The QANTAS Group (QANTAS Airways) (Sydney) has announced it will upgrade its entire fleet of Airbus A330s and order new Boeing 737-800s to drive its strategy in the international and domestic markets.

Beginning in late 2014, the Group will reconfigure the interior of 10 Airbus A330-300s and 20 A330-200s with a new flat seat in business class, refreshed economy cabin and a new inflight entertainment offering.

The A330-300s will be operated by QANTAS International on its network between Australia and Asia, while the A330-200s will be operated by QANTAS Domestic on routes between the east coast and Perth – enabling the final retirement of the Group’s Boeing 767s.

The Group will also purchase five additional Boeing 737-800 aircraft for QANTAS Domestic (for delivery during 2014) and extend the leases on two existing Boeing 737-800s this year.

The A330 reconfiguration program and the additional Boeing 737-800 orders do not affect the Group’s planned capital expenditure of $1.6 billion in 2012/13 and $1.5 billion in 2013/14..

The airline will also upgrade 20 A330-200s for QANTAS Domestic’s wide body fleet – meaning the trans-continental flights will be operated by aircraft featuring lie-flat beds in business and the latest inflight entertainment technology.

The Boeing 737-800 fleet will ultimately grow to 75 aircraft.

The older narrow body Boeing 737-400s will be phased out by the end of 2013 and Boeing 767s by mid-2015.

The group recently announced new orders for five additional Boeing 717 aircraft and three additional Bombardier Q400s for its regional operations.

On the financial side, the Group announced the following statement:

The Qantas Group has announced a statutory profit after tax of A$111 million (all currencies in Australian dollars) (and an underlying profit before tax of A$223 million) for the six months ended 31 December 2012.

Key points:
-Statutory Profit After Tax: $111 million, up 164 per cent
– Underlying Profit Before Tax1: $223 million, up 10 per cent
– Qantas Loyalty: record result2, underlying EBIT up 15 per cent
– Qantas International: 65 per cent improvement, turnaround on course
– Qantas Domestic and Jetstar: solid earnings despite excess capacity in domestic market
– Emirates partnership announced, interim authorisation granted, fares on sale
– No interim dividend declared

The result is in line with previous guidance and reflects progress in the Group’s strategy, despite challenging conditions in international and domestic air travel markets.

All operating segments of the Group’s portfolio were profitable with the exception of Qantas International. However, losses in QANTAS International were reduced by 65 per cent in 1H13 compared with 1H12.

Underlying profit before tax for the first half included $125 million in revenue from the agreement negotiated with Boeing in August 2012 to restructure the Group’s Boeing 787 order.

The Group incurred $136 million in one-off transformation costs during the first half, which have been recognised as items outside of underlying profit before tax.

CEO commentary and Group performance

Qantas CEO Alan Joyce said the Group was delivering against all its strategic goals.

“During 1H13 we increased underlying profit by 10 per cent, announced a global aviation partnership with Emirates3, launched Jetstar Japan, reinforced our position in the Australian domestic market, reduced comparable unit costs by 3 per cent4, announced the early repayment of $650 million in debt, commenced a share buy-back and sold non-core assets,” Mr Joyce said.

“In total, the Group achieved $172 million in transformation benefits in 1H13.

“The operating environment remains complex and volatile, but we are now beginning to realise the benefits of the tough decisions that we have made over the past 18 months.

“This progress would not have been possible without the passion and commitment of everyone at the Qantas Group, right across the company, and I thank all our people for their contribution.”

QANTAS International

QANTAS International reported an underlying EBIT loss of $91 million in 1H13 – an improvement of $171 million compared with 1H12.

“QANTAS International is well advanced in its turnaround plan,” Mr Joyce said.

“The 65 per cent improvement in QANTAS International’s underlying EBIT is testament to the steps taken to remove cost from the businesses, from closing down loss-making routes to retiring aircraft and consolidating
operations.

“But we have also moved to renew QANTAS International: nine Boeing 747s have been upgraded with A380- standard cabins, we have strengthened our alliances with American Airlines and LAN Airlines around the new hubs of
Dallas/Fort Worth and Santiago, and we are introducing new customer services such as chauffeur transport. International customer satisfaction has reached the highest level ever recorded.5

“From March 31, subject to final regulatory approval, our partnership with Emirates will take effect – giving our customers one-stop access to over 65 destinations in Europe, the Middle East and North Africa, via a superb hub in Dubai.

