Qantas expects return to profitability

457 flag carrier Qantas has announced it is expecting a return to profitability after more than two years of losses due to COVID-19. Qantas anticipates an underlying profit before tax of between $1.2 billion and $1.3 billion for the first half of the 2023 financial year. The company said the expected profitability would result from forward bookings, its latest assumptions of the second quarter, and current fuel prices. A return to profitability would end the run of five consecutive halves of heavy losses since COVID-19 first hit, resulting in a cumulative statutory loss of $7 billion. Qantas said net debt is expected to fall to between $3.2 billion and 3.4 billion at 31 December 2022, which is below the bottom of the target range of $3.9 billion.

Domestic travel demand remains strong across all categories. Revenue intakes for business purposes are over 100 per cent of pre-COVID levels and leisure intakes have further strengthened to over 130 per cent. Yields from international markets are particularly strong but are expected to moderate as Qantas and other carriers steadily increase capacity. Qantas Loyalty expects to post record earnings for the first half and is on track to reach its FY23 EBIT target of $425 million–$450 million.

The broader operating environment remains complex with high fuel prices and high inflation, as well as higher interest rates impacting on consumer confidence. However, robust demand indicates that people are prioritising spending on travel above other categories, which supports the Group’s ability to fully recover higher fuel costs through fares. Fuel prices are now around 75 percent higher than pre-COVID, compared with around 60 percent in August 2022.

Group international capacity is now expected to increase from 61 percent of pre-COVID levels in first half of FY23 to 77 percent in the second half. This is largely determined by the ability to return additional A380s from storage and required maintenance, as well as the delivery of three new Boeing 787-9 Dreamliners for Qantas International and additional Airbus A321LRs for Jetstar.

Group domestic capacity will be 94 percent of pre-COVID levels for 1H23, growing to around 100 percent for the second half – which is six percentage points below previous capacity guidance. This reduction is designed to protect the sustained improvement in operational performance as the broader industry recovers.

Operational performance has continued to improve towards pre-COVID levels, despite some extreme weather events on the east coast, air traffic control limitations and a busy school holiday period nationally.

Qantas domestic’s on time performance increased from 67 percent in August to 69 percent in September, finishing ahead of its main competitor. While this is below the 75 percent target for some of the reasons mentioned above, performance in October has so far averaged 75 percent despite a four percentage point impact from continued extreme weather conditions.

Qantas’ cancellations fell from 4 percent in August to 2.4 percent in September. In October so far, only 1.7 percent of flights have been cancelled, which is market leading and better than pre-COVID levels. Mishandled bags remained low at six per 1,000 passengers in September and into October.

Jetstar’s performance in September suffered significantly from six of its 11 wide-body aircraft being out of service simultaneously as a result of several lightning strikes, a bird strike, damage from runway debris and challenges with global supply chains for replacement parts. These aircraft have since returned to service; Jetstar’s domestic and international performance have stabilised significantly in October, with further improvements expected in November.

The Qantas Group announced a change to the wages policy covering around 20,000 employees. After a two-year freeze that reflects the bulk of the time the airline was in hibernation, annual wage increases will be adjusted upwards from 2 percent to 3 percent. This represents an extra $40 million per annum before compounding and is a return to the Group’s pre-COVID level of increase due to the speed of its financial recovery.

The increase will automatically apply to around 5,000 employees who have already agreed to 2 percent as part of their Enterprise Bargaining Agreements. (The average non-executive salary at Qantas is more than $100,000.)

This wage increase is in addition to the $5,000 recovery boost announced in June and the 1,000 share rights awarded to non-executive staff as part of a retention program, worth a further $5,000 on the current share price.

As part of decisions announced, around 3,600 employees who joined the Group after the cut off date for the retention program in mid-2021 will now receive 250 shares rights to recognise their role in the accelerated recovery. This applies to those employed with the Group today with rights expected to vest in August next year.

In August, the Group announced an upgrade to its staff travel program by increasing the benefits to employees and expanding access to more of their family and friends. To date, more than 10,000 new beneficiaries have been added.

Qantas Group CEO, Alan Joyce, said: “It’s been a really challenging time for the national carrier but today’s announcement shows how far we’ve come. Since August, we’ve seen a big improvement in our operational performance and an acceleration in our financial performance. It’s clear that maintaining our pre-COVID service levels requires a lot more operational buffer than it used to, especially when you consider the sick leave spikes and supply chain delays that the whole industry is dealing with. That means having more crew and more aircraft on standby and adjusting our flying schedule to help make that possible, until we’re confident that extra support is no longer needed.”

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