Qantas Airways Limited (QAN) Earnings Call Transcript & Summary

Thanks, Amanda, and good morning, everyone, and thanks for joining us on the call today. First, I'd like to make a few brief comments related to the statements we've lodged with the ASX this morning, then Vanessa and I will be happy to take your questions. Since we last spoke, we have seen momentum build in the domestic market. Combined with the continued strong performances from Loyalty and Freight, the group is starting to turn the corner. But we do have a long way to go and our focus on the recovery plan to fundamentally restructure our cost base continues. We remain on track to deliver the $600 million in cost savings for financial year '21, and we are well positioned to deliver a total of $1 billion in ongoing savings from financial year 2020. Today, we're also announcing several initiatives to solidify our recovery. These include: a 2-year wage freeze for all employees, changes that will reduce our cost of sales and distribution, and an additional voluntary redundancy program for Qantas International cabin crew. All of these are difficult decisions, but we must ensure we are well placed for the future. We've also commenced the process of balance sheet repair consistent with our financial framework. Net debt peaked in February, and we expect to end the financial year with net debt lower than at the end of the first half. Total liquidity remained strong at $4 billion, including $2.4 billion in cash. This includes $330 million allocated to the repayment of the June bond maturity, which was proactively refinanced late last year. Despite lockdowns that have delayed our recovery, our earnings are improving. We expect underlying EBITDA to be between $400 million to $450 million for the full year. This includes a significant uptick in earnings for the second half. But given the massive reduction in revenue, we expect to report a statutory loss before tax in excess of $2 billion. This all assumes no further lockdowns or significant travel restrictions. Consumer confidence is growing, driving the rebound in domestic travel demand. Leisure travel is leading the way, with business-related travel also continuing to recover. Through our continued focus on cash-positive flying, our domestic capacity will be close to pre-COVID levels for the fourth quarter. And we recommenced scheduled international services with the opening of the travel bubble to New Zealand last month. This is a tremendous outcome, because we've been able to get all of our domestic crews and our corporate team and several hundred of our international crews back to work. Regrettably, about 6,000 of our international crew remain stood down until the full reopening of our international border. So, we are grateful for the government assistance provided for these employees. Freight continues to perform well with revenue expected to grow in the second half, providing a natural hedge to the international passenger business. Qantas Loyalty has returned to earnings growth as it continues to demonstrate its value to our partners in the coalition and its relevant to our members. Redemption activity is picking up, surging to a massive 85% higher than pre-COVID levels in April, aligned to opening of the Trans Tasman bubble. As we look ahead, we have confidence in the future. Our domestic capacity is expected to exceed pre-COVID levels in financial year '22. And we are well on the path to achieve a consistent profit in the domestic business as demand recovers. We have adjusted our expectations for the timing of the reopening of international borders, and our performance this half proves that we can continue to repair the balance sheet as we all wait for the opportunity to travel overseas again. Qantas Freight will continue to provide the group with an important source of cash flow, while the international passenger business remains largely grounded and Qantas Loyalty has returned to an earnings growth trajectory. There is still a long way to go on our journey to full recovery, but the outlook is positive. It's great to see more of our aircraft back in the air, along with more of our people back to work. And we're optimistic it will keep getting better from here, so we can continue to pay down debt and repair the balance sheet. So, thank you, and we will now open up to questions, and Vanessa is happy to take them as well. So over to you, Amanda, for the first question.

[Operator Instructions] Your first question comes from Jakob Cakarnis from Jarden Australia.

I was just wondering if you could please speak to the markets in the corporate business that you're seeing return? I know you've spoken in the past that government and mining were 2 key parts of the corporate return. Just interested if you could elaborate a little bit more on how you're seeing both of those markets and maybe some of the further return into April.

