Qantas Airways Ltd

ASX:QAN

Earnings Call Transcript 2019-Q3

[Frances van Reyk, Head of Investor Relations]

Good morning, everyone, and welcome to Qantas' quarterly trading update. My name is Frances Reyk, I'm the Head of Investor Relations for Qantas. The progress for the call today will be some introductory comments from Alan Joyce, group CEO, and then there will be time after that for Q&A. I'll hand the call over to Alan.

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

Thank you, Fran. I'm joined by Tino La Spina and Vanessa Hudson. This is Tino's last quarterly update and he has a big smile on his face. Stop laughing, Tino. And this is Vanessa's first quarterly update as you know, Vanessa's taking over as CFO. So I'd like to take you quickly through some of the key points from the quarter and what we're seeing going forward. And then Tino, Vanessa and myself are happy to take your questions. For the group, total revenue grew by 2.3% to $4.4 billion. That was in line with our expectation. And it is despite the stack of Easter holidays moving from March to April this year, which means a lot of traffic demand that was in quarter 3 last year moved to quarter 4 this year. And this has a big impact on obvious comparisons on prior years, and people should take that into consideration. Group unit revenue was up 4% on a 1.6% capacity reduction. If we normalize for the shift of the Easter, looking at the 4 months from January to April, group RASK increased by around 5.5% compared to the same 4-month period last year, which shows the strength that we are experiencing across all parts of our market. Particularly for the Group Domestic, unit revenue grew by just over 1% in the quarter on 1% less capacity. This was in line with expectations and of course, domestic had the biggest impact because of that Easter move. At half year, we talked about our confidence in International and what you can see as data has materialized in the quarter, with a Group International RASK increase of more than 6%, a significant increase. The main drivers were the structural changes we've made to our network via the Singapore hub, the new Perth-London Service, the 787 introduction and in particular, the introduction on the Brisbane-LAX-JFK route, which has had a significant impact on these economics. We're also seeing various catching up with the higher fuel prices, and I'll say higher fuel prices are also leading to lower capacity growth in the broader market. And that trend will come back to us continuing going forward, and is actually looking pretty positive. Turning to Jetstar. The shift of Easter had a material impact due to its exposure to the leisure market. But it still managed unit revenue growth and an 8% increase in ancillary revenue per passenger for the quarter through things like the new baggage options that are working really well. Loyalty continues to perform well, both in terms of the frequent-flier program and other businesses like Qantas Money and Qantas Insurance. Today, we also have announced that we reached agreement on selling the Melbourne Domestic Terminal in Melbourne Airport. The details are in our statement for a high level. The total deal is worth $355 million to Qantas with $276 million in cash proceeds in this half and the rest we accrue over coming years. Turning to the market on what we're seeing going forward. In many ways, we're a reflection of the broader economy and the forward demand view is mixed. International continues to be positive for the same reasons it performed well in quarter 3. Travel demand, revenue and yield are all strong and broader market capacity in quarter 4 is actually contracting. In addition, in quarter 1 of next year and going all the way into Northern Winter, we're seeing the international capacity for all carriers flying into Australia to be in negative territory growth, and that's the first time as CEO over the last 10 years that I've seen the market for a full year having negative capacity, and we still believe more adjustments are to be published. Domestically, there are some obvious bright spots. Our corporate and SME market share is increasing. Leisure traffic over Easter was extremely strong and it's continuing to hold up. The resource sector is performing well and we're lifting our intra-WA capacity by about 13% to take advantage of this. And there has been absolutely no weakness in the resource sector through this period of time and we don't expect any weakness in that sector. But we are seeing softness in some parts of the domestic market in May and June. We're seeing it in SME and with SME, it had been growing by double-digit growth numbers at the start of the year. It is still growing but it has slowed down in growth. And we're seeing here -- seeing weakness in financial services, telcos and some part of the construction industry. These sectors have well-known challenges and there's already the overlay on the federal election, which always has a dampening effect on travel demand. So like a lot of businesses at the moment, we're monitoring these things closely. If the weakness is sustained, we'll have the advantage of a diversified portfolio and the ability to move assets from 1 market to another. But I'll come back to the fact that the overall picture for the Qantas Group is positive. We're expecting record full year revenue, meaning we can fully offset fuel and partially offset for the cost and price increases like foreign exchange, selling commission outstanding charges. The sale of the Melbourne terminal and the seasonally stronger operating cash flows this half means we are expecting the net debt position to be well below the bottom of our target range. We have the leading position in the domestic market across both the full-service and low-cost carriers, and we are moving corporate and SME market share to Qantas quite significantly. We have structural advantages in our international business and we are seeing all the other international carriers taking significant capacity held at the market. And we have the diversified earnings from loyalty, which is returning to a 7% to 10% growth in the second half. Now with the balance sheet in its strongest position for a decade, we are confident in the long-term future for the business and our ability to continue to return surplus capital to shareholders. So Tino, Vanessa and myself are now happy to take your questions. Operator, over to you to manage the questions coming through.

