Virgin Australia Holdings Limited (VGN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Virgin Australia HY '26 Results Market Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Dave Emerson, Chief Executive Officer and Managing Director.

Good morning, everyone, and thanks for joining us for Virgin Australia's results for the first half of FY '26. Joining me today for our presentation is Race Strauss, our CFO, and we also have other members of the ELT in the room to answer your questions. I'd like to begin by acknowledging the traditional owners of the land on which we live, work and fly and pay my respects to elders, past and present. I'd also like to extend acknowledgment and respects to any aboriginal and/or Torres Strait Islanders people joining today's call. Moving to Slide 4 and our ambition. I presented this slide in August, and it's important to reinforce that our ambition remains clear to be Australia's most loved airline by our people, our guests and our owners. We believe our first half results demonstrate we've continued to strengthen the 4 strategic pillars that underpin the delivery of this ambition. We're now operating a simpler, more focused business. We're delivering experiences our guests value. We're improving operational performance and converting that into strong and consistent financial outcomes. This is visible in our fleet investment as we continue to scale in new 737 MAX 8 and Embraer E190-E2 aircraft, our strong completion rate and NPS scores and our EBIT growth and margin accretion as we continue to position the company for long-term success. It's also visible in the evolution of our leadership structure with recently announced creation of the role of Chief Customer Officer and CEO, Loyalty, combining customer experience, marketing and loyalty under the unified leadership of Andrew Cleary when he joins us next month. Moving to Slide 5. There are 3 messages I want you to take away today. First, we delivered strong RASK growth of 6.4%, driven by strong demand and revenue transformation. Second, our EBIT grew by 11.7% with further margin expansion despite high cost inflation. And third, we exited the half with a very strong balance sheet with leverage just below 0.9x net debt to EBITDA, giving us real flexibility headed into the second half and beyond. Taken together, these results demonstrate our ability to deliver on our commitments. In addition to the strong financial results, we achieved several milestones in the first half. Through our partnership with Qatar Airways, we launched new long-haul services between Melbourne and Doha, adding to Sydney, Brisbane and Perth routes. Virgin Australia Regional Airlines or VARA, introduced the Embraer E190-E2, the first new aircraft in the WA charter market this century. We became the first airline to launch pets in the cabin services with a successful trial between Melbourne and the Golden Sunshine Coast. We formed new partnerships, including an Australian-first collaboration with OpenAI. And finally, and importantly, we set new passenger records, including our busiest day ever and our busiest December on record. Moving to Slide 6. Before we look at our first -- at our half yearly results, it's important to reflect on how far we've come over the past few years. These charts also serve as a useful reminder for investors about the seasonality of our business, which delivers a greater portion of EBIT and stronger margins in the first half. Underlying EBIT increased more than 50% between FY '23 and FY '25 with double-digit growth this half is poised to increase even further by year-end. Importantly, this growth has not come at the expense of margins, with first half margins approaching 15% as customers continue to value the service we provide even as we become more efficient. This provides a platform for the company to continue to grow from, delivering strong shareholder returns over the long term. Now turning to Slide 7 and our headline numbers. We're very pleased with the outcome in the first half with strong financial results. And importantly, we've improved or maintained our strong operational performance. Results were ahead of both the markets and our own expectations despite inflationary headwinds due to strong customer demand, continued benefits from the transformation program with over $200 million in gross benefits delivered and the delivery of further growth from our Velocity Loyalty business. Revenue increased 9.3%, which drove underlying EBIT up 11.7% to $490 million. The underlying EBIT margin was 14.8%, increasing 40 basis points compared to last year. Underlying NPAT increased 21% to $279 million with the growth of EBIT and a 30% effective tax rate. Underlying earnings per share was $0.351, an increase of 11%, which includes the dilutionary impact of all shares associated with the IPO. Statutory NPAT decreased 28%, reflecting the benefits in the prior period from accounting recognition of deferred tax assets. And finally, our strong balance sheet is evident with our leverage being 0.9x net debt to EBITDA, which is slightly below our target range ahead of planned aircraft purchases in the second half. Race will provide more details on this shortly. Turning to Slide 8 and our Airlines segment, which includes our domestic, international and charter businesses. We remain focused on our customers and our operations with improvements in our OTP and NPS while maintaining industry-leading completion rates. We've done this with improved financial performance with underlying EBIT increasing 13.5% to $419 million, which represents a margin of 13.1%. RASK growth was 6.4%, ahead of our guidance of 3% to 5%, with December particularly strong. Market demand was strong, especially in the leisure customers due to event-driven travel such as the Lions and Ashes Sporting tours. This demand, together with Virgin Australia's own revenue transformation, drove yields higher, which ultimately led to the strong RASK outcome. Even though market demand is strong, we've been disciplined in our approach to capacity investment with overall ASK growth of 2.3%, including domestic growth of 4.2%. International ASKs decreased 6.7%, which reflects the end of our Kansai, Tokyo, Haneda route last year. Transformation remains a critical component in the fight against cost headwinds with many operational costs such as airport charges escalating well ahead of inflation. These cost headwinds are reflected in our CASK, which increased 5.7%. Our completion rate was 98.5%, which is market-leading and critical to meeting our customers' needs with load factors above 86%. While our on-time performance increased, there's room to further improve there to ensure we continue to deliver for our customers. Pleasingly, we've had a strong start to the second half, leading the major Australian airlines in on-time performance in January. Importantly, our NPS also showed continued momentum, improving to 28. Moving to Slide 9. Velocity delivered another record half and continues to be a key growth driver for the group. Underlying EBIT grew 14.8%, with margins expanding to over 30%. External billings were a record for the half and increased nearly 19% with underlying revenue growing 9.5%. We added more than 700,000 new members and grew our active member base by 11%. New partners were also added. We saw strength across existing portfolio of partners and products as well, including strong growth in new credit cards with points regularly transferred from bank and non-bank partners. Pay-with-Points was launched for use to onboard and with partners, and our partnership with Qatar Airways continues to improve member engagement. As we look to the second half, we're deliberately increasing investments in partners, data and personalization to drive further long-term value creation. This investment, together with an expectation that redemption levels will increase, means we expect second half margins to modestly reduce from our first half levels. Moving to Slide 10. Transformation remains central to our strategy. In the first half, we delivered over $200 million in gross transformation benefits, keeping us on track to exceed $400 million in FY '26 and more than $1 billion since FY '24. These benefits are coming from a mix of commercial initiatives like revenue management optimization and operational and fleet initiatives such as our cabin renewal and seat densification for our mainline aircraft and the renewal of our fleet for VARA as we take delivery of the Embraers. Importantly, transformation is no longer about fixing the business. It's now about continuously improving it and investing selectively to sustain benefits in FY '27 and beyond. Our recent announcement of the transformation function reporting directly to me demonstrates how important this work will remain over the coming years. I'll now hand it over to Race, who will run through the numbers in more detail.