Yes, Jake. I mean what we've said in this is that in the latest intakes, the corporate market, that's the -- what we would classify as corporates and SME, is back to 75% of pre-COVID levels. And what we are seeing is the resource sector, and probably no surprise in the intra WA and Queensland is actually getting back 100% to pre-COVID levels and above. There's huge growth there, a huge demand there, and we're leveraging as many aircraft as we can to take advantage of that. We've seen really strong growth in the government business as we expected. And what's surprising is that -- and maybe not surprising, what we're actually seeing is the SME market is ahead of the big corporates. So, we've got the SME market now and the latest intakes are over 80%. And that's the trend we've been seeing all the way through. We've seen leisure lead the way at getting back to 100%, now over 100%. SME following a few weeks, months behind that, and corporates following a few weeks, months behind that. So, it gives us confidence that our projections of where this is going to end up is valid. We have said before that when we looked at it by segment, we thought that the government, the resource sector and the construction sector, which represents 60% of our corporate volumes, will get back to pre-COVID levels. This reconfirms that. We did say the professional services, the financial services, we will have a Zoom/Microsoft Teams effect. And we estimated that, overall, that would reduce our corporate travel between 13% and 15%, which would, over time, recover at the pre-COVID levels. But we also said that would be offset by us taking market share. And it's very clear we are taking market share. We've now had over 30 corporate accounts move across from Virgin and a lot of smaller SME accounts move across. So, we think that number could be smaller eventually as we come out of this. So, we're in a fairly good position when all [indiscernible] market.

And just one quick one on the cost-out. You're saying $600 million for FY '21. I think you'd mentioned previously that $500 million of that was going to be orientated towards the domestic business. Is it right in thinking that the extra $100 million is across corporate and international? Or is there any extra detail you can give us there, please?

Yes. So, as you say, we are on track with achieving the $1 billion. We did outline in the equity raise that it was $600 million for this year, $800 million the next year and $1 billion in FY '23. The $500 million related to the transformation that accrued to domestic of the $1 billion, so 50% accrues to the domestic of -- when we actually get to our full run rate. So, we're well on track as our announcement said in terms of implementing the plan to achieve that $1 billion. And we've actually got clear line of sight now in terms of how we will deliver that over the next 2 years.

Your next question comes from Paul Butler from Credit Suisse.

Can I just ask where are you seeing domestic unit revenues tracking at the moment compared to pre-COVID levels?

Well, I think that what we're seeing, and I think you can actually reflect on how we're building capacities demonstrating what the intake trends that we're seeing. So, over the year, quarter 1, we're at 20%; quarter 2, 40%, then 60%; and now this quarter, we're at 95%. So, I think it's a fair reflection that that is reflective of the trend that we are seeing versus pre-COVID. The other point to make is, on average fare basis throughout the entire year, we've actually seen average fares for Qantas and for Jetstar at a higher level than it was pre-COVID. And since February through to April, Jetstar average fares are 3% higher than they were pre-COVID and also Qantas is around 1%. So, we are seeing that there is relatively price inelasticity in the market. We have maintained and we will continue to do so that our motivation at the moment is to drive cash-positive flying. We think that that's really important to ensure that we get our aircraft and our people back flying as soon as possible, and we will continue to do that. And as we head into next year, capacity is going to continue to grow and we will see then over a period of time, seat factors will lift in that forward view.

And that we'll continue our plans, as we said, Paul, for next year is to get Qantas to 107% of pre-COVID capacity and Jetstar to 120%. And we're activating a lot of aircraft in order to do that. And we think all of that will be very significantly cash flow positive, which will help pay down the debt. But very importantly for us and one of the social requirements that we have is to get as many of our people back flying as we can. We have no qualms about doing that, and we think that's the right thing for the business, the right thing for the people. There's 16,000 of our employees now back working. So that strategy has worked. We still have 6,000 stood down, and we're going to try and get as many of them back flying as we can, given that international borders are probably going to be closed for a little longer than we had expected.

Okay. If I could ask just one more. The initiative you've got to reduce commissions to agents from 5% to 1%, can you just give us some color on how much of a benefit you expect there? And also, how that changes the profile of your distribution, do you expect to be getting more direct bookings for international travel compared to what you were doing pre-COVID?

