New Horizons


QANTAS ANNUAL REVIEW 2016

Our Performance in 2015/16

Qantas reported an underlying profit before tax of $1.53 billion in 2015/16 – the best result in our 95-year history.

GROUP PERFORMANCE

$1.53
billion
(↑ 57%)
Record
underlying profit
49.4 cents
per share
(↑ 24c)
Statutory earnings
per share (EPS)
23% Return on
invested capital
$2.8
billion
Operating
cash flow
3% Ex-fuel
unit cost
$5.6
billion
(within target $4.8-6bn) Net debt
Qantas
Domestic
$578m Underlying EBIT.
Up 20 per cent
Qantas
International
$512m Underlying EBIT.
Up 92 per cent
Jetstar
Loyalty
$452m Underlying EBIT.
Up 97 per cent
Qantas
Loyalty
$346m Underlying EBIT.
Up 10 per cent
QANTAS
FREIGHT
$64m Underlying EBIT
Down 44 per cent

This exceptional performance reflects the strength of our Qantas Group strategy, with record results and increased margins for Qantas Domestic, Qantas International, Jetstar and Qantas Loyalty, and Groupwide return on invested capital of 23 per cent.

The result also reflects the continued delivery of the Qantas Transformation program, which has now unlocked $1.66 billion in cost and revenue benefits since beginning in 2014. The Group’s disciplined fuel hedging – which helped secure a $664 million benefit from lower global fuel prices – was another driver.

The Group’s financial position was strengthened during the year, with $2.8 billion in operating cash flow used for capital expenditure, shareholder distributions and debt repayments, and excess cash used for refinancing aircraft. Qantas’ strong balance sheet and more sustainable outlook was recognised by ratings agencies during the financial year, with an investment grade credit rating restored by Standard & Poor’s and Moody’s Investor services.

Our Financial Framework

Optimal Capital Structure

The Group maintained an optimal capital structure throughout 2015/16, with net debt at year-end of $5.6 billion, within our target range of $4.8 billion to $6 billion. Credit metrics remain significantly better than the investment-grade metrics Qantas targets through the cycle.

In addition to strong short-term liquidity of $3 billion – including cash of $2 billion – the Group’s unencumbered asset base totals over US$3.9 billion.

Improving Return on Invested Capital

The Group’s ROIC of 23 percent was up from 16 per cent in 2014/15, and well above our threshold of ROIC above 10 percent through the cycle. All operating segments continue to deliver ROIC above the Group’s cost of capital. Efficient allocation of capital, increased fleet utilisation, and ongoing business transformation contributed to achieving greater returns from the Group’s existing assets.

Efficient allocation of capital, increased fleet utilisation, and ongoing business transformation all contributed to achieving strong returns.

The Qantas Transformation program has unlocked total cost and revenue benefits of $1.66 billion since 2013/14 – including $557 million in 2015/16. A further $450 million in benefits will be realised in 2016/17, to reach the Group’s increased target of $2.1 billion by 30 June 2017.

Disciplined Allocation of Capital

The Group used cash in excess of short-term liquidity requirements to refinance 29 maturing aircraft leases, while funds from operations were directed to debt repayments ($1.1 billion), net capital expenditure ($1 billion), and shareholder distributions ($1 billion).

Shareholder Returns

The Group has returned more than $1 billion to shareholders over the past 12 months, through a $505 million capital return (completed in November 2015) and $500 million on-market share buy-back (completed in June 2016). Combined, these two capital management initiatives reduced shares on issue by 12.6 percent.

Our strong result in 2015/16 means we can return a further $500 million via a fully-franked ordinary dividend of 7 cents per share – totalling $134 million – and an onmarket share buy-back of up to $366 million.

Where there is surplus capital in the future, the Qantas Group will distribute to shareholders via an ordinary dividend as the first tranche of capital management.

