Qantas sets course for return to profit

By David Flynn, December 2 2014

Qantas is flying steady towards a return to profit in a dramatic turnaround which could prove an early vindication of Alan Joyce's tough 'transformation' of the airline.

Earlier this year, Joyce made a brave but measured forecast that Qantas would chalk up an underlying pre-tax profit by the end of this year.

Analysts are now tipping this at around $136 million based in part on falling oil prices, along with an end to the 'capacity wars' between Qantas and Virgin Australia, a lower Australian dollar, early benefits from the cost-cutting scheme and increased passenger umbers and per-seat revenue for Qantas' domestic and international arms.

It's an extraordinary turn-around from Qantas' previous full-year loss of $2.8 billion dollars, although after write-downs and one-off costs the real loss was a more manageable $646 million.

Qantas already nailed a profit in the July-September 2014 period, says airline CFO Gareth Evans, driven by the 'transformation' program designed to carve out $2 billion dollars in costs by mid-2017.

"The transformation program is going well, although it's still early days – we are nine months into a three to three-and-a-half year  program, but so far so good," Evans told Australian Business Traveller on the sidelines of the delivery of Qantas' new Boeing 737-800 in funky 1970s livery last month.

"The domestic market is also in a more stable situation than it's been for some time, albeit that it's quite weak on the demand front, but there's also very little capacity growth so demand/supply is matched better than it has been."

Lower fuel costs deliver only modest benefits

However, Evans pegs lower fuel prices as having only a relatively small impact on the July-December numbers owing to the timing of fuel purchases and Qantas' 'hedging' program.

"Lower fuel prices is more of second-half [January-June 2015] issue than a first half issue – the price benefit to us in the first half is going to be relatively modest" he said.

"So far, so good" says Qantas Group Chief Financial Officer Gareth Evans of the airline's ambitious turn-around plan
"So far, so good" says Qantas Group Chief Financial Officer Gareth Evans of the airline's ambitious turn-around plan

"The impact (of lower fuel prices) in the first half is going to be about $20 million, that's the Aussie dollar price benefit driven by fuel."

"The dollar's been lower for pretty much the whole period than it was in the previous year but fuel prices really only started to drop dramatically from October, which prices November, so really we're only getting a benefit for a couple of months in the first half of the [fiscal] year."

"But if the fuel price stays where it is at the moment then there's a bigger benefit in the second half."

How to save $100 million a year...

The larger wins towards December "are being driven by the transformation program," Evans said. "That's the engine that is turning the business around."

Evans revealed that the airline will recoup over $100 million per year just from smarter scheduling of its Airbus A380 superjumbos.

"When we re-timed the Melbourne-Dubai-London flight that freed up a whole A380, and changing the way we plan and do our A380 maintenance freed up another A380."

"We've taken those two A380s and deployed them on Dallas and retired two older Boeing 747s. The A380 can make Dallas a direct flight in both directions where the Boeing 747 had to drop into Brisbane."

"That all adds up to over $100 million a year in terms of the cost benefit."

A smaller saving comes from not filling up the tanks of its Airbus A330s on their Sydney-Melbourne legs.

"The A330s have big water tanks and we've been substantially filling up those tanks for Sydney-Melbourne, but on those flights you're not even going to use 25% of the water tank capacity. But that weight means you have to burn more fuel, and of course in this game weight is cost."

"So one initiative we undertook was to decide that for A330s flying those short domestic sectors we'll only fill the tank up to 25%. That's a few hundred dollars saving on each sector in fuel, but when you add all those sectors up over a year that's another $1 million to $1.5 million in savings."

"You've got to do the big things and you've got to do the little things, but they all add up" Evans said.

At the same time, Evans is keen to stress that "it's a clear tenet of the transformation program that we don't want to take things away from the customer."

"In fact we will continue to invest in the customer where it makes sense. That's why you're seeing flat beds on the A330s, new lounges in Los Angeles and the new economy meal product."

Fleet re-shuffle also saves

The reshaping of Qantas' fleet also plays its part in this turnaround, and again ties into lower fuel bills as older gas-guzzling aircraft are put out to pasture.

"The fleet is the big key that unlocks a significant amount of this change" Evans said.

"The arrival of the Boeing 787s into Jetstar allowed us to retire the Boeing 767s, and getting rid of the old 747s really changes the fundamentals of the business. But there options weren't available to us two years ago or even one year ago, and it just so happens that are arriving now." 

