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Edited Transcript of QAN.AX earnings conference call or presentation 21-Feb-19 12:30am GMT

Half Year 2019 Qantas Airways Ltd Earnings Call

Mascot Mar 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Qantas Airways Ltd earnings conference call or presentation Thursday, February 21, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Joseph Joyce

Qantas Airways Limited - CEO, MD & Executive Director

* Alison Webster

Qantas Airways Limited - CEO of Qantas International

* Andrew Paul David

Qantas Airways Limited - CEO of Qantas Domestic & Freight

* Gareth R. Evans

Qantas Airways Limited - CEO of Jetstar Group

* Olivia Wirth

Qantas Airways Limited - CEO of Qantas Loyalty

* Robert Marcolina

Qantas Airways Limited - Group Executive of Strategy, Innovation & Technology

* Tino La Spina

Qantas Airways Limited - CFO

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Conference Call Participants

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* Anthony Moulder

CLSA Limited, Research Division - Analyst

* Cameron McDonald

Evans & Partners Pty. Ltd., Research Division - Head of Research

* Jakob Cakarnis

Citigroup Inc, Research Division - Associate

* Michael Morrison

Deutsche Bank AG, Research Division - Research Analyst

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Simon A. Mitchell

UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand

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Presentation

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [1]

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First of all, thank you, everybody, for being here. We're going to introduce the different members of the senior leadership team. So we start over at that end with Andrew Parker, our Head of Government Affairs and Industry Affairs, Andrew; Ali Webster, our Head of Qantas International; Vanessa Hudson, our Chief Customer Officer; Jetstar Head, Gareth Evans. He's grown a beard since he took over that job. I still think you should get rid of it though. Andrew David, who is Head of Qantas Domestic; Rob Marcolina, who is the Head of Strategy, IT and Transformation. Your title goes on forever. So hopefully, I got it right. And we've got Lesley Grant, who's Head of People; John Gissing, who's Head of QantasLink Safety Services; and Olivia Wirth, who is Head of Qantas Loyalty; and Andrew Finch, who is our Legal Counsel. He is on the Senior Executive team. He isn't here to watch what we say.

So, and of course, I've got Tino La Spina, the Chief Financial Officer for the group. He is going to, as normal, do the slides, which he's getting very good at after 5 years.

And after our record performance in the 2018 financial year, the team here at Qantas has again delivered another strong result, while continuing to invest for our customers and in our people. Our ongoing focus on transformation and investment in the business has helped us deliver a resilient performance in the face of significant fuel increases. As we moved forward quickly, to recover the increased fuel cost, demand also remained fairly robust.

In a moment, I'll take you through some of the highlights of the half, but first, just to remind you that we applied the new revenue accounting standard from the 1st of July 2018, so our prior half year results have been reinstated for comparison purposes. If you have any questions on how the application of these standards apply to our results, Fran and the Investor Relations team, and I'm sure, Russell, who is here, will be happy to answer those questions in immense detail.

So looking at our profitability first. On an underlying basis, profit before tax was $780 million as ticketed passengers and freight revenue strength substantially offset the fuel cost increase. In fact, the revenue performance for the group in the first half this financial year was the highest revenue that the group has achieved in 99 years of operations.

Increases in other revenue sources partially offset other cost increases, such as foreign exchange on nonfuel costs, selling costs and depreciation and amortization.

The statutory profit before tax was $735 million. Taking into account the effect of the buyback completed this half, statutory earnings per share were $0.30 per share. The group's return on invested capital remained very strong, at nearly 20%, taking us into our fifth year of returns well above our 10% value creation threshold, determined by the financial framework.

All segments continue to deliver returns above the group's cost of capital. And we achieved record earnings at Qantas Domestic, at Jetstar Domestic and at Qantas Loyalty. And the Qantas Domestic and the Jetstar Domestic numbers combined to deliver a record Group Domestic earnings.

As I said, Qantas Loyalty achieved yet another record performance as both the Coalition and the new businesses continue to expand. The international businesses are more exposed to higher fuel costs, but demonstrated resilient performances. We made good progress on the longer-term strategy to fortify these businesses, with Qantas International fleet transition in full swing throughout the half. And our strategy of developing unique propositions, such as the Perth-to-London direct route is extending our sustainable competitive advantage.

The fundamentals of the Jetstar International business, including its Asian portfolio, remain strong, with the performance of the Australian international long-haul business being particularly pleasing. And we're on track to deliver greater than $400 million in gross transformation benefits in the full financial year '19.

We continue to invest for our customers and our people. 3 additional Dreamliners entered into service, taking Qantas International Dreamliner fleet to 8 aircraft. This has provided significant opportunities for promotion amongst the pilot ranks. In fact, since 2016, we have recruited over 1,000 pilots and promoted 1,000 pilots. And we have been conducting one of the biggest training programs across pilots, cabin crew, airports, customer operations and engineering.

Turning now to the balance sheet. Net debt at the 31st of December, 2018, was $5.2 billion. This is at the bottom of the target range, set to minimize the cost of capital for the group. Our strong operating cash flow generation ability allowed us to return $500 million to shareholders in the half, and this was through a combination of fully franked dividends and an on-market share buyback. And today, as a result of the strength of the balance sheet and the medium-term outlook for earnings, the Qantas board has the confidence to announce up to a further $500 million of capital returns to shareholders. As we return to paying cash tax, as I keep on pointing out, we pay a lot of other taxes outside of corporation tax, up to $3 billion a year, whilst we get the return to pay corporation tax -- cash tax, and we will be generating sufficient franking credits. This includes an increase in the base interim dividend per half from $0.10 to $0.12 per share, fully franked, with the remainder of the returns to shareholders distributed through an on-market share buyback of up to $305 million. This will take the anticipated total capital returns to shareholders, since October 2015, to over $3.6 billion.

The dual brand strategy remains at the core of the group's integrated portfolio strength, with record first half Group Domestic earnings of $659 million after absorbing a significant increase in fuel costs. The domestic demand environment was strong across all our brands. Qantas Loyalty earnings growth is gaining momentum. It delivered another record result and continues to provide a growing and diverse earning stream for the group. Qantas International continued to build its earnings resilience. The benefits of the hub switch and the Perth-London services and the Dreamliners arriving are evident in the RASK performance. Fuel increased by $219 million. Obviously, it's disproportionate on these markets given the sector length and the impact that, that has on fuel burn. And so that cost was up $219 million at the same time last year. Without that increase, earnings would have been significantly up, showing the benefits of those initiatives are coming true in the underlying results on this operation.