Our Approach to Sustainability

As a company that’s been around for 95 years, Qantas is used to looking at the big picture. In that time, we’ve seen massive economic and technological advances and responded by transforming and adapting our business, setting milestones for the aviation industry along the way.
So when we think about sustainability today, we define it in simple terms. It’s about taking actions now to ensure we can succeed and grow for the decades ahead, building value for our shareholders; creating great jobs for our people; providing world-class service for our customers; and making a positive impact on the environment and community.
 

 

 

 

 

 

 

How We Create and Protect Value

The Qantas Group’s approach to creating and protecting long-term value rests on two pillars: strategic foresight and day-to-day accountability.

Foresight

Global forces, or mega-trends, are changing the environment we operate in – and the pace and scale of that change is increasing.

In 2015/16, we identified the four global forces that are most relevant to our business and mapped them against the strategic priorities that guide our business in responding to them.

Accountability

We hold ourselves accountable for – and disclose – our performance against our strategic priorities within the following frameworks.

Governance

  • Our Group policies, business practices and Board committees
  • Our approach to risk management

Integrity

  • The Qantas Group beliefs
  • Our actions and investments in the community

Transparency

  • Disclosure of financial and non-financial metrics and progress against performance, reflecting the Group’s material issues.
  • Inclusion within sustainability indices of most value to our stakeholders, like the Carbon Disclosure Project.

Global Forces

Global Force 1: New Versus Old Powers

New centres of geopolitical power and customer demand are changing every industry, including aviation.

Economic and population growth in Asia is continuing to increase the region’s political influence and share of global business, as well as contributing to mass urbanisation.

As the size of Asia’s middle class grows, the service economy will grow with it, driving demand for regional air travel.

And competition within Asia, as well as economic integration, will make it the world’s most dynamic market for decades to come.

Global information and data flows today have a bigger impact on GDP growth that trade in goods

Global Force 2 : Emerging Possibilities

Rapid digitalisation and the rise of big data have already changed the way people live and companies work.

Smartphones, 24/7 connectivity and new business models like Uber and AirBnB have given people much greater choice and access to services, information and entertainment.

And big data – used securely and sensitively – gives companies the opportunity to understand their customers and respond to them in a much more personal and tailored way.

 

 

By 2030, two-thirds of the global middle class will be Asia-Pacific residents

Global Force 3: Tomorrow’s People

Demographic change is impacting everything from public services and health care to the types of media people get their news from.

For businesses, the challenges are opposite sides of the same coin: the need to better understand new generations of consumers and, at the same time, attract new talent to the workforce.

For the aviation industry – which became global in the Baby Boomer generation – it’s a priority to understand what travel means to Generations Y and Z (the first true ‘digital natives’) and how to meet their aspirations. These are the travellers of the future, but also the employees of the future – so it’s equally important to plan for the jobs and skills that companies will need over a 20-year time span and beyond.

By 2020, more then 50% of the workforce will be members of Generations Y or Z

Global Force 4 : Planetary Boundaries

Resource constraints and climate change are already major drivers of government policy, business decisions and consumer behaviour.

Airlines, uniquely, have committed to a global industry-wide approach to stabilise and reduce carbon emissions, but there is still a long way to go to turn these commitments into results.

The aviation sector also has a leadership role to play in partnering with governments on broader policy frameworks.

The reward for companies that think ahead on all these issues is the chance to accelerate innovation (for example through new, low-carbon technologies) minimise risk and become brands of choice for the new generations of socially-conscious consumers.

18% of all transport fuels will be biofuels by 2040

Safety and Security as First Priority

The safety and security of our customers and our people is our first priority, underpinning the trust of our customers and stakeholders, the health and wellbeing of our workforce, and the way we operate. We take a vigilant, proactive and systematic Approach to protect the Qantas Group against a range of risks and strive for continuous improvement in our safety and security practices and performance

Governance

Safety and security performance and risks are monitored and reported at all levels of the Qantas Group – from Board-level oversight by the Committee for Health, Environment, Safety and Security (CHESS) through to our business unit safety committees. Our governance structure allows safety and security related information to flow freely throughout the organisation, ensuring that our risks are openly discussed and best practice shared across our businesses.