David Flynn visited Seattle as a guest of Qantas and Boeing.

Follow Australian Business Traveller on Twitter: we're @AusBT

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

10 Mar 2011

Total posts 531

Good news for Qantas!

Qantas - QFF Platinum

20 Mar 2012

Total posts 213

It would be only natural for the CFO to downplay the benefit (now, in the future or otherwise) of falling oil prices in order to maintain the current fuel surcharge as the norm for as long as possible without consumer & industry backlash. 

Virgin Australia - Velocity Rewards

24 Aug 2011

Total posts 736

QF may have hedged their fuel price for several months into the future at a price higher than what is available now. Thus there isn't too much to say about it at the moment. 

23 Aug 2013

Total posts 8

Must be transferring some of those Jetstar costs back where they belong.

Qantas - Qantas Frequent Flyer

29 Jun 2013

Total posts 367

This is great news as many were talking doom and gloom for Qantas when they posted their last accounts which were losses!! Well done Qantas

Virgin Australia - Velocity Rewards

19 Feb 2014

Total posts 451

It's amazing how such a massive financial loss can prompt simple things like re-timing a flight and not filling up aircraft tanks to the brim when it's not needed.

Something doesn't seem transparent to me.

Virgin Australia - Velocity Rewards

06 Aug 2014

Total posts 20

I find it hard to believe that Qantas thinks that they will return to profit so soon. Not even remotely possible after bleeding over $2.5m per day. To come anywhere close to this supposed turnaround , airfares to some destinations would need to double, another 2500 jobs would need to go  & a handful of services cut! Aircraft would also need to operate 24/7 ,.capacity would need to be around 90% each flight, this in turn alone would blow out wages & fuel costs! Seriously have to wonder who is actually doing the sums & how they come to such unbelievable figures!

Virgin Australia - Velocity Rewards

06 Aug 2014

Total posts 20

People still don't realise that the credit rating of Qantas is junk status. So effectively this remains with Qantas until 2021! Even if they manage to still pay the outstanding amounts owing on wages, fuel, aircraft etc, etc, it still remains on their file. The junk credit status rating would suggest that there have been several defaults listed against the airline for non payment of oustanding accounts!

11 Jul 2014

Total posts 13

Since when have Jetstar 787,s replaced the 767 in the mainline fleet.They are being replaced by Jetstar A330,s.

Qantas - Qantas Frequent Flyer

12 Jul 2014

Total posts 110

787 to Jetstar

Jetstar A330 to Qantas

Qantas 767 retired.

Qantas - Qantas Frequent Flyer

10 Jan 2013

Total posts 715

It's good news, although the profit numbers suggested are a fraction of the losses incurred to date. There is a long way to go before Qantas will be back to full health. Let's hope they don't take their eye off the ball.

Virgin Australia - Velocity Rewards

06 Aug 2014

Total posts 20

The main concern for Qantas is the junk status rating that has been given by Moody's & Standard & Poors ratings agencies. This will severely impact on their ability to borrow funds as most financial institutions will not touch any organisation with this type of credit rating. This still remains against Qantas for 7 yrs from the date of the first listed payment defaults of which there  are currently numerous listings! Even if Qantas clears all payments owing, the defaults still stand for the mandatory 7 yr period for corporations. So the chance of Qantas even remotely making a profit so soon is next to impossible until liabilities have been sorted & even then it's more likely to be a few  yrs before they begin to break even & a lot longer before they claim that they are back to profit. So any claims of a profit appearing any time soon should be viewed as pure fantasy .

17 Feb 2012

Total posts 121

What you have said Steve simply isnt' true, as most airlines during the last financial crisis were downgraded to 'junk' status and most of them continued to borrow and invest in new aircaft [United, American etc].  All this status does is increase the borrowing costs.  Have a read and lets sort the fact from the fiction:  https://www.abc.net.au/news/2013-12-06/qantas-shares-in-trading-halt-ahead-of-credit-rating-announceme/5139902

Virgin Australia - Velocity Rewards

06 Aug 2014

Total posts 20

The article pretty well sums up what I've stated. There are concerns about it returning to  profitability.  US airlines are protected by Chapter 11 Bankruptcy which is not available in Australia.  Qantas effectively  should be using some of their cash & assets to reduce liabilities. 


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