Thanks, Dave, and good morning, everyone. I want to reinforce that this was a very strong half, which shows that the strategy is on track. Both the airline and Velocity have grown EBIT and improved margins. And we have generated more than $200 million of cash, which further strengthens the balance sheet and provides a platform for future growth. At the group levels, margins continue to expand with EBIT margin increasing 40 basis points to 14.8%. Lower fuel costs and transformation benefits helped offset ongoing inflationary pressures and the cost of fleet investment. The FY '25 tax position is now finalized. Given the business has delivered a consistent and profitable performance over the past 3 years, we have been able to recognize and utilize all of our deferred tax assets and have begun paying cash taxes in the half. I suppose this is a reward for success. Therefore, for the first half, the effective tax rate is 30%, which is reflected in our 21% underlying NPAT growth, and you should assume a rate of 30% for your future modelling. Given we have started paying cash taxes, we have accumulated $94 million of franking credits available as at the 31st of December. Turning to Slide 13, which shows line-by-line detail of our operating expenses. Total underlying expenses increased 8.4% as lower fuel costs and gross transformation benefits were more than offset by increases in other costs. Much of this cost increase can be attributed to the growth in the business with revenue up 9%. To support this growth, we are investing in the fleet and increasing our flying activity. However, outside of this, we are seeing above inflation cost increases in certain areas. Transformation costs are mainly allocated to the labour and comms and tech cost lines, and this investment is therefore part of the increase. Labor costs increasing 8% included this transformation investment, EBA increases and the transition to a public company remuneration structure with STI and LTI replacing the cost of the IPO-related management equity plan. Comms and tech increased 24% due to transformation investments, noting that we have moved a lot of costs from below the line to now be above the line given some of the work is now moving towards continuous improvement. Maintenance costs increased 30%, which partly reflects the growth in the business, but is also due to the higher rates from global supply chain pressures and a one-time increase in end-of-lease provisions for some aircraft. This one-time increase reflects the transition of our fleet as we return leased aircraft and increase the amount of owned aircraft. As it is one-off, it will not repeat. And combined with some lease extensions, we are planning for the second half, this will result in our maintenance costs being significantly lower in the second half. Airport charges increased 14%, which reflects the continued capital investment by airport owners and operators. This is an industry-wide issue and is set to continue into the second half and beyond as monopoly airports continue to invest a significant amount of money in capital works, which drives up costs for airlines. As an industry, we must remain vigilant on costs to ensure aviation doesn't become unaffordable for Australians. Despite these headwinds, we continue to see benefits from transformation, and it's playing a critical role in protecting and expanding margins. Moving to Slide 14. This bridge shows our EBIT growth through another lens, which highlights the strong RASK growth and also the cost increases we are facing. RASK increased 6.4% and activity reflects the 2.3% growth in ASKs with incremental revenue and direct costs associated with the additional flying. There was a benefit from lower fuel prices, but we have also achieved favorable fuel burn rates as we increased the number of MAX aircraft, which are at least 19% more fuel efficient than our current 737 fleet. When looking at nonfuel costs, this represents rate increases only and mirrors the detailed cost information I just showed you. The major contributors are airport charges, maintenance and labor costs as well as depreciation from our investment in fleet renewal. Higher depreciation is partly offset by the fuel burn benefits from the MAX aircraft. Velocity EBIT increased $9 million with another strong half of external billings growth and continued success in financial services. Overall, the group increased underlying EBIT by 11.7%, while improving margins by 40 basis points to 14.8%. Moving to Slide 15. A very strong outcome this half as the business generated $223 million of cash, reducing our net debt levels. Operating cash flow was $644 million, which included $19 million of tax payments. Total CapEx was $235 million, which was principally comprised of maintenance spend with a further $59 million of engine and aircraft CapEx. CapEx was lower than expected due to the timing of maintenance events and lower aircraft PDPs, which defers more of the CapEx until delivery. CapEx will be higher in the second half and in future years, and we look to directly purchase more aircraft. Asset proceeds of $253 million relates to a sale and leaseback transaction for some MAX aircraft that were delivered during the half. As these aircraft were funded in prior years, these funds were used to pay down debt. Interest on bank debt and leases was $45 million each or $90 million in total, and lease principal payments were $133 million. Moving to Slide 16. The strong cash flow is reflected in our leverage with net debt reducing to 0.9x EBITDA, which is slightly below our target range. Total debt was flat with higher leases from the delivery of new aircraft, offset by lower interest-bearing liabilities. We repaid an unsecured QIC loan using proceeds from our new corporate facility, and we repaid a secured aircraft facility from the sale and leaseback proceeds. Liquidity was $1.4 billion, including an undrawn debt facility. This excludes $200 million in restricted cash we are also holding. We expect net debt to increase in the second half as we purchase 4 MAX 8 aircraft, but we'll still be at the bottom end of the range at the end of FY '26. Moving to Slide 17. Importantly, our capital allocation framework is unchanged. We prioritize balance sheet strength and business-as-usual investment. Invest excess cash in value-accretive growth with surplus capital return to shareholders. This framework underpins all our capital allocation decisions. Moving to Slide 18. Our fleet simplification journey continues. We're transitioning towards a younger, more efficient fleet of Boeing 737 MAXs and Embraer E190-E2s with an average fleet age of 12.6 years and falling. Fleet growth remains aligned with long-term demand growth of around 3%. Aircraft deliveries and retirements remain on track and the F100s recently ceased operations in the VARA business. As we start to purchase more aircraft, you can see that our lease fleet percentage is expected to fall from the current 70% to 64% by the end of FY '27. And finally, before I hand back to Dave, I'm going to touch on an important investment decision for the company. As noted last year, we had 12 MAX 8 aircraft still to be delivered with a funding decision to be made on 9 aircraft, would they be leased or purchased outright. In line with our capital allocation framework, we have made the decision to purchase these 9 aircraft. 4 will be purchased in the second half of FY '26 and the remaining 5 in the first half of FY '27. With the aviation cycle strong, purchasing these 9 MAX aircraft delivers a favorable outcome through lower maintenance and depreciation costs, which improves EBIT margins, lower cost of debt financing relative to leasing with high loan-to-value ratios, resulting in minimal cash outlay required. It reduces our FX risk given we are funding in Australian-denominated debt as opposed to U.S. dollar leases, enhances our fleet and operational flexibility and provides -- purchasing provides a potential source of future liquidity. Importantly, we have the flexibility to convert to leases in the future if circumstances change. Our fleet is currently 70% leased, and we have an ambition to move towards 50% over time. Our leverage is currently below the target range in advance of this CapEx outlay across the next 12 months, and we expect to be towards the low end of the range at the end of June. We have not yet made a decision on whether we buy or lease the 4 remaining firm Embraer orders. But we will follow the same approach and be consistent with our capital allocation framework. And with that, I'll hand back to Dave.