Systematic Risk Management

Qantas was one of the first airlines to introduce an integrated Safety Management System in the 1990s, and we continue to evolve it. Both the International Civil Aviation Organisation (ICAO) and national safety regulators set out the requirements for airline safety management systems, and the Qantas Group builds on those requirements with our own, stringent internal standards and management system methodology. Qantas applies this systematic approach to all risk disciplines, not just aviation safety. We integrate aviation safety, WHS, aviation and cyber security, environment and business resilience, learning from collaboration and shared experiences to make the system better and stronger.

Maximising Our Domestic Position

Our strong domestic business is the main source of the Group’s earnings and frequent flyer base. The Qantas and Jetstar dual brand strategy and leading market position enables us to hold an earnings share above our capacity share, providing greater resilience in the Group’s earnings profile.

The Group’s domestic business is the bedrock of our strategy. Qantas serves the full-service, business and premium leisure travel market, while Jetstar serves price-sensitive customers.

Our strategic focus in 2015/16 was navigating the ongoing economic transition in Australia, with regular joint reviews of market conditions feeding into decisions on routes and capacity, and growing the Group’s margin advantage over our main competitors.

Resilient & Sustainable Qantas International

Qantas International gives our customers a global network, linked to our domestic and regional networks, and serves Australia’s most important business travel markets. With a restructured cost base, network and customer offering, and cornerstone alliance partners, Qantas International is now a fit and competitive business that can generate sustainable returns.

We have increased Qantas International’s aircraft utilisation by 20 per cent since 2011/12. As a result, Qantas International has been able to grow efficiently, without significant new capital investment, and with a clear focus on meeting growing demand for business and premium leisure travel in our Asia-Pacific markets, while maintaining a presence in other global regions. Our growing global network is extended by strategic alliances.

In 2015/16 we received regulatory approval for a deeper partnership with China Eastern, as a foundation for long-term growth into China, and significantly expanded our joint network with American Airlines1.

  1. American Airlines partnership subject to regulatory approval.

 

Aligning with Asia

Asia is the world’s fastest growing aviation region, home to most of Australia’s top trading partners, and will increasingly dominate our industry over the next 20 years. The dual-brand strategy and our investments and partnerships in the region position us to capture our share of both long-term and short-term growth.

Almost half our international capacity is now deployed to Asia, and we are responding to accelerating demand with capacity increases where we see profitable growth opportunities.

The Emirates partnership has enabled Qantas International to re-frame Asia as a core focus of our network, rather than a stopover to Europe.hailand, and the regional gateway of Singapore.

Almost half our international capacity is now deployed to the region

Meanwhile, the Asia-based Jetstar airlines in Japan, Singapore and Vietnam give the Group a deeper Asian presence.

Diversification & Growth at Qantas Loyalty

Qantas Loyalty sits at the heart of the Group’s long-term competitive advantage, reinforcing customer loyalty at the same time as providing earnings diversification. Its growing, non-cyclical earnings provide a buffer against more cyclical segments in the Group portfolio, while customer insights and data are informing new ventures that now account for 44 per cent of its earnings growth.

Loyalty’s evolution since the Global Financial Crisis has come in three stages:

  1. Strengthening the core consumer Frequent Flyer program with new partners and more ways to reward Qantas customers;
  1. Expanding with adjacent ventures that complement the Frequent Flyer program and respond to customers’ needs, including Qantas Cash (a travel money card), Qantas Aquire (an SME loyalty program) and interest-based clubs like Qantas EpiQure (food and wine) and Qantas Golf; and
  1. Launching data-led new brands into sectors where Qantas can disrupt and grow.

Investing in Customer & Brand

The Qantas Group’s goal is to remain first choice for customers in every market we serve. World-class service, product and technology underpin Qantas’ brand and revenue premium, earn and strengthen the loyalty of our customers, and give our people the tools they need to perform at their best. The strength of the Qantas brand as national carrier and our broader role in the Australian community is what sets us apart from any other airline serving Australia.