Combined with Jetstar's international operation, the group has the 2 largest outbound airlines in Australia. They enjoy strong RASK improvement as the demand for international travel continues to remain strong.

I'll now hand over to Tino, who will take you through the details of the group's results.

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Tino La Spina, Qantas Airways Limited - CFO [2]

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Thanks, Alan. So during the half, the group experienced more than a $400 million increase in the fuel cost. Through improved revenue performance, the group was able to substantially offset this increase and deliver a strong underlying profit before tax of $780 million. Underlying earnings per share was down 16%, partially offset by the accretive nature of the buyback. Statutory earnings per share was at $0.30. Return on invested capital was also strong at 19.3%, well above the group's cost of capital. Unit revenue for the group was up 5.7% for the half as the aviation industry took action to address rising fuel prices. Total unit cost was 9.8% higher. Ex fuel unit costs were up 1.3% on a 0.5% reduction in ASKs. The group's operating margin was a healthy 9.5%. The group remains focused on maintaining a margin advantage to all of our competitors.

Operating cash flow for the group remained strong at $1.25 billion. This is comparable to the results for the first half last year, after adjusting for timing differences. Confidence in the group's ability to continue to generate strong net free cash flow and in the second half has also supported the additional returns to shareholders that we are announcing here today.

Turning now to the profit bridge. Starting with 2018 earnings, the bridge to the first half of 2019 consists of the following. Fuel expense increased by $416 million, net of transformation fuel efficiency benefit of $18 million. The group's disciplined hedging program provided significant protection from volatile fuel prices through the half.

Ticketed passenger revenue was up $338 million, and combined with the increase in net freight revenue of $70 million, substantially offset the increased fuel costs for the group. This is reflected in the improvement in group unit revenue. Capacity discipline was maintained in the domestic market, and international competitor capacity moderated. $79 million in net revenue benefits from transformation and favorable FX on foreign currency sales also contributed to the overall increase in revenue. As flagged at our first quarter trading update, an unfavorable move in FX on net nonfuel expenditure impacted the result by $61 million. Selling costs also increased by $37 million, commensurate, of course, with the rise in revenue. Transformation delivered a total of $206 million, including a nonfuel cost reduction of $109 million offsetting the majority of the impact of cost inflation.

Depreciation and rentals rose $61 million, driven primarily by investment in fleet, lounges and technology.

The group continues to generate strong cash flows. This slide shows the first half cash flow conversion trend. Comparing the operating cash flows for this half versus the same period last year, the first thing to highlight is the stability of EBITDA. The key differences in the cash flow performance relate to the reversal of temporary working capital benefits, primarily related to payables which built up in the first half of 2018. Also, the first half of the 2019 financial year includes the impact of bringing forward hedge premium spend to fully hedge our fuel exposure in 2020. This compares with the first half of 2018 financial year, which benefited from lower-hedged premium outflows.

These movements, together with the seasonally stronger cash flow performance in the second half, give us the confidence of a strong cash flow performance in the second half of 2019.

I'll now hand you back to Alan.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [3]

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Thanks, Tino. Earnings for the Group Domestic were at a record $659 million. This represents 80% of the domestic market profit pool from 62% of the available capacity. That continues the trend that we've seen now for a number of years, with the Qantas Group holding over 80% of the profit pool.

Segmental return on invested capitals were greater than our threshold of 10% on a rolling 12-months basis. Our sophisticated dual brand strategy, domestic market capacity settings and improved demand environment allowed the recovery of increased fuel costs through a 6.1% increase in Group Domestic unit revenue. Our Qantas Domestic and Jetstar continue to deliver superior margins, maintaining a significant margin advantage over their respective competitors.

This year, we continued the structural transformation of Qantas International, with the Dreamliner fleet now at 8 aircraft. That's the best they've gone to at International. And we further modified and expanded the network. The benefits of the hub switch, the Perth-London service and the other Dreamliner services and a higher premium seat mix are evident in the RASK performance for the half. As I said previously, the fuel increase represents the lion's share of the profit variance. And our customers loved it too, with the Perth-London changes having now the highest Net Promoter Score in the Qantas network and a 92% C factor overall. With 95% C factors in the premium cabins, it probably means that we're spilling premium traffic because of the demand for -- on that sector, which is a great sign that these long-haul operations are being sought by our customers.

Looking at the integrated portfolio, each segment plays a role in the success of the overall group. That's why we continue to make a strong margin relative to our regional peers.

Turning now to the details of the segment performance on Slide 10. Qantas Domestic reported a record underlying EBIT of $453 million. Unit revenue rose 7.5%, fully recovering the increased fuel costs. Available seat capacity reduced and the load factor increased. There is opportunity to continue to improve load factors further because we have achieved an 83% load factor in the past, and we think that the business could reestablish that in the future. On the demand side, Qantas Domestic has maintained its leadership position in the corporate market, and we believe we are growing our share in the SME market.

While growth in resource market revenue continued, with a $28 million increase in revenue from the sector during the half, peak to trough, we saw a decline of approximately $300 million for this resource sector market. So far, we've seen an approximately $80 million comeback, so the upside, we believe, is quite considerable and that's why we are expanding our resource sector by over 10% going forward.

Our revenue premium and superior earnings are maintaining -- are maintained through our focus on the customer. Qantas Domestic continues to invest in the customer experience, installing in-flight WiFi in the domestic fleet, upgrading its airport lounges and delivering leading on-time performance. In fact, January was the best on-time performance for Qantas Domestic in a year, and it was the best for QantasLink in 2 years, so the trend of improvement continues. And importantly, for our customers and regional centers, Qantas has improved the regional resident fare program and is investing in the refurbishment of the turbo prop fleet.

Qantas International has strong revenue growth of 6.7% versus the same period last year. This was offset by a $219 million increase in fuel costs and increase in other costs such as foreign exchange on nonfuel costs, higher depreciation and increased selling and activity costs. Unit revenue increased by 5% as the benefits from the hub switch, the Perth-London service and the Dreamliner fleet introduced flowed through the results. Through the half, international competitor capacity additions eased, and our airline peers raised fares to cover the increase in fuel costs.

The new network structure and Dreamliner fleet are building the resilience of Qantas International. During the half, we received 3 more Dreamliners, taking the fleet to 8. And as we continue to build this fleet, we will structurally improve the premium seat mix, with the international fleet driving a RASK improvement.

