Brisbane to San Francisco.
  • Completion of the first of three Project Sunrise research flights, with the first direct commercial airline flight from New York to Sydney cutting three hours of total travel time.
  • Completion of the first of 12 Airbus A380 cabin upgrades, providing a 27% increase in premium seating to meet demand and improve the economics of these aircraft.
  • Qantas Frequent Flyer announced a new customer loyalty partnership with BP which will allow customers to earn Qantas Points on fuel and purchases in service stations.
  • Woolworths Rewards and Qantas Frequent Flyer revamped its decade-long partnership to make the tie-up simpler and more rewarding, with points earned on groceries increasing by almost 15%.
  • Expansion of Qantas Business Lounge in Singapore complete with the new First Lounge to open in November.