So, the move that we're making is something that's happened around the globe in Europe and in Asia. And it's actually what's been happened in domestic some time ago, because commissions of domestic and Trans Tasman moved to 0%. So, moving from 5% to 1% we think is the right move, because everything we do we have to review, everything we do we have to transform. And other businesses will have to do the same. I noticed that after the industry body has made commentary about previously that they need to move for an in-service fee for people that use the services of travel agents. We think that travel agents add huge value. We're a big supporter of the travel agent community. We want to help them with this transformation. But we do think the way the rest of the world moves is a booking service fee, that's the way it works in a lot of domestic travel. So, if you want the aid, the significant aid of the travel agent with some complex international itinerary, that's a transition that it shouldn't do, too, and that's what we’ll be helping. And that's why we've given such large notice of doing this. Usually, airlines do this very rapidly. We have given a targeted approach and say this would be from July next year. The savings for us will be in the tens of millions of dollars. That's where the benefits are going to come from. And it's -- again, as you think about when we've announced the pay freeze for our people, a $2 billion loss with now more redundancies for international long-haul cabin crew, we have to review everything that we're doing. And this is one area that, unfortunately, we have to move on. And we know it's going to be a transition for a lot of the travel agencies out there, and we're happy to work with them with that transition.

Your next question comes from Anthony Moulder from Jefferies.

I'll start first by talking about forward bookings for domestic. What are you seeing as far as the trends on those forward bookings? And are people effectively booking a lot earlier now than what they were pre-COVID, which is further spot, I guess, of that working capital repair more than just the cash-flow flying -- cash flow-positive flying?

Yes. Look, we're seeing -- and obviously, we're in a period where our capacity is increasing. So, our forward bookings, I think the first point to make is it is very reflective in those intakes that it's growing in line with what the forward capacity that we have outlined today. So, we are seeing it is growing. We're seeing for both Qantas and Jetstar that the booking period is returning to similar levels as it was pre-COVID. Obviously, domestic is a lot shorter than an international booking curve and also across Jetstar and Qantas, there are differences. But we are seeing that it is tracking back towards the pre-COVID booking intake level. And what we are seeing as well is that domestic revenue received in advance is also returning towards what it would have been on a pre-COVID level. We're not quite there yet, but we're expecting at June to be pretty close to where we've been in the past.

Okay. That's useful. And secondly, I wanted to ask how you're thinking about the return of slots from Sydney -- or at Sydney Airport? Is the expectation that all of those are returned with or to Qantas and Jetstar by October?

Yes, Anthony, the way the slot scheme has been working worldwide is that there's been a scheme of alleviation of the requirements during COVID. That's in Heathrow. That's in Tokyo. That's in New York. That's everywhere. And the same is true for here in Sydney. The federal government have given that alleviation of the slot management back that's there until the end of October. So that means you don't have the use or lose rule applying at the moment. At the end of October, that's up for review. We're hoping that in some parts of the world, like if we've not been able to fly to Heathrow, that we'll get the alleviation continuing, and we're working with the federal government on that. The likelihood is now probably for the domestic slots at least we'll be in a position where that alleviation will be waived. At the end of October, we go back to normal practice. We -- it means that Qantas has all the slots it had pre-COVID and we get them back and use them. And we'll be after more because we're growing Jetstar by 120% and Qantas by 107%. And the question will be what happens with the international slots because a lot of the international carriers won't be able to operate in. And so, whether that use or lose rule applies to them. In the interim, until the alleviation is -- while the alleviation is there and the slot management company can allocate slots on a temporary basis, which they've done to a number of airlines, and then it will allow them to have operations going. Independent of that, there's also a slot review that's taken place by Peter Harris. That's a regular review that goes for the federal government. And we're expecting the outcome of that to be not significantly different from where the Slot Management Act is today. The Slot Management Act is a worldwide best practice. It's the exact same in every other country around the globe. And there is absolutely no reason for that to change. And we don't think that will change significantly, but maybe some tweaks to it.

Your next question comes from Sam Seow from Citi.

