Qantas Airways Ltd

ASX:QAN

Earnings Call Transcript 2019-Q1

[Alan Joseph Joyce, CEO, MD & Executive Director]

Thank you very much, and welcome, everybody. Apologies to those people who have been on the phone for an hour. I believe some people didn't know that we were in Brisbane and we're on daylight savings time. I'm glad we've generated their revenue for Telstra, which is fantastic. Good morning, and thank you. Hopefully, we've had -- you've had a chance to read through our statement, which has quite a bit of detail. I'd like to briefly take you through some of the key trends we saw in quarter 1, and what we're seeing as we move towards the half year. Tino and I are then happy to take your questions at the end. At the top line, our total group revenue was up more than 6% for the quarter at $4.41 billion, it's a record for quarter 1. Net passenger revenue was a record as well, and that growth meant we were able to substantially recover the increased cost of fuel in the quarter. Group unit revenue or RASK, was up 5.4%, which is roughly in line with the improvement of forward bookings of 6.2% that we flagged back in August. While our full-year fuel bill has gone up since the estimate we gave at the full year, the value of forward bookings continue to increase as well, now up 8% compared with the same time last year. That gives us confidence that our net passenger revenue will allow us to substantially cover the higher fuel costs for the year we've updated you on today. The strong growth in our total revenues helped us partially offset and increase a nonfuel cost, particularly, the higher commissions paid to travel agent on stronger ticket sales, and the impact of a weaker Aussie dollar on U.S. dollar cost. 2 of the things worth noting are the noncash impact of the new accounting standard on financial year '19 and the prior year, and the $155 million increase in standard charges, which we mentioned in August. Managing costs remains a big focus and we're confident that we'll deliver more than the $400 million in transformation benefit for the full year. We're expecting the cost out to be skewed to the second half given the timing of various initiatives. A lot of heavy lifting we've done now through transformation, including some big structural changes in Qantas International, has helped us to manage some of the headwinds in the sector. Perth-London, as we've communicated recently, continues to perform exceptionally well, as do the performance of our 787s generally. Our revised Emirates partnership plus the co-chair deals with other airlines are delivering, and the Singapore hub is going very well to the point where today we've also announced a new first-class lounge and expanded business lounge to meet the demand for premium travel that we're seeing. Group capacity in the quarter was down almost 0.5%, which underscores the strength of our record revenue performance. Getting these settings right is obviously one of the levers for managing higher fuel prices, and we now expect capacity in the first half to be flat for the group. As you expect given where oil is, our expectation for our full year fuel bill have edged up since August and is now likely to be around $860 million higher than financial year '18. We have a rolling hedge program, which now has us 76% hedged for the rest of this year and about 40% hedged for financial year '20, which has the scope to benefit from significant price falls. This gives us the time to make sure fares adjust to reflect higher fuel. We're not providing guidance today, but we have given a lot of detail on how the business is performing, which allows the market to confirm its own assumptions. And it reflects that these quarterly updates are chiefly about providing a revenue number and guidance only when required. To sum up, we are really pleased with our record revenue performance in the quarter and the trend we're seeing in forward bookings, particularly, given the fact that we're cycling a strong prior year. We're managing fuel and nonfuel costs closely with ongoing transformation on track, and we're confident in our ability to keep investing and keep generating strong cash flows through financial year '19. Now, myself and Tino will be available for your questions. Can we get the first question?

[Operator]

First question comes from the line of Simon Mitchell from UBS.

[Simon A. Mitchell]

Just given your comments, it looks like the -- there will be less to skew this year towards the first half in terms of profits. And you mentioned a second half skew for cost outs. Can you just talk a little bit more on what's driving that second half skew to cost out?