[Operator]

[Operator Instructions] And next question here is from Simon Mitchell from UBS.

[Simon A. Mitchell]

First question just on capacity. Obviously, one of those things that depressed the overall revenue growth number has been a 1.6% contraction in capacity which is -- versus your guidance of flat capacity that you gave at the result. What's the outlook now for capacity into the fourth quarter?

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

So as we said, we believe that capacity for the northern summer period outside of resources because resources are showing a growth, and as we mentioned we're adding -- from April, we're adding 13% capacity growth to intra-WA flights to meet that resources demand which is very strong. So outside of that, the April to October period is essentially flat capacity, for domestic. And for International, we're seeing as I mentioned -- I'll just give you the numbers, Simon, because I think they're pretty positive given that the changes that we're seeing. For the northern summer period, as you know, people publish in seasons. For April to October, the total market is minus 0.6% published and the northern winter '19, which is from October '19 to March '20, we're seeing at the moment a 1.4% reduction in capacity. They're usually -- there's a slot conference in June. And so carriers will -- may publish more reductions by the time we get to June. So again, they're very positive in terms of outlook for managing the fuel increases.

[Simon A. Mitchell]

I guess I was more referring to your capacity tensions. So the guidance for flat capacity in the second half. Where does that stand now both International and Domestic?

[Tino La Spina, Chief Executive Officer of Qantas International]

Simon, it's Tino here. It's just under 1% growth in the last quarter. The context I think you need to look at is remembering in the last quarter last year we had some of the issues with capacity as we were introducing the 787 and we had some of the training issue. So we did have some reduction in capacity at that time. So we're cycling that period in the last quarter. Also, of course, Easter is now in the fourth quarter so you would expect that we were trying to get very high utilization of our aircraft during that peak season, so.

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

And the resource sector growth is also in that quarter, it started in April so if you net that out, it's actually flat or even slightly negative.

[Tino La Spina, Chief Executive Officer of Qantas International]

And just a bit more color on the resources sector as well, we did put some couple of 320s into WA. And a lot of that business is charter business which is not included in the ASK but obviously is accretive for us.

[Simon A. Mitchell]

Okay. And then normalization that you talked about the group RASK for the Easter retiming. How do we think about that just typically the group domestic versus group international? I presume most of that fits within Domestic.

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

So I think we're not giving the split on that but you can assume that there was a big, obviously, for Jetstar Domestic and Qantas Domestic, there's a big impact on that Easter Newman red skill holidays in particular, but there was a positive impact or an impact on both businesses but was slightly bigger on domestic.

[Simon A. Mitchell]

Okay. And lastly just the Melbourne terminal sale. Can you just clarify what you mean by this difference between what you're booking in cash versus future accrued benefits?

[Tino La Spina, Chief Executive Officer of Qantas International]

It's just the timing of the flow, Simon. So the total deal is worth $355 million. We will receive $276 million of that cash in this year and then the balance in future years.

