Qantas Airways Limited (QAN) Earnings Call Transcript & Summary

Welcome to the first half financial year 2023 Investor and Analyst Briefing. My name is Filip Kidon, and I am the Head of Investor Relations for the Qantas Group. I'd like to begin today by acknowledging the traditional owners of the land on which we meet today, the Gadigal people of the Eora Nation and pay our respects to elders past, present and emerging. I'd like to now hand over to Alan Joyce, our CEO; and Vanessa Hudson, our CFO, to present the results today.

Thanks, Fil, and welcome, everybody. Can I also start off by acknowledging the traditional owners of the land in which we meet, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging. Can I say we're actually really proud of the fact that now on all of our aircraft arriving into Australia, we do a welcome to country. And it's amazing, the reaction that that's gotten from the indigenous community, but also from visitors. I had some visitors over the weekend that came from the U.S. that thought it was pretty special. So well done to everybody that keeps that going. I am joined by the group CFO of Vanessa, who's going to help me with all the difficult financial questions, which usually there's a lot of them. And we are joined by the GMC members who are also going to help with particular questions about different parts of the business. So in the front row facing me I'll do them in the order in which I'm seeing them, so I don't forget anybody. This Andrew McGinnis, who's Head of Corporate Affairs and Government of Affairs; Rob Marcolina, who's Head of People, Strategy and IT and transformation. And then we have Andrew Parker, who is our Chief Sustainability Officer, a new role that we've created in the last few years that's made immense progress. And hopefully, we'll get some questions on that, and we'll be able to cover it. One of the newest members of the team, Marcus Venzon, who came from a lot of different areas within the group and the company, and is now our Chief Customer Officer. And Marcus starts that job at a great time launching new seats and new lounges. I think Steph had a tough beforehand, where we're just cutting back on all expenditure. We're not throwing money at him. I shouldn't say that, should I? And then we've got John Gissing, who's Head of QantasLink Safety Security, all of our ancillary airline businesses, which do a lot of good work, particularly on the fly in fly out sector. Andrew David, who's in charge of Qantas International and domestic. We have Olivia Wirth, who's the CEO of Qantas Loyalty, and she's going to talk a little bit. Hopefully, we'll have a few questions about the amazing progress we're making in Loyalty and the record results we have there. We have Steph Tully, who's the newly appointed CEO of Jetstar. Again, Steph worked in various different areas within the group and is now running our low-cost division. There's a few exciting things, I think, that we have in Jetstar. Hopefully, we'll also get some questions on. And then we have Andrew Finch, who's interacted the Office of the CEO and our General Counsel. So we have plenty of people to answer questions. The introductions get longer than the speech, I think, but we'll get into it and then cover it off for our shareholders at the results for this year. So this morning, we announced a record first half for 2023 with an underlying profit before tax of just over $1.4 billion. That compared to a substantial $1.3 billion loss for the same period in the previous year. So we've had a $2.7 billion turnaround in the group in terms of profitability. Amazing rapid turnaround, thanks to the effort of all of our people and unprecedented demand in the marketplace. The statutory profit after tax was $1 billion, with earnings per share of $0.54. These results represent a record half year for Qantas Domestic, Qantas International and Qantas Loyalty and a strong performance by the Jetstar Group. Our portfolio of businesses has never been stronger. Net debt finished the half at $2.4 billion, below the bottom of our target range. All of our segments have performed well and further detail is in the documents that we've released today. But there are some broad drivers of our financial performance that are worth signaling out. The first is travel demand and spend, which remains robust, particularly for leisure. While interest rates and inflation are impacting spending in some sectors, we're yet to see any of that impacting our bookings. In fact, our research supported by external surveys shows that travel is one area that people continue to prioritize. And we're seeing this in our weekly revenue intakes, which continue to track above pre-COVID levels. That flows into the second factor, which is the imbalance between strong demand and the supply as the industry restores capacity, particularly in international markets. Restoring our capacity has been slowed by ongoing industry challenges, including delayed fleet deliveries. We get trade brand new 787s in the next few months, which are 2 years late. There are supply chain dislocations, which are still continuing, and we're finding parts for some aircraft fairly hard to get. Labor availability and while we don't have an issue with pilots, we're recruiting a significant amount of cabin crew and engineers and particularly engineers we're ramping up on and training pipelines. We've had unprecedented training, covering the backlog of re-endorsing pilot staff being driving buses for 2 years, but also the massive recruitment that we've been doing. And this imbalance has resulted in yields to be materially higher than pre-COVID levels. They are offsetting fuel prices, which are 65% higher than pre-COVID levels this half. And while we expect these challenges to ease and for fares also to moderate, our international capacity is not expected to return to pre-COVID levels until financial year 2025. This is still ahead of the broader international market. The last driver of earnings is the $1 billion in restructuring benefits that we had implemented over the last 3 years, and this is flowing through our results. Our 3-year recovery plan is largely complete, and this restructuring was about making sure we survive the pandemic and bounce back quickly, which is exactly what has occurred and it's worked as we had planned. That said, given the industry challenges, there are some temporary costs that we have in financial year '23. We've kept more spare aircraft in reserve and rostered more crew to give us operations an extra buffer and deliver reliability that the customers expected. And this has worked with Qantas now the most on time of the major domestic airlines for 5 months in a row, and we're currently leading for the 6 month in a row. The estimated