Importantly, our customers love the product, and as I said, the Perth-London has the highest Net Promoter Score in the network. And the product that we have on the 787s, we're going to be introducing on the 380s to have a consistent international product by the time we get to the end of 2020, given the customer reaction to that product.

The focus on strengthening our airline partnership with Emirates and China Eastern continues and a number of new codeshare partnerships with Cathay, with Air New Zealand and with KLM, Air France. And the expansion of existing codeshare agreements were announced in the half, and we think they add considerable consumer benefits, aid with competition and help improve the economics of our international operation.

Associated with the changes to the Qantas International network and fleet, it is investing in the overall customer experience. The new Singapore First Lounge is set to open towards the end of 2019. And I believe we have a virtual reality version of it that Vanessa and Ali demonstrated recently. So if anybody is interested in having a virtual experience, we only charge virtual currency to get into the virtual lounge. And in terms of fleet, earlier this month, we announced that the formal cancellation of the order of 8 additional A380s, and as you are aware, that program has now also been canceled, but we remain committed to the existing fleet of 12 aircraft, with, as I said, those configurations taking place over the next year.

The fundamentals of the Jetstar business remain strong as revenue increased by more than 5%. A highlight was the record performance for the Domestic business. It was able to offset increased fuel and other costs through a combination of increases in unit revenue and ancillary revenue per passenger. In fact, ancillary revenue increased by 11% in the half, which shows you the great effort of giving added-value products to the Jetstar customers and how they are reacting to it.

Our strategy is to increase load factors towards the low-cost carrier benchmark level, and that is working. We're at a 1.3% increase compared with the same period last year. For those that follow these low-cost carriers in Europe, some of those carriers are operating with load factors in the mid-90s. So there's significant opportunity for further improvement.

And we're also continuing with our -- with increasing the capacity, and we've added 1% more seats to the domestic fleet through the cabin enhancement program. Jetstar's International business, including the outbound Australian short-haul and long-haul operations and Jetstar New Zealand, had a greater exposure to the higher fuel costs and foreign exchange changes. The revenue strength there was only able to partially recover these higher costs.

The Asian portfolio of airlines was also exposed, in some cases, to significant increases in airport charges and taxes. So across the Jetstar Group, FX on nonfuel costs reduced earnings by $27 million. Combined with the lower earnings from the affiliates, this represents more than half of the decline in earnings from the combined Jetstar operations.

On the demand side, long-haul travel to markets like Bali, Japan, Thailand and Vietnam continue to remain strong. Jetstar investment in customer experience, digital transformation and operational improvements continues. The ancillary revenue strength from the Jetstar Group was assisted by the successful launch of Plus 3kg carry-on, increased catering and the bundling strategy. Club Jetstar is also gaining popularity, with more than 300,000 members as of the end of January. Meanwhile, investment in the fleet through the cabin enhancement program is more than 80% complete, with the remaining aircraft on track for completion in 2019.

Jetstar maintains its commitment to affordable low fares, selling almost 2/3 of its fares for under $100. And I think you carried, Gareth, more than 15 million people in the half. So 10 million people traveled for under $100, which is an amazing statistic, as we'll say later, cheaper than most car parking around the country.

Qantas Loyalty continues to grow and diversify its earnings, from both the Coalition and new businesses. Underlying EBIT was a record at $175 million. The fundamentals of the Coalition business remain strong with positive momentum. The attraction of Qantas Frequent Flyer points really remain strong. Qantas Points-earning credit card growth was at 4%, continue to outpace the market, which declined by 1%. In fact, we now see that 36.5% of all credit card expenditure in Australia is on a Qantas-earning credit card. I still think that's a phenomenal statistic and shows you the success of this program and how sought-after these points are.

Our focus on improving the value of the program continues, with a significant expansion in partners, over 90 added in the half for earn and redemption options, and we have further enhancements on the way, when we will -- which we will launch later in this year, which we think are quite exciting and significant. We also saw a 9% growth in membership of the Qantas Business Rewards program, a key part of our airline SME strategy. And it is one of the reasons why both Domestic and International are seeing an increase in performance in that segment. I still think we should be getting to the end of membership, but amazingly, we've grown the membership by a further 600,000 members, added since the same time last year, and now at 12.6 million members, which again shows you how pervasive this program is.

The Qantas Health Insurance is growing strongly. We're one of the lowest-average premium increases of any health program out there. We are seeing strong take-up of the Qantas Premier Platinum card and the Everyday card launched last year. That gave us confidence to launch the Titanium card, which was launched by Olivia last week, and it's another innovation from Qantas. This super-premium metallic card has higher earn and superior benefits. It's ideal for our higher-spending members. It has the highest Qantas point earn rate of any Mastercard or Visa card currently in the market. I think it is very suitable for a lot of people in this room. So if you don't have it, Olivia will give you an application form on the way out. You're exactly the customer base that we need for that card.

And it's very impressive. I have one. It's very impressive when you hand it over in shops.

We are confident that our strategy to grow Qantas Loyalty earnings keeps us on track to reach our 2022 EBIT target. In fact, I think we are going to go back for this half to between 7% and 10% growth on that program, which is what we need to do to get to that target.

So I'll hand back to Tino, who will go through the performance against the group's financial framework.

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Tino La Spina, Qantas Airways Limited - CFO [4]

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Thanks again, Alan. Our financial framework continues to guide how we create value for our shareholders. The 3 pillars of the framework remain consistent. Firstly, maintaining an optimal capital structure that minimizes the group's cost of capital. The group's optimal net debt range has increased to $5.2 billion to $6.5 billion. This reflects the increased cash-generating ability where ROIC is at 10%. The supplementary slides to this deck also show the detailed calculations of how we arrive at that.

Secondly, delivering ROIC above 10% through the cycle. And finally, growing invested capital with disciplined investment, returning any surplus to our shareholders. Qantas has once again performed strongly against each of these long-term metrics. And we're pleased to say that we continue to deliver strong earnings per share performance, consistent with achieving our overarching target of delivering TSR in the top quartile of the ASX 100 and our global airline peers.

The group's net debt at 31 December, 2018, was $5.2 billion, at the bottom end of the target range. This gives us the financial flexibility to continue with our capital investments, shareholder returns and maintain our optimal capital structure under a wide range of operating conditions.

During the half, the group extended debt tenor through the second issuance under our corporate secured debt program, $450 million with a 10-year maturity. We continue to be investment-grade with no financial covenants, reflecting the debt -- investor confidence in our business and financial framework settings.