Just to confirm, that 4 basis point reduction in front-end commissions, is that as simple as saying you're going to increase your gross margin by 4%? Or is there any -- are you giving some of that back in overrides or anything in the back end? And how permanent is that going forward?

I think that you can assume that it is a reduction in cost of sale that is off the gross revenue at the front end. And we have entered into back end arrangements, commercial arrangements with all of the agents. We've pretty much signed multiyear commercial arrangements with every agent except one. So we are, I think, have completely restructured our cost of sale, both back end and front end and agents. As well as Alan said, is that we're working with agents to provide them with much more rich content through our distribution capabilities now and the freedoms that we've been working on over the last couple of years. So, we do see that there is value for agents to work with us and actually better sell valued products to customers. So, we see that although that we're getting this cost reduction through the new commercial framework, agents have got greater power to sell much better valued products to customers. And we think the right thing for the agent is to focus on the end user and the customer to provide value through that channel. And as Alan said, to recoup that through a service fee as a change to the model going forward.

And I think the power of this new distribution system shouldn't be underestimated, because we spent a lot of money on getting this in place. And when Vanessa talks about content, it means we have so much rich content we can make available to agents that are working with us. So whether it's cheaper prices than are generally available, whether it's initiatives like extra frequent flyer points for certain airfares, status credits may be available in terms of promotions, access to see inventory that people could get, access to promotions on certain days in certain routes. There's so many things we can now do that we couldn't do before. So, it's very much -- we're very keen to work with the agents because getting access to that content for the people at our practice with Qantas is huge. And we think that will be a big driver for the agents to continue to work with us.

Okay. So is it fair to say it sounds like you're forcing the agents through to the NDC. And how does that work with some of your competition that don't actually have something that's up and running and potentially paying higher commissions?

Well, I think that the word force is not the right way I would think of using it. We're actually creating a new channel that provides greater value for agents to better sell to customers. And we think that's the right way to incentivize agents is to focus on the customer and to actually focus on the selling. And what we've seen is that because of what we're offering through this channel, the agents have recognized the value that they're going to be getting and they are themselves moving and subscribing to these new channel because there is real value there for them. And we've seen pretty much most of the agents sign up for it.

And I'd say some of the agents are ultra-keen on this, chomping at the bit for it. Where I take CTM as an example, they are very keen. They have put a lot of effort in the technology to link into it, and they see it as a strategic advantages of taking a lead to get access to the NDC. So, I think this is going to be -- it's more people demanding it than people feeling like they're being forced into it by far, by a massive amount, because it adds so much value to them. And some of these agencies are seeing that as a strategic advantage if they can get into it first.

Your next question comes from Richard Jones from JPMorgan.

Just in relation to net debt, getting back to $6 billion by June seems like a good result. Just wondering what -- how you see that trajectory kind of into FY '22 and how quickly you think you can get back within the target range.

Yes. Look, I think it's -- I do think it's a great result, peaking at February at $6.4 billion. And as we've said in the results, expecting to be below where we were in December really does demonstrate, I think, the momentum in the domestic recovery, both across Jetstar and Qantas, and also across Loyalty and Freight is supporting that. And as well, I suppose, in the outlook that we've provided in the announcement that momentum in the domestic market is expected to continue, if not grow. And also, we are seeing continued performance in Loyalty. And as long as international remains, I suppose, closed, we believe that Freight will continue to perform incredibly strongly as it has. So, we feel really confident that over the next 12 months that we will be able to continue to repair the balance sheet and move net debt within our targeted range by the end of June '22. And we believe that we'll be able to do that even if international doesn't open until midyear, which in our view, is very conservative and a very pessimistic outlook. Even the government themselves have said that in their budget update. So, we're feeling very optimistic around our performance in next year.

Richard, I thought it was interesting, as we've said, that the lockdowns, the ones that happened to like the Avalon lockdown, the Perth one and then Brisbane one, cost us well over $400 million at the EBITDA level. And that would have gone straight through in cash. If they hadn't have happened, we would be in the range by the end of June, well into the range. So, it shows you how well this domestic business generates cash and how well and how fast, provided we keep the borders open, that we can get the balance sheet repaired.

