Qantas Airways Limited (QAN) Earnings Call Transcript & Summary

Thank you very much, and thanks, everybody, for joining us. Can I first acknowledge the traditional owners of the land of which we meet, the he Gadigal of the Eora Nation. I pay my respects to elders past and present. Good morning, and thanks for joining us on this investor and analyst call. With me is Vanessa Hudson, who's probably got the longest title in and Qantas [indiscernible] development as Chief Executive Officer Designate and Chief Financial Officer at the same time. And I will provide some brief remarks, and then Vanessa and I will take your questions. Earlier today, we released a trading update for the second half of financial year 2023. Trading conditions remain very strong with positive trends continuing as the industry recovers. We continue to see strong demand for travel and based on forward bookings, we expect this to continue into financial year '24. Our weekly revenue intake remained substantially above pre-COVID levels. For Group Domestic, they are running 118% and for Group International, they're running at 123%. We've also seen our operation stabilized and there, we had 8 months in a row that Qantas is as head of its major competitor in on-time performance and other operational statistics regarding cancellations and mishandled bags are back to pre-COVID or better than pre-COVID levels. This means that we've been able to unwind some of the operational buffers we put into place over the past year. We're putting more crew and aircraft back into service and the cost associated with those additional reserves are also starting to roll off. The additional capacity, coupled with easing jet fuel prices, is putting downward pressure on fares, which is good news for our customers. Although across the industry, the mismatch between capacity and demand will persist for some time, and we expect yields to remain elevated, particularly internationally. Across the Qantas Group, we expect to see group domestic capacity reach around 104% up pre-COVID levels by the end of the financial year. This includes increasing flying on key triangle routes between Sydney, Brisbane and Melbourne. We're starting frequently during morning and evening in peaks. In fact, on Melbourne, Sydney now, we're back to 15-minute -- services every 15 minutes in the morning in peaks, which is great for our customers and great for the returning business market. Group International capacity will be back at around 100% by March 2024. We're achieving this by bringing more of our aircraft out of storage and continuing to invest in new fleets. We've taken delivery of 4 new aircraft so far this year and another 8 will arrive by the end of the calendar year. These aircraft allow us to restart important routes like Sydney to San Francisco, which depart for the first time in 3 years last night and it was ahead of time as of left. It also means we can open new routes like Auckland to New York from next month and start the Shanghai service again for the first time in 3 years. Now turning to the financial update. Based on current projections, we expect underlying profit before tax for financial year '23 to be between $2.425 billion and $2.475 billion. This will be a record result for the Qantas Group. Importantly, this includes the benefits of our 3-year recovery plan. Our people have been key to a recovery from the pandemic and the restart of our operations over the last year. Completing our recovery plan means we will be in a position to reward about 20,000 employees with a 6,500 recovery bonus following our August results. Our balance sheet remains exceptionally strong. This has allowed us to form future fleets, return money to our shareholders and invest in our customers. Supported by the strength in earnings and the rebuild of capacity, our net debt is now forecast to end at the 30th of June between $2.7 billion and $2.9 billion. This is substantially below the bottom of our target range. Given the strength of the balance sheet and the confidence in the outlook, the board today has approved an increase of up to $100 million to our second half on the market buyback. We expect the increased buyback to be completed by the 30th of June and it is already assumed in our net debt guidance. So today's update shows the success of our recovery. Travel demand remained strong. Our operations have stabilized and the strength of our balance sheet means we're able to invest in our people and our customers and deliver value to our shareholders. The Qantas Group is in incredibly strong position, and we look forward to sharing more with you at our Investor Day next week, and we will now take questions. First question?

[Operator Instructions] Your first question comes from Anthony Longo with JPMorgan.

Look, firstly, congratulations on the results. Perhaps some net debt is the first thing I wanted to look at because ultimately, that was -- that's a fantastic number again and it looks low even with the amount of CapEx that you have committed for the next few years as well. Perhaps either Alan or Vanessa, are you able to talk to how we're expecting this balance sheet now to relever in the context of the earnings coming through? And then I guess your confidence in executing on that CapEx program as well?

Well, I think the most important point to reflect on is that the strength in our net debt is demonstrating that the underlying performance of the business and the cash flow structural change that we've been saying for a long time is demonstrating that it is there and that we're very confident about that. And I think that, that is -- what is really important is we look forward now in terms of the CapEx program that we've got over the coming years that the business is in a very strong position to afford the CapEx, but also continue to strike the right balance as well as rewarding shareholders over that period. As you would know that the net debt range that we have is a dynamic range. And as we invest in our business and as we continue to generate earnings into the future, that net debt will rise, but we, as the financial framework is always being a principle that we will manage our net debt to the bottom of that range. And as we start that CapEx program and being below the bottom of the range, I think it just talks to the significant headroom that we have and the strength in the balance sheet that we've got going into this very exciting period of growth in renewal.