impact of these temporary costs is $200 million this financial year. We do expect this will unwind in financial year '24. Our people have been absolutely key to achieving our operational and financial recovery. They've shown incredible resilience of dedication, especially when our challenges were at their peaks in the middle of last year. A return to profit means we can share those benefits with them and around 20,000 nonexecutive staff across the group are eligible for shares and cash bonus valued up to $11,500 at today's share price. We've also announced an improvement in our wages policies in the half, revising annual wage increases from 2% to 3%. And today, we've added another $500 in staff credit and other travel benefits as an extra way to say thank you. We are making good progress on open enterprise agreements. In recent months, we finalized our reach in principle agreement with many of our key work groups. By the end of March, we expect to have reached agreement with more than 3/4 of all EBA covered employees. Our customers are another group that have stuck with us even when we were a long way from delivering the service that they expected. Thankfully, most of these issues have been fixed, and the return to profit also means we can make some important investments in their experience. There's a steady stream of short and long-term projects happening across the group, all with a simple aim of making people's journey a lot better. We are opening 5 new and upgraded lounges this calendar year. And this week, we announced $100 million for several more, including a flagship first lounge, at London Heathrow to be opened in time for the first Project Sunrise direct flights into Australia. I will continue to invest in our loyalty program for members. This week, we announced an extension of our program offering 50% more classic reward seats on international routes through to December 2023. With membership grown by over 1 million over the last year. The program continues to go from strength to strength, and we'll have further announcements to increase member value in the coming months. Our financial framework has helped guide our recovery and our capital priorities with net debt substantially below our target levels. Today, we're announcing a number of allocation decisions. We have a further on-market buyback of up to $500 million taken to total announcement of financial year '23 up to $900 million. We've allocated $300 million to purchasing shares for our employee retention and reward schemes, which we were going to issue new shares for, which is on track to invest in August this year. We're increasing the financial year '23 capital guidance to between $2.6 billion and $2.7 billion as we rephase existing commitments with Airbus. And we're providing initial capital guidance of $3 billion to $3.2 billion for financial year '24. That includes aircraft deliveries from our existing order as well as new aircraft announced earlier today. Our investment in our fleet is accelerating, and we expect an average of 1 new aircraft arriving every 3 weeks over the coming years. That's an amazing statistic. And when you think of the cost and the investment and the renewal and the benefits this gives us, it's quite substantial. And every new aircraft arrive sprints closer also to achieving our emission targets reductions with up to 25% less fuel burn compared to previous technology. Today, we're also announcing an update to our financial year '24 targets. This bar reflects the expected performance of our international business. The move to an EBIT-based margin target brings the group international in line with other segments. In the case of Qantas International, it represents a significant upgrade to pre-COVID ROIC targets. For Jetstar Domestic, we have also confirmed that we see an industry-leading low-cost carrier performance of a 15% EBIT margin target for financial year '24. We previously said that LCCs are most exposed to higher fuel prices. And if fuel prices were to reduce to long-term average, we still see a pathway to the 22% margin target we had before cohort. Importantly, these targets were first announced at our Investor Day in 2019, and we have maintained focused on them through recovery, and it's great we're able to recommit to them in '24. Their delivery will be underpinned by unwinding of the transfer costs and the inefficiencies that I mentioned that are present in financial year '23. Now turning to our outlook. We remain positive about the future. As we head into '23, the group will maintain a strong focus of providing value and travel. Across the calendar year, we expect the Jetstar Group to offer more than 10 million fares under $100. And for those haven't seen it, there is $39 airfares available on the Jetstar website, to places like the Gold Coast, Melbourne, Sydney. And there are $200 airfares to Honolulu to Ho Chi Minh City and to Bali and to Phuket, so get on your phone and book them as soon as possible. And Qantas Domestic will sell 2 million airfares under $200. There are $99 airfares on sale today as prior to that 1 million seats. And an amazing 5 million classic reward seats are available on Qantas Loyalty, and we released a load of the seats at 11:00 today to the website -- 11:00 tomorrow, sorry, I got the timing wrong, 11:00 tomorrow, so be on the website ready to do that. Our airline passenger segments continue to see good demand with revenue intakes maintaining significantly above pre-COVID levels. We expect capacity, including our own, to restore in the second half and for RASK to moderate. The return of international capacity will also moderate freight yields. However, we believe the trend on domestic e-commerce are structural and here to stay. As at today's prices, we expect our fuel bill for the year to be near $4.8 billion, approximately $200 million lower than previous guidance provided. And our loyalty business has had a very strong first half. It is expected to continue its momentum into the second half, reaching the upper end of its $425 million to $450 million underlying EBIT guidance for financial year '23. Further details on the outlook, including our capacity forecast can be found in the investor presentations. So in conclusion, it's been a long, frankly, difficult journey to get here today. But thanks to our people, our customers and our shareholders were here. Our high service levels are back. Capacity is recovering. We're investing for the future and once again, returning capital to our shareholders. There's clearly a lot to be excited about, and we look forward to updating you on our progress. Thank you, and we'll now open it to your questions. Do we have any questions online? I don't think we have any in the room so far. We have a few on the line.

