Qantas Airways Ltd

ASX:QAN

Earnings Call Analysis

Qantas' strong financials with fleet upgrades and steady demand

Qantas reported an underlying profit before tax of $2.08 billion for FY2024. Despite a $387 million decline due to increased investments and lower freight yields, the company demonstrated resilience with a post-tax statutory profit of $1.25 billion. Operating cash flow was robust at $3.4 billion, supported by second-half rebounds. The group is undergoing significant fleet renewal, adding 16 aircraft and investing $3.1 billion in CapEx. Qantas Domestic earned $1.06 billion in EBIT, while Qantas International saw $556 million. Moving into FY2025, Qantas guides a 2-4% RASK increase domestically and expects positive revenue momentum across all brands.

Summary of Performance

Qantas reported an underlying profit before tax of $2.08 billion for FY 2024. However, statutory profit after tax was down by $493 million to $1.25 billion, primarily due to one-off impacts such as a settlement with the ACCC and legal provisions for a ground handling case. Operating margin stood at 10.4%, maintaining its strong position globally.

Domestic Performance

Qantas Domestic recorded an underlying EBIT of $1.06 billion, a decrease of 16% from the previous year. Despite challenging economic conditions, total demand remained steady. Corporate and SME travel showed ongoing growth, offsetting a moderation in premium leisure demand. Operational performance improved significantly with on-time performance and NPS increasing by 24 points. The segment faced a 4% rise in unit costs.

International Performance

Qantas International, including freight, generated an underlying EBIT of $556 million. Capacity grew by 30%, reaching 85% of pre-COVID levels. Although RASK moderated by 11%, unit cost improved by 5%. Freight yields declined faster than expected in the first half but stabilized in the second half, supported by strong e-commerce trends in Asia.

Jetstar's Record Performance

Jetstar achieved a record underlying EBIT of $497 million, a 23% increase from the prior year. Demand for low-cost travel remained robust, bolstered by the addition of 13 new A321LRs. Despite a moderation in RASK, improved unit costs allowed Jetstar to maintain its operating margin at 11%.

Loyalty Segment

Qantas Loyalty reported an underlying EBIT of $511 million, aligning with guidance. The Classic Plus product launched in April showed early positive feedback. The total points earned grew by 8%, while active member engagement increased by 19%. Qantas Business Rewards program also saw membership rise above half a million.

Financial Metrics and Investment

The group's financial framework remains robust with a net debt of $4.1 billion, strong operating cash flows, and net capital expenditure of $3.1 billion. A new $400 million on-market share buyback was announced, and plans to reinstate a fully franked base dividend in the second half of FY '25 are pending Board approval.

Future Outlook

Qantas plans to continue its transformation, targeting $400 million to offset CPI in FY '25. Group Domestic RASK is expected to rise by 2-4% in the first half of FY '25, while Group International RASK is projected to decline by 7-10%. Overall, Qantas remains focused on delivering sustainable earnings growth and maintaining operational excellence as it navigates the coming year.

Earnings Call Transcript 2024-Q4

[Filip Kidon, executive]

Welcome to the 2024 Qantas Full Year Results Investor and Analyst Briefing. My name is Filip Kidon, and I am the Head of Investor Relations for the Qantas Group.

I'd like to begin today by acknowledging the traditional owners of the land on which we meet today, the Gadigal of the Eora Nation and pay my respects to Elders past and present.

I'll now hand over to Vanessa Hudson, our CEO, to take you through the results. Thank you.

[Vanessa Hudson, executive]

Thanks, Fil, and good morning, everyone. Good morning to those online and also those that are here in the room. Thank you for joining us for what is the full year 2024 Investor and Analyst Briefing.

I'm joined here by Rob Marcolina, who is the Chief Financial Officer, who will assist me in talking through the results. But also we have in the room, the Qantas Group leadership team.

So let me just introduce who we have here. We have Stephanie Tully, who is the CEO of Jetstar. We have Markus Svensson, who is the CEO of Qantas Domestic; Cam Wallace, the CEO of Qantas International; Rachel Yangoyan, the CEO of QantasLink; Andrew Glance, the CEO of Qantas Loyalty; Danielle Keighery, who is our new Chief Corporate Affairs Officer. This is her first result. So far, so good Danielle.

Catriona Larritt, our Chief Customer Officer; Catherine Walsh, our new Chief People Officer; Andrew Monaghan, who is our Chief Risk Officer. We are also joined by Andrew Finch, our General Counsel; and Andrew Parker, our Chief Sustainability Officers. And as you would know that Andrew and -- or both Andrews are leaving the group, but I'd like to take this opportunity to just make sincere thanks for what has been over a decade of work for the group across your areas, and we will miss you. So thank you.

We have evolved the format today. So format from where we were last time. And whilst you will have seen that we have lodged quite an extensive pack today, we are going to take that as read, but we are going to also though change the format and step you through some specific slides in that pack before we open up to questions.

So slide master, if you can change, that would be great. Earlier today, we announced an underlying profit of $2.08 billion for the financial year 2024. This was an underlying EPS of $0.88 per share. And this is a strong result. And I think what it does recognizes the value of our dual airline brands, but also the role that Qantas Loyalty plays as a part of that integrated group.

It is testament to the value creation from this group. But as we have communicated many times, our focus this year has been about getting the balance right across all of our stakeholders, customers, our people and also, of course, most importantly, our shareholders. Whilst there is still work to do, we have made significant progress in what is been a short period of time.

We have invested in customer $230 million of additional investment this year and the specific initiatives that we focused on included on-time performance, reliability, delivering a more seamless experience, the in-flight experience, but most importantly, a new reward product called Classic Plus, which launched in April this year. And you will be able to see that this investment have paid dividends in terms of improved on-time performance, but also improved satisfaction with customers and reputation, and we've seen that across the board, seeing that for Jetstar and also Qantas, both Domestic and International.