Okay. And just a second question, just elaborating on Vanessa's comments just in relation to further international bubbles. Is there anything you can share with us in terms of beyond New Zealand? Is there much progress that's been made? And is anything likely in the remainder of 2021?

Well, New Zealand happened a lot faster than we were expecting. I think our original plans were going to be in July this year, and they were both forwarded to April. And these things develop very fast, and there's a lot of changes that are taking place every day. A couple of months ago, I think I was saying maybe possibility of Taiwan, Korea, Singapore. There's been outbreaks in those countries, which probably means that that’s less likely in the short term. But then you've got the significant improvement of what's happening in the U.K. with the rollout of the vaccine and how effective it's been, the significant improvement that's happening compared to the United States, the drop in cases of California have just been dramatic. So, this could develop as corridors in places we can't predict at the moment at times we can't predict. So, what we're doing, and the government has asked us to do this, is get ready, our international capability, our 787, which are all back activated. Keep the crews trained, which the government is paying for. They've got this skills retention program, which gives them those crews payments while they're stood down to get ready for how this could open up. And it may not be now, I think, a big bang. I mean, I think we're unlikely to see that. We're likely to see it market by market, maybe segment by segment with the government working with us, and we're trying to work through what that looks like. So how the borders open up progressively through '22. And that's maybe the more likely outcome from where we stand today. And there's a lot of dialogue going on with the government about how that could work and how that could progress. But there's certainly in our minds, the vaccination rollout is key. We've always linked that they -- that ensures people are safe. It's nearly 100% effective on serious illness and death. And we've seen where it's rolled out in the rest of the world has had a dramatic impact on cases and deaths. And it's around people to open up the borders again. The Europeans are saying they'll allow people to travel that are vaccinated now. The U.K. and the U.S. looks like they're going to put a travel corridor there for people that are vaccinated, which they haven't done before. This is changing in the rest of the world, and it's rapidly changing. Again, people vaccinated here, I think is key for those borders to be opened up.

Your next question comes from Niraj Shah from Morgan Stanley.

Just one for me on the ongoing, the restructuring benefits. I think at the half, you said you were 90% of the way through in terms of specific decisions for the $600 million. Presumably, that's a lot closer to 100% now. I was just wondering if you could quantify how far you are on the remaining $400 million for the program?

Yes. Look, you're right, Niraj, we did say that we were 90% through. And it is fair to say, as I mentioned before, that we are very clear now in terms of the pathway to get to the $1 billion. A lot of the initiatives that contribute to that have either been implemented or underway, or are in the process of being implemented. So, as I said, we're feeling very confident that the $1 billion -- the pathway to the $1 billion is known, and we will progress.

Okay. And just a second one for me, just a point of clarification really. But I was just wondering, for the various lockdowns, you really helpfully sort of quantified the impact. I'm just curious, even conceptually how you guys estimated those impacts for the various lockdowns.

Yes. So, the way in which we estimated it, we could clearly tell the impact. If we take Avalon, for instance, we could directly impact the bookings and also the expected intakes that we would have got through that month. So, it was the specific, I suppose, calculation in terms of the direct impact of the lockdown. And then as we did look forward what we did directly see that these lockdowns and the position of the state premiers, in particular in what they said, we could see the impact that that was going to have on future demand given the impact that it actually had on confidence. So, we created 2 estimates, one was the direct impact from the lockdown and then the second estimate was we created a forward view of the impact that it had on people's confidence. And what we have actually seen now in the light of day is those 2 impacts have occurred both in terms of suppressing demand in the short term because of the lack of confidence and then the direct impact of the lockdown occurring.

And also, there's one thing that -- we were just talking about yesterday that sort of really points to this, is that both Qantas Domestic and Jetstar Domestic made an EBIT profit in December 2020 before the Avalon lockdown. But it then took us until April for the next EBIT profit to be made, which was Jetstar. So, you can see immediately, it was on a great trajectory, a great improvement and it knocked us back those 3 or 4 months. And it's great to see that the airlines -- so many airlines in the world making an EBIT profit. But without Avalon, I think we would be making a lot more of them during this period, and it was clearly a hit to our operation.