As at 31 December, 2018, Qantas held substantial short-term liquidity of $2.5 billion. This includes $1.5 billion of cash and $1 billion of undrawn facilities. In addition, the group retains a significant pool of unencumbered aircraft. With 3 new Dreamliners added, the value of this pool is now USD 3.7 billion.

Our high level of participation through our hedge program allowed the group to benefit from falling oil prices in the second quarter. For the remainder of financial year '19, the fuel expense is 90% hedged, with an expected fuel cost of $3.9 billion at current prices. On average, we have 73% participation should U.S. crude prices fall from here. Importantly, we're less sensitive to adverse movements from here. In addition, the group took the opportunity to significantly extend the FY '20 hedge program. FY '20 is now fully hedged, with fuel cost expected to be $4.18 billion at current prices. Again, we have 73% participation to favorable price movements from here.

Now turning to transformation. In the half, we delivered $206 million in transformation, well on the way to our target of at least $400 million for the year. This includes net revenue benefits of $79 million. Examples of initiatives include the structural changes such as the Dreamliner introduction, the Singapore hub shift and commencement of the Perth-London direct service. As a result of the transformation, London is now profitable.

In the half, we achieved nonfuel cost reduction of $109 million, helping to offset inflation. In addition, $18 million in fuel benefits were achieved through a range of initiatives. The pipeline of initiatives for FY '19 is well progressed and we're on track to deliver at least $400 million in benefits to offset inflation and any other headwinds. And the pipeline of initiatives for financial year '20 is also progressing well.

The group is at its optimal capital structure and continues to generate returns on invested capital much greater than 10%. As a result, the group continues to generate significant capital for reinvestment and distribution to shareholders. We took delivery of a further 3 Dreamliners and continue to invest in product and technology. In the half, the group invested $1 billion net of the proceeds from the sale of our catering business. Looking forward, the FY '19 net CapEx spend is anticipated to be $1.6 billion. Given the status of airport negotiations, this guidance excludes the anticipated proceeds from the sale of the Perth domestic terminal. Perth negotiations are subject to an arbitrated process, which will bring the matter to a conclusion. However, given the expected time involved, we expect proceeds to be received in future periods. We're going to do the right deal, not a quick deal.

Negotiations for the sale of the Melbourne Domestic Terminal are well advanced, and we are expecting to receive the proceeds in the second half.

The previous guidance also excluded the purchase of the stake in Alliance Aviation and CapEx for future existing aircraft deliveries, which we brought forward to attract favorable commercial terms, using our shareholders' money wisely.

The strong operating cash flow generated this half has also allowed us to return $500 million to shareholders through a combination of fully franked dividends and an on-market share buyback. During the half, the buyback reduced the issued capital by 3.4%. This takes the reduction on shares on issue since October 2015 to 26%, at an average price of $4.46.

The financial framework continues to guide our capital allocation decisions. Our primary objective is to maintain a strong balance sheet at all times to maximize value for our shareholders. A strong balance sheet is our #1, #2 and #3 priority. The group's forecast net debt position, relative to its earnings prospects, defines where the surplus capital exists. Given our second half earnings and cash flow expectation, the group has surplus capital.

Today, we are pleased to announce a 20% increase in the base dividend, from $0.10 to $0.12, fully franked, totaling $195 million. We're also pleased to announce an ongoing market -- on-market share buyback of up to $305 million. This takes the total shareholder returns for the half to $500 million.

Looking forward, the group intends to distribute future surplus capital via the base dividend every 6 months, in conjunction with a share buyback, special dividend or a capital return, considering what's the most efficient form at the time.

I'll now hand you back to Alan.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [5]

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Over to you, Tino. That was very smooth. We'll ask for scores at the end.

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Tino La Spina, Qantas Airways Limited - CFO [6]

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That's why you're the boss.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [7]

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Oh yes, we've got a scoreboard here. That is actually great. So let's turn to Slide 22 for the outlook.

You can see the particular capacity and fuel guidance on the slide, so I'll just make a few comments about what we're seeing in the market at the moment.

Looking ahead, we're seeing strong forward bookings. Competitor capacity has slowed internationally and is relatively flat domestically. In fact, on International, for the Northern summer season, international airlines published by season, which starts at the end of March, it's the first time since 2010 that we've seen a retraction in the market and only the second time since I have been CEO. So airlines are coping by managing supply with the higher fuel price, which is a great sign internationally. And oil prices have declined from the peaks we saw late last year. These factors point to a strong second half, and we expect to completely recover our increased fuel costs by the end of this financial year.

And with our seasonally stronger second half, operating cash flows and the lower capital expenditure, the group expects to generate significant net free cash flow during the half. We are mindful of potential signs of weakness in the broader economy, and we're always adjusting capacity to meet demand in individual markets. But overall, revenue and yield indicators remain positive. Above all, the resilience we've built into the business gives us plenty of confidence about our performance going forward.

With that, I think you have heard enough from us for the time being, so we'll open it up to questions and give the opportunity for the senior leadership team to be involved. So we might start with the room and then go to the phones. So in the room, any questions? We never have a question in the room first, it's always people on the phone first. So on the phone, any questions?

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Simon Mitchell from UBS.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [2]

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Just a question on the domestic market. If we look at industry statistics for December, we saw traffic and RPK decline. I think it was about -- by about 2%. And numbers coming out of the airport to January are looking reasonably flattish, to even down a bit. Is it fair to say that you are now seeing some -- you actually see impacts emerge from the RASK increases?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [3]

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So I might get Andrew David and Gareth to give an answer on this. So Andrew, do you want to go first?

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Andrew Paul David, Qantas Airways Limited - CEO of Qantas Domestic & Freight [4]

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Yes. Hi, Simon. Look, let me just, first of all, start by commenting on the first half and just reiterating the points that Alan made. Between the 2 brands, 62% capacity share and 80% profit. And you can go through all the other indicators, so it was a great first half. What do we expect to see in the second half? A continuation of unit revenue up in the second half for Qantas. What are we doing in the second half? We're adjusting our capacity. Where there is demand increase in Western Australia in the resource market, we are putting capacity into that market. We're reinstating some of the capacity we took out in the first half into the Queensland market. Where there is demand, we're picking up that demand. We're adjusting in the Northern Territory market at the back of the INPEX project. We've seen demand come off there and we've adjusted accordingly. We've also strengthened across the 2 brands, if you look at the Northern summer schedule, both our peak frequency and capacity share in markets like the Sydney market. So we are responding to those changes in demand, but overall, we expect our unit revenue to continue to grow in the second half.