We have seen investment step up this year as we foreshadowed of $3.1 billion in CapEx across the fleet and other projects. We've seen 16 aircraft join the fleet this year with 8 new deliveries across Jetstar and Qantas. We are excited by the benefits that we've seen, and Rob will take you through what we are seeing across Jetstar, in particular, but also what we are seeing with Qantas.

The growth of the new fleet and the restoration of the existing fleet saw group ASK increases are around 20%. Whilst the continued restoration of capacity resulted in some decline in unit revenue, this was expected and was offset by the unwind of the temporary costs that occurred in full year '23.

We saw positive momentum in the second half, which has continued and is continuing momentum into this financial year 2025. Our forward bookings and travel demand remained stable and intention to travel and the revenue intakes that we are seeing are positive across all of our flying brands.

Before we get into the performance of the segments, I just wanted to acknowledge some of the challenges that we have had this year, and thank you all for your support. Restoring trust and pride in Qantas as the national carrier is our priority. And while there is more work to do, we'll get there by delivering for our customers, our people and consistently doing that into the future. If we get that right, we'll be able to continue to deliver sustainable earnings growth for you, our shareholders.

So if we turn now to the group financial metrics. Underlying profit before tax was $2.08 billion. This was down $387 million, predominantly driven by a number of things. The increased customer investment that I meant for, the impact of declining freight yields that we saw in the first half and also the moderating fair environment that we've seen across Domestic and International.

Statutory profit after tax was $1.25 billion. This was down $493 million on the prior year. This was driven by one-off impacts from our ACCC settlement as well as legal provisions for our ground handling case for which panels and compensation is yet to be determined.

The group's operating margin was 10.4%, and this continues to represent one of the strongest margins globally across the airline industry. Guided by our financial framework, the Group's balance sheet remains exceptionally strong.

Net debt ended the year at $4.1 billion at the bottom of the group's target net debt range. Operating cash flow was also strong at $3.4 billion, supported by a rebound in the second half as we expected. The group continued its focus on balancing investment with shareholders' return with a net capital expenditure of $3.1 billion and completed buybacks of $869 million.

The continued restoration of group and market capacity resulted in ongoing unit revenue moderation with a fall of 8.9% for the year. Costs also fell 5.8%, supported by the unwind of temporary costs and scale benefits returning fleet from -- scale benefits from returning fleet offset by customer investments and the impact of freight performance that was predominantly in the first half.

Group RASK grew 10% and were 93% of pre-COVID levels for the year.

And now let's look at the segment results. Firstly, Qantas Domestic. Qantas Domestic recorded an underlying EBIT of over $1 billion, $1.06 billion for the year, a fall of 16% on the prior period. The decline in EBIT was predominantly in the first half with strong momentum in the second half as RASK grew 5% for that half.

Total demand remained steady despite the challenging economic conditions. Premium leisure demand moderated, but this was as expected. But pleasingly, it was offset by ongoing growth in corporate and SME travel. Qantas Domestic maintained its share of the corporate market but grew its share of the domestic SME market.

The resource market continued to perform very strongly with charter revenue up 18%. This was supported by ongoing fleet growth with the delivery of 3 mid-life A319 to customers in Western Australia and Queensland. Unit costs increased 4% and in the year impacted by the customer investments, entry into service costs associated with the new fleet that is coming and temporary inefficiencies from delayed exits of the 717 fleet. This saw a reduction in operating margin to 15%.

One of the key highlights this year was the improvement in operational performance that saw very strong increases in on-time performance and NPS jumped 24 points during the year. New initiatives in the year included Group Boarding and baggage tracking. Excitingly fleet renewal has commenced with the first of our 220s now delivered and in operation and our first A321XLR which is expected in April next year. We also announced exciting plans to renew our turboprop fleet to simplify this type and to grow the Q400 to a fleet of 45 aircraft.

Qantas International. Qantas International, which includes freight, recorded underlying EBIT of $556 million. Whilst this was a reduction of the prior period, this was a strong performance for the segment. The form in the full year earnings was driven predominantly by 3 factors. Freight yields declined in the first half, predominantly continued restoration of international market capacity resulting in RASK moderation and also the investment that we've set in the customer.

Starting with freight. We've previously outlined our performance in the first half was disappointing as yields moderated faster than what we had expected but they have stabilized now in the second half. This was supported by really strong e-commerce trends in Asia, and we anticipate freight revenue to grow into the first half of FY '25.

Capacity for Qantas International grew 30% with ASKs for the year at approximately, now 85% of pre-COVID levels. Growth in ASK continued to contribute from new 787, the commencement of the Finnair wet lease and the ongoing return to service of the A380. As capacity returned, RASK moderated 11% in the year and 9% in the second half. This was in line with expectation. Partially offsetting this decline was a 5% improvement in unit cost.

The weaker yield environment has also seen forward competitor capacity removed from the market, with RASKs expected to grow from quarter 4 this financial year, as we see that capacity moderate. Also pleasingly, we continue to see strong performance across all our ultra long-haul routes. Routes like Perth-London continued to demonstrate strong revenue premiums being sustained and RASK increasing 5% and versus the prior year despite what has been the overall reduction in RASK across the rest of the market. These proof points give us the continued confidence as we start to approach the delivery of Project Sunrise.

You will see in our investor material today that we have reiterated the earnings growth expectation for Project Sunrise of over $400 million of incremental EBIT when we get all of the aircraft into the network. The Jetstar Group.