The fundamentals of great customer service are well-trained, committed people; a young, reliable and comfortable fleet; world-class domestic and international lounges across multiple tiers; and intelligent terminal designs that allow customers to check in, drop offer their bags and proceed to their flight in one seamless process.

We invest in these fundamentals – and service training for 24,000 frontline employees – because we know they’re the keys to our reputation as a premium brand.

We’re stepping up investment in new technology to give our people better tools and our customers more control of their journey, from SMS check-in to mobile apps, meal pre-selection and free newspaper and magazine downloads – with inflight wi-fi as the next stage of the journey.

Representing Australia at its best is what sets us apart from other domestic and international airlines.

Qantas Group Brand Health, 2015/16

  • Qantas Domestic holds a 32 point lead in brand preference compared with its competitor, and a 17 point lead in operational NPS.
  • Jetstar Domestic holds an 8 point lead in brand preference compared with its major competitor.
  • Qantas International is the preferred choice for 34% of international travellers, 16 points ahead of the second-choice airline, and its operational NPS is at record levels.

The Qantas brand is synonymous with Australia, and representing Australia at its best is what sets us apart from other domestic and international airlines. It strengthens our ties to communities at home and Australians returning from overseas, it’s a point of difference for overseas visitors when they book with us, and it’s why we invest in initiatives and partnerships that reflect our values and beliefs.

Community Strategy and Partnerships

Our community strategy governs the high-level investments we make and the partnerships we form to champion Australia at home and internationally, with three core focus areas:

  • Showcasing Australian excellence;
  • Our Reconciliation Action Plan; and
  • Working with communities and engaging our people.

Reconciliation Action Plan

Since 2007, our Reconciliation Action Plan (RAP) has shaped our commitment to extend economic opportunity for Aboriginal & Torres Strait Islander people, build Indigenous supply chains and tell the stories of the First Australians.

Our 2015 RAP was accredited to Elevate level, meaning we are a leader in corporate Australia, and holds us to firm targets:

  • To lift our proportion of Indigenous employees from 1.2 per cent to 1.8 per cent by 2018;
  • To grow our spend with Indigenous suppliers to $1.75 million over the same period; and
  • To create more than 200 internships for young Aboriginal & Torres Strait Islander people over the next 10 years, through partnership with Career Trackers.

In 2015/16 we made a new investment in the Indigenous Marathon Project’s ‘Frontrunners’ project, which aims to develop future Indigenous community leaders.

Our 2015 RAP was accredited to Elevate level, meaning we are a leader in corporate Australia

Harnessing Data & Digital

Our customer insights are a key competitive advantage
  • Flying behaviour of our customers
  • Frequent Flyer profiles and behaviour
  • Customer Net Promoter Score and feedback
  • Customer segmentation
  • Web, mobile and social media interactions
  • Rich history of data
  • 50m+ passengers annually across Group
  • 11.4m members
  • Panel of ~25k Frequent Flyers can record NPS each time they fly
  • Market-wide segmentation insights
  • 2.5m+ visits to qantas.com/week
    3.7m+ visits to Jetstar website/week
  • 29 years of historical data

The ability to analyse and harness big data at a strategic, tactical and operational level is essential for any business yet still a relatively untapped resource in aviation. Digital tools help translate data into personalised service for our customers and smarter ways of working behind the scenes. Increasingly, data and digital are providing new opportunities to diversify earnings.

Strategic Network Decisions

Determining where Qantas and Jetstar fly is fundamental to our dual-brand strategy, and requires sophisticated analysis of market demand and capacity, competitive positioning, and broader implications for our network and financial performance.

Through data-led customer segmentation, we can gain a clear picture of what routes are best-suited to Qantas, which are best served by Jetstar, and which can support both airlines. And our data analytics ability means we can constantly review a wide range of data to make capacity adjustments swiftly as required. This capability has been vital in navigating the Group through the economic transition in Australia, which has seen demand decline in resources-reliant markets and grow in other markets.

Operational Innovation

Big data is also helping Qantas manage operational disruptions.

Our new schedule recovery system, Compass, automates the analysis of operational and passenger information to determine priority take-offs and landings, consolidate flights, allocate aircraft and, most importantly, communicate with customers.