[Simon A. Mitchell]

Will that be recognized as proceeds from disposal of assets? Or be recognized in other forms?

[Tino La Spina, Chief Executive Officer of Qantas International]

You mean in the cash flow, you don't mean operating cash flow?

[Simon A. Mitchell]

It would be operating cash flows. So it accrues not from asset sales but from other benefits.

[Tino La Spina, Chief Executive Officer of Qantas International]

Correct.

[Operator]

Next question is from Owen Birrell from Goldman Sachs.

[Owen Birrell, Metals and Mining Company Analyst]

Just a couple of questions for me. the first one, really looking at the international capacity. So we can see on the table that you guys provide that, that Jetstar had quite a material contraction in capacity both international and in Jetstar Asia during the quarter. I'm just wanting to get a sense of how much of that was led by, I guess, the timing of holidays in this period. And therefore, should we expect that to snap back in the fourth quarter? Or how much of that was actually impacted by just more difficult economics on certain routes?

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

Jetstar had, again, a good performance of RASK improvement during that quarter and is having the same benefit from the reduction in International capacity coming into Australia and some of the changes that they've made on the route network. A large element of this is, again, the movement of Easter which Jetstar does put a lot of extra capacity on both internationally and domestically. Our Jetstars' network is highly profiled. So in the non-holiday months, we do take a lot of capacity out to do maintenance on aircraft, do other activities on the aircraft. And in the high peak months, we fly the aircraft to the extreme and so that's just what you're seeing is a factor of that.

[Owen Birrell, Metals and Mining Company Analyst]

So do we include the fourth quarter, should we expect Jetstar capacity to be broadly flat year-on-year? Or is there a reduction in line with some of the broader reductions?

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

Again you're seeing -- I mean, Jetstar have not taken on any extra aircraft. So if you were to look at it normalized for Easter, it's pretty flat, but when the Easter appears you'll see growth.

[Owen Birrell, Metals and Mining Company Analyst]

Okay. And just a question for Tino. Firstly, Tino congratulations on the International role but I just wanted to -- a quick question on the Melbourne Airport sale. With the deferred consideration structure, how should we consider the, I guess, the profit on the sale taken below the line. Is that really all going to be taken into the one -- upfront I guess below-the-line adjustment in this period? Or is that going to be deferred as well over multiple periods?

[Tino La Spina, Chief Executive Officer of Qantas International]

No. So the profit on sale, we're working through, as you can imagine, you've got to go through the asset register and identify every asset that's going in. But I suspect it to be just north of $150 million and that $150 million will all be taken outside underlying this year.

[Owen Birrell, Metals and Mining Company Analyst]

And is that pretax?

[Tino La Spina, Chief Executive Officer of Qantas International]

That is pretax.

[Owen Birrell, Metals and Mining Company Analyst]

And just finally on the International performance. Just wondering if you can give us a -- you called out some of the northern hemisphere carriers removing capacity. That's a pretty broad group. I'm just wondering if you can give a sense of which, I guess, which routes are seeing the most capacity reduction? Or which ones are seeing the best pricing environment?

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

Apology for the confusion, I was referring to the northern summer and the Northern Winter schedules, not just the northern carriers. So that's the schedules that includes all carriers and most of them are in the southern hemisphere, I think, but apologies. That was not meant, just referred to the European ones. So if you look at, as example, I'll go to northern winter '19, October to March, as I mentioned, published at the moment is down 1.4%; Asia is down 1.2%; Tasman's flat; and Middle East and Africa is down 5%. Others are down -- other Asia is down 1.2%; and there's a slight growth on the U.S. of 2%. If I look at the April to October period, total markets down 0.6%, Asia is up 0.8%, Tasman's got -- we're cycling over the fallout of Virgin and Air New Zealand so it's a 5% growth. But Middle East is down 12%, North America is down 5% in capacity. So there's some significant capacity reductions there.