This was a record result for Jetstar, with underlying EBIT of $497 million for the year. This was up 23%, almost $100 million versus the prior year, with demand for low-fare travel remaining really strong. New fleet played an important role in delivering this result for Jetstar. With 13 new A321LRs delivered that they now represent 25% of Jetstar Domestic capacity.

On a replacement basis, these tails are delivering $7 million in incremental EBIT per hull. The new fleet also unlocked profitable growth with the group capacity increasing 27%. This includes new routes like Sydney to Busselton, Melbourne to Fiji as well as redeployment of 787 flying on to longer routes in Asia.

Whilst Jetstar RASK moderated versus '23, unit costs also improved, allowing operating margin at Jetstar Domestic and also international to maintain at 11%. These margins remain industry leading when compared to other global low-cost carrier peers. Improved operational performance was a feature for Jetstar as well, and we saw on-time performance increase substantially as was NPS followed as a result. Commensurately, we saw this NPS improved 16 points for Jetstar and 23 points for Jetstar International.

Underlying profitability in the Asian business improved year-on-year despite almost $20 million of negative foreign exchange impact from the depreciation of the yen impacting Jetstar Japan leases. New deliveries are expected to underpin strong growth in ASKs in the next financial year, with a stronger RASK environment likely to emerge in the second half, underpinned by a lower capacity growth. Looking forward, Jetstar continues to have a relentless focus on its key priority areas of transformation, fleet renewal and ancillary revenue transformation.

Loyalty. Qantas Loyalty delivered an underlying EBIT of $511 million, in line with guidance and includes this year's financial impact from the launch Classic Plus. Total points earned in FY '24 were 202 billion and 171 billion redeemed. This is both growing at double-digit rates on the prior year. At its core, Loyalty is about our members. And this year, we saw strong growth in both members, growing by 8%, but more importantly, the active level of members grew by 19%. This was led by initiatives like the relaunch of Qantas mobile app, but of course, Classic Plus.

While still early days customer feedback has been very positive and has been very pleasing to see engagement starting to improve. With 1 in 5 Classic Plus redeemers having not redeemed an airline product in the last 5 years, it gives us a lot of confidence that this product is going to accelerate our flywheel.

Earnings performance continues to be driven by the strength in our financial services portfolio with new card acquisitions up 25% and Qantas Points earning credit cards still maintaining over 35% of market share. The strength in our loyalty program continues to be replicated in the amazing growth of our Qantas Business Rewards program.

With membership now above $0.5 million, it is a key part of our group offering in the SME segment, and we have further development plans for this year. Performances in our insurance businesses was also strong, seeing a 32% growth versus last year.

And during the year, the group acquired its remaining stake in TripADeal, accelerating its expansion in the holiday packages market with the group on track to realize synergies from this acquisition. This supported hotels, holidays and tour at TTV to reach $867 million in the year. Looking forward, we are very confident in our plans for Loyalty and remain focused on the business achieving its target of $800 million to $1 billion of underlying EBIT by 2030. So I'm going to now hand to Rob take the next...

[Robert Marcolina, executive]

Yes. So thanks, Vanessa, and good morning, everyone. I think it's still morning. So if we go to the next slides, to our financial framework continues to guide our decision-making and capital allocation principles.

As Vanessa said earlier, our balance sheet remains exceptionally strong, and this has shown our financial framework slides in our investor presentation. We continue to maintain $10 million of liquidity, minimal refinancing risks and good access to debt funding. Under our financial framework, we maintained significant balance sheet capacity and also flexibility to support investment in fleet and return to shareholders whilst maintaining a strong investment-grade credit. We understand that investing in our people and our customers helps to drive return on investment that's greater than WACC through the cycle.

And we're always looking to strike the right balance between investing in our business and also distributing to shareholders. Every dollar we invest in the business is guided by a strong discipline on returns. And we will always look to optimize capital in the business and dispose of nonperforming or nonstrategic assets to allocate to stronger earning outcomes.

Our FY '25 net CapEx guidance remains unchanged at $3.7 billion to $3.9 billion. These investments generate ROIC greater than WACC. And as we will shortly outline, as Vanessa has indicated, the new fleet have already begun to drive significant benefits and opportunities.

Today, we're also announcing a further $400 million on-market share buyback in addition to completing the remaining $31 million for FY '24. With tax payments having commenced, we anticipate having a franking credit balance sufficient to reinstate a fully franked base dividend in the second half, subject to Board approval. Going forward, our CapEx and distributions will continue to be guided by the financial framework.

So I'd like to now turn to fleet, which is really our hero of today's presentation. As we previously outlined, we are entering a significant and exciting period of fleet renewal for the group. And we're on track to receive over 40 new aircraft in the next 2 years. And again, that's one every 3 weeks. This new fleet technology improves cash generation, profitability and also experience for our customers and our employees.

At our half year results, we showcased the new A321LR at Jetstar. And in today's full year presentation, as Vanessa has mentioned, we are affirmed a $7 million in EBIT benefit per hull on a replacement basis as well as [ unlikely ] significant profitable growth opportunities. And we're already seeing the proof points from the beginning of our fleet replacement.

Now Slide 23 and 24 in our supplementary presentations, which I won't go through now, but it does outline the categories that will drive this EBIT uplift and how that will queue over time.

To summarize those slides on the cost side, these include fuel efficiency, reduced maintenance and scale cost benefits, offset by the increased depreciation from the new capital cost to the fleet. And on the revenue side, benefits are driven by growth opportunities, including from seat count and better utilization and yield premium, including the premium seat mix and point-to-point offerings.

And of course, we've talked a lot about sustainability, the benefits of lower emissions, which are important contributions to us achieving our sustainability targets. We're also seeing NPS uplift from the cabin design, better reliability and IFP improvements.