Thanks, Race. So moving to Slide 21 and our outlook for FY '26, which reflects the strong start to the year. We expect demand to remain strong. And we will remain disciplined with our capacity growth, increasing domestic ASKs by 2% to 3% in the second half and by 3% in the first quarter of FY '27. Specifically for the second half, both EBIT and EBIT margins are expected to be higher than the second half of FY '25 despite continued increases in airport charges. We expect the RASK growth of 3% to 4% in the second half will contribute to this earnings growth and margin accretion. Gross transformation benefits of more than $400 million are expected in FY '26 with investment being brought forward into the second half to accelerate FY '27 benefits. We remain well hedged on fuel and FX, and Velocity is expected to continue growing external billings by more than 10% with no impact from the proposed RBA decision on interchange fees, albeit at modestly lower margins than in the first half, as mentioned earlier. As Race mentioned, our CapEx spending steps up in the second half as we purchase 4 MAX aircraft and will total $850 million to $950 million for FY '26, but we expect leverage to remain at the low end of our target range at the end of FY '26, which provides optionality for future shareholder distributions. We've also provided our updated guidance on significant items, with the only change being a slight increase in non-cash share-based payments associated with the IPO. Moving to Slide 22. Before we start the Q&A, I want to finish where I started. Virgin Australia has a clear plan to deliver continued earnings and margin growth through disciplined segment growth, revenue initiatives, cost initiatives and the continued expansion of Velocity. The first half demonstrates this model works. The focus is now on sustaining momentum, making disciplined choices, continuing to deliver strong operational performance and exceptional customer experiences, and of course, creating long-term value for shareholders. Our more than 8,000 people are the driving force behind our success, and I want to thank each of them for the vital role they play every day. Thank you for your time this morning. And operator, we're now ready to take your questions.