That's a great answer. And I think what you'll see in the Investor Day Anthony, is showing how that structural change in earnings is there, how it comes from the different business, how it's ongoing and it's sustainable and how out of that structural change in earnings, which we're seeing in these results, we will be able to afford that fleet, as Vanessa said, and give capital returns, which we've been thankful for some time, but I think it will become more evident as you go through the presentations next week. Next question.

Your next question comes from Jake Cakarnis with Jarden Australia.

Can we just talk about the fuel cost outlook, particularly hedging, heading into '24 and maybe what you guys are thinking strategically that you'll do with any fuel cost benefit so they likely to be traded back in some promotions to keep on stimulating demand? Are you thinking that you'll need to do that, just noting also your yield commentary about domestic and the international outlook?

Well, our hedging approach in our principle has not changed and remains the same. So you can assume confidently that our hedge profile into '24 is following that declining wedge profile. We've been very disciplined with continuing to layer hedging in place and we have a more hedge position in the first half than we do in the second half on that declining wedge and we have been maintaining outright options as preference and also callers to ensure that given fuel price has been a bit dynamic recently that we are protected on any fuel price spikes, but also have good participation if fuel price declines. And as you say, rolling into next year, that's going to be an important part of the way in which we manage that fuel cost. But also in the context of demand, we're continuing to see strong demand. We're continuing to see capacity in the domestic market being rational. In the way it is being deployed and also continuing to see constraints internationally. So although that yields are declining across both markets, we're seeing that yields will continue to cover the cost of fuel and remain above where they were in FY '19.

And I think, Jake, what you can see in this half is that the benefits we were getting from fuel mostly came through to the bottom line, but offset by some noncash movement in FX in bond rates and a little bit of delay to international capacity. We pointed out that Melbourne, Hong Kong started at later than plan because of ground handling shortages in Hong Kong and a little bit of freight getting to the levels that we expected a little bit faster than we expected. So definitely fuel price is a tailwind. It's helping us, and they helped us offset some of those variants, some of which are noncash in this half with a substantial proportion of the fuel benefit going through to the bottom line.

Your next question comes from Andre Fromyhr with UBS.

Just wanted to focus still on costs. some comments in the release about the extra $200 million of overheads in FY '23 beginning to roll off. Just wondering if you could give a sense of the pace of that and perhaps reconcile that reference to $200 million with the guidance that you gave in February that there'd be $400 million in transitionary costs unwinding from '23 to '24.

Yes, absolutely. And we are very confident that as we're experiencing as we expected moderation in RASK. We are seeing that our cost -- our CASK moderating equally in this period. And there are -- as we head into FY '24, there are 4 drivers that I think it's really important to understand in terms of what is going to help our CASK reduce substantially into '24. The first one is the temporary costs reversing which, as you say, was 200 predominantly of getting our operations stabilized and having all of those transitionary costs associated with those disruptions reverse, and we're feeling very confident with the way in which the operation is performing now and heading into '24 that they will no longer be a material feature of our cost. The second part is, and don't forget the benefit to our CASK is going to be driven substantially by the restoration of our capacity, both international and domestically in terms of that capacity covering a greater proportion of our overhead costs. The third part is that we will deliver the $1 billion program on time by the 30th of June and hit that scorecard target, which is an incredibly important part of our structural change to costs going forward. And then the fourth part that we will update next week is that we are continuing to drive transformation across the business with a focus on offsetting our CPI, and that's going to be targeting both revenue and cost initiatives that will enable us to continue to offset the impact of CPI on our business.

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

Just circling back to the net debt number. And if we think about the half year 2.4% and we're expecting that net debt number to rise, but it's not rising anywhere near to the degree of what I think people were expecting. Does that -- is that coming through from just the cash flow benefits of the underlying demand and forward bookings? And if that's the case, does that imply that the first half of '24, you're generating sort of $400 million to $500 million more in revenue than you were previously anticipating?