[Tino La Spina, Chief Financial Officer]

Simon, it's just the timing of the initiatives, as you know, we're bringing the 787s in progressively, we're starting to see some of those benefits, you can see the RASK performance internationally being affected by the positivity of the Dreamliner and on the Perth-London service. As we've said, we're getting more 787s coming in towards the end of the year and the cost benefits associated with those, you will naturally get more in the second half as you have more of them. And then we've got a number of other initiatives, whether they're in the procurement space, where we -- the pipeline that we have we understand when each of the initiatives is starting and when that'll -- the benefits will deliver. And based on an assessment of that timeline and when the benefits will crystallize, that's the base on which we make the comment.

[Alan Joseph Joyce, CEO, MD & Executive Director]

I think a couple of examples on that, Simon. Obviously, we got next month 2 787s arriving, and we've been ramping up for the delivery of those aircraft with the training program, so you won't get any of those benefits until the second half. And we have a lot of IT projects that Tino is managing, that we're investing heavily in at the moment that starts kicking in. Our flight planning system is one that's being rapidly rolled out to the fleet and only covers, I think, the 787s at the moment, but it'll be covering at the second half a larger component of our fleet. So there's a lot of benefits we can say will happen, and it gives us confidence that we'll achieve the $400 million or more than the $400 million, and I think our track record has shown we have done that in each prior year.

[Simon A. Mitchell]

Okay. And the fuel guidance, it's based on $92 per barrel of jet fuel, which seems to imply a reasonably high refining margin. Are you actually seeing some signs of that refine margin edge up through these changes to marine fuel regulation?

[Tino La Spina, Chief Financial Officer]

No, it's been pretty stable, Simon, the refining margins. So it's been around the -- in the teens for quite a while now. So...

[Alan Joseph Joyce, CEO, MD & Executive Director]

And I think we said Simon, I mean, we're, obviously, less worried about the movements in that than the general movements in crude oil because, I mean, what we think will happen there is, we have -- as you know, this week, we've had $3 or $4 with the oil alone, and I don't think you'll ever see that type of movement in the crack spread.

[Simon A. Mitchell]

Okay. And just lastly, just another question on costs. You talked about movement in nonfuel costs and you've singled out commissions to travel agents, and your comment's just then you've talked about 787 ramp-up costs, which obviously, are now contributing to that inflation as well. Is there anything else, and beyond that, we should be aware of on the cost front?

[Tino La Spina, Chief Financial Officer]

All we're saying, Simon, is that we've got U.S. dominated costs in our business as well. The -- we have a natural hedge between the inflows of foreign currencies and the outflows of nonfuel U.S. dollar denominated costs. The benefit associated with the revenues included in the RASK numbers and the revenue numbers that we've guided today. But the offset to that is that there's rising U.S. dollar fuel costs. So that's why we're saying we're doubling down on transformation to make sure that we can find all the initiatives we can to further offset that. And we've seen in that -- in the quarter that the other revenue sources that we've had have helped us to offset some of that as well.

[Alan Joseph Joyce, CEO, MD & Executive Director]

And some of the transformation initiatives that clearly -- to generating significant revenue benefits because, as we said, our RASK performance continues to improve, which is great. And so when we did the update in August, we were only looking at 6% forward revenue improvement year-on-year. Now we're looking at 8%. And as we said, it's cycling on a strong year. So I haven't seen the revenue performance being this strong since I've been CEO. All elements of the economy are kicking in. We got the resource sector really starting to turn the corner. So this is a pretty strong revenue environment, which is significantly helping meet those fuel and those other costs.

[Operator]

Next question comes from the line of Jakob Cakarnis.

[Jakob Cakarnis, Associate]

Just 2 quick ones for me. Firstly, can you just make some commentary around the Jetstar international ASK? I noticed it was down 7%. I mean, just give us some commentary around what drove this decline and whether there was any flight movements or anything structural that we should be thinking about?

[Tino La Spina, Chief Financial Officer]

Nothing really structural. They're probably more seasonal.