Importantly, all new fleet types have some element of upfront entry into service costs that are required to bring the new fleet into the organization. This is part of the capital cost of each business case, but generally, these accrue as operating expenses.

These include dedicated project teams, spares and importantly, pilot training ahead of delivery. The amounts will vary by fleet and will be higher in new fleet types or OEMs that are being introduced for the first time. For example, as Qantas Domestic moves from the 737 fleet to the Airbus XLRs over time.

Turning back to this particular slide because we've tried to bring this all together for you in one place. This slide outlines what profit drivers are relevant to each of the new fleet types, the relative level of entry into service and the absolute cost benefit that we're seeing on a replacement basis. We will continue to report this in the future as we introduce and scale each of our new fleet types.

I think the statistic that should excite you the most both for investors, but also for customers is by FY '27, we expect about 50% of our narrowbody flying will be on new fleet technology. And this will drive significant benefits for our customers, for our people, for our shareholders as well as for the environment.

I'd like to return to travel intentions, as Vanessa mentioned earlier. This is important as before we get to the outlook. We know it's a key area of focus, particularly with what's been happening in the broader economy. Pleasingly, on the left-hand side, you'll notice that the latest data shows continued strong intent to travel for both domestic and international travel across the Australian population.

Our Qantas Frequent Flyers continue to prioritize both domestic and international travel in an environment where we know cost-of-living pressures persist, demonstrating the value of our loyalty business to our integrated portfolio. And this is further supported by the leisure travel intent, which remains stable, including in the price-conscious end of the market. And on the right-hand side, you've seen this play out in our latest intakes.

We've seen a good start to the year with 6-week intakes compared to last year, up 4% for Group Domestic and 13% for Group International. Our dual brand strategy remains well placed to capture both premium and low fare demand in the market. Additionally, as we have said when discussing Qantas Domestic, we're seeing a shift in customer mix with business purpose travel, particularly in corporate, offsetting the softening in premium leisure. And [ local ] travel continues to support Jetstar's growth as the Australian Domestic LCC market only returned to 92% of pre-COVID levels in FY '24.

I'd like to now go to the outlook statement. So firstly, starting on the left-hand side with the business outlook. So the group continues to see stable demand across the portfolio with positive revenue momentum heading into the first half of '25. Group Domestic RASK is expected to increase 2% to 4% in the first half versus the corresponding period in FY '24.

Group International RASK is expected to fall between 7% to 10% in the first half of '25 versus the first half of '24 as market capacity continues to be restored. And the rate of decline in Qantas International RASK is expected to slow in FY '25 with RASK expected to turn positive in Q4 versus Q4 in '24. And total international market capacity into Australia is expected to be restored to about 100% of pre-COVID levels in FY '25.

On freight, we see net freight revenue in the first half is expected to be $20 million to $40 million higher than the first half of '24. And on Qantas Loyalty, underlying EBIT expected to deliver at least 10% underlying growth in FY '25 versus FY '24. And this is consistent with the guidance we provided at the Classic Plus introduction. This will include previously disclosed impacts from the fair value increase from the launch of Classic Plus and the upturn in the flywheel benefits, which are expected in the second half of '25.

It's also important to note that business performance is expected to be in line with historical seasonality, and that's both across profitability and also cash flow.

If I move to the right-hand side, the financial outlook -- in terms of fuel, the fuel cost for the first half of FY '25 is at $2.7 billion, and that's inclusive of hedging as well as gross carbon costs of $35 million. And this is based on prices taken at the 1st of August with the assumed market price and consumption included in the outlook slide. FY '25 depreciation and amortization is expected to be $2 billion and FY '25 net financing costs at $0.27 billion.

On transformation, the group will continue to target transformation in FY '25 of $400 million to offset CPI. And as always, this will include a mix of both revenue and cost initiatives. EIS costs, which we've talked about today, will grow by $30 million in FY '25, in line with the acceleration of our new fleet deliveries, particularly the XLR as I flagged earlier, coming into Qantas Domestic. The gross impact of Same Job Same Pay announcement that we made today is expected to be $60 million in FY '25, and the group will be looking to offset this with costs through revenue and cost initiatives.

And finally, management remains committed to the airline margins and Loyalty EBIT target that we outlined in Investor Day in 2023. Additionally, on the following slide, we have outlined the group's capacity and our expected loyalty points earned and burn projections that are part of the investor presentation.

So with that, I'll hand back to Vanessa.

[Vanessa Hudson, executive]

Thanks, Rob. We wanted to close the presentation where we started. Today's result reflects the value that our integrated portfolio of businesses delivers to our customers, our people and to you, our shareholders. We see it as our competitive advantage that allows our stakeholders to benefit. This includes our dual brand strategy, with our domestic and international markets, which enables us to serve customers at both ends of the market with flexibility to deal with various market conditions as we've seen this year.

We have one of the world's leading airline loyalty programs, but it's secret is its coupling with the strength of our Domestic and International airline offerings. It provides unique customer proposition, supports our revenue premium and drives our member engagement.

And finally, in the scale and the diversity of the group, we bring improved cash generation and reduced earnings volatility. Coupled with our financial framework, this ensures we have the capacity, resilience and flexibility to deliver consistently across all stakeholders.

Thank you for that. And I'm very happy to open up to questions. We have our group leadership team here today that will help. And first question.

[Operator]

Your first question comes from Jakob Cakarnis with Jarden Australia.

[Jakob Cakarnis, analyst]

I'd just like to direct one to Cam and Stephanie, if I could, please? Can you just get both the business leaders to talk about why there's confidence about that improving second half RASK outlook?