[Operator]

Next question is from Paul Butler from Crédit Suisse.

[Paul Butler, Director]

Just wanted to ask about the moderation of capacity that we're seeing in the International. I mean Alan you suggest that we haven't seen this sort of capacity restraint for some period of time. I just want to understand what's changed? Why is this happening? Do you think this is going to be sustainable for some period of time? Because I just wonder if the reason why we're seeing it is that in the lead up to the slot conference at the end of last year, oil price was much higher and therefore could have been a factor in why we're seeing this capacity moderation and perhaps it's not sustainable.

[Tino La Spina, Chief Executive Officer of Qantas International]

Yes, I think what we spoke about at the half, Paul, was exactly that, that it takes time for the increase in or the reduction in capacity to come in to reflect the higher fuel prices. I think what we're seeing is fuel prices are still, I would say, elevated and there's still some volatility around that given some of the geopolitical risks out there at the moment. In that context, the confidence of carriers to go and put more capacity in right now where they're still not being able to cover their fuel build is being reflected in the capacity reductions. We're internally at the moment, of course, it will depend on how it plays out, but we're not expecting to see any significant increases in capacity from where we are here.

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

Paul, within the run up to the slot conference for the northern winter period now like we were last year. And if anything, more capacity is taken out. So the announcements that have already happened very recently, Cathay Pacific have talked about pulling out the Canmarc at the Honk Kong. Air China is pulling out Brisbane to Beijing and Australia to Shanghai services. China Eastern aren't operating the Cairn services. We've seen Emirates discontinue the Bangkok service and reducing the capacity to Perth for that season. That's just been published. Qatar are dropping down a A380 out of Perth to a 777. Etihad have discontinued the Perth service and I could go through the list of all the stuff that's just being actioned since that change last year. So we do think this is a continuation. We can only see out, as you know, with these schedules to really March of 2020. But nearly for all of next year which I haven't seen before, we're seeing international capacity reductions, which is positive. And what we're seeing, again, talking about our increase in share of the corporate market and the SME market, that is not only happening on domestic, it's happening on international. And we're seeing some of the structural changes that we made internationally. The Perth-London is still unbelievably performing well. The Trans-Tasman, we've seen a big improvement on it. Our change in our Singapore Hub has been fantastic. As you know, it's caused these problems in the lounge. I was up there a few weeks ago. The lounge is chock-a-block and we're opening up new lounges by the end of the year to meet the demand going in there which keeps on increasing and increasing. And we're seeing good strength of the Japanese market. We've announced Sapporo coming on in Japan which is a more expansion of where we are. So we're getting more and more optimistic on international. And now Tino is becoming the CEO, I've got to increase the targets even further on that because I know that the revenue is coming in and he'll manage the costs down even further. So that's [ grateful ].

[Paul Butler, Director]

Just one other one. Can I just come back to your answer you gave to the question about the impact of Easter on the domestic business compared to international? I wasn't quite clear where in your answer you were saying that the impact for Jetstar is much higher than Qantas Domestic? Or you were talking about the overall domestic business versus international?

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

It's overall. But in particular, the biggest carrier that's impacted by is Jetstar. So March because of the move, would have been negative for Jetstar and April because of the move is massively positive for Jetstar.

[Operator]

Next question is from Jakob from Citi.

[Jakob Cakarnis, Assistant VP & Analyst]

Just a quick one for me. Just given the timing of Easter, would it be fair to assume that the month of April would be about 40 -- or sorry, 80% of the fourth quarter in terms of importance? Or is that overstating the importance of that Easter holiday period?

[Tino La Spina, Chief Executive Officer of Qantas International]

Well, we're not going to give a percentage on it Jakob, but absolutely it was -- it'll be the biggest month in the quarter. It was a big month, which is why we gave the view on the 4 months just because of the impact that it had on the third quarter.