[Operator Instructions] Your first question comes from Andre Fromyhr with UBS.

Just wanted to first ask about the RASK growth that you saw in the first half. Just it's come in above guidance that you reiterated at the AGM. So, what was that exit momentum like late in the period? You mentioned the events that helped drive that. But has that provided a good start to the beginning of the second half? And then I'm curious as to the role that the Haneda exit has had on the mix of that RASK?

Yes. Look, we've got Paul, our Chief Commercial Officer here, so I'll let him answer that one.

So just to answer the last question first. So, the RASK performance, both overall as a business and in domestic, both were around that 6.4%. So Haneda has not really provided any impact on the RASK number that we've given you. In terms of the momentum, yes, we saw some really strong event-driven demand. And certainly, December overperformed for us versus what we were forecasting. We also saw some overperformance late November. That has translated to a good start to the year, and that's why we are forecasting a RASK growth of 3 to 4 percentage points on top of ASK growth of 2 to 3 points for this half.

Okay. And then I just had another question about transformation. Dave, you mentioned that you've accelerated some investment in transformation to support FY '27. If I recall the prospectus information suggested that in addition to the $400 million you were targeting for this year, it flagged another $150 million for first half '27 that was sized and costed. Just curious, is that still the right number or does the acceleration lift that? Or is there anything more you could say about the depth of the transformation pipeline beyond this year?

Yes. I guess, we obviously aren't giving any specific guidance yet on FY '27 transformation. But what I will say is that we are investing now to accelerate that transformation, and we're certainly not walking away from that number. I think we will give guidance on the expected FY '27 number at our full year results. But yes, it will certainly be north of that -- the number that we previously gave.

Okay. And then last one for me, which I think is just an easy definitional question about the new CapEx guidance. So should we interpret this as $850 million to $950 million total less the $200 million sale leaseback proceeds is $650 million net and that compares with previous guidance of $900 million net. Is that the right way to think about it?

Yes, that's right, Andre. We tried to simplify it for you by separating out anything to do with sale and leaseback proceeds. So, the $850 million to $950 million is what we expect to spend. And then we will get sale and leaseback proceeds on top of that.