The question comes from Jake Cakarnis with Jarden Australia.

I should say before we go, Jake, sorry to interrupt, but given the amount of questions we have online, we're trying to limit it to one question per person so we can get through it. And then we'll cycle back around if we have time. So over to you Jake.

Very efficient Alan. Just want to focus on the group international EBIT margin target of 8% you've put out for FY '24. You've also spoken about a softening as capacity recovers across the divisions, particularly in RASK growth. Can you just comment about a sustainable level of capacity? Is that 8% EBIT margin in '24 going to be sustained as you get back to 100% capacity moving forward, please?

Andrew, do you want to answer that one?

When we put targets out, we have a track record in the history of delivering on them. So I can assure you, we will deliver on that 8%. It's underpinned by a couple of things, performance of freight. Alan mentioned, we see freight yields moderating as capacity comes back but what we have seen through the 3 years, the pandemic is a move to online shopping. So we've seen significant growth in e-commerce. That's here to stay. We have a very strong position domestically with freight as well. So we're confident that while yields are moderating, they will remain above the FY '19 levels. Similarly, with our international business of the $1 billion of transformation, 90% of that is in Qantas International and domestic. And we're confident that will flow through as we get aircraft utilization back to 100%. We also have initiatives underway to offset inflationary pressures, and that will also flow through in the 24 years. So we're very confident in that target of 8%.

I might add as well, Jake, -- so all of those factors that Andrew said give us confidence in that 8%. But we do believe that going forward, we also have a number of other significant changes that will help maintain those targets. So we have Project Sunrise taking place from the end of '25 onwards. We have the XLR aircraft deriving into our fleet, which allows us to operate a significant amount of international routes from Australia that we couldn't have operated before with widebodies economically, and they are a lot more efficient aircraft going forward. So when we set the '24 targets, we're talking about them being step-change targets for the future. The margin that we're getting on international this year is obviously higher, and the return on invested capital is higher, but we do think it moderates to that and with the changes that we think are unique and the value proposition that nobody else is offering. Those are the numbers that should be maintained going forward. Next question?

Question comes from Andre Fromyhr with UBS.

Staying on the FY '24 targets, am I right in understanding the main changes that you processed today in those targets is the change in the international fleet capital base and the assumption of a different fuel price? Or is there something else that's been updated, say, with agreement with the Board on what those targets look like? I mean we're 4 months out from the start of FY '24. Should we now be thinking about that almost like guidance at this point?

These are targets. We don't give long-range guidance. And we have had these outer targets, as Alan said, since FY '19, and we are committed to them and the businesses and segments are absolutely driving towards these targets. When you reflect on what has changed, I think the first one is that we did commit to coming back on the Qantas International targets as we could see that there was going to be better performance than the target, which was ROIC at 10%. So we're going to be delivering higher than that and the outlook page in the investor pack demonstrates what that step change is. There are assumptions that sit behind that, but I think that, as Andrew said, that with the transformation activity that we've been doing and also particularly the route structure that we've got with new markets and more point-to-point traffic that customers are really valuing at the moment. We're very confident in that target and also the underlying performance on freight. Qantas Domestic maintained at 18%, as we mentioned in the summary that Jetstar is still targeting leading low-cost carrier margins, which at these levels of fuel is 15%. So if you go add that all up and with the upgrade of international, the contribution from these reset targets is actually higher than what we said with the targets back in August. So we feel very confident, again, as the structural change in our cash flow is going to be underpinned by this performance.

Matt Ryan from Barrenjoey.

I just had a question on the debt levels. Obviously, you're gearing is below where your target gearing range sits at the moment. So just hoping if you could step through what you're thinking about when, I guess, you're looking at distributions. Obviously, you've had an issue with probably wanting to distribute more than what you could. So if you could just comment on, I guess, how we should expect for that gearing to sort of move over the next few years as you sort of move into probably a higher investment phase?