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Gareth R. Evans, Qantas Airways Limited - CEO of Jetstar Group [5]

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Thanks, Andrew. Yes, really, I mean, in short, the answer to the question is no, we are not seeing any softening in demand. Looking forward, into the second half, I think we're taking the momentum from the first half into the second half. In terms of bookings, it was a good -- January is a leisure peak. It was a good month from a leisure travel perspective. And as we look into the entirety of the second half from where we stand today, we're not seeing any signs of weakness. Quarter 4, with Easter, the way Easter is configured this year, Easter fell in March, towards the end of March last year. It's all in April this year, so there will be a bit of a shift of quarters. Quarter 4, I think, will look particularly strong because Easter is very aligned with school holidays and Anzac Day this year. And whilst we're only 30% -- we're, at Jetstar, only 30% booked for Easter at the moment, we're seeing strong demand for that right now. So on broadly flat capacity, which we're going to put in, from where we stand today, we're seeing strong demand out there in the remainder of the year.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [6]

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And I think, Simon, if there is any elasticity that shows, we'll just manage capacity going forward. For us, it's all about making sure that we recover the increase in fuel costs, making sure we maintain our strategic position on the core markets and making sure we take the opportunity to maintain our margins because that's where the focus is and we think we have enough levers in order to do that. But again, I think there's -- I was doing a lot of media interviews today, and one of the things that seems to be coming across, there may be a change in consumer demand patterns that I think we probably are seeing, and particularly, with younger generations out there, people may not be spending on retail, maybe not be spending on alcohol, but they certainly are spending on experiences. And that seems to be a trend across the reporting season. And I think that's what we are seeing and that's probably one of the reasons why we're seeing no weakness in the revenue and the demand profile going forward at this stage.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [7]

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Okay. And just a second question on fuel. The $4.2 billion indication for FY '20, is that a worst-case scenario? I notice it's based on $83 a barrel for jet fuel. You've mentioned your participation in the favorable price movement, but how should we think about participation in unfavorable price movement?

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Tino La Spina, Qantas Airways Limited - CFO [8]

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Yes, so the $4.18 billion that we've got out there for 2020 is basically, if you take the current forward curve, both for the base crude price and for the refiner margin out at that point in time, and extend it based on the forecast volume that we would take, that's our expected spend. Now reality is, and here's a couple of the caveats, if the refining margin doesn't move significantly from where it is in the forward curve and if the Aussie dollar moves consistently with the oil price, then reality is, we are at about the worst-case position for FY '20 with that fuel price. Okay, so what we did during the half, given that we've taken -- and this year, we're going to absorb $700 million of fuel increase, we took the opportunity when oil was at $85 and was moving down towards $50 a barrel, that's Brent crude, we took the opportunity to put -- to cap our worst-case position and whilst still maintaining a significant level of participation. And we've got that. That buys the business some breathing room if fuel prices go north again and hit -- and start to go and encroach on $80 a barrel again. It just gives us more time to respond. Ultimately, we're not going to beat the forward curve and we're all going to deal with them. When I say, we all, the whole industry is going to deal with the new realities. But it does cap our worst-case position. Importantly, again, we've got massive participation to falling fuel prices. So that's really important to us. It's a long way out. We're not trying to guess what the fuel price is going to be, so we do have significant exposure to the benefit of fuel prices falling from here, limited exposure to fuel prices going up, with those couple of caveats I listed at the front.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [9]

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Okay. And just lastly, before Alan cuts me off, just tax. No cash tax paid in the first half. Should we expect payments to resume in the second half?

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Tino La Spina, Qantas Airways Limited - CFO [10]

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Yes. Sure. We've got a provision for tax in the balance sheet of 153-odd million dollars. And there will be a small amount of tax that's payable for the 2018 financial year as we consumed all of our tax losses. And then, of course, as we've consumed those tax losses, we now go onto an installment regime between now and the end of the year. Obviously, one of the other guides for you to think about is we wouldn't be issuing franked dividends if we didn't have franking credits by the 30th of June. So the amount of franking credits that are required to frank a $0.22 dividend, which was the $0.10 in the first half and the $0.12 in the second half, should give you a guide as to the amount.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [11]

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And Simon, can we say, I mean, one of the other things that we pointed out in the presentation is in the second half, we're expecting net free cash flows to be considerably bigger than the first half because capital expenditure is a lot lower. In the first half, as Tino pointed out, we did all of the hedging for not only this year, but also 2020, which, with the option premium, was a big cash outlay. And of course, we see the demand environment continuing to be pretty strong, and typically, the second half has better cash flow. So we are still confident in our ability to do everything that we've said, which is to return to shareholders, pay the taxes and continue to invest in the business.

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Operator [12]

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Your next question comes from the line of Paul Butler from Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [13]

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The forward booking number that you reported at the end of December, it was 6.8% year-on-year increase versus the 8% increase that you were seeing back at the end of the first quarter. I'm just wondering, just between -- reading between the lines in your commentary, has that sort of declined since then, over the last 1.5 months.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [14]

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So it might get the guys to have a talk about what they're seeing on forward. So Ali, do you want to talk about yours?

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Alison Webster, Qantas Airways Limited - CEO of Qantas International [15]

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Great. Thank you. We're certainly seeing strong performance across International for our forward bookings. I think Alan covered off earlier this afternoon that, importantly for us, we are seeing very pragmatic behaviors from our competitors in the international market, 0.3% ASK growth over the second half, but importantly, focusing in on Northern summer '19. Starting from the end of March, we see, for the first time, since 2010, a 0.5% reduction in competitor ASKs. Now when you stare into that, it's also very clear to us that a majority of that shaping is happening on key competitive markets for us right now, North America and also the Tasman. So we feel very confident around our forward bookings and most importantly, around our competitor capacity behavior.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [16]

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Go on, go Gareth.

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Gareth R. Evans, Qantas Airways Limited - CEO of Jetstar Group [17]

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Look, I can probably only reiterate the comments I made earlier. The one thing about the forward booking profile as at even at the 31st of December, looking into the second half, the movement in Easter does have a little bit of an effect to that. Easter was a lot earlier last year. So the Easter bookings were more represented at the 31st of December than they are this year because Easter is a little bit later. So that switch is partly responsible, I think, for maybe it looking slightly weaker at the end of December than it was at the end of June, which was a like-for-like period. But as I've said, we're still seeing strong demand out there, and for as where we stand today, the momentum continues.