Your next question comes from Matt Ryan with Barrenjoey.

I was just interested in your capacity growth into the second half. Obviously, you had a cabin configuration that's been adding a little bit of capacity over the last 12 months. So just wanted to know whether that has fully cycled through and just whether you can call out anything else in regards to where you're placing capacity or whether that lower international capacity is still feeding into that guidance?

Yes. We are towards the back end of our cabin refresh program. I think we're about 81% through, yes, the team corrects me. We should be done with that completely by the end of the fiscal. And so, most of the benefits of that has already flown through. It's -- just as a note for those following along at home, it's hard to see that in the data because the way the -- some of the external providers measure and capture the data doesn't always capture the cabin reconfigurations. And so, I think it's always a little tricky to see externally exactly how that's flowing through. But we will be done with the higher density configuration by the end of this year. I'm sorry, the second part of that question?

It's just about there was a comment earlier about Haneda perhaps influencing capacity in the half. Just any color on whether that continues. I'm just not sure of the timing around those international capacity reductions.

No. We'll have fully lapped Haneda this result. So, you won't see anything in the next result on that.

Okay, great. And then just non-fuel cost inflation, obviously, you guys called that out. Interested in airport charges and labor costs because there are 2 things that I think Race, you said probably continue into the second half. And I guess the question is a bit more high level as to whether these sorts of things that you're seeing are more temporary in nature? Or are you sort of seeing pretty elevated inflation as perhaps a more medium-term issue that you're going to have to continue to offset?

Yes. Matt, the airports are likely to be a continuing cost. I mean what's important for us is we support investment in airports, but we need to make sure that it creates value for our customers. But there is a lot of capital investment planned across the entire airport network. So I would expect that to be an ongoing cost. With regards to things like labor costs, a lot of that labor cost is linked to the transformation. So we've invested a lot to ensure we can deliver the transformation. I don't expect that cost to continue. It's very important that when we look at our costs, whilst they are high this half, one of the reasons was maintenance. The maintenance, we do have some global supply chain issues, obviously, with the delay in the new aircraft that is pushing all airlines around the world to use older aircraft, which creates more maintenance demand with no change in supply, pushing up prices. But we did have a one-off increase in our maintenance this half as we return a number of aircraft. That won't repeat. Therefore, I'm not expecting the sort of increases we've had in maintenance to continue in the second half. And that's one of the reasons that we are confident in delivering margin accretion in the second half.

Your next question comes from Jakob Cakarnis with Jarden Australia.

Just 3, if I may, please. This might be best orientated towards Paul, but can we just unpack the RASK growth a little bit? I think you've said that in the airlines, the load factors went backwards by 30 basis points in the half. That implies pretty strong yield growth on the 6.4% reported RASK growth. Can you just unpack for me how much revenue transformation is in there? And then if there's ancillary and how the ancillary is performing, please?

Go ahead, Paul.

Yes. So we don't provide a breakdown, but what I can say is absolutely, you're right in terms of it is really yield growth. The load factors were where we do expect for our business model at 86%. We have gained share from a B2B point of view. And so that's been an important dimension. We have also had some significant revenue transformation that we're seeing this half and into next half, which is really a mix of fares. It's an extraction of willingness to pay from consumers who want more choice and flexibility. An example of that is we now price our Flex fares much lower in the latter, and we're seeing more people take that Flex fare up in terms of purchase choice. So that's part of our transformation. But we're also seeing ancillary revenue growth year-on-year. And we've got a strong pipeline of ancills, as Dave outlined in the opening. We don't provide a breakdown of the individual components of that. It's commercially quite sensitive in this market, I think, given the market. And so that's why we don't provide that breakdown.

Any way that you could kind of size that for us versus where you were as the airline was recovering through COVID as a proportion of revenue? I mean you don't have to tell me what it is, but just give us a sense of where you are and maybe the size of the prize that you see midterm?

Yes. So as Dave said on the transformation, we don't -- we're not guiding transformation beyond this financial year at this point. What I will say is that we see continued strong upside momentum from a revenue transformation point of view. Our business model is very well suited to the areas that we are growing from a revenue point of view. And I think there's still a long road to travel on those set of transformation levers.

Yes. Look, I'll just say, without giving specific numbers, in order to achieve our ambitions in FY '27 and beyond, we'll have to make big delivery of transformation on both cost and revenue as well as continuing sort of the momentum and velocity. That's the only way we can deliver the commitments we've made. So you can be sure that we have targets that allow that, and those are the targets we're going after.