“At the same time, we will strengthen our network in Asia. Earlier this month we announced a new schedule for QANTAS services to the region, increasing dedicated capacity.

“Taken together, these measures provide a platform to return Qantas International to profit and, over the long term, target growth opportunities.”

QANTAS Domestic

QANTAS Domestic reported underlying EBIT of $218 million in 1H13, down from $328 million in 1H12.

“Clearly the Australian domestic market is highly competitive,” Mr Joyce said. “We have seen elevated levels of capacity growth from competitors attempting to claim market share from QANTAS Domestic.

“This has put pressure on yield for all airlines – but QANTAS Domestic has remained the airline of choice for business travellers, maintaining its 84 per cent share of the corporate market. During the first half we renewed 40 accounts and won 39 new accounts, including four won back from the competition.6

“We have continued to invest in the domestic business, with new and upgraded aircraft and a big focus on improving customer service through training and technology. Qantas Domestic consistently outperformed its main competitor for on-time performance during 2012 and achieved record customer satisfaction.7

“We also continue to grow in regional Australia, both through QantasLink and through our expanding charter business in mining regions. We are confident that with our balanced portfolio of domestic airlines we will
remain the leader in every segment of the market.”

Jetstar Airways:

Jetstar Airways reported underlying EBIT of $128 million in 1H13, down from $147 million in 1H12, reflecting domestic market conditions and start-up investments in Jetstar Japan and Jetstar Hong Kong.

“Jetstar’s revenues increased by 12 per cent as it positioned itself for a new phase of growth,” Mr Joyce said.

“Jetstar Japan commenced domestic operations in July and has made a strong start – with over 600,000 passengers carried in its first six months.

“Singapore-based Jetstar Asia continued to grow, with an improvement in profitability, while the performance of Vietnam-based Jetstar Pacific is also improving after an ownership restructure and fleet renewal program.

“Jetstar Hong Kong’s application for regulatory approval is well underway, and though we do not take the outcome for granted, we believe there is a compelling case for a new low cost airline in this market.

“Already the largest low cost carrier in the Asia Pacific by revenue, we are now building up Jetstar’s scale across the region to support forecast passenger demand – using a capital-light model that draws on close
partnerships with local market leaders.”

Group financial position

The Group’s liquidity position is strong at $3.5 billion and disciplined financial management remains a core priority.

“In August 2012 we said that we would focus on debt reduction after a period of relatively high capital expenditure, and that’s what we have done,” Mr Joyce said.

“During the first half we announced the early repayment of over $650 million of debt. At the same time, we launched a share buy-back, reflecting the Board’s confidence in the Group’s underlying financial strength and long term strategy.

“These steps were enabled by $750 million in cash generated by the sale of our stake in StarTrack to Australia Post and the restructure of our Boeing 787 delivery schedule – prudent transactions in keeping with our commitment to disciplined financial management.”

Planned capital expenditure has been reduced by $600 million, with a forecast of $1.6 billion in 2012/13 and $1.5 billion in 2013/14.

Net free cash flow in 1H13 was $205 million and the Group continues to target positive net free cash flow9 on a full-year basis.

Outlook

The operating environment for the QANTAS Group in 2H13 remains challenging and volatile.

Group capacity is expected to increase by 0.5-1.5 per cent in 2H13 compared with 2H12. Group domestic capacity is expected to increase by 5-7 per cent in 2H13 compared with 2H12, while maintaining flexibility.

Underlying fuel costs for the Group are expected to be approximately $2.25 billion10 in 2H13.

No Group profit guidance is provided at this time due to the high degree of volatility and uncertainty in the competitive environment, global economic conditions, fuel prices and foreign exchange rates.

Copyright Photo: John Adlard. The last Boeing 767-300 will be retired by mid 2015. Boeing 767-336 ER VH-ZXB (msn 24338) in the special QANTAS Socceroos livery is pictured at the Sydney hom and base.

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