[Alan Joseph Joyce, CEO, MD & Executive Director]

I think what we're definitely doing within Jetstar now is profiling both the domestic and the international business a lot more. So you can see, there's been significant improvements in seat factor, both domestically for Jetstar and internationally. And that's getting this profiling right. The intention for us, as we've always said, is that we think there's room for improvement on seat factor even further. We have, as you know, Ryanair operating in the mid- or low 90%. So Jetstar is aiming to try and create those types of margins eventually. So you could see us being a lot more aggressive on the schedules in the off-peak ones in order to try and achieve that.

[Jakob Cakarnis, Associate]

Sure. And then just a second one. Is there any commentary about what's happening down into the Southern side, I guess, from international competitors? I've noticed that the guidance has changed for flat international capacity growth. Just get some commentary on what you're seeing from competitors in the region, please.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Yes. So we're seeing a lot of competitors taking capacity out as well. I think, for the first time, we saw some Chinese capacity come out in the last week or so, with some of the major Chinese carriers scaling back, that hasn't usually been the case. We've seen some on the U.S. market with flights to Houston being profiled quite a bit by United. So that -- it is definitely happening across all of the international markets, that capacity is being rationalized, and with the higher fuel price, that's not surprising.

[Operator]

Next question comes from the line of Anthony Moulder from CLSA.

[Anthony Moulder, Analyst]

Just following on from international pricing. I guess, we're seeing Cathay raise a surcharge, other carriers unhedged, seem to be pushing pricing a little bit. Is that what you've seen more recently on that front on pricing?

[Alan Joseph Joyce, CEO, MD & Executive Director]

Yes. Well, as you can see, we did have a good RASK improvement on the international, not as good as domestic because there's still, in certain markets, a lot of capacity being added, as we talked before, with the Middle East and Chinese. But that's starting to pull back a bit, which is good. And well, our typical approach has been -- certain markets do have fuel surcharges prior to the filings. Where that exists, that will be the case. Like Hong Kong, I think, is strong there. But our price approach has been, in this market, to have all-inclusive pricing. And we'll drive new prices up if the market allows you to, which is all about the capacity that's in the market. And also, impacts on the RASK performance is the strength of the business market. And as we announced today, we are seeing internationally good strength in the business market. One of the reasons we're increasing the lounge in Singapore by 50%, it's full already and we need the extra space there. So it shows how good our Singapore operations are going. And we know some of the changes we've made structurally are coming through on RASK. So the 787 has a higher profile of business than premium seat. That's starting to show up as you can see in our RASK numbers. The Perth-London service has a 94% seat factor in business class, that's showing up in our RASK numbers, and we're getting a premium for routes like the Perth-London service. The fares we're charging are higher than the one-stop compared to other airlines. So that's all starting to show up in the RASK performance.

[Tino La Spina, Chief Financial Officer]

And Anthony, you can also see we've put in the release that our forward bookings, we're saying they're up 8%, which is what Alan mentioned earlier, that compares with 6.2% at the end of the year, which, I guess, is an indicator of the momentum across the business, both domestically and internationally, that we're getting the other fares increased across the business to cope with higher fuel.

[Alan Joseph Joyce, CEO, MD & Executive Director]

And it's always the case, Anthony. To be clear on that, we've always said that domestically that there is good strength there in the domestic market and certainly, our competitors are in the same boat as us. Roughly, we're hedging. So we get the same profiling and try to recover it. Internationally, it is a mixture. And some markets like the U.S., the U.S. carriers are nonhedged, that's what the imperative is there. A lot of carriers don't seem to act in the same way. So international is never going to be strong as domestic in recovering fuel.

[Anthony Moulder, Analyst]

Certainly. But I guess, the key point is, with 8% growth in passenger revenues, I guess, mostly in the second quarter is that you're not seeing a weakness in demand despite the pricing environment being pushed higher.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Not at all.

[Tino La Spina, Chief Financial Officer]

No. Not at all.

[Anthony Moulder, Analyst]

The other, I think, key is the recovery of oil. You'd talked to substantially recovered in the first half. Can you give us any quantification as to what that level of recovery was?