Yes. So we are guided by our financial framework, and that is on always a forward-looking basis in terms of how the business is performing. What I think you can assume is that this financial year, FY '23 will have the lowest levels of net debt. And you should expect that as we invest now going forward into the business that, that net debt level will return to very similar levels at a minimum of what it was pre-covered which is a lot higher than what it is today. Our policy and our practice around our financial framework with regard to the decisions that we make every half with our Board on distributions has not changed. We will maintain a position where we target the bottom of that net debt range. We have indicated that we will be below that come 30th of June, we think that, that's appropriate given the level of credits that we are still carrying forward, and we're working very hard to ensure that our customers can access them and burn them before December this year. So what you should expect is that our net debt levels with that investment will grow, and that's because the contribution and the earnings from the business from that investment will also grow. So there is a commitment that we have to you as investors that we will act in accordance with that financial framework, and we'll strike the right balance between investing in the business and distributing to shareholders over the cycle.

Anthony Longo with JPMorgan.

Firstly, congratulations on the results. Quick one for me. Just wanted to get a sense of your confidence in the revenue outlook going forward, just in the context of what you have delivered in this half, which has been fantastic. Is it as good as it gets here? And then if you can perhaps talk to the interplay between what you're expecting on capacity increases and RASK to, I guess, offset some of that, particularly in the context of the moderation that you're anticipating?

Yes. So what I do, I might get Andrew David and then Steph to talk about what we're seeing in each of the businesses. There may be a lift to talk a little bit about what we're seeing in Loyalty, which is a good view of the economy and some of the research that Loyalty has done, if we can. And then Vanessa could do a summary of where we are overall. So maybe, Andrew, you go first.

Both Alan and Vanessa have mentioned stats in terms of intent to travel and I'll leave Liv to go through that in a little bit more detail, but what we're seeing is reflected in our forward bookings. So we're seeing forward bookings consistently up sort of 110%, 120% against pre-COVID. What we're seeing domestically is not only premium and leisure growth, but we're also seeing the return of government, mining, construction, manufacturing and SME. And in the rest of the corporate market, it's returning in line with our expectations. Because of that demand, we are then quarter 4, if you look, we are looking to get back to 100% of our capacity. If I take a market like Sydney, Melbourne, we're adding 40 additional flights a week across that quarter 4 period, and some peak weeks, we're back to 50. So we are back to 100% of our pre-COVID capacity in the domestic market. Our share across the 2 brands has grown through -- since FY '19. So we're now 66%, 67% of the market, and we continue to enjoy our profit share much higher than 80%. So very confident in our position domestically. A similar story internationally. The demand has been very, very high for leisure, in particular, 60% of our premium cabin is leisure travel. Our reconfiguration of our 380 means we've got more premium seats and the 7.8% in comparison to the 7.4% also have a higher percentage of premium seats. The 5 new markets we've gone into are all performing very, very well, as are all the other markets we've gone back into. Our capacity is coming gradually over '23, '24 and '25. But we are ahead of the rest of the market, and we don't expect the market in total to get back to 100% of capacity in and out of Australia until FY '25. And as Alan mentioned, we then start taking delivery of 350s and the 321s and 220s will also open up opportunities for us in the international market. I've already made reference to the freight revenue position. So we are very confident across all 3 businesses.

Steph?

Thanks. I won't repeat everything Andrew said, but it's worth saying that intention to travel data plays out in the price-sensitive segment, which is really important. So when we serve our customers, we can see Jetstar customers have the highest level of intention to travel they've had over the pandemic just now. So the intention to travel for price-sensitive customers remains really high. Our RASK is strong, both domestically and international similar to Andrew, we're seeing intakes 120% of what they were pre-COVID. So very strong. And whilst in the second half, as Alan mentioned, you do see some normalization. We also have a lot of our temporary costs starting to be removed from the business. So it's not as good as it gets is the answer to that. For International, it's worth pointing out for Jetstar's a great example of what we're seeing in the market where we grow our market share quicker than the market has. So therefore for the first half, you'll see 75% of the market's return. Jetstar's returned 100% of its capacity. And in doing that, we've shifted 15% of market share. And some of that sticks. So you're making sustainable rebound decisions and recovery that are good in the longer term as well. Liv?

