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Edited Transcript of QAN.AX earnings conference call or presentation 20-Feb-20 12:30am GMT

Half Year 2020 Qantas Airways Ltd Earnings Presentation

Sydney Mar 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Qantas Airways Ltd earnings conference call or presentation Thursday, February 20, 2020 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

* Andrew Paul David

Qantas Airways Limited - CEO of Qantas Domestic & Freight

* Gareth R. Evans

Qantas Airways Limited - CEO of Jetstar Group

* Tino La Spina

Qantas Airways Limited - CEO of Qantas International

* Vanessa Hudson

Qantas Airways Limited - CFO

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Conference Call Participants

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* Anthony Moulder

Jefferies LLC, Research Division - Equity Analyst

* Anthony Longo

CLSA Limited, Research Division - Research Analyst

* Cameron McDonald

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

* Jakob Cakarnis

Citigroup Inc, Research Division - Assistant VP & Analyst

* Matthew H. Ryan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Owen Birrell

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

* Paul Butler

Crédit Suisse AG, Research Division - Director

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Presentation

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

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So thank you, and welcome, everybody. It's great to be here. Can I introduce Vanessa Hudson, who's, as you probably -- everybody's aware that she's our new Group Chief Financial Officer. Vanessa's been in the company for over 20 years. She doesn't want me to give the exact amount of years. I said she joined, I think, when she was 15, obviously, yes?

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Vanessa Hudson, Qantas Airways Limited - CFO [2]

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Very young, very young.

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

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But Vanessa's had a number of roles in finance, in operations and in commercial. Most recently, she's had roles of Senior Vice President of North America, Head of Global Sales and National Sales, and most recently, Chief Customer Officer. So it's great to have her back here. As you see, she's breaking with the trends. I didn't have to coordinate my tie this morning, where -- which is actually quite good. And the last 2 CFOs have grown beards and have dropped ties completely since they've left, as you'll see in a second. So they've really gone downhill since they've left their role.

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Vanessa Hudson, Qantas Airways Limited - CFO [4]

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And no chance that the trend continues.

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

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No chance that the trend continues, which is good. Can I introduce the rest of the executive team? Andrew Finch, stand up and say hello. He's our General Counsel, Company Secretary and Head of the Office of the CEO; Olivia Wirth, who's CEO of Qantas Loyalty; Andrew David, who's CEO of Qantas Domestic; John Gissing, who's CEO of QantasLink and Associate Businesses and Safety Services; Rob Marcolina, who's in charge of people, in charge of IT and strategy; and Steph Tully, who's our Chief Customer Officer; Tino La Spina, watch the lack of tie and beard now, the CEO of Qantas International; Andrew Parker is, again, Head of Government Affairs; and of course, Gareth Evans, last but by no means least, another beard and no tie, as the CEO of Jetstar Group.

So welcome to Qantas headquarters for our 2020 half year results, and also welcome to everybody that's on the phone. So I'd like to now start off by giving you some of the highlights of the half before we go through some of the ways we're managing some of the challenges that we have.

The team here at Qantas has again delivered another strong result while continuing to invest for our customers. The efforts of our people continue to underpin our performance, and I want to acknowledge our people for the great work that they do every day, particularly in supporting Australians when needed, like carrying in planeloads of firefighters and supply to bushfire zones or evacuating Australians from Wuhan and Tokyo. It takes all those people on the ground that work to plan and support those complex operation and, of course, the volunteers who crew those flights.

I have to say we had successfully the flight from Tokyo arriving into Darwin this morning, and I had the pleasure of meeting the crew that were on that flight before they went out. I believe that half the crew on that flight were also volunteers on the Wuhan flight. And they talked about those flights being the most uplifting experience that they've ever had in their careers, particularly taking young kids -- there were 130 kids on our second Wuhan flight, taking them back to Australia. And I went and met the second flight from Wuhan. It was nearly impossible to get the crew off the aircraft after most of them being on it for 24 hours. They were that engaged, that enthusiastic, and it shows you how Qantas can make a difference as being the spirit of Australia.

Our ongoing focus on transformation and investment in our business has also helped us to deliver a resilient performance in the face of temporary headwinds, and we will ensure we remain strong as we face even more challenges to come.

Looking at our profitability first. Just to remind you that when -- we have applied a new leasing accounting standard, AASB 16, from the 1st of July, 2019. So our prior half year results have been reinstated for comparison purposes. If you have any questions on the application of the new standard, please do not raise them with me. We have Russell and Vanessa here. He will tell you. He loves that I raise questions on that and answer questions on that, and we also have Investor Relations who are experts on it.