[Tino La Spina, Chief Financial Officer]

Well, you can see from the numbers, when you look at the -- you can do the calculation based on the RASK as to how much substantially it turns to be on your calculation, it's around $12.7 billion of revenue. It gets close to 90%. We're not giving that sort of guidance. Now further rather than stay with the sort of forward booking strength at 8%, all things being equal, we would expect that continued strength. And then we look at the total revenue, which was up 6.3% because total revenue, obviously, includes the other sources of ancillary revenue in there and whether it's additional revenue from our Coach Airlines and Emirates alike. When you include that, then that's fully recovered the fuel.

[Operator]

Next question comes from the line of Guy Bunce from JPMorgan.

[Guy X. Bunce, Analyst]

Can we talk a little bit more about Group Domestic based on the RASK disclosure of growth of 6.8% and the RPK growth of 2.9%, ASK is down 0.2%. It does seem to imply that yields are up 3.6%. Does that sound about right to you guys?

[Alan Joseph Joyce, CEO, MD & Executive Director]

Don't you worry, Guy.

[Tino La Spina, Chief Financial Officer]

[ Absolutely ], Guy.

[Guy X. Bunce, Analyst]

So in terms of domestic passenger yields, up around sort of 3% to 4% for the first quarter. Does that sound about right to you?

[Tino La Spina, Chief Financial Officer]

Well, we're giving you the RASK growth there of 6.8% across the business.

[Alan Joseph Joyce, CEO, MD & Executive Director]

I think you did your calculations on it. So I think -- yes, I mean, there is strong growth there, but it was also the demand from an airfare's point of view.

[Guy X. Bunce, Analyst]

Yes. So the 3%,4% against last year, you did about 7% during the same period. I was just wondering, how easy do you think it is to raise domestic fares in the current environment?

[Alan Joseph Joyce, CEO, MD & Executive Director]

I think it's all about strong underlying demand. With the economy growing at 3.2% GDP, you will always have a significant underlying growth in airline demand. I think some people look at a multiple of 1.5 to 2x GDP as the underlying growth. And we're certainly seeing that very strong growth across all segments of the economy, and that allows you -- that can come through in seat factor and demand through seat factor, which are getting some of it or it can come through in essentially people buying up the fares chain, which is what we're seeing. The airfares are still considerably low compared to where they were historically. I think we've said they're down 40% on the -- where they were a decade ago. So consumers are having really good competitive airfares, and 1 or 2 or 3 percentage points increase in that through to fare class is to recover oil, still means the consumers' having a -- fantastically good. And with the underlying demand out there the way we see it, is that there should be no reversal of that trend going forward. And particularly, with the unemployment numbers being low as well, all the economic trends indicate to us that if that continues, the underlying market's strength will continue.

[Tino La Spina, Chief Financial Officer]

Just a bit more color, we're also seeing that strength across all sectors in the domestic market. And that's on top of the growth that we're continuing to see on the rebound of the resource market.

[Guy X. Bunce, Analyst]

Okay. Just a final one for me. And that is, last year if you look at what the company provided at the quarterly update, it did give us first half profit guidance. I'm just wondering why it wasn't provided today?

[Tino La Spina, Chief Financial Officer]

So Guy, we -- potentially with these quarterly results they give a revenue update. Never to give continuously quarterly profit or half yearly profit update. We give a lot of information here, we've given a lot of information about the revenue performance, the outlook for revenue, the demand performance we've given exactly where we stand with fuel, we've given where we believe we're going to be for transformation. So our view is, there's plenty of information here to keep the market fully informed and we will -- and we are compliant with our continuous disclosure obligations as a consequence of it. In fact, we've given 4 pages of information. I don't think that much companies would do that at this stage. And I think we felt and continue to feel that, unless it's needed, we don't need to give the half yearly or full yearly update at the quarters.

[Operator]

Next question comes from the line of Michael Morrison from Deutsche Bank.

[Michael Morrison, Research Analyst]

Could you just give us a little color on Frequent Flyer and how things are traveling there?