Thanks, Steph. I'll cover 2 aspects. Firstly, just briefly around what we're seeing from the research as both Andrew and Steph have mentioned intention to travel, both domestic and international and both from premium customers and lower end customers is really strong. It's stronger than pre-COVID and we're seeing that obviously come through in our forward bookings. But when you take a step back and have a look at where customers are actually spending, we are seeing a disproportionate amount being spent on affairs and travel and entertainment in general. And we see that in our current data, but we also see it in our attention to spend. So we've spent -- we've talked to our members, same with our spend, and it is the intention to travel -- intention to spend on travel remains high. Then we also look at the membership base of the Frequent Flyer program. We also have a higher proportion of medium to high income members. And what that means is that their discretionary income is obviously higher, but it also they're more likely to spend on travel and entertainment. So all those things combined, we see flow-through for all our businesses, including loyalty, you would have seen in the half, spend on credit cards. We've got 35% of the spend in the Australian market is on a Qantas points in credit card. So we get a fairly good view around spend, and that spends back to 110% of pre-COVID and we are also seeing increased number of acquisition of cards. So when you add all that together from a loyalty perspective, revenue continues to be strong, and we do expect that to continue through the second half. Thanks Alan.

So adding all of that together with the yield moderation that we are seeing is going to -- with the capacity coming on, fares are going to normalize, but we're also seeing some moderation in fuel. And there is no evidence to suggest that the cycling of our profit across both half doesn't continue to exist as it has in the past as well. The one thing, though, is important to emphasize is that as we head into FY '24, this year, we are carrying a lot of transitionary costs. We flagged that in the outlook statement that we valued that at $400 million, and that will reverse. But also our task and our cost position is going to continue to improve as capacity comes back. And across the flying businesses, that is a material number as well. And we've restarted and continue to do, as we've always done, identified transformation to offset the normal costs that would flow through our business, including CPI. So I think that what we are seeing is that, that's underpinning what we expect to be the performance in FY '24.

I would just add one other thing to that is that when you look at our confidence levels about when we look forward at those targets in '24, what we are seeing domestically is that Qantas and Jetstar have a better margin than our competitors with recent information that was outlined. We do believe that the strategic advantages we had before COVID are not only still here, they've probably been enhanced. And that gives us -- and those targets were set before COVID. So that's why we have confidence on domestic. And then on international, we clearly see a step change on international with the freight changes that Andrew said, and we wouldn't be out today, essentially changing the targets upwards if we didn't have confidence that, that was real, and that's what we are seeing. And we think with this capacity, taking a good few years with all the log jams that we've talked about a lot today to fully recover back to pre-COVID levels. It means that the environment that we're in at the moment, where higher demand and supply will certainly continue internationally for the next few years. And we are seeing no indication on the general economy as Liv pointed out, and our research shows that people are prioritizing travel over other expenditure, which gives us confidence in that outlook going forward. Okay. Next question.

Niraj Shah with Goldman Sachs.

Just you guys obviously provided guidance on fiscal '24 CapEx. Thank you for that and mentioned continued investment over the medium term. Could you just remind us of sort of how you think about the returns attached to that investment over the medium term?

I think the best guidelines to take as set by the targets that we've outlined for FY '24. I think that it is a key focus for us, and our focus from there will be not just sustaining that, but growing that. If you think about the value that it is coming with the investments with the new fleet, they have a better range and they will be able to be deployed. For Qantas, the XLRs will be able to unlock new markets and also drive better utilization, have a more premium seat count. So we're expecting that the investment will uplift earnings beyond '24. That's the same with Jetstar and the investment in the LRs and the XLRs when they come after the Jetstar fleet as well. Sunrise is all growth and Sunrise, the first aircraft is delivered at the end of FY '25 and will be delivered across the next 2 years. And I think that that's actually really important to recognize that these investments are going to step change our profitability and also our cash flow. And it's also very important to recognize that with regard to Sunrise and that working capital rebuild from Sunrise will come earlier than the aircraft and the capital flow that we expect because we'll be selling those flights earlier than the aircraft arrived. So we feel very confident that the business is well positioned, not just with where our balance sheet is, but we are very confident with the cash flow that we can see in that full year that we'll be able to afford the capital, but we'll also be able to strike the right balance with distributions as well.

Justin Barratt from CLSA.

I just wanted to ask in relation to the -- how much of the $400 million transitory costs were incurred in the first half of '23. And with that, can I guess, pre-COVID 1 half, 2 half splits or pre-COVID 1 2 half splits are still relevant for FY '23?

So the $400 million is broken down predominantly between 2 components. One is the one-off bonus allocation, the reward recognition, which is roughly around $150 million. And there's a $200 million that we have updated the market, which is the cost of carrying higher spares, carrying higher rosters and also the disruption costs that we incurred in the first half. What I would say in terms of how that's spread across the year, the $200 million we did update in the market when we were there in August that, that was a forward cost from that point for the rest of the year and the accounting for the allocation of the bonuses is relatively even across those 2 periods. But I come back to the point I made before that there is no evidence to suggest that the profitability between the halves and that historical trend that we're seeing doesn't exist into the second half.