Case study

During severe storms in Sydney in June 2016, data-led schedule recovery meant Qantas had to cancel just 3.4 per cent of fl ights across the weekend.

“It put us in the best position to manage the disruption to our operations over the weekend and meant our customer contact team could notify a large number of our customers before they were even on their way to the airport,” said Paul Fraser, Head of Qantas’ Integrated Operations Centre.

Focus on People Culture & Leadership

A highly skilled, engaged workforce is our greatest asset as we deliver our strategy, foster innovation, and navigate through change. Our people strategy aims to build a diverse, inclusive and resilient culture to maximise engagement and performance, and remain an employer of choice in Australia. Strong employee relations are the foundation for constructive industrial relations, minimising risk to operational stability, brand reputation and future earnings.

 

Our people strategy has been consistent since 2009, focusing on:

  • Engagement and culture;
  • Managing change; and
  • Leadership capability and talent development.

Engagement and Culture

The Qantas culture is framed by our five Group beliefs:

  • Everyone has the right to return home safely;
  • Customers determine our success;
  • Being a fit, agile and diverse organisation drives innovation and simplicity;
  • Working together in an inclusive manner always delivers the best Group outcome; and
  • Each employee deserves respect, trust and good leadership.

These beliefs anchor our priorities and initiatives, including investment in training, effective communication, rewards and recognition, and a commitment to diversity and inclusion.

We were proud to see record engagement scores in our 2016 employee survey – and, more importantly, we are using the insights from the survey to find areas where we can improve our business and culture.

Engagement Survey – Qantas Group Enagagement Score History1

  1. Engagement survey completed by Willis Towers Watson. Survey not carried out in 2014.

Diversity and Inclusion

We value diversity of thought and experience and we believe that an inclusive and collaborative culture contributes to our success. Our diversity strategy is focused on mitigating unconscious bias, improving access to flexibility, recruitment and talent programs and dedicated leadership development.

The Board set a target that 35 per cent of senior management positions be held by women by 30 June 2018; at 30 June 2016 women held 34 per cent of these roles.

Thirty per cent of our Directors are women, and the overall percentage of women employees across the Group is 41.7 per cent.

Percentage of women on Qantas Board:

30%

Percentage of women in senior management roles:

34%

Gender balance in graduate program:

61:39

Female            Male

Responsible Action on Energy, Emissions & Supply Chain

As a major consumer of fossil fuels, we recognise our responsibility to reduce our emissions, work with partners, governments and industry, and contribute to the global response to climate change and resource constraints. Our comprehensive environment strategy ensures that we play a positive role in the community while reducing cost and risk.

In 2015/16, we combined the Group’s core environment initiatives into a single flagship program – Qantas Future Planet.

Aircraft and Fuel Efficiency

Through a centralised fuel optimisation team we’re working on 120 projects to hit our target of a 1.5 per cent average annual improvement in fuel-efficiency between now and 2020, from aircraft weight reduction to precise navigation technology.

While our absolute emissions and fuel consumption have increased, our fuel and emissions intensity has decreased – and we expect this trend to continue with further fleet renewal through to 2020.

In 2015/16, we realised $51 million in fuel efficiency benefits1, contributing to a 6.2 per cent improvement since 2009.

 

  1. Includes reduction in consumption from fuel efficiency and reduction in into-plane costs following transformation initiatives.

Environmental Performance

Fleet age

8.6 years (Qantas Group)
9.6 years (Qantas)
6.5 years (Jetstar)

Fuel
efficiency

6.2% improvement on 2009
baseline

Total
emissions

12,218,478 tonnes CO2e

Total fuel
consumption

4,805,045,000 L

Electricity

10% reduction in 2015/16
19% reduction achieved against
2009 baseline compared with
2020 target of 35%

Water

10% increase in 2015/16
4% reduction achieved against
2009 baseline compared with
2020 target of 20%

Waste to
landfill

9% increase in 2015/16
19% reduction achieved against
2009 baseline compared with
2020 target of 30%

 

The Three Global Short, Medium and Long-term Goals

GOAL 1

Pre-2020 ambition

1.5% average annual fuel efficiency improvement from 2009 to 2020

How is Qantas achieving this?