It sounds like you've partly answered this, that there is a moderation of what you're seeing in terms of competitor capacity coming online? Can you talk to some of the other dynamics that we need to consider as well, please?

[Vanessa Hudson, executive]

Yes, of course. So Cam stepping up first and then Steph.

[Cameron Wallace, executive]

Thanks for the question. If we look -- take a step back and look at the macro capacity conditions, they've been quite fluid into Australia. And if I look at even the last few weeks, we had previously expected total market capacity into Australia to be around 105%. Our expectation now, even in the last 48 hours, that will be between 99% and 100%. So if I look at some examples, we've got Air Canada pulling out of Melbourne, Vancouver, we've got Etihad not flying from Brisbane to Abu Dhabi. Turkish Airlines haven't loaded their capacity from Sydney to Istanbul. Virgin have pulled out of Cairns-Haneda. And United Airlines have pulled out of Brisbane-L.A.

So we're seeing a moderation of capacity. And we've also been seeing more seasonality. So that gives us the confidence. Also when we're stimulating the market through tactical activity even 7, 9, 12 months out, we're seeing a great response. So our bookings into Q4 give us confidence.

The other thing I'd talk to is our premium strategy. Our premium cabins, Premium Economy, Business and First have been more robust than our Economy cabins. They're building better and our load factors are building [ during ] those cabins as well.

The other thing I'd say is our ultra long-haul nonstop services. If you look at the portfolio that we've got, they continue to perform well. So Perth-London, seasonal services to Rome, JFK, Dallas, those markets are performing in the top quartile of our city peers. So all of those things combined, but probably the biggest single determinate for us is the moderating international market capacity.

I'll hand over to Steph.

[Stephanie Tully, executive]

Jakob, Cam answered that quite extensively. But I'll just add a couple of points from the low fares. And obviously, Firstly, you look at your own performance. And if you look at Jetstar, if you look at our travel intention, it's incredibly strong, stronger than it's been at the low fare's end. And also our intakes, the last 6 weeks have been very strong internationally. Last week, we had our best week ever at Jetstar. So Jetstar's record result last week was driven by international.

And importantly, for Jetstar you're seeing some real underlying strength in some of those key markets. Japan already has a positive RASK. Indonesia's strength in Indonesia, which is obviously critical for Jetstar. We've seen Virgin moderating capacity, as Cam said, on Japan, but also on Bali. So you have all those signals that point to, I think, great confidence for us that RASK will be positive in the second half.

[Operator]

Your next question comes from Andre Fromyhr with UBS.

[Andre Fromyhr, analyst]

Just wondering if you could help me understand some of the cost drivers as we look into FY '25. Obviously, there's a decent step-up expected in your capacity. So should we be firstly scaling by that capacity change, maybe applying some inflation? You called out $400 million of savings to combat that inflation. I know that you've commented that, that also includes fleet benefits. Curious to understand how much of the benefits explain of the $400 million?

And then we add the $60 million and a $30 million extra items that you've called out. I'm just wondering if that's a reasonable logic? Or is there anything else that we need to adjust for in the '24 numbers, for example, as we sort of bridge from this year to next?

[Vanessa Hudson, executive]

Thanks, Andre. I'll give that one to Rob.

[Robert Marcolina, executive]

Yes. Thanks, Andre. I think, I mean, in terms of the cost environment, as we're obviously seeing and we have seen in FY '24, there are a number of categories that continue to grow greater than inflation, such as food and beverage, in-flight services, those types of things. But as you mentioned, the transformation, the $400 million is our commitment to be able to cover those costs in FY '25.

So that is our -- that's what we've done in the past, and that's what our community is going forward. You are correct though, we are seeing new costs coming to the business. So today, we've called out the EIS costs and also the 717s and the inefficiency that, that has come as we exit those fleets and also Same Job Same Pay that is another cost that is coming to business.

So our commitment is to continue to drive transformation. We'll obviously be looking for other forms of revenue, not just cost transformation, but other forms of revenue transformation as we think about use of technology as well. So I think the way you've summarized it though is correct.

[Operator]

Your next question comes from Anthony Moulder with Jefferies.

[Anthony Moulder, analyst]

If I can ask about Jetstar record results and an increase on last year [indiscernible] I guess, that Slide 29 is a very useful slide as we think about the profile of new aircraft coming into the fleet, and you've reiterated that $7 million EBIT benefit per hull. But can you just talk to how you saw FY '24 and the benefits of those new aircraft within that strong results in FY '24, please?

[Vanessa Hudson, executive]

I'll get Steph to come up and cover this. While she's doing that, I think that -- the benefit of the new aircraft is multidimensional in terms of the EBIT driving better customer outcomes, better route optimization, better efficiency. But it comes to the way in which the Jetstar team and Steph are flying those aircraft and using them to drive that value.

[Stephanie Tully, executive]

Yes. Thanks, Anthony, for the question. I think you've got a bit to think about the new fleet twofold. Jetstar and obviously, the results coming through in that record result that we're really proud of. But for Domestic, obviously, on a unit cost basis, they deliver a better result. They fit more people on them, and we're flying them to not only replace existing aircraft but also to new routes.

But a big part of the Jetstar route has been the way those aircraft online range and fly internationally. So we're obviously flowing them a lot to Bali, Rarotonga, Fiji. Looking forward to going over to Perth on Monday where they're flying in Southeast Asia with a new pilot base in Perth. So we're opening up new markets. And that's critical for Jetstar in being the #1 low-cost carrier for international travel for Australians.

So they're playing that critical growth role, which has been profitable growth internationally. They also do amazing things for our people. People love -- our people love new planes. It means new people working for Jetstar. Every second person at Jetstar is basically new since COVID. So you've got an incredible energy that new fleet bring, which I know will happen with Qantas now as the fleet starts to roll in. So it has that positive effect for all of our stakeholders, but importantly, our people as well.