I think as Vanessa said, it is coming through because of the strong operating performance of the business and the strong forward bookings that we continue to see. But given the forecast for the first half of '24 is something we won't do at this stage. And I think what we are seeing that, yes, capacity is continuing to build. So what you can see in our table that we've given on is how we build up domestic capacity for the rest of this financial year and into next financial year and international capacity substantially increases get into March next year. So you've got a lot of revenue build up for those new routes, those new services that are there. But it's absolutely the case. We are well below the range that we have. The range is going to increase over time as we acquire more aircraft. And that shows you the bandwidth that we have to pay for the fleet to return shareholder distributions. And I know there's been a concern from some people out there that, that wouldn't be. Next week on the Investor Day, we'll be with these numbers building on them and show that there is a substantial underlying change in the underlying earnings of the business, which is what you're seeing coming through here and we expect that to continue to go forward the fleet and for distributions. And that's why we've always been saying we're very comfortable with that going forward.

Your next question comes from Sam Seow with Citi.

Just a question on booking windows. I guess the domestic and international. Can you provide us some color about how far people are booking advanced -- booking in advance compared to pre-COVID? Just for context, when we're thinking about trying to understand your revenue intake and your net debt result?

Yes, Sam, I think that domestically, particularly, we -- our booking curve is pretty much back to what it was pre-COVID. There's no material change there. And that, on average, is around a 4 to 6 weeks forward booking window for both Jetstar and Qantas. Internationally, it is wider. It is at around about an average of 4 to 5 months. It's interesting, our booking curve for international does tend to have a seasonality effect to it. And this time of year, particularly June and July, a lot of Australians are starting to book for their summer holiday. And where that is international, we will see that some revenue in advance will build very seasonally around June and July. But it is not materially different to what we've seen in the past. And as Alan was saying, the largest contributing factor to rebuild at the moment is because we're continuing to bring back capacity and particularly, that is a feature from the international network with that longer booking curve.

And I think, Sam, it's important to say, as Vanessa said there that domestic is back to where it was pre-COVID and international has got back. This is very similar to where it was pre-COVID. Our actual problem was the opposite of that, with some of the uncertainty that we had all the way through borders opening and closing. People were leaving a very late to book. So it's great to see that it's now we established that confidence and our people are booking in line with precoded levels of booking spot domestically and internationally. But we expect it to stay at these levels. We don't expect this to shorten again, if that's the worry. This is the type of booking profile that you would expect domestically and internationally.

Your next question comes from Nathan Gee with Bank of America.

Just a question on the demand side. So can you talk about any differences you're seeing between maybe business and leisure demand as well as Qantas and Jetstar? And just to confirm, you're not seeing any pockets of demand weakness anywhere despite the mortgage rate hikes?

No. So we're not. We've seen very strong demand coming through. And all of our indicators, as Vanessa said, I think in an earlier answer, this demand has been the strong since we go back to February when we outlined it to the market. We're seeing the same trends across each of the segments we identified in February. We're seeing very strong leisure demand, both for Qantas and for Jetstar. We're seeing very strong SMA, well above in revenue terms, well above pre-COVID levels. And the corporate market is the market that is behind the others but more than compensated by the other markets performing. The corporate market we have, as we pointed out before this trend, the same day travel is down, and that trend has improved from where it was, but still well below from where it was before COVID. We do expect as people come back to the offices, which is still not where it needs today. A lot of CEOs I see are out there in the last few months trying to encourage people to get back to the offices. We think that's a prerequisite to get the same day travel back on places like Melbourne, Sydney. But that has improved since February but it's not where we think there's more an upside on that from where it is today. And we are seeing Jetstar being particularly strong as well. So there's no weakness even in the price sense of event.

And maybe just adding to that, in February, we did share [ reviews ] and market research that we do in our loyalty segment around intention to travel. And that was a forward-looking data point that we had around intention to travel both domestically and internationally, and that has not materially changed either. So that still is very robust across all our networks.

And just building on it because we might show it again at the Investor Day. If you remember, there was a loyalty slide that said, what are people prioritizing. We still see that 30% plus of people saying they're going to spend money on domestic and international travel, but they are cutting back on other areas like eating out and other areas like that to fund. And that's still coming through on our research, and that's still coming through as the intent over the next 6 to 9 months. So that's a forward indicator as is the forward intakes that we're seeing each week.

Your next question comes from Owen Birrell with RBC.

Just a question regarding labor. You made a comment that you've finalized 38 EBAs covering 80% of your staff under the new revised wage policy. Just wondering if you can give us a sense on the wage escalation that was finalized within those agreements as well as any changes to the flexible arrangements that I guess you guys can leverage at the corporate side?