Statutory profit before tax was $648 million. On an underlying basis, profit before tax was $771 million as ticketed passenger revenue strength offset the temporary headwinds of subdued demand on the Hong Kong market. Freight markets and foreign exchange impacts were also offset by that revenue increase. So for the first time in a couple of years, we have seen only modest fuel cost increases.

The group was required to transfer ownership of our major domestic terminals back to the airport operators effective the 30th of June last year. That has resulted in a step change to our cost structure in the 2020 financial year, which has also been absorbed. The group was compensated for the transfer of ownership by all airport operators, except for Perth Airport, and shareholders have benefited through substantial capital returns over the years. Taking all of this into account, an underlying result of $4 million less than the same time last year is reflective of the group's growing resilience.

Statutory earnings per share was $0.288, up 3.2%, a benefit of the share buyback. The group's return on invested capital remains strong at nearly 20% as we entered our sixth year of returns well above our 10% value creation threshold determined by the financial framework. All segments continued to deliver returns above the group's cost of capital and we achieved record earnings at Qantas Loyalty, while the group's airlines delivered strong performance in the face of temporary headwinds. We are on track to deliver greater than $400 million in gross transformation benefits in financial year '20.

We continue also to invest in our customers, people and the community. We have set ambitious emissions targets and are on track to deliver our waste targets. Three additional Dreamliners entered into service, taking Qantas International Dreamliner fleet to 11 aircraft. We completed the reconfiguration of 3 A380s and invested in our lounges in Singapore as our hub restructure increased demand there. The Pilot Academy is up and running with the first cohort of student pilots commencing training in the half with the formal opening of Toowoomba just a few weeks ago.

Turning now to the balance sheet. Net debt at the 31st of December 2019 was $5.3 billion. This is the lower end of the target range, which is set to minimize the cost of capital for the group. Our strong operating cash flows allowed us to return nearly $650 million to shareholders in the half. This was through a combination of fully franked dividends and a tax effect of off-market share buyback.

And today, as a result of the strength of our balance sheet, our medium-term outlook for earnings, the Qantas Board has the confidence to announce up to a further $351 million of capital returns to shareholders. This includes an increase in the base interim dividend per half from $0.13 -- I think it was $0.12.

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Vanessa Hudson, Qantas Airways Limited - CFO [6]

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It's $0.12 from 2019 first half, then it's $0.13 from last half.

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

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Sorry. I'm just checking on the girl, yes. $0.13, good answer. $0.13 to $0.135 per share fully franked, with the remaining distributed through an off-market share buyback of up to $150 million sized to use all the available franking credits. Combined with the distribution in the first half, this would take the distribution in the financial year 2020 to about $1 billion.

Our portfolio of mutually -- you're nearly doing the Tino.

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Vanessa Hudson, Qantas Airways Limited - CFO [8]

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No. No. I just -- I'll have to keep on it.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [9]

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Our portfolio of mutually reinforcing business is at the core of the group's ongoing strength and resilience. Domestic dual-brand strategy remains central to our earnings strength, with the first half Group Domestic result of $645 million now nearly 2/3 of the earnings from the operating segments. Qantas Loyalty earnings growth is regaining momentum, now double digit for the second consecutive half. It delivered another record result and continues to provide a growing and diversified earnings stream for the group. Qantas International continues to transform with the introduction of the Dreamliner, growing revenue and earnings in the half.

At Investor Day, we set ambition market -- margin targets for the group's domestic airlines. We believe we can achieve these targets based on the structure of the Australian market and our sustainable competitive advantage in it. This half saw operating margins for Qantas Domestic essentially flat, with Jetstar domestic margin declined compared to the same period last year. Competitor capacity reductions lagged the demand environment, compressing margin growth, coupled with the impact of industrial actions on Jetstar margins. Also, Jetstar was impacted by foreign exchange costs, which impacted its business more than any other segment. But our sophisticated dual-brand strategy allowed us to achieve a 0.5% increase in Group Domestic unit revenue.

The group's international airlines were set ambitious returns on invested capital targets. The rolling 12 months' ROIC to the 31st of December for both Qantas International and Jetstar International was greater than WACC as Group International earnings were up 2.5% from the same time last year. Qantas International benefited from a 6% increase from unit revenue in the half. Combined, the group's international airlines' home market strength ensure that the Qantas Group remain the leader in the Australian outbound market having a 26% share.

The records continue at Qantas Loyalty with earnings up 12% to $196 million. This tremendous result was achieved through growth in both the coalition and new business as their revenue grew by more than 20%. Membership also grew by 5.4% to 13.2 million members. The program reset has benefited our members with more than a 20% increase in both points earned and Classic Reward activity.