[Tino La Spina, Chief Financial Officer]

Yes. So I think as we said at year-end, it went well, back in August, it continues to perform well. We said that we expected it to be -- go through the balance or remainder of the impact of the interchange regulations in this calendar year. We're seeing that. So we expect to see probably small growth in the first half, and then it'll return to normal transmission in the -- from next year. So all signs look good from where we are right now. So no change to what we said back in August.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Probably gives us -- yes, it gives us a little bit of good indication of how the general economy is going because we're seeing the same strength in Qantas earned in credit cards. We're seeing the same strength in the Qantas businesses through loyalty. So again, the same underlying demand strength that we're seeing at the airline is there in the Frequent Flyer, which is a good indicator of how healthy the economy is.

[Michael Morrison, Research Analyst]

Okay. And still seeing growth in absolute numbers of Frequent Flyers?

[Tino La Spina, Chief Financial Officer]

Yes.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Yes. So what we've always said, I think that Olivia is going into the maternity wards of hospitals and handing out Frequent Flyer cards because I don't know how we keep on growing, but it does.

[Michael Morrison, Research Analyst]

And just last question on the forward bookings. Is that typically just for the next upcoming -- or the current quarter? Or is that across your system you're looking out sort of 12 months.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Yes. That's out in the total system at the same comparison with the same time last year on the total system. So as you'd expect, domestic bookings book very late and internationals are earlier. So it's got a combination of a lot of early international bookings and a very good combination of the forwards -- of domestic but in a shorter time frame. So it is the entire system range.

[Michael Morrison, Research Analyst]

Okay. And if -- is there anything impacting or any thought changes that would see you change the way you're sort of filling up your fare buckets? Are you trying to book things up earlier or given the higher fuel you'll try to wait?

[Alan Joseph Joyce, CEO, MD & Executive Director]

No. The reason why we're giving that number is like we did in August, it is to us an indicator of what the forward RASK is starting to look like. This -- as you can see in this quarterly that we -- the quarter we just reported, there is a little bit of wastage from the booking levels down to the RASK performance. So it's not quite one-for-one but we expect the same trend to continue and that's why we've given that number.

[Operator]

Next question comes from the line of Mr. Paul Butler from Crédit Suisse.

[Paul Butler, Director]

I just wanted to come back to the question about the first versus second half PBT split. So I understand you're expecting less of a difference than you normally would because of the benefit from the $400 million of transformation coming more in the second half, and you're pointing to more 787s and a pricing benefit. But I would've thought there that you're also going to have higher depreciation in the second half with those new aircraft. And also, with the -- I would've thought that the first half fuel cost split is going to be more skewed to the second half because I would have thought you -- the hedging that you put in place for there would've been later and therefore, at higher prices. So just trying to understand why that PBT split might be different than what we've seen in the past?

[Tino La Spina, Chief Financial Officer]

Paul, we're not really going to get into a conversation about the first half/second half split or give first half guidance at where the profit is. I think what we're trying to do is just to give a sense of: number one, transformation, we continue to believe that we'll get more than $400 million. Traditionally, there's been about 1/3 of that that's been revenue related. So what we wanted to talk about that as well. And as we've said, in the release, based on the pipeline that we can see of transformation benefits, we expect more of that to be in the second half. And then there are a number of ups and downs that go in each of the halves, which we're not planning to give any commentary on. But we were just trying to give more a scoping of where the transformation benefits are going to go.

[Paul Butler, Director]

Okay. And in the statement, you say that the cost benefits are going to be more skewed to the second half. I mean does that imply that the 1/3 of revenue benefits are more evenly spread or am I trying to dig too much out of it?

[Tino La Spina, Chief Financial Officer]

Yes. You're probably trying to dig too much out of it, Paul. Again, we're not giving that level of guidance. It was just to say that we have -- when we look at the pipeline, there's certain initiatives and there's some pretty -- maybe IT initiatives that are in there, that really you're getting the scale of benefits that are going to come into the second half. So when we do get to the first half, I would expect that when you look at the cost benefits, you're going to see more in that second half based on the pipeline. That was all. We're not going to break that for you...