Yes. So all of those 38 have the same wage as policy, which is a wages policy that we announced coming out of COVID. We have 0033 arrangement. The 00 is in place for the 2 years that the group lost significant amounts of money. And it's been a principle of the group over a long period of time that we didn't pay, pay increases for periods of time where the group lost [ money ]. The 3% has been our long-term average. So when inflation was running at less than 2%, we were paying 3% for COVID, and we intend to continue to pay 3% post-COVID. But the compensate for what people have gone through over the COVID period, we have issued a number of bonuses this year, which one we call the Boost bonus, which is $5,000 for those 38 agreements, everybody is being paid $5,000. And there is the recovery in retention plan that gets paid that we hit the targets in August, which we're on track to do, which is 1,000 shares, which on current share prices were at $6,500. So that translates into $11,500 in bonuses this year for people now being paid that are signing up to those new agreements. And we pay on average 100,000 -- just over 100,000 in the Qantas Group. So we're a high payer and that represents, therefore, 11% once-off payment this year to help people with those inflation burdens. And that's been received unbelievably well by our employees, and we're getting great feedback all the time on it. In terms of flexibility, we haven't lost any flexibility in any agreements. In a few agreements, we've gained flexibility because of the new aircraft technology. So when it comes to the use of the A321 XLRs, the cabin crew have done an arrangement where they will allow those aircraft to be flying to longer sectors. That was positively perceived by the cabin crew. And similarly with the pilots, when it comes to Project Sunrise, when it comes to the XLRs, getting them to fly those aircraft. So if there have been productivity benefits that have come out, some of the agreements to take advantage of new technology. Same with the 220 as opposed to the regional operation. Some of the regional operations have gotten there. So -- and we're pretty optimistic that we will continue in this path with our agreements to -- there is a few more agreements to open up at the end of this year and into next year, and we'll continue to go in the same way, in the same line.

Next question comes from Scott Ryall with Rimor Equity Research.

Vanessa, congratulations on your appointment as CEO, first and foremost.

Thank you. Thank you.

I have 2 questions. One is hopefully really easy to answer after the first one. The -- so your capacity increases that you're showing your ASK increases for international is, call it, roughly 15% on -- in the first half '24 relative to second half '23 and then roughly another 15% in the second half of '24. Could you just explain to me whether that is -- how much of that comes from sweating the current fleet? And how much of it is new fleet if you can provide a split? And then the second one was going to be around the -- you've got quite a high-quality board appointment that was also announced today. I was wondering if that means anything different for Qantas given the -- given where Doug's historic executive experience comes from or what you think the Board will get out of that piece?

So maybe, all we're doing to get that capacity up and running is reactivating existing aircraft. As you're aware, we have 10 A318s that we are only flying 6 of, I think, at the moment. So we will be getting an extra won back in service during this period of time. We've got 3 brand new 787s that have just arrived and we are reversing the aircraft that we put the 25 aircraft that we put as operational spares, both domestically and internationally to get our operation back to stability. So those are an aircraft that would be flying to the same levels they did before COVID but just that in reserve at the moment that we're stepping up on. And similarly with Jetstar, we put a lot of aircraft in reserve for Jetstar. Jetstar is getting delivery of the NEOs. We mentioned here that we have more aircraft arriving in the next -- by the end of this calendar year. They all help us add to that capacity both domestically and internationally. So this is not trying to sweat the assets any further. This is just taking advantage of the aircraft, the crew that we have in the operation. I go back to Vanessa's answer about cost are coming out in '24. This is a large [indiscernible] because we have very expensive assets sitting on the ground, not generating revenue at the moment and crews for them sitting on the ground. This allows us to get them back in the air to do that. And we did announce on Friday also that we're hiring 2 aircraft for Finnair, one aircraft that couldn't see in October as a wet lease within our pilots that converts into a Qantas aircraft in 2.5 years' time and a second aircraft that comes in March next year, which also helps add to that capacity, a freeze of Qantas aircraft to do even more flying than we are planning. So that's how we get there on those numbers. And Doug is a fantastic appointment to the Board. He has an extensive aviation experience, particularly in a very large domestic market. I've known Doug for a long time. I was on the Board of Oneworld and I have [indiscernible]. We did the negotiation of the joint venture between American Airlines and Qantas, which Doug was central to. That joint venture is one of only 3 that we have with Emirates in China Eastern. And it was a big step from American, they're our largest partner, in the United States by far, one of the largest partners in the world. And what Doug will bring is, I think, very complementary to the skill sets that Tony Tyler brings. Tony ran Cathay Pacific, Director General of IATA, Tony ran one of the biggest international airlines in the world with a fairly Asian focus. So you get both skill sets coming and complementing each other. And the operational skill sets that Doug brings with no -- with known-how an airline works, the operational issues of massive large-scale operations and how to bring excellence to that environment is something that I think he specializes in. So I think it shows the quality of the Qantas brand that can attract to the most sought-after former airline CEOs on a global basis to join the Board and had probably the most aviation experience on the board, which I think will be a big advantage to management. Management all responds that the Board agree advisers, and they help advising what they've seen and what they've identified before. And I think Doug and Tony, in particular, bring those aviation dimensions that I would say no would an aviation Board in the world would actually have. So it's a great catch I think a lot of other airlines would love to get Doug. It's a great credit to Qantas that we've got him on our board.