I will say on those transfer costs, obviously, the retention and recovery payment is a payment for this year. Then on top of that, the capacity is the big investment in the on-time performance and Andrew David and then Steph went through the step-ups that we're doing from March. We also have a huge amount of training going on at the moment, which is also in the cost base to try and get all of our international capacity up and running. So we did say that the 24 targets are underpinned by us taking those transitory costs out. So we will see a significant move in our cost base back to levels that we expect as an ongoing cost level to help support the business going forward. And that we believe also will happen at the same time, yields will moderate -- so again, going back to, is this as good as it gets? While we know the yield environment is high, we know that the cost environment at the moment is high, and those costs will come out and they will be coming out in '24 and beyond. Next question.

Paul Butler with Credit Suisse.

Can I just ask the change in the target for Jetstar Domestic. You've -- from '22 down to a 15% EBIT margin. You flagged fuel, but is there also a component there of the competitive environment? Because I mean, I think in the past, you've said that your competitors are more having an impact on the Jetstar Domestic business as opposed to the Qantas Domestic business?

Well, I might start at this to get Steph to come in. I think what we're seeing, Paul, is worldwide, a change in what the belief is low-cost carriers can actually achieve. So if you look, probably the industry standard, they're the largest carrier in Europe, Ryanair, -- great success story, by the way, a fantastic airline in terms of low airfares out there. Ryanair originally, I think, had margins at around 22%. And we were aiming and thought they were absolutely achievable to get to that level. What's happened is with higher fuel prices, the price-sensitive vendors in the market is more sensitive to movements to recover that fuel. And so Ryanair, I think, are down at around a 15% mark, and that's the projection for them going forward. We're 11% for Jetstar in the first half. We have a lot of temporary costs in there at the moment. And we do believe as we get them out and we see the recovery and getting the aircraft that we have on the ground as a buffer back in the air. We can get to those 15% targets. We have also said, Paul, in this that if fuel prices do come back down to pre-COVID levels, we're still committed to that 22% target as well. And I'll get Steph to talk about the competition and how that is -- how we're seeing that and what if that's having an impact.

Yes. Thanks, Paul. We've got a clear path to 15%. We think that's the right target. But as Alan said, if fuel prices do normalize, we think we can do better as well. Ryanair is the only airline saying 15%, most low-cost carriers are about 8% to 10% in their projections. So there's no reason that Jetstar shouldn't be as good as Ryanair. Competition-wise, domestically, what we know is Jetstar is seen as the fast leader. Today, we've sold thousands of fares already since midnight for $39, and we know that Australians will turn to Jetstar for low fees. So it's great to have more competition in the market. Bonza obviously have started flying. Virgin and Rex arguably low-cost carriers as well, but we know that Australians will turn to Jetstar for low fares. So the dual brand effect in this market despite the competition gives us a very strong impact. And the reality is if there's a anywhere in the market that feels a value exception and ahead over the next while from economic pressure. It's more likely to be the mid-market. And Jetstar's well placed to take that spill. So the dual brand effect of Qantas and Jetstar sees that playing out. So we've got a really clear path for Jetstar to reach that 15% target in FY '24.

I will add. I think that's a good answer, Steph. I will add that what we are seeing at the moment is this is a very competitive market. We have 5 main Jet airlines operating that I don't think we've seen before. But Bonza is keeping away from Jetstar, which is fascinating. There's only one route they're operating on and recognition is extremely low at the moment. I think only 10% of the population recognize the Bonza is there, so they need to improve on that to be really any way of a challenge to Jetstar down the line. With Virgin, what we are seeing is that they are certainly focusing on the middle of the market and focusing on the triangle to restore our operation levels to where they needed to be, we did scale back, particularly on the triangle, which I think you have reported on. And as Andrew David already mentioned in March, we reestablished our position by adding 40 flights a week on Melbourne, Sydney alone and some weeks up to 50 flights a week. So we are going to recover that share and we are going to recover that market, and I think that's the right thing to do. And I think that's also helped, I think, Rex because that's where they're focused. And I think Qantas as the national carrier couldn't pull service from that one, couldn't services from Hobart and we could scale back on a very high frequency market like Melbourne, Sydney, but now we have the confidence to reinstate that capacity back into that market. So we think that will certainly help with the Qantas performance and taking costs out or helps with our overall competitive position in the domestic market. Next question.

Owen Birrell with RBC.

Just a quick question for me on the net CapEx guidance that you provided for FY '23 and '24, quite a notable step up. Obviously, there's a lot of fleet coming on. But I'm just wondering if you can give us a sense of what the breakdown for those 2 years is between, I guess, what you would sort of call sustaining CapEx versus supporting infrastructure like lounges and I know the lounge investment that you've announced. But then also what is coming from international and domestic play. Just a rough split just so I can get a feel for that.