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Andrew Paul David, Qantas Airways Limited - CEO of Qantas Domestic & Freight [18]

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Yes, and again, like Gareth, I'm at risk of repeating what I said before, what we are seeing, we have very strong corporate share position. We're continuing to grow our SME share, capacity discipline in the market. And when there are changes in demand as there is in the West, where the resource market is now coming back from the $300 million that came off from 2012 peak, 28 first half, 50 last year, we expect that growth to continue in the second half. All of that bodes well for demand for the Domestic business.

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Tino La Spina, Qantas Airways Limited - CFO [19]

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Paul, just going back to your question as well. I know what you're asking. Is the 6.8%, 6.8% at the end of January, not only the end of December? We haven't disclosed that. But it -- I think the 6.8% compares strongly with what we announced at the end of the financial year, which was a 6.2% growth in forward bookings, and then at the end of September, was an 8%. So it's still strong, and I guess we didn't put it in here by accident that it's at 6.8%.

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Paul Butler, Crédit Suisse AG, Research Division - Director [20]

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Okay. Can I just ask on the transformation benefit? At the quarter, I think you had indicated that, that $400 million or better benefit would be skewed to the second half, and yet, you've already done $206 million. So it looks like that if there's a skew, then we're talking about something significantly above $400 million.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [21]

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Rob?

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Robert Marcolina, Qantas Airways Limited - Group Executive of Strategy, Innovation & Technology [22]

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If you -- with regards to transformation, I mean, the $200 million represents just over half. But if you look at last year, it's more than last year. But what we would say is that we're still on track for a minimum of $400 million, and that's where we're headed at this point.

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Tino La Spina, Qantas Airways Limited - CFO [23]

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Sorry, and Paul, I think the comment that we made at the half was specifically related to the cost part of the transformation of that transformation target. So you'll see, in this half, we did $109 million of cost transformation. What we were implying is that we would expect that component to be larger in the second half. We didn't give any guidance just to the other components.

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Paul Butler, Crédit Suisse AG, Research Division - Director [24]

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Okay. And if I could have just one more. The net CapEx guidance of the $1.6 billion, that's up from the $1 billion you gave at the full year. Is that because the Perth terminal transaction is no longer included in that, or is something else happening?

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Tino La Spina, Qantas Airways Limited - CFO [25]

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So there's 3 components to it. As I said earlier, which would -- number one was the Perth terminal definitely. So we are in dispute on -- with Perth Airport. And we are not going to do a quick deal just to try to get the proceeds into this -- in this half. We're going to hold our position and get the right deal, which provides value for our shareholders. So just given that this is going to be expected to be longer process than was originally planned, we don't expect to get it in this half. Whether it's next half or the half after that remains to be seen. But we will make sure that we get the right deal from Perth Airport. Secondly, Alliance Aviation. It was $60 million that we spent in buying our stake in Alliance. That was not included in the previous $1 billion guidance. And the last component, Paul, which is not any increase in CapEx, but we found an opportunity, where we were approached with an opportunity where we could bring forward some existing CapEx payments, attract favorable commercial terms, and we availed ourselves of that opportunity. So we are not going to be fixated on what our target was in a particular half. If it adds value to our shareholders and it's value-accretive, we will make the right decisions. And given where our cash is and our net debt position is and our strong balance sheet, importantly, it's a strong balance sheet position that we had that allows us to avail ourselves of these opportunities if they were to arise. But those 3 make up the $600 million.

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Operator [26]

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Your next question comes from the line of Jakob Cakarnis from Citi.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [27]

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Just 2 questions. The unit cost inflation for operating costs, your variable operating costs in the half, looks like it's up about 9.5%. Can you just talk to how much of that is from higher selling costs versus other operating costs? It's just interesting against the background that operating variable costs are higher given the capacity cuts.

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Tino La Spina, Qantas Airways Limited - CFO [28]

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Yes. So what we have got in the -- when you look at that line, presumably, you're talking about in the 4-D, has gone up. So there are a couple of things. Number one is CPI or inflation, which we should be expecting. Also, when we mentioned the foreign exchange impact on nonfuel U.S. dollar-denominated costs, a lot of that lands in that line item. Separately, we've had the increase in block hours versus ASKs as well, which does drive up variable costs, which is why we tend to focus on the margin in the business. So you get some of that impact. Also, when we sold the catering business, the cost now of the meals goes into that line item. So there's a few things unfortunately going on in that line item, which make it look worse than it actually is, but we can probably take that offline with you if you've got any further questions, Jakob.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [29]

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So I think outside of that, if you look at our unit costs, which I think is a better way of looking at where the business is, there's still a big focus on that. Our unit costs, typically outside of fuel, has been up 1%. And that's because we've been using smaller aircraft in certain markets to manage the margin on it. That's because we have a huge training program going on with the retirement of the 747s, and there is a lot of those costs, as we've said, that will continue to be moved out of the business and the focus on cost has never been stronger. So we're quite happy with how our cost performance is going, but we continue to focus on the margin we're producing. And we've added cost with things like WiFi from a product point of view, which we know gives us a big improvement in NPS and gives us a big improvement in our share in the corporate market and the SME market, which is what we're seeing. So those costs are actually giving a return on the bottom line, and we'll continue to invest in that space.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [30]

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And then just a second one from me then. How should we think about load factors from here? I know there has been a lot said about lower passenger numbers, but that makes sense in light of capacity reductions. Do you just want to talk -- I know you did mention briefly where you think that load factors can get to versus the International piece. Just give us some more color on that. How should we think about it across the brand?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [31]

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Yes. I'll ask each of the guys to talk about what they see and how they think they're going to be managing it. Maybe Andrew first and then Gareth and then Ali? Yes.

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Andrew Paul David, Qantas Airways Limited - CEO of Qantas Domestic & Freight [32]

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I think, Alan, you gave the answer earlier on. I mean, in line with demand, we're adjusting capacity. There is room to grow load in the Domestic business. It did go up 1% in the first half, and RASK was up 7.5 percentage points. If you add actually ancillary revenue in there, it was up 7.9% for the first half. So it's a mixture of those factors, but there's certainly room for more load growth -- load factor growth in the Domestic business.

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Gareth R. Evans, Qantas Airways Limited - CEO of Jetstar Group [33]

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Yes, look, similarly, for Jetstar domestically, we're in the very, very high-80s domestically now. As Alan said, European low-cost carriers are in the low to mid-90s, so that opportunity is there for us. That's not going to happen in the next 6 months. But with strong demand growth over time, I think we can push the load factor up into that sort of space. And in our International business, we are in the mid- to high 80s as well. So there's probably some opportunity there too.