Just one for Race. I think you mentioned that there was some end of lease costs that have come in, in the half. If I look at the change to the provisioning on the maintenance side, it's about $100 million. Could you just help me work versus the June balance date in that $100 million change of those maintenance provisions on the balance sheet? How much of that would be those end of lease, please?

So we're forever taking end-of-lease provisions. That's just part of the normal operations. Every time we fly, we take the provisions. What I'm referring to is in addition to our normal provisions, we had some additional one-off costs. That's effective, it is close to $40 million that we have taken. So that's in addition to the normal heavy maintenance provision costs that we take.

That's helpful. And then just a final one, just on fuel. It seems like better burn rates helped you guys better versus our expectations in the first half. How do we think about the hedging profile? I appreciate you've given us good guidance for this year, but how do we think about you guys starting to shape the profile for '27? Are you actively in the market at the moment and over the last 6 months? And then I guess, how do we balance between a refining margin objective, FX and fuel, please?

Yes. So we are, of course, very active. If you come back to our policy, we can hedge out to 2 years, but we usually -- most of our hedging is in the 0 to 3 and then the 3 to 6 months. We've already started hedging out FY '27 quite actively. At this point, we are about 50% hedged for the full FY '27. Of course, most of that would be in the first half. With regards to refining margins, in FY '26, we took a decision as we went through the IPO to be more active in our refining margin hedging because it is quite an expensive thing to do. But FY '27, at the moment, we are less than 10% hedged for refining margin, and we would expect that to continue because of the cost of the refining margin.

Your next question comes from Justin Barratt with CLSA.

I might just try and continue on with the previous line of questioning. I was just keen to try and understand, I guess, not specific numbers, but the drivers of the RASK growth in the second half. Is it fair to say that, again, you're relatively comfortable with where your load factors are and so that it again will be driven by fares? And then within fares, are you willing to make any comments around is the driver more, I guess, base fares versus ancillaries or vice versa?

Yes. I'll hand it over to Paul, but I just -- I would emphasize the other element, base fares versus ancillary is the mix of business versus leisure. That's one of the key drivers that we don't want to understate. Our core strategy is to grow in small business and premium leisure and value corporates. Those customers all pay premiums above the average customer. So as we gain share there, our average fare naturally goes up. So that's one of the key drivers. I'll let Paul comment more.

Yes. And in addition to what Dave said, as I mentioned earlier, we also -- it's not just base fares, it's the mix of fares. So we offer now fares in the market, which are full of value and choice where people can select different attributes depending on what it is that they want in a product. So we obviously have a light fare where that's without bags. We have a flex fare that's fully flexible and has lots of options, which is normally more expensive. So what we're doing, part of the revenue transformation program is better matching customers' willingness to pay to what are the right fares for that customer. So it's not -- the transformation we expect will continue strongly from a revenue transformation point of view in half 2. And as Dave said, it's partly a customer mix, partly a mix of the fares that we're selling, partly ancillary revenue growth. And all of those factors are playing into a continued RASK increase with a continued ASK growth trajectory for half 2.

And just to illustrate that, the -- for those who won't spend a lot of time studying fare ladders and fare structures and fare families, traditionally, if you wanted to buy a flexible fare, you'd pay hundreds of dollars of a premium. And so therefore, very few people bought it. We made a decision about a year ago to sort of to offer a different set of choice and value in the market where we have flexible fares priced $50 -- plus or minus $50 above our nonflexible fares and available throughout the booking window. And so now more people are buying them because they're a much better deal. And so that they're voluntarily choosing to pay a higher fare in exchange for more value. And so these are the kind of things that drive our revenue up.

Great. And maybe a question for Race. Just in terms of your gross CapEx guidance for FY '26, Race, I was just wondering, could you break that out for us between, I guess, new aircraft purchases and non-aircraft-related CapEx for us?

Yes, but we need to be slightly careful here because we aren't allowed to publicly disclose the total -- the cost we pay per aircraft. So -- but what I will say is that our -- we roughly spend about $100 million -- just over $100 million on non-aircraft CapEx and we are spending about $400 million on maintenance type CapEx. And the remaining amount is, therefore, on the aircraft.

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

Just wanted to delve into the ASK growth into the second half. It's running a little bit softer than your main competitors guiding to. I'm just wanting to understand, is that due to the availability of the aircraft being delayed? Is it -- you've indicated demand is strong, so potentially it's not demand, but is it a reaction to the pricing strategy that you're also employing, which you've just spoken about?