Your next question comes from James Teo from Bloomberg Intelligence.

My question is on the competition with REX. Would you be able to characterize a bit of your strategy, your response? And how has it been on your Trans route so far and also some of the less-dense routes? Are you using maybe Jetstar as the main vehicle, for example? Or you think the Embraers or a mix of both, or even Qantas? Can you just elaborate a bit more on that, please?

Yes. So, the clear position, as you can see from our position is that Jetstar has such a low-cost base and it's the most competitive of the low fares market out there. We're seeing Jetstar offering $30 airfares continue to be the price leader. Jetstar will always be the price leader. Even before REX came in, we were offering $19 airfares to stimulate the market. So, it's not unusual for us to do that. And even with those levels of airfares out there, Jetstar reported an EBIT profit in April, which shows you that's the business of Jetstar, it's to offer low airfares and to make money out of it. REX is an interesting strategy. They've come in with a full-service model trying to compete on low airfares, which I've never seen before, but maybe they figured a strategy that nobody else has figured will work. And they seem to be very much working and competing against Virgin. Same aircraft, same product, same strategy in the middle of the market. And we see that competition getting even more aggressive between the 2 of them. Whereas -- where in reality with Qantas, because of its product, its services, its lounges, its in-flight product, its free WiFi, its Frequent Flyer program, Qantas is in a different category from REX and Virgin. And it's staying above this and not having to offer those low airfares because that premium service demands a premium price. It's like Mercedes, BMW against Kia. It's a completely different price for the product that's offering out there. And we're very comfortable with that. We see that as being sustainable. And then we're just at the sidelines watching how the battle between Virgin and REX progresses with interest, and certainly getting aggressive between the 2 of them and we're just watching.

Your next question comes from Cameron McDonald from E&P.

Two questions, if I can. The first one is, in the last call, you had equity of about $1.5 billion, you're now forecasting a statutory loss in excess of $2 billion. The optics, therefore, would be that you’re going to be negative equity at the end of the financial year. What sort of consideration do you give to that? I know it's not a liquidity issue, but what are the optics around that, please?

Look, I think that there will be, obviously, some considerations that is -- we are not planning to do an equity raise. And I think that over the period of time that we're looking at, even though the potential is that the losses will contribute to that, it's really just accounting. It doesn't affect any of our credit rating. We don't have any financial covenants that would be triggered as a result of that. So, what we're doing rather than dwelling on that, we're looking forward in terms of how this business -- when it recovers, how it will move back into profits and generate profits in the future. And our focus is very much going to be focused on that repair process and putting the position with the business in -- with our transformation in a position where, on an ongoing basis, we’ll be generating significant profits.

The second question is, back at the half year, you had -- you said you had $4.2 billion of liquidity in cash and $1.6 billion of undrawn debt facilities. You've consistently said since then that you're focusing on cash-positive flying activities. Your CapEx is pretty minimal. Where's -- and you've now said today that you're $4 billion, so where has the $200 million gone?

Yes. So, if you think about the process or the cash flow that we've actually had over the first half, we've had a significant number of one-off cash flows. The three categories of that one is that we were paying back deferred payables. We were also providing redundancies to customers who have chosen not to fly and also...

[indiscernible]

[indiscernible], sorry. What did I say? Redundancies. And also, redundancies is the other category. We've actually paid a significant amount of outflows associated with that around $3 billion. And where we are today, the majority of that outflow is now behind us. So, heading forward, we are going to be, as we said in the statement, in a much more positive cash flow position in the second half and also going forward.

That's it. I think we don't have any more questions. So, can I thank everybody for dialing in today. And certainly, I think the next time we'll have a conversation is when we do the full year results in August. So, looking forward to that point. Maybe we'll be speaking to a lot more people in person, to get you to come in, and out of the [ door ] and come into Qantas Head Office going forward. See you guys. Thank you.