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Alison Webster, Qantas Airways Limited - CEO of Qantas International [34]

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We certainly saw a good load performance for the first half for Qantas International. We grew 1.1 points to 85.5%. One of the things we're absolutely focused on is very close revenue management across all of our routes. And as Alan mentioned earlier, the standout is the Perth-London for us, where we have been achieving load factors on average in the mid- to high 90s, and we see that particularly as we get the right aircraft, right route. And we're rolling those 789s. As we retire 747s, we'll continue to see load improvement for International.

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Operator [35]

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The next question comes from the line of Anthony Moulder from CLSA.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [36]

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Just a question back on CapEx. Obviously, $1.6 billion. We strip out Alliance. Maybe a little bit other CapEx coming into this half. Does that still form a base for what you would expect through future years? And obviously, for next year, you've got the cabin flex program. You won't tell us how much that is, but that would be an addition to that kind of base level of CapEx that you would spend this year.

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Tino La Spina, Qantas Airways Limited - CFO [37]

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We haven't talked about what the forecast for CapEx is next year, Anthony. So we're saying that this year, it's $1.6 billion, and it's $1.6 billion for the reasons we gave earlier. What we have said consistently is that looking at our fleet plan, we are able to replace our entire fleet over time and not have to exceed growth CapEx of $2 billion in any 1 year. Now clearly, we can exceed $2 billion. The balance sheet is strong, the earnings capability is strong, but we don't have to. We don't have to go above $2 billion in any 1 year on average. Now if we have growth, I don't include growth in that, of course. If we do Project Sunrise, for instance, that's growth capital expenditure and in that case, will need to be made on its own merits. And if we choose to do that, it will be because it's value-accretive for our shareholders. But that's the only guidance that we've ever given on CapEx going on beyond this year.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [38]

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And of course, we've always done it in the past. We've managed the CapEx, dependent on what's happening with the environment. But as we said, we're seeing a strong environment. We've seen changes in transformation across our entire business. And if we can keep the earnings where they are going forward, we can do everything we believe that we said we wanted to do, which is replace the fleet, renew the fleet. We can invest for our customers in the configuration programs and lounges and product, we can give returns to our shareholders. And that's our intention and that's the business that we think we have created. And we'll see over the next few years how that transforms out there because we are continuing with the transformation program, we're continuing with the focus on improving our share in the SME market and the corporate market, and we're continuing to leverage all the assets we have. And that's why you see the confidence now with the management here today.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [39]

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Just a follow-on from that, if I could. The capital returns to $500 million per annum despite you guys being at the bottom end of the optimal capital range. How does that mostly sit with the strong outlook that you're talking to today?

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Tino La Spina, Qantas Airways Limited - CFO [40]

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So we're at the bottom end of the net debt range, Anthony, so it's $5.2 billion to $6.5 billion is our range. We ended the half at $5.2 billion. Importantly, when we determine whether we have got surplus capital, it's always forward-looking. So we're looking forward into the half. We know that our CapEx is going to be lower in the half. Notwithstanding, we've got the tax payments in the second half. We have said, quite categorically, we expect to have a very strong cash flow performance in the second half, and that's giving us the confidence that we've got surplus capital, that's why we are distributing $500 million here today.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [41]

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And I think you will see that. I mean, with our outlook going forward, we're saying that we're going to cover the increase in oil, and that's clear across each of our business. That's why we have confidence with the revenue performance that's there. You can work out what that means, Anthony, and why we're pretty strong on where we think we're going to be on a net free cash flow position at the end of the financial year because the second half will be a lot better than the first half.

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Operator [42]

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Your next question comes from the line of Cameron McDonald from Evans & Partners.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [43]

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Just 2 questions if I can, one for you, Tino, and one for Alan. So firstly, Tino, just you mentioned that the operating cash flow was impacted obviously by the earnings decline, but then also some timing issues. Can you give us some more detail about what those timing issues were?

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Tino La Spina, Qantas Airways Limited - CFO [44]

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Yes. So the timing issues I was referring to was a buildup of working capital. We had a buildup of payables in the same period, comparable period in 2018. And this year, we didn't have that. It's as simple as that. It's just the movement or the reversal of those timing differences, which is why we keep focusing on EBITDA. We've drawn attention to EBITDA to give you the sense of what the cash-generating ability of this company is. We're not going to do things like hold back payables just to give an operating cash flow performance for a particular half. That's not the way we run the business. So if it's the right thing to do, we'll keep -- we'll manage it as it comes. But it turned out to be 1.205, which means you're going to see a reversal in the second half. We're confident of that. I can't be stronger in the words I've used about the second half.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [45]

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And the other question?

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [46]

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Okay. And then, so the other question, Alan, was can I get your reaction to the Productivity Commission draft review?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [47]

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That's a short question. I'll give a short answer. I thought it was terrible. I think, in all honesty, I think the people that read the report were probably pretty disappointed in the report. It was a bit of a setback, you can't put it any other way, from what we thought would come out of it. But when you look at the report, it was very clearly flawed. I mean, for the fact that they said that there is no problem with car parking costs. I don't know when the last time you parked in a car park, Cam, at the airport, but it's higher than some of the Jetstar airfares that will take you to markets like Tasmania. So the public know that it doesn't pass the sniff test. That's very clearly not the case. And our argument has been if you get that, what airport parking charge is, imagine what they're charging us. They're monopoly airports. They are overcharging the airlines, we believe. And at the end of the day, you, the consumers, are paying for that. Airfares have come down by around 40% in the last decade. Airport charges have gone up towards by 25%. Imagine the consumer benefits if we had competition when it comes to airports. And all we've been asking for, all we've been asking for, is that when these disputes occur, like we have with Perth Airport, that an independent arbitrator comes in and decides the merits of the case. We have asked for the ACCC to come in and look at it. Who could complain about that? That is fair. It's saying, let's have a look at this and let's make a true determination of what's good. And unfortunately, the Productivity Commission missed it. We think we -- we're going to continue this debate, this discussion. We're getting some good traction with politicians. We'll make the case with the general public and with the politician. All I know is Anthony Albanese text -- tweeted, tweeted that maybe the Productivity Commission should have gotten somebody with airline knowledge before they wrote that report. So even potentially, the future minister that's going to look at this area has completely discounted the report as well. So we're not giving up on it. We can't give up on it. This is a big cost imposition on our customers. We think we have a strong case. We are going to be canvassing, and all the airlines feel the same way. Actually, in my 10 years, never being on the stage with John Borghetti and John Sharp and Christopher Luxon, and all of the airlines sat on the stage to talk about this because we all feel that this isn't fair to the traveling Australian public and something needs to be done about it. And every day, we're living with the monopolistic behavior of airports, we're living with the arrogance of airports, and we are having disputes all the time that we think could be reasonably resolved if an independent arbitrator actually got involved in this and stopped the taking 4 years to get through supreme courts or court cases. It's just outrageous what's happening at the moment, and it needs to change. Sorry, I didn't give a short answer to that.