Yes. Look, I think when we talk about ASK growth, it's important that we step back a little bit because it's been sort of a story of 2 years. If you remember sort of -- it was sort of July, the previous year when RASK went into administration and withdrew sort of a significant amount of capacity from the capital cities market. And I think that if you looked in the last fiscal, we grew at sort of well above inflation in an ASK basis, well above GDP to replace sort of our -- what we would see is our natural share of that capacity going after our core customers. And I think over that same period, the Qantas Group's domestic growth was sort of flat in the ASK basis. So this year, we're growing more in line with GDP and they're growing faster than us. And I think that -- but if you look at over a 2-year basis, I think our growth rates would be quite similar. And so I think that's the context around which this sits. And so now you see our growth rate is going to be more around GDP for the year, and we think that's roughly what we would guide as an expectation.

That's great. And just to be clear, I'm not advocating that you go into a capacity war by any stretch of the imagination. Just in terms of the -- how we should think about the capital structure framework -- and maybe this is a question for both of you, Race and Dave. In terms of how -- like what more were you or the Board looking for in the decision around the distribution given that capital structure framework, you're below the bottom end of the gearing range. You're saying that you still will be for the full year. Like what was the missing component there?

Yes. Look, I think, obviously, this is a decision for the Board. And what we've said, of course, is that we've got -- we'll be spending significant capital in the second half purchasing aircraft. But despite that, we expect to be at the low end of the range. That creates a lot of flexibility and the Board will look at the overall picture and make a decision on the best use of that capital.

Okay. And then just the final question is just in terms of the margin performance, -- what's the sort of benchmark that you think is achievable in terms of where you could get to for the margin?

Yes. Look, what I'll say is that while we're not giving a specific number guidance, I think when we think about our domestic margins, of course, as you would know, we report on a different basis than our key competitor as far as what's in and out of segment margins. And so you can't compare them directly apples-to-apples to domestic segment margins. But if you do your underlying math, our view is that while we're pleased with our performance that we still have a margin gap to our key competitor in the domestic market. And our ambition is to continue to close that gap. And so we don't believe our business model structurally should deliver lower margins than our key competitor. And so that's the sort of target that I guide to over time.

[Operator Instructions] Your next question comes from Scott Ryall with Rimor Equity Research.

I just had a quick one on Velocity and loyalty more broadly. This week, obviously, Qantas announced a bunch of loyalty changes. So I don't know if I'm allowed to say their name on the line, but they announced a bunch of loyalty changes. Your aspirations clearly from Slide 22 is that is one of the key transformation levers for you. I'm just wondering what you can say about current plans that you have to grow, I guess, particularly that middle one grow active members and deepen engagement. You might not want to give away trade secrets, but do your current plans suffice in terms of what you're trying to do for your business? Or do you need to react to this way? Is there anything you can give us some clarity on that?

Yes, look, we've got Nick Rohrlach here, who leads our loyalty and Velocity program. So I'll let him answer that one.

Thanks for the question. Look, you've seen today's results. Obviously, we've had really strong active member growth, and we're pretty confident that we can continue to do that. We've seen both our existing flyers, the people who are in the plane already on VA, the percentage of those choosing to also then earn velocity points has really grown over the last few years and including in this half. We can see that there's still headroom there. And then we've also been really focused on making sure that non-flyers who still like to earn points to get free travel, we've seen also really strong growth in that. So we see both of those -- headroom in both of those going forward. That gives us confidence to continue to see strong growth in active members. And then within that too is the people who are already on our program just using data and personalization to keep cross-selling into products, especially financial services. That's what gives us a lot of confidence to keep this level of growth over the next few years, double-digit external billings growth as well. And you referenced obviously other changes that happened in other programs yesterday. Look, we've always had a level of on-the-ground earn. You can earn status credits from your Amex cards or your Amex Velocity cards with Flybuys. So we think that's a great idea, and we'll continue to do those things. And that goes part of that, as I said, we're constantly trying to grow both our flyers and non-flyers, and we'll look at changes keep on going in the future. So yes, we're very confident about the growth potential over the next few years.

Your next question comes from Niraj Shah with Goldman Sachs.

Just coming back to the demand picture for a moment. Would it be reasonable to assume that sort of the unit revenue guidance you've provided for the second half kind of lines up with what you're seeing in terms of intakes? And then you've called out leisure as being particularly strong, exiting the last half. If you could just comment on sort of SME and value corporate a little bit more specifically as well, that would be great.