Fuel optimisation through new technology including fleet renewal, operational and infrastructure improvements.

Progress

Achieved 6.2% on 2009 baseline. Although currently behind linear projection of target at a Group level, we expect accelerated improvement prior to 2020 with the continued delivery of new aircraft.

GOAL 2

In line with the next UNFCCC Commitment Period

Stabilise net aviation CO2 emissions levels through carbon neutral growth

How is Qantas achieving this?

In addition to our fuel efficiency initiatives we are working through ICAO and IATA on a global market-based measure (MBM) to regulate airline emissions from 2020 and help bridge the gap to carbon-neutral growth.

Progress

Decision on MBM expected at the ICAO Assembly in September 2016

GOAL 3

On the 2°c pathway

Reduce aviation’s net CO2 emissions to 50% of 2005 levels by 2050

How is Qantas achieving this?

In addition to continuous fuel efficiency improvements, we will continue to invest in new aircraft technology and explore alternative fuels.1

Progress

Significant research efforts underway into biofuel opportunities as well as informing government policies.

  1. Sustainable aviation fuel could reduce aviation emissions by 63%, but it relies on government incentives to get the supply chain up to commercial scale.

Global Industry Leadership

In 2015/16, the International Civil Aviation Organisation (ICAO) agreed strict CO2 standards for future aircraft types, while governments are expected to formalise the MBM at an ICAO meeting in September – building on the agreement reached by industry under Qantas’ chairmanship of IATA in 2013. Qantas has been a key contributor to the technical design of the global framework and is working closely with the Australian government to inform the position it takes to global ICAO and UNFCCC forums.

Australian Policy Development

With over two thirds of our emissions derived from our international operations, we continue to support a global approach as the most appropriate way to manage airline emissions. However, we are committed to working with national and state governments on environment policy. That includes detailed consultation on the Australian Government’s Emissions Reduction Fund and Safeguard Mechanism.

A particular focus is on making the case for biofuels investment and incentives. Australia has great long-term potential in waste and biomass feedstocks, and we are sharing our insights with governments who see this as a potential growth industry of the future. In 2015/16, we advised Queensland Government on its ‘bio-futures’ strategy to accelerate the commercialisation of biofuels.

Strategic Procurement

In 2015/16 we refined our procurement strategy to focus on creating value for the Group through:

  • Insightful category management and agile sourcing;
  • Tailored approaches to supplier management;
  • Efficient and effective supplier transactions; and
  • Suppliers as an extension of Qantas’ brand and reputation.

The Qantas Transformation program has increased the importance not just of cost-efficient procurement, but of a partnership approach with suppliers to make sure they understand and support our strategic objectives. During the year, Qantas implemented an integrated procure to pay process for indirect spend (Spend Aware). As well as providing better control over spend, Spend Aware will ensure more efficient transactions with suppliers and improved supplier management.

Supplier Diversity

As with our own workforce, we recognise that a diverse supplier base is a business strength. We also recognise our ability to build scale and create jobs for our suppliers – especially small-to-medium enterprises.

Many suppliers rely on Qantas’ business to operate at scale, and we’re proud of the part we play in showcasing their products across our domestic and international networks. We spent $5.9 billion with Australia-based suppliers in 2015/16, making up 60 per cent of total procurement expenditure.

We have a particular focus on lifting our spend with Indigenous suppliers, as a founding member of Supply Nation. Our spend with Supply Nation suppliers in 2015/16 was $508,000, and we expect that figure to rise in 2016/17 as we work towards our target of $1.75 million by 2018.

Our efficient, diverse and sustainable supply chain of 11,000 large and small companies is essential to every part of our business. We enforce stringent ethical standards through our procurement policies to minimise reputational risk. We also combine the Qantas Group’s large economic contribution in Australia with our brand values to make a positive social impact.