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Operator [48]

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Your next question comes from the line of Michael Morrison from Deutsche Bank.

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Michael Morrison, Deutsche Bank AG, Research Division - Research Analyst [49]

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Just a quick question on Loyalty, since we haven't touched on that yet. Margins were down, notwithstanding the restatements. Could you just give us a bit of a -- you did mention 7% to 10% revenue growth this year. What are your expectations for margins?

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Olivia Wirth, Qantas Airways Limited - CEO of Qantas Loyalty [50]

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Absolutely. Thanks for the question. You would not have seen Alan wink at me because it's been a number of sessions since we've had a question on Loyalty. Look, you would have seen, over this first half, a strong result for the Loyalty business, with now 4% growth in EBIT. You mentioned there that there was a slight deterioration in margins. We have indicated previously that we are looking to diversify the Loyalty business. That's very important for us in terms of reaching our EBIT target of $500 million to $600 million in FY '22. And part of that diversification is investing in new businesses. And that is obviously -- has an impact on the margins. So investment in businesses, such as the Insurance business and our Money business. We do expect though in the second half a strong momentum to continue, that we've seen in the first half, and we expect to return to the 7% to 10% growth, which is what we need to do to ensure that we reach our targets in FY '22.

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Tino La Spina, Qantas Airways Limited - CFO [51]

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And sorry, Michael, just to correct you. You said 7% to 10% revenue growth. To be clear, the target for Loyalty is 7% to 10% EBIT growth from hereon in.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [52]

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Yes, as Liv said, their revenue was up 8%. It was the highest growth in revenue of any of our business segments. So we are seeing that coming through. And you can imagine, with the startup costs being alleviated going forward, that we can clearly see a path of getting back to that 7% to 10%.

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Michael Morrison, Deutsche Bank AG, Research Division - Research Analyst [53]

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Okay. So it's hit the bottom for margin decline then?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [54]

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Well, it's not a decline, it still grew by 4%. And last year, it grew as well. So what we are seeing is record results every year. It is just that the level of growth slowed down as we made the transition through the start of businesses occurring and the financial services changes that occurred last year. But this is still fantastic growth. A lot of businesses would love 4% earnings growth. And with the potential again to 7% to 10%, I think shows you the quality of that business in our portfolio.

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Michael Morrison, Deutsche Bank AG, Research Division - Research Analyst [55]

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Okay. And you mentioned, just with spilling capacity on certain routes, that you would see some improvements with the new planes coming in. Are there other things you can do in the shorter term? Do you reconfigure the planes that are on the routes, or what are the types of things you can do?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [56]

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We've got some exciting plans on International, in particular. I think everywhere, we're reconfiguring aircraft at the moment there. And wait, but Ali, you are the ones excited.

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Alison Webster, Qantas Airways Limited - CEO of Qantas International [57]

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Absolutely. We are thrilled that starting with July of this year, we'll be reconfiguring all 12 of our A380 fleets. 2 benefits. The first one, definitely a customer benefit. We will be putting our business flatbed suites, that have been so popular on the 789, onto our A380s. And also, our new Premium Economy seats from the successful 789s will also feature on the A380s. And then we are doing a complete refresh and refurb of our first and our economy cabins and some exciting changes to our upper deck bar. Importantly, as part of this reconfiguration, we're actually improving the premium footprint of these A380s. And effectively, what we're doing is taking 30 economy-class seats off the A380s, and we will put an additional 6 business-class seats and an additional 25 Premium Economy seats on instead. Those 2 cabins, particularly on our long-range routes from Australia via Singapore to London and also from Australia to Los Angeles, are very strong performers for us. And we're delighted we're improving that premium footprint.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [58]

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Thanks, Ali.

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Michael Morrison, Deutsche Bank AG, Research Division - Research Analyst [59]

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Just while we're on that, what type of CapEx spend is that?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [60]

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It's -- we haven't disclosed that, but it's going to be included in our CapEx guidance for future years when we outline them. And it is, as Tino mentioned, that we don't think in any 1 year we need to spend more than $2 billion to replace or renew the fleet. That includes all the product stuff that we're doing. And one last question, I think. Thank you very much. One last question on the phones, and then we're just checking in the room again before we close on the phones.

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Operator [61]

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Your next question comes from the line of Owen Birrell from Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [62]

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Just a quick couple of questions for me. Firstly, on the fuel costs. So does the cost of increased hedging sit in this half of the cash flow results?

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Tino La Spina, Qantas Airways Limited - CFO [63]

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Yes. Sorry. Hang on. So the cost of increased hedging for 2020, you mean the cash cost of that was in the first half that we just reported, yes.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [64]

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Yes. And secondly, on that fuel hedging. I noticed that you had jet fuel price set at about $82 in the fuel guidance. Does this represent a proxy for the maximum fuel cost over the next 3 years for Qantas in your opinion?

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Tino La Spina, Qantas Airways Limited - CFO [65]

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The maximum fuel costs, hang on a second. I can't tell you what the maximum fuel cost is going to be for the next 3 years because we haven't hedged that far out. So we've only hedged until FY '20. And what I said earlier is the level of protection that we've put in place and given with the caveats, as long as the refiner's margin doesn't increase significantly from here and as long as fuel and FX move in concert the way they ordinarily do, then we would expect that number of $4.18 billion to be around about the worst-case position. So you got very little slippage from there. However, we have massive participation should fuel prices fall from there. We got massively high participation at 73%.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [66]

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I have to say, if Tino could predict the oil price for the next 3 years, he wouldn't be the Qantas CFO, he'd be on his super yacht in the south of France at the moment, I think.

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Tino La Spina, Qantas Airways Limited - CFO [67]

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Let me dwell on that for a moment.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [68]

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I think that's the last question on the phones. Any questions in the room? No. Okay. So we can wrap up. Thank you very much, everybody.

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Tino La Spina, Qantas Airways Limited - CFO [69]

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Thanks, everyone.