I think it's fair to say that the majority of the CapEx that is -- that you see between '23 and '24 is aircraft delivery. We've got 1 aircraft coming every 3 weeks. And that will be a split between progress payments and final delivery payments when they come, but also the maintenance CapEx that goes into maintaining the base fleet that we have. You can assume that the proportion of non-aircraft CapEx is very low. It is traditionally a lower proportion historically that we've had, albeit that we've announced the big investment in lounges that we're making of $100 million, but it will also include investment into non-customer things, including systems and technology and upgrades and maintaining our operations, that runs at around $200 million to $300 million per annum. So hopefully, that gives you a good breakdown there.

I'll add to that in the capital expenditure number for this year, we've actually said that we paid Airbus another $500 million. And we said that's a really good commercial terms. So that's for aircraft that are going to arrive in the future. So we also within that, have been very clear that we've been allocating money to $500 million to the share buyback, but we've now allocated another $300 million to the recovering retention program that we work on to issue new shares for, which is essentially you could look at it as another form of a buyback in some way. And we've now maintained our net debt levels below the target range, $500 million below the target range that we set for ourselves. So the balance sheet is as healthy as it's ever been, and there is plenty of flexibility within that balance sheet. And it's fairly -- given the targets going forward, it's very capable. I think as Vanessa calls it, chewing gum and walking at the same time of continuing to do distributions to shareholders and renewing the fleet and renewing the capital investment in the business that we are planning this year and next year. Next question?

Cameron McDonald from E&P.

Just after just a question for me on just looking into -- just reviewing actually the commentary you made back in November, and you had the sort of $900 million improvement in cash flow, $700 million odd in the rebalance and $200 million in the deferred CapEx. Are these changes you're announcing today on top of that $200 million worth of deferred CapEx. And then similarly, just in terms of what's happened with the rare balance, can you talk about what the $6.3 million, is that actually lower or higher than what you're expecting back in November and how are the forward bookings looking at the moment?

So our rear balance is continuing to build. And you would have seen that between the full year and December that we've seen a further $400 million growth in revenue received in advance from flying. And that is very much a function of the yield environment, but more so from the international capacity rebuild in the second half. And we are seeing, as stated in the outlook section that our intakes are continuing to demonstrate the momentum that we saw pre-COVID which is a function of that strong demand environment, but also a function of the recovery of capacity into the second half. You will note in the supplementary slides in our investor pack that we have outlined that in our rebalance there remains an $800 million credit balance, and that specifically relates to COVID credits. We issued 2 million COVID credits during a pandemic. And so we've burned 60% of that with $800 million remaining. We are very focused on making sure that our customers have the best access, the best reminders and the easiest way to redeem those credits, so they can use them before they expire in December. But also the permanent working capital that was built during COVID for the Loyalty business, you will see that, that has remained a key part of our rebuild. I hope I've answered that question when you're talking about deferred CapEx I'm assuming that there is timing differences. We do have timing differences that move between the first half and the second half. And we are seeing that mix occur in our CapEx as we go through the second half of the year. And that is going to build to that $2.6 billion to $2.7 billion guidance that we've given, including the rephasing of CapEx for the aircraft, which we think is the right thing to do. It derisks our CapEx going forward. It is not incremental to the plan, and we've got significant value from Airbus from doing that.

Scott Ryall from Rimor Equity Research.

I'm going to take you up on asking about sustainability, Alan. On Slide 12, you've got your emission targets restated, and I understand the fleet efficiency is a big driver of that. So my question goes to the sustainable aviation fuel and offsets. And I guess on SAP, I'm wondering, can you hit the 10% target without Australian production? And how are you progressing with incentivization there? And then on the carbon offset you're signaling some changes in the way that you assess offsets. And I was hoping you could give a bit more color about that, please.

Great question, Scott. I'll get Andrew Parker, our Chief Sustainability Officer to update you on this because we've done a huge amount of great work on this with him and his team, Andrew?