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

And what we've been saying, Jake, as you said, we think the alignment of Easter holidays, which has come through, was actually really positive for us. We really had a strong performance particularly on the leisure market, but as we've been saying here, there is some softness drifting into May and June that we didn't see before Easter. That could be election related. There definitely is an election impact. We came up with a number of, I think, $20 million which is the direct impact that might be indirect impacts on it. And we -- in some sectors which we're not giving anything away that's not in the public domain, but some sectors that we listed here like financial services, telecommunications, have definitely pulled back in those last couple of months. But we are seeing really strong growth in the resource sector. We're seeing shifts in market share on the corporate market and the SME market to us, but that weakness is something that just occurred post Easter. It's not significant compared to everything else that we're experiencing, but we need to outline that weakness is occurring.

[Jakob Cakarnis, Assistant VP & Analyst]

Sure. And then the commentary at the second half -- sorry, the first half for the outlook for the second half, you were saying that you expected to more than offset the negative impact of the federal election. Is that still the case?

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

So if you isolate the direct impact on the federal election, yes, the positives of Easter are better than that. But there's this other weakness that is appearing in the last quarter that we're only seeing now. We haven't seen that up till now. I will say, overall, though this is really positive for Qantas and where we stand. We're still seeing RASK -- positive RASK growth domestically and very strong positive RASK growth internationally. We're seeing the international continue to improve and our expectation is that even gets better from what we're seeing going forward and we're seeing domestic. We're looking at period saying, can we identify what are the secondary effects because of the election and this may change going into next year. We know going into next year outside the election is going to be positive again. And we're expecting positive RASK both domestically and internationally. It's just that there's this little bit of weakness starting to appear in the months of May and June that we just want to make clear.

[Operator]

Our next question is from Michael Morrison from Deutsche Bank.

[Michael Morrison, Research Analyst]

Just could you give us an update on your hedging position now?

[Tino La Spina, Chief Executive Officer of Qantas International]

Michael, it's Tino. No change from where we were at half year, so we remain relatively highly hedged for this year and you won't see any material shift from what we gave at year-end. And for FY '20, we already said that we were fully hedged there at a worse case position of $4.2 billion, which in the context of the capacity stance that we gave for international, is why we're feeling confident as well for International performance next year. And obviously, highly leveraged to any fall in fuel prices from where we are right now.

[Michael Morrison, Research Analyst]

Okay. And Alan given your comments in respect to fully covering fuel costs and largely covering nonfuel costs, you're not confident enough to give some guidance for the full year, for PBT?

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

We're trying to get away from doing this on the quarterly updates. The intention often was to actually give revenue updates on the quarter where we've been performing and giving you an outlook of what we see where the marketplace is. We didn't give one in October and we're not going to give one today. We know our obligation to keep the market informed. We think there's enough information here to do that and I think this is probably the way we'd like to proceed going forward.

[Operator]

Our next question is from Anthony Moulder from CLSA.

[Anthony Moulder, Former Analyst]

I want to start with guidance. Obviously I understand the point you're making about PBT guidance, but previously you provided the next quarter's forward booking profile or value of forward bookings. Is it not provided this quarter only because of the complications of Easter?

[Tino La Spina, Chief Executive Officer of Qantas International]

Yes, that's spot on, Anthony. It would be misleading to put that sort of number out there at the end of March given just how big April is because Easter's in there so it doesn't make sense to do that.

[Anthony Moulder, Former Analyst]

Could you have provided it for the last 2 months of the quarter?

[Tino La Spina, Chief Executive Officer of Qantas International]

Sorry, say that again?

[Anthony Moulder, Former Analyst]

Could you provide it just for May and June?

[Tino La Spina, Chief Executive Officer of Qantas International]

We haven't done that, Anthony. I think the commentary that we've given around what we're looking at with what we saw in the 4 months coupled with what we're seeing saying going forward both in the domestic and international market, I think, is a good indicator of what we're expecting.