[Alan Joseph Joyce, CEO, MD & Executive Director]

We've done this before, Paul. I mean, what we're trying to do is, one, is outline our belief and strong belief that we'll keep on delivering the transformation benefits we have done in each of the years. And just give people a little bit of color about what's generating those benefits so that people have the substance behind them. And clearly, a couple of the initiatives are going to kick in at the second half because of aircraft deliveries and IT deliveries. And the whole purpose of that is just to give confidence on delivery of the $400 million, it's not trying to give you an indication of the split between. We just want people's confidence we're going to deliver on that, yes.

[Paul Butler, Director]

Okay. And if I could just ask one more. So you -- we've got forward bookings up 8%. But I'm -- and that's obviously of bookings you've taken over the last few months, if not slightly longer. I'm just wondering whether you've seen any change in the forward booking pattern just in the last month when we have seen more volatility in financial markets and arguably, more concern about real estate prices.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Not really, Paul. If anything, it's strengthened. Because you can see the delta between August and now. In August, we were telling you the forward booking profile was just around 6%, 6.2%. Now we're telling you the value of the forward booking profile is 8%. So it's strengthened in the space of those couple of months. One more question. And we've got a board meeting to go to. So we might make this the last question if we can.

[Operator]

Next question comes from the line of Cameron McDonald from Evans & Partners.

[Cameron McDonald, Head of Research]

Quick question on the fuel hedging profile. Why wasn't it more aggressively hedged? So given over the last 8 weeks, you've seen a significant increase in the -- in that cost of fuel. I'm just wondering from a finance perspective or treasury perspective, why you didn't more aggressively hedge that fuel exposure?

[Tino La Spina, Chief Financial Officer]

So Cameron, I think we -- our fuel policy has been clear. We don't try to pick up those. We give ourselves a capital worse case that allows us to participate if fuel prices fall from there. And the steep decline in wage profile over a 24-month period has held us in good stead over the years. That's what we've done. In fact the only times we've really -- have gone aggressive on hedging more than that and changed that profile is, you'll recall back when the -- when oil was down to $27 -- when Brent was down at $27 a barrel, and that was predominantly because the risk of a rise was asymmetric with the risk of a reduction. So we were happy to do that, to go in heavier in hedging. Ultimately -- and we remain consistent in our approach. We don't rely on hedging to fix the oil price because, over time, we're going to pay the forward curve. Though it's all about giving ourselves time to be able to adjust pricing and capacity in the market that we have so that we can adjust with it. And that has held us in good stead. I think the quarterly show that that's working well.

[Alan Joseph Joyce, CEO, MD & Executive Director]

And if you go back historically, Cam, it's a very similar profile. I don't think we've changed our policy at all differently. So -- and I think that is sort of in good stead in the past, and that's how we're going to do it. So yes, we're better than a lot of airlines with our hedging position, some airlines are a bit better than us with this hedging position. That's the way it generally is. But given our other strengths, we believe that we're in a very good position generally.

[Cameron McDonald, Head of Research]

Okay. And then just finally, just on the CapEx profile. I mean, you've previously given guidance that you've got net CapEx of about $1 billion because of the 2 terminal sales. Have you got -- have you made any headway over the last couple of months on those terminal sales?

[Tino La Spina, Chief Financial Officer]

Look, we're not going to go into all of the commercial details. But we -- discussions continue. I would expect that it won't happen in the first half, that it's more likely to happen in the second half or even beyond that if it needs to be. I think we've been pretty clear and saying, we'll do the right deal, not a big deal. It's not to say we're desperate for the cash as well. And that's why the financial strength and the balance sheet strength is important to us so that we can do the right deal. But those negotiations have been continuing.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Thanks, guys, thanks everybody and we'll see you probably at the half year. Thank you very much.

[Tino La Spina, Chief Financial Officer]

Thanks, guys.

[Alan Joseph Joyce, CEO, MD & Executive Director]

Bye.