Yes. Thank you for the question. On SAF, the answer is yes. We reverse engineered how to meet that target, looking at a series of different scenarios. And whilst domestic production for strategic reasons, which are significant is our priority, we know that due to our international network, where SAF is either underway in terms of production or we have already procured offtake agreements. We can meet the 10% target by 2030 through ports like Los Angeles and San Francisco, where our offsets will kick in from 25 London Heathrow, where the only airline in this part of the world who is procuring SAF on a commercial basis as of today, and we just extended a new arrangement out of London Heathrow. But clearly, SAF domestically in Australia is critical for us. 70% of our fuel. We uplift domestically out of Australia. So we are encouraged that next week, the federal government is hosting its first SAF Council meeting, which is something we have pushed for a long time. So that, coupled with a lot of state government engagement and a lot of due diligence we've been doing on potential Australian projects gives us hope that we will see domestic SAF production in the second half of this decade. And we know we have to play a lead role in developing a domestic industry. And then on offsets, we were very supportive of the Chubb review. We encourage additional assurance and quality and transparency in carbon offsetting in this market. As you saw in the pack, we have announced some additional domestic AC projects, and there will be more of those investments that the Qantas Group will make. So whilst we already have very high leading standards in terms of offset markets we participate in, we welcome additional assurance and you will see us investing in more domestic projects, including the reef credits we announced in the Charleville project and the new Savannah project in the Northern Territory.

Great. I think we're pretty excited about that meeting next week after a few years of pushing for a SAF industry to be developed here in Australia. It's great that we're starting to make traction on it. I think for our field requirements alone, we think there could be up to 20,000 jobs created in this. This is a phenomenal way of creating high-paid Australian jobs and for us to be a leader in production of SAF worldwide. We have the land mass, we have the feedstocks. We should be there on it. So I think next week, hopefully, we'll make some good progress, and Andrew will be at that meeting. I think we have 2 last questions . So we got a second last question and then the last question.

Have a follow-up question from Jake Cakarnis with Jarden Australia.

Just one maybe for both of you, Alan and for this I just wondering, heading into FY '24, how much are you thinking about trading back any potential benefits that you have from lower fuel costs, just noting that the forward curve is still in backwardation for Brent. How much of that would we see coming back through, do you think pass-through for lower ticket prices or maybe capacity adjustments, please?

Do you want to do that? I think it's coming back isn't it?

Look, I think that fuel is very much a function of market. And historically, when fuel has been lower, that has been passed back through our fares. So it is more an indication of demand. And I think -- the way we think about our profitability is that whatever the fuel environment, whatever the demand environment, we have the levers at our disposal through capacity to be able to either recover fuel through fares when they are hire or pass them through when fuel is lower because it's more typically reflecting of the demand environment that we're in. So we think about these targets that we've got for '24 to be through the cycle that we operate in, and that's how we've managed the business in the past.

Yes, I think it's a good answer. I would say I just reinforce that the way we've seen it domestically is that certainly, the carriers do a just capacity up and down to take account for fuel, as Vanessa said, -- so we don't see that one way or the other, being a big mover. But internationally, we may be in a position if there was a significant drop in fuel, there's still going to be a shortage of international capacity with the demand there for a period of time. So you will still have the supply demand constraints. And then fuel price, if that still get there, fuel was to be higher. We think we have the ability to recover that. But if it was to be lower, we're still in a very strong demand environment. So that may be different from normal circumstances, and we'll see what happens there. Okay. Last question.

Sam Seow with Citi.

Afternoon, great set of numbers. Just quickly, I couldn't help notice load factors domestically declined sequentially in the second quarter, kind of below pre-pandemic there's one essentially flattish capacity. So just wondering if you pick up capacity in the second half, are you seeing your loads pick back up above pre-pandemic or have they stayed below?

Andrew, do you want to do that?

So our load factors are in line with what we were seeing pre-COVID. I come back to the numbers that I stated before. The intent to travel, the forward booking levels that we're seeing. The demand is there in leisure and it's certainly there in the SME market. And in resources, in government, in mining and construction and the rest of the corporate market is returning to travel in line with our expectations. That's why we have confidence to put capacity back into the market to get ourselves back to 100% of pre-COVID levels. So we're not seeing any sign in terms of our RAS performance that there is any softening whatsoever, in fact, quite the opposite.

And I think there could be some just slight anomalies in various parts of the network because we're seeing a bill in the fly in and fly out market, which does obviously have very high lot factors out. The aircraft usually full. And then on the way back, the aircraft usually empty. And so as that is a bigger proportion that can distort the C factor. We also are seeing, I think, record factors in Jetstar in the 90s so that shows you the leisure demand out there. So we're definitely not seeing a problem with C factor. I wouldn't look at it as an indicator of an issue with demand. It's just that demand could be very directional in some of the regional markets we operate in, but the yield does compensate for that. And we do make a profit even if the aircraft is empty on the way back from the resource companies. I think that's it. And we got through all of those questions. So can I thank everybody and I've got a lot of employees here in the room. Thank you for amazing and effort on these results. And hopefully, you saw for some of our investors and the analysts, the good reaction that they're seeing in the results and the performance going forward. And I cannot thank the management team Vanessa to work a way through all of these -- the economics of this and get the annual results ready for today and the entire management team here for helping answering all those difficult questions. Thank you, everybody. And we see you again in 6 months with hopefully and equally good set of numbers. Thank you.