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

What we sort of don't want to get into is bespoke reporting of different numbers because it gives you comparisons that are very hard to judge. So our preference is that when we can do it to make it clean, and not trying to explain any distortions by putting it down to 2 months or putting it down to periods that are impacted by Easter. It just makes it very complex and people can be given misleading information and that's our intent is to provide what we can that helps you get informed, not something that can't be actually complicated or distorting the picture of where we stand.

[Tino La Spina, Chief Executive Officer of Qantas International]

To be clear on that one as well, Anthony, you'll appreciate that at the end of April was when everyone was on holidays through the Easter period as well, so that's not what you would call a normal intakes period. So again, just adding to the same distortion. You've got the same impact of the distortion, just the opposite end of then you would have at the end of March.

[Anthony Moulder, Former Analyst]

Now I understood. It's difficult out there. On Melbourne Airport, how many years does it take to be fully receiving of the additional proceeds?

[Tino La Spina, Chief Executive Officer of Qantas International]

We haven't given that sort of guidance but it's over the term of the lease of the terminal which is a 10 year lease.

[Anthony Moulder, Former Analyst]

Right, so it's evenly spread against higher lease costs that would be coming through from that terminal?

[Tino La Spina, Chief Executive Officer of Qantas International]

You could assume that. Materially, you're right.

[Anthony Moulder, Former Analyst]

Okay. You mentioned you're going to be below the optimal capital range or measure your work Tino in net debt terms at the end of this year. How do we think about that position? Obviously, you've got the Cabin flex, the A380 refit coming through next year which is high capital cost? Is it best to think about FY '19, FY '20 to give us some perspective of CapEx in the optimal capital range of the balance sheet?

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

I think the way to think of it, Anthony, is what we're saying is that we still think we have really strong position with the cash flows at what the outlook's looking like to continue with the shareholder returns with a strong balance sheet. What we're were very focused on, and we'll report in April, is where we see a given indication of capital expenditure going forward, what the type of initiatives that we see out there. But we're very keen, as we've always said, on the financial framework that we have if we're in that debt range that we set ourselves, the business is generating surplus capital, we will be returning that capital to shareholders. We gave this indication because we wanted to show that the cash flows of the business are still very strong and expected to continue to be very strong. And that means that, that capital management program that we've had are likely to continue.

[Anthony Moulder, Former Analyst]

And lastly, if I could, then the -- an update on Perth Airport?

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

So there's no movement on that, Anthony, at the moment. We still are talking to the government -- both potential governments, about what needs to happen in the regulation around airports, as we have mentioned here. We're seeing some good dialogue with airports like Melbourne airport and a couple of others that have seen economic sense and that's produced outcomes that I think are win-wins for everybody involved. Perth airport is still continuing with legal action. We're hoping -- we're in dialogue with them about trying to get this resolved. Our position has been very clear. We think there's still a big gap between the two. Hopefully and like these other airports that have seen commercial sense, Perth airport will get there. But at the moment, there's no movement. Any other questions?

[Operator]

We have another question from Cameron McDonald from Evans & Partners.

[Cameron McDonald, MD & Head of Research]

Just a detailed question on the ancillary revenue at Jetstar. You said that the groups are an 8% increase. And at the half year, you said that it was 11% but it was a bit ambiguous whether that was just Jetstar Domestic. What's the sort of the like-for-like number?

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

That's a detailed question. Cameron, we may have to come back on that one because I think Tino is looking through these accounts but I'm not sure we can do the off the top of our heads. The 8% -- we'll come back to you on that. I think the 8% is actually a good number. Some of them may be circling, I don't know, over initiatives that were already in. But we thought it was a good number to disclose because it is actually been a very good news story for Jetstar, and we're expecting that with some of the initiatives that are being launched to continue into next year. But let's come back with the detail to explain that difference.

[Cameron McDonald, MD & Head of Research]

Okay. And then just my final question is, can you give me some granularity around the strength you're seeing in international? Is that inbound U.S. visitors coming in because of the currency and then is that fading through the strength you're seeing in domestic leisure with Australians not traveling off shore? And are you worried about the corporate weakness ultimately flowing into domestic leisure demand? Obviously, majority of people have got jobs and if corporates are pulling back, does that eventually fade through to a weaker leisure market?