[Vanessa Hudson, executive]

Yes. And I think to start that and Steph touched on the role that the invest making in our Perth hub is going to be really fundamental with the new aircraft that are coming in, not just for Jetstar with the new pilot base, but for Qantas, particularly in the way in which we're going to be able to use those aircraft, but both the wide-body and also the narrowbody to fly further west than we've ever done before.

So this is new fleet in conjunction with making some very important strategic infrastructure decisions as well.

[Operator]

Your next question comes from Justin Barratt with CLSA.

[Justin Barratt, analyst]

Just -- can you talk a little bit more about the strong improvement that you've seen in active members and increased members overall in your Loyalty business. Is this, I guess, Classic Plus playing out as you anticipated? Or is it a little bit over and above your expectations when you started the program?

[Vanessa Hudson, executive]

I'll call Andrew up. But as he's doing that, I'll comment that this is the heart of the strategy in Loyalty, which is to drive this flywheel and engagement, and it is multidimensional across everything that you do.

[Andrew Glance, executive]

That it is Vanessa and thanks for the question, Justin. That's absolutely right. I think it really is effectively a reflection of the value across the entire program and probably more importantly, the portfolio of businesses. When you think about the strength of QFF, it does come back to essentially depth of program.

Most certainly, Classic Plus has been a major improvement with regards to active members across the course of the financial year. But I'd like to think of it more in terms of the holistic value and probably more importantly, the integrated value across the entire group. So for us, the journey is very much, I suppose, beginning. And the focus moving forward is ensuring that we can drive that active member base even deeper and more meaningful across the audience.

[Vanessa Hudson, executive]

And I think as well, we're very committed to the FY '30 target still, which is, as I said before, the $800 million to $1 billion and the way to do that, this will be about organic growth. This will be about driving more engagement more engaged members participating across the portfolio that's going to continue to kind of drive that value.

And I think that the result that the team have achieved this year is fantastic, and it's a proof point on our journey to that target.

[Operator]

Your next question comes from Anthony Longo with JPMorgan.

[Anthony Longo, analyst]

Just perhaps building on a couple of the earlier questions. So in the context of the capacity settings that you've tabled and the revenue and RASK expectations. And then also on the cost, given the amount of investment that is coming this year and what is ultimately likely to still be required over the next few years.

How do we sort of get comfort around those margin targets? And over what time frame do you expect to achieve them? I appreciate you have recommitted to achieving them. But starting from the FY '24 base, it seems like a [ reasonable ] bridge to pass through respective of the benefits that you're expected to get through?

[Vanessa Hudson, executive]

Let me make a few comments about that. Well, I'll first start with Loyalty because we have achieved the margin target, and we are driving and have a very clear pathway to the FY '30 margin targets. And as to comment that we mentioned before is the key indicators that we'll bring to you and the proof points about that will be around the outlook statement of a growth of 10% in earnings for this year, but all of those metrics pointing towards that flywheel spinning faster.

And so I think that you should take from the results today that those proof points are there, and that's what we'll continue to drive going forward with investing in earn and burn opportunities.

I'll also start with the Jetstar International margin target has been delivered this year. So congratulations to the Jetstar team because the margin target for Jetstar International was 10% to 12%, and Jetstar has delivered 11%.

If I step into the domestic market, I say -- as I said and as Rob said, we are committed to those margin targets on Qantas. We delivered this year around 15% in reflecting on what was a key driver for the reduction in that margin target was the investment in the customer experience.

We think that, that is absolutely fundamental and foundational for sustainable earnings growth from here on in. And so why do we believe that we can get there? I think a couple of things. One is that we have said and we said at the half, that one of the shortfalls in the Domestic margin target is still the recovery of the corporate market which is growing and which we are seeing recover, but it is more slow than what we would have thought when we were at the Investor Day, what we thought was going to be the speed of that recovery. So we have rebaseline that.

We are forecasting that, that is going to get back in the next couple of years. to where we had anticipated it to be. And that's going to be a substantial part of the delivery of that margin target.

The second thing that you need to believe is that the domestic market remains rational. And we believe that. I think that we've seen that in terms of the way the airlines are operating in this market. that should enable all airlines at a minimum to get a RASK increase year-on-year in line with CPI. That's what is in our outlook statement this year in terms of what we expect for the Domestic airlines. And there's no reason that we wouldn't continue to see that happening.

We will continue to deliver transformation that offset CPI and really, if you just kind of believe in those 3 proof points that will enable Qantas Domestic to get to its margin targets. But that transformation benefit is going to come with the new investment that we are making in the new fleet.

It would be very similar for Jetstar. Steph has spoken about the incredible value that the new fleet is providing in a market that is rational as well and also a market that is starting to see some fuel moderation.

And then finally, Qantas International, we are seeing that there will be a headwind for some time with the announcement that we've made today with the Same Job Same Pay. That is a cost input without an immediate productivity offset, but we are going to be very focused to mitigate the impact of that cost.

We also know that with the transformation in the fleet with the benefits flowing for Qantas Freight. We see upside in profitability from Qantas Freight. Also, the growth in the e-commerce in that business is going to continue to drive growth in our Domestic freight business. But then we've got the rollout of the new fleet for Qantas International that will play to our strengths that will enable us to serve our premium markets more direct with a configuration that has a higher premium density than the past.

And as I said, we've reconfirmed Project Sunrise uplift of $400 million once that fleet reaches scale. But also the proof points that we're seeing today as Cam spoke to around the revenue performance that we are getting on those ultra long-range routes such as Perth-London, Perth-Rome gives us the ongoing confidence that we will be building what will be a competitive advantage in the international market.