Your next question comes from Matt Ryan with Barrenjoey.

I just had a question on capital allocation and the early payments that you've made to Airbus in the past. So just wanted to know, is that sort of like an ongoing option that you have in regards to distributing profits? And just trying to think about that and how you're assessing that distribution in the context of announcing new buybacks?

Look, I think, Matt, the key point here for me is that we have been able to achieve a really strong partnership with Airbus that's got flexibility, and that flexibility extends to both the way in which we can vary our predelivery payments and also flexibility around how we manage the actual delivery of the aircraft, if we were needing to do that. I think it's really important to recognize that any aircraft order has a sum of predelivery payments, which you pay to the manufacturer before the aircraft is delivered, and then you have a final delivery payment on the delivery of the aircraft. And as we said back in February this year, the performance of the business, the strong generation of cash that we were seeing and the significant surplus that we're seeing this year gave us the confidence to rephase some of those pre-delivery payments and have them actually occur this year. So it is going to be a feature of the flexibility that we have of Airbus. But when we make those decisions, we will absolutely ensure that it is strikes the right balance that we actually get the appropriate return on that capital. And as we said in February, we were able to achieve a substantial value with Airbus, which is commercial in confidence. But we believe it strikes the right balance, and that's the way we're going to continue to think going forward over the coming years.

Your next question comes from Paul Butler with Credit Suisse.

Congratulations, Vanessa, on the appointment of the CEO role. Just a couple of questions. The numbers you've given us on the revenue intakes. If I want to think about that in terms of -- what that means in terms of RASK, just to clarify, I need to take into account the difference in the capacity that you're intending to have versus FY '19. Is that right?

Yes. Yes, you should account for the change in the capacity for both international and domestic.

It's also, Paul, you need to take in the mix, particularly domestically of Jetstar versus Qantas as well going forward because there's a bit of a mix change.

Okay. Okay. And then just the other question was I wonder whether you can give any comment on your view on what you'd like to do with your stake in Alliance Aviation or what your intentions are there given the ACCC obviously has some objections?

So we think our stake is a good investment, all we have always will. But what we are doing is we're, we absolutely believe that this arrangement to takeover of Alliance would be in the best interest of the long customers and in stress of the aviation industry. So we're still convinced of that. we are looking at what our options are at the moment. We are talking to the ACCC. We have made no decision that what we do next. And as soon as we have, we'll make sure that people are informed. But our investment is a good investment. We're quite happy by how it's performing and how that business is working. As you know, we also have another relationship with Alliance and our wet leasing the E190s from them. We've increased our commitment there and continue to do so. We think that the aircraft is a great aircraft that's working really well for a large level of our operation. And I think we're now over 50% of the revenue that Alliance gets comes from the Qantas Group today. So it's an important relationship in a number of different dimensions that will continue post this either way.

There are no further questions at this time. I'll now hand back to Mr. Joyce for closing remarks.

So thank you very much, everybody, for joining us. As you can see that the group is in a great position, the results are record result for us. Demand is continuing to be extremely strong going forward into the first quarter of next year. We will now build on this at the Investor Day next week. We'll be talking about how our earnings have structurally changed going forward to allow us to move forward the fleet and to allow us to afford distributions to shareholders. We'll be also going through each of the individual business, talking about the massive strategic advantage we think we now have coming out of COVID. So hopefully, next week, we'll build on this fairly positive announcement that we have today. And it will be part of the [indiscernible] change between me and Vanessa. Hopefully, it's a smooth one so far. It's going very smoothly for this anyway. We'll continue on that. And hopefully, you'll see that next week when we do that. So thank you very much, everybody, for joining us.