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

So I suppose a few things. The strength in international is across the board in a lot of areas. I think there are a couple of weaknesses, but we're seeing with the restructuring we've done, London market's going really strong and that continues. In the Perth-London we mentioned before when we gave the full year score card is a seat factor of over 95% and there's no let up on that. And actually as we go through the second year, it's actually even getting stronger which is actually a good sign for our valuation of projects on rise down the line because we're seeing the route performance a lot better than we expected and the same is true for the Sydney Singapore London service particularly for the traffic going into Singapore. Southeast/Asia is very strong, overall. China is still weak and I think China is weak because it's had a lot of capacity added. Our exposure is very limited on China. We only have Shanghai and Beijing. But we have seen some of the carriers pull back. We mentioned Air China and some of the other carriers have taken capacity out because we can see that coming in which is good and that used to be having double-digit capacity growth for the last decade or so and that level of growth is slowing down dramatically. Japan is strong. And Japan is both outbound Australians because Sapporo as an example is Australians going there for skiing but it's also Japan -- some strength of the Japanese market coming in. If you haven't been following Japan, the Prime Minister, their main strategy has been to dramatically increase the visitor numbers to the Japanese market and that seems to be working. A lot of Chinese, a lot of Australians, a lot of market going in there. And on the U.S. it's -- U.S. we're now starting to see some capacity as we talked about in [ order to some ] come back out 4.6% because I think the capacity was a reaction to us preempting us getting API with American Airlines. So we had a few carriers adding seats in. That was depressing yields on the U.S. We had some very low airfares. That seems to be pulling back. And we're still confident that we'll get I think -- Doug Parker of American Airlines talked very recently about getting anti-trust immunity and said he was very confident. Unfortunately, that's got delayed because for the Department of Transportation is dealing with the 737 Max issues, but we're still -- there's a regulatory requirement to have that announcement and have that done by the end of June. So we do think that does help with the North American market going forward. So that -- the environment on the international, we're pretty positive with that as we were at the half year reporting. And going forward with these capacity settings, we think this trend and positive RASK will definitely improve. And yet you can project a lot of different scenarios on the economy here and I take what the RBA was saying this week where they held the interest rates and they've said that they are looking at the expectation of unemployment. If it comes down below 4%, they will -- if it doesn't come down below 4 -- 5%, they may lower interest rates. So people are out there judging what could happen on the economy and I think you can put speculation on anything at the moment. All we can tell you is what we're seeing and we are seeing leisure still being pretty strong.

[Operator]

There's no more further questions at this time. I'll like to hand the call back to Alan for any continuing remarks. Please go ahead.

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

Right, well, thank you, everybody. As I said, I think this quarterly update really shows that the Qantas group is in a strong position. We are seeing this continued improvement on international which is what we were expecting. I think we're pleasantly surprised that the amount of capacity that's been taken out by international carriers which is a good sign going into financial year '20. We are seeing really good strong growth in the resource sector. We are seeing some weakness in those other sectors, which are drifting in and maybe election related and we'll have to judge in the next few months whether that will rebound post the election. We are seeing that leisure market holding up, and we are seeing our share of the corporate market and the SME market improving. The domestic capacity settings are looking pretty mild with very little growth in that market as well which is a good sign for our ability to recover fuel in 2020. So these are positive position for the Qantas Group. We have a balance sheet that's stronger than it's ever been and cash flows that are likely to lower our debt below the end of that range. So I hope people feel that a useful update. And we're certainly looking forward to talking to you at the end of the year in August, which will be Tino's last session, he's smiling again; and Vanessa's first session on handling this. So I'll try and do less talking then and get these two to do most of the talking. They have to earn their salaries. Okay. Thank you very much everybody, and we will see you later in the year.