[Operator]

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

[Cameron McDonald, analyst]

Maybe can I ask that in another sort of way around and maybe coming from the financial framework. So you've had increased invested capital of $1.3 billion this year. You're guiding to effectively another -- you have pretty heavy investment, $3.7 billion of CapEx and depreciation of $2 billion.

So the average capital is going to go up again. And then combining that with the outlook statements, should we be thinking that you're going to get that return, that 10% return in FY '25, which would be additive to the results you've had this year? And then how do we think about that in terms of the comments you've made around the distribution.

With that CapEx investment task, that's growing and what the base level of that, which Rob, you referred to as a base level of dividend, what's the guide rails that you can point to about how we think about that dividend?

[Robert Marcolina, executive]

Yes, that's a pretty complicated question, but let me have a go at it. So I think -- well, first of all, in terms of the financial framework, we will always be guided by the financial framework as we look at the projected cash flows of the business, think about the capital and the CapEx that we can afford. And then obviously, with the distribution, which I'll come back to. So the $3.7 billion and $3.9 billion that we put out for this financial year. That is the guidance in terms of the capital. But in terms of the way you should -- I'm not going to give profit guidance today.

So obviously, that's a key component of the way the financial framework works. But in terms of the dividend, what we have announced today is a $400 million in distributions through buybacks. We feel quite confident as we think about the financial framework that creates the right balance, with investment we're doing in customer, with the investment that we're doing in fleet.

In terms of the dividend, as you write on that particular slide, we have flagged that it is our intention to reinstate a base dividend. We're not providing that information today. The reason for that, we're not announcing that today is because of the franking credits. And whilst we are in a taxpaying situation, we're starting to accumulate franking credits. We're not in a position yet to declare that base dividend.

But as we go into the second half, obviously, with Board approval, will be looking to size and to communicate what that base dividend is. But at this point in time, we're not giving that communication. But as I said, it's all governed by the financial framework.

So I think the investors should feel confident that our CapEx guidance is always going to be, as we think about an eye towards profitability -- projected profitability and with an eye towards distribution back to the shareholders, which we're also committed to do.

[Operator]

Your next question comes from Sam Seow with Citi.

[Samuel Seow, analyst]

Just a quick one on the incremental $7 million EBIT per hull on the A321. Just wondering, would that be reflective of what the Redtail is expecting? I appreciate we're talking LRs and XLRs and obviously, different parts of the market. But at high level, anything you'd call out that would make the economics materially different?

[Robert Marcolina, executive]

So the $7 million is specific to Jetstar and it's specific comparing the new aircraft type to the classic, the 320. So that is specific to Jetstar. What we have done though is on Slide 29, I think it is. That we've tried to give you a bit more information with regards to the comparison to the 220s to the 717s and also the 321 XLR to the 737.

I think it is important to note the 737 is an excellent aircraft we do expect to get incremental profitability as we've outlined on that particular slide on the Qantas side as well. But we're not giving any projections at this point in terms of a specific dollar number per hull.

[Operator]

Your next question comes from Matt Ryan with Barrenjoey.

[Matthew Ryan, analyst]

Just coming back to the capital management framework. I just want to be clear on how you're framing your distribution. So is the primary objective to be at or below the middle end of our target gearing range? Or are you taking into account how much free cash that you're actually able to pay out as dividends and buybacks each year?

[Robert Marcolina, executive]

Yes. So it's -- nothing's changed, Matt. So what we said at the half is that our goal was be out of the middle of the net debt range. That remains consistent. Obviously, the net debt range and the bottom of the net debt range, we flagged, will go up $700 million to $900 million this year based on the increase in CapEx. So there's no change to that guidance, and we'll be aiming for that as we look into this financial year as well.

[Operator]

Your next question comes from Owen Birrell with RBC.

[Owen Birrell, analyst]

Just a quick question around the seasonality of the business as you're expecting this year in the context of, I guess, you're talking to an improving second half international environment. Usually, profit before tax is roughly of 60-40 first half, second half. Just wondering whether you're expecting it to be around that same sort of SKU or whether we should be expecting a stronger second half SKU.

[Robert Marcolina, executive]

Yes. Owen, thanks for the question. As per the guidance, we have reiterated that we do expect that we will return to seasonality, which has typically been, as you said, 60-40 with regards to profitability and the reverse essentially with regards to cash flow. That's obviously at the group level. So the different businesses will vary, but in most part, the airlines are more geared towards the first half from a profitability standpoint.

[Operator]

Your next question comes from Ian Myles with Macquarie.

[Ian Myles, analyst]

Can you just talk about your on-time performance. You historically referred to getting lifted up, you can actually get some productivity savings and actually benefit out of the business. I'm just wondering, have they actually started to materialize? Or are they still yet to flow?

[Vanessa Hudson, executive]

So I'm going to get Markus to step up and maybe Steph as well. The one thing with on-time performance, it's a win-win-win. It's a win for our customers, it's a win for our people, but it is, as you say, it's a win for the business because the most efficient way for an airline to operate is that it operates on time.

So Markus is absolutely focused on this.

[Markus Svensson, executive]

Thanks, Vanessa. I think Vanessa almost answered the question to me. It was a great answer. Now it is very true. Focus on OTP focus on on-time performance is the best way to run an efficient and a cost-effective airline. And we are very focused on that. You've seen that in our numbers. We're up 10 points in the quarter 4 versus the quarter 4 last year.

So we will continue that drive because we know it drives customer satisfaction. It drives NPS and it keeps our cost down. And it takes away all those temporary costs around disruption, you have crew out of base, you have to pay for overtime. So it is absolutely the best way to run the business. And we are seeing that coming through in the second half.