Yes. So look, first of all, the guidance is absolutely in line with the intakes we're seeing. As you can imagine, we look at that quite closely. And then as far as the sort of the -- how we're seeing the segments, yes, look, I think that we called out that leisure and particularly event-driven leisure is particularly strong. I think we'd characterize that the overall B2B market is stable. And -- but we've had a very clear strategy of growing our share in that space. So our revenue is still growing in that space even if the sort of the passenger numbers aren't growing as quickly as in the leisure space.

Your next question comes from Sam Seow with Citi.

Just thought I'd mix things up and ask on Velocity. Just your redemption there at 4%. Just wondering, does that include Qatar? Is that the kind of level that you were planning? I mean, yes, just any kind of color on what kind of level you would have thought is a good number for redemption with Qatar?

Sure. Thanks, Sam, for the question. Yes, look, what you'll see is we've had really, really strong active member growth in the last few years, including particularly this half, the 11%. That creates a bit of a life cycle sort of aspect for us. We've done a great job of convincing existing flyers and non-flyers to actively engage with Velocity. It takes a few years for people to build up points, especially when you're talking about international redemptions, like you mentioned Qatar. So what that means is you'll see that we brought a whole lot of people into the program. It takes a while for them to earn those points. On average, it's about 4 years to your first long-haul redemption, 2 years to sort of short-haul redemptions. So what you should think is this redemption growth has just been a little bit slower than our overall growth because people are basically building up the points balances. We saw a massive rush in redemptions a few years ago when everything reopened. And so in some ways, those perhaps points balances were depleted a bit, but also we brought in all these new existing flyers. So you'll see that redemption revenue growth really continue in the next few years and sort of catch back up. Long term, over a 5 or 10-year period, earn and burn rates should absolutely match out. So just think of that as a point-in-time thing. You mentioned then specifically Qatar, we've just seen great -- I mean it's really, really helped boost awareness of the program. We saw a significant increase. And I'm sure part of that 11% active member growth is quite down to the boost we got from awareness around our international partner network. We've always had great partners, including Qatar, but it really transformed and boosted the perceptions around that. And so I think that's part of that 11% growth. And going forward, I'm quite sure that, as I said, it will moderate, but Qatar is a really key one great part of that redemption growth going forward.

Got it. Got it. And maybe just a follow-up. On the external billings, obviously quite strong there, 19% and the gap to revenue growth closer to 10%. Is there anything as you think about the second half about that gap? And I guess in context of your guidance where you kind of talk to external billings greater than 10%. Just how we should think about, I guess, the difference in growth rates there?

Yes. Thanks for the question, Sam. Yes. So look, as we've talked about before, too, there is always a level of complexity in loyalty accounting. So that's why we try to give the external billings to you because it's really the cash that comes in the door. So we saw that 19% growth, which is obviously a combination of both the earned active member growth, but also people attaching more, especially around financial services products. So as we go forward, that should continue, too. So we're certainly guiding to double-digit billings growth, and we're definitely on track for that partway through this half. And it's a combination of member growth and as I said, particularly financial services, but actually just generally across all of our products. And we'll see new partnerships also be announced over the next few months as well, too, which is the other driver of that. So that's, I think, why we're confident going forward. The difference between the billings growth and the revenue, there's really a series of factors. It's a little bit to do with that life cycle thing I mentioned before. We've seen this rush of new people come in. They, on average, earn slightly less in the first few years. It takes them a while to sign up for their first credit card, those sorts of things. There's also accounting differences, but there's also, frankly, the external versus internal. Paul mentioned before, the growth in internal -- growth in VA side of things, it's external match with the VA growth gets you the net revenue number. So it's a combination of all those, and I apologize, it's quite complex.

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

Yes. Thanks for that. Look, I think I'd just come back to -- we're really pleased with what we delivered in the half. And it is in line with what we had said and in line with the commitments we've made. And I think that's the core point that I want to make is that it is absolutely our intention to deliver a clear reputation to the market that we make commitments and we deliver them. And this is the second result we've had as a public company, and we look forward to many more of these where we deliver our commitments. And that's really what we have. The business has got great momentum. We're guiding to continued strong results at the year-end, and that's where we're expecting to be. So probably with that, I'll sign off.

That does conclude our conference for today. Thank you for participating. You may now disconnect.