[Stephanie Tully, executive]

There's not much left to say. But I will suggest proof point because of the difference in our financial performance from '23 to '24 includes the removal of about $60 million of temporary costs, which were all associated with poor on-time and cancellation performance. So the step change is really important for the business.

The other thing it does, not only for Jetstar but for Qantas too is just [ main ] utilization goes up. So that's critical, obviously, from a unit cost perspective that we are flying our planes as much as they can with customers on board paying for their fares. So utilization is a key output of on-time performance as well.

[Vanessa Hudson, executive]

Yes. Thanks, guys. And I think the one thing that I would say in recognition to what the entire group leadership team has done. And the on-time performance comes from reliable aircraft engineering effort and across Jetstar and Qantas, our teams have been completely focused on that. It's been a part of the investment in the $230 million that we outlined this year across Jetstar and Qantas.

But I would also call out the work that we are doing with our people and our culture is going to increasingly be at the heart of our ability to continue to deliver this consistently and improve on it. The call out, I have our airports team, they've just implemented a new boarding regime. That is Jetstar and also Qantas deliver have seen better customer outcomes, but better on-time performance outcomes.

Our pilots -- engagement with our pilots is enormous. We're running a program called every minute matters. Right across the group and particularly with Qantas. We are seeing that level of engagement with our people and with our pilots left substantially. And so there is a people power that we are very focused on in unlocking to continue to deliver this, but continue to improve going forward. And don't underestimate the value that exist in the business for that.

[Operator]

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

[Nathan Gee, analyst]

Just a question on Qantas Domestic leisure intake. So that was down 3% year-on-year. Just help us better understand what's driving this? Is this maybe some down trading to Jetstar? Or is this maybe some inflationary pressure hidden consumption?

[Vanessa Hudson, executive]

Markus will take that one.

[Markus Svensson, executive]

Thank you, Nathan, for your question. It's a good question. Obviously, we have seen premium leisure demand moderating, but the good thing and the really important part for us is made up and more with corporate and to make travel coming back and being strong.

What was driving this is probably a factor of 2. Yes, you're seeing some downtrade and that definitely has some Jetstar benefiting from. But also, we have seen some shift into international as international fare comes down. So it's probably a factor of both.

[Vanessa Hudson, executive]

Yes. And I think as well what Markus said is absolutely right. The one thing that Markus' team have done is that they've quickly changed our schedule to make sure that our network and capacity is optimized because we saw that leisure reduction come through probably on North Queensland coast. So we changed out some frequency, but also aircraft size, and we've redeployed that aircraft to international. So again, I think it comes back to the way we're flexibly optimizing our network to the changing demand patterns, and we'll continue to do that going forward.

[Operator]

Your next question comes from Billy Boulton with Morgans.

[Billy Boulton, analyst]

Just following on from the question on on-time performance. I would have thought that could have been a decent driver of margin improvement into FY '25 and just hasn't been caught out in the outlook. Is that the case? Or is that all included in the transformation number?

[Vanessa Hudson, executive]

I think that you can assume that the outlook statements accurately cover what are the large movements and benefits that are going to flow through the business in FY '25. It will be a key part of our transformation effort as well because offsetting that CPI is significant and on-time performance, reliability, driving ancillary revenue, driving automation, revenue management optimization will all be key impact inputs into delivering that $400 million transformation benefits, which is pretty substantial. And if we reflect on years past, this is probably one of the largest transformation numbers we've had.

[Robert Marcolina, executive]

Yes. I mean maybe just to pick up on Markus' point. But in terms of the 737s and there's been a lot of work done on where they're based, how they fly, where our pilots are based, getting them home at night, et cetera. And so I think it's just running the network in a more efficient way as we said, drives a better outcome for every own customers and obviously, the bottom line as well. But it's included in the outlook statement.

[Vanessa Hudson, executive]

I think we've got the last question.

[Operator]

Your next question comes from Scott Ryall with Rimor Equity Research.

[Scott Ryall, analyst]

I jumped on a bit late, so apologies. I don't think you've answered this. But on Slide 21, you gave the number of $7 million of incremental EBIT per hull for the new -- for the replacement Jetstar planes, which you talked to and answer to Anthony's question before.

Is there any reason that that's not indicative of the kind of upside when you introduce the fleet gradually into Qantas?

You've obviously given on Slide 29 and indicative unit costs metrics that show that, that 321s are kind of in the middle relative to the new fleet coming in. But is it kind of indicative if we adjust to that to think about that as the benefit when you are using it as a replacement? And is there any difference if you buy them versus where you lease them at some point?

[Vanessa Hudson, executive]

Yes, Rob, I think you touch on this before, but I'll get into...

[Robert Marcolina, executive]

Yes. So Scott, I did answer before, it will be different. So we're not giving guidance today on a dollar number for contest. But the thing that I said before is that the 737 plane is an excellent one. And so the incremental profitability will be different than what we're seeing in Jetstar at the moment.

But I think that slide, in particular, that identifies where the profit drivers are going to come from. It's a really important one. And I think it's important to say that this is a conversation we're going to have every 6 months, and we will quantify and bring case studies to investors as we get more information.

So just as we did at the half with LRs, as we get more scale into the 220s, we will definitely start telling a quantifiable story on the 220s and we'll do the same with the 321 XLRs, as we see how they perform within the fleet, which we're really excited about.

[Vanessa Hudson, executive]

Okay. Unless there's any more questions, I think that, that's a wrap. Thanks again for those on the line, but most importantly, thanks again for the team in the room because they've been a key part of the journey this year, and we look forward to catching up with you all over the coming weeks. Thank you.