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

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Vanessa Hudson, Qantas Airways Limited - CFO [10]

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Thanks, Alan. During the half, the group experienced headwinds totaling more than $170 million due to Hong Kong protests, global freight weakness and foreign exchange impacts on our net expenditure and an increase in airport costs. Total revenue for the group reached another first half record. This helped the group absorb these headwinds and deliver an underlying profit before tax of $771 million, which is essentially flat on the same time last year. Underlying earnings per share were up 10% due to the accretive nature of the buybacks, and statutory earnings per share was $0.288, up 3.2%. Return on invested capital was also strong at a statutory level of 17.6% and 19.6% at an underlying basis and both well above the group's cost of capital.

Unit revenue for the group was up 2.8% as Group Domestic achieved an increase of 0.5% and Group International benefited from 4.8% increase. Total unit cost was 3.2% higher while ex fuel, unit costs were up 3.1% on flat group ASKs. On a normalized basis and after adjusting for the freight impact in airport charges, fuel -- ex fuel unit costs rose by more of a modest 0.7%.

The group's operating margin was a healthy 9.5% as the group continues to maintain its operating margin advantage to its regional competitors. Operating cash flow for the group remained strong at $1.475 billion, up $40 million from the same time last year. After investing close to $1.3 billion in the business, net free cash flow was $213 million.

Now turning to the profit bridge. Starting with the first half 2019 statutory earnings, the bridge to the first half 2020 consists of the following: First, we add back the net of items outside of underlying of $84 million. This includes $47 million accounting charge for the adoption of AASB 16 and also the IFRIC Fair Value hedging agenda decision, which has had a retrospective impact and taken as an item outside of underlying. After adjusting for $88 million of gains, the restated first half 2019 underlying performance was $775 million.

Fuel expense increased by $12 million net of transformation, fuel efficiency benefits of $19 million. The group's disciplined hedging program provided significant protection from volatile fuel prices throughout the half. As flagged at our first half -- quarter trading update, an unfavorable movement in FX on net fuel expenditure impacted the group by $51 million. The group also experienced structural changes in costs associated with the transfer of the domestic terminals to airport operators of $55 million and $23 million in depreciation and amortization driven primarily by increasing investment in fleet, lounges and technology.

Ticketed passenger revenue was up $196 million that substantially offset the increase in costs and other headwinds that we experienced. Transformation delivered a total of $188 million, including nonfuel cost reduction of $113 million, offsetting the majority of the impact of inflation. As we said at the quarter 1 trading update, the benefit of cost transformation will be skewed to the second half with an increased focus on cost reduction given the revenue environment.

First half 2020 underlying profit result after the discount rate change and other items was $771 million. And adjusting for items outside of underlying and transformation -- predominantly transformation, our statutory result was $648 million, $43 million down on the same time last year which had benefited from $88 million in gains and reversal of impairments that were not repeated this half.

This slide shows the items not included in the underlying result for the current half and the same time last year. You can see that there are items of transformation costs and discretionary bonuses pertaining to prior years were similar in size for each reporting period.

The group continues to generate strong cash flows. Comparing first half operating cash flow for this half versus the same period last year, the first thing to call out is that the earnings quality remains strong, the key differences in cash flow performance relating to timing difference predominantly. The group returned to income-paying status in 2019 financial year. Tax installments of approximately $300 million were paid in the first half, covering installments for both 2020 financial year and catch-up payments pertaining to the first half of 2019 financial year. This increasing tax payment generated significant franking credits that are being distributed to shareholders through fully franked dividends and off-market buybacks. This was primarily offset by the benefit from lower hedged premium outflows and working capital movements in 2019.

Now turning to the detailed segment performance slides and passing back to Alan.

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

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Thanks, Vanessa. We're now on Slide 13 of the pack, going through each of the segments, first of all with Qantas Domestic. Qantas Domestic reported underlying EBIT of $465 million, down only $13 million. This is a great result considering the $55 million increase in airport charges. The demand environment was mixed with weakness in a number of segments of the business market offset by growth in the resource sector. Unit revenue rose 0.9% driven by a modest recovery in demand in the second quarter. And revenue from the resource sector increased by $27 million as the rebound continued. Available capacity also increased as aircraft were added to the growing resource market, including 3 A320s added to Western Australia. Qantas Domestic maintained its leader position in the corporate market and is growing share in the small and medium-sized enterprise market. Qantas continued to support regional Australia, capping the regional resident fares and launching new routes to Ballina and Orange and extending services to Bendigo and Kangaroo Island.

Qantas International delivered improved earnings with underlying EBIT of $122 million even as it faced headwinds totaling $65 million from falling demand on the Hong Kong market and a decline in global freight demand. Unit revenue growth was strong, up 6% versus the same time last year, supported by a contraction in competitor capacity of nearly 2%. 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 11 aircraft, opening up more long-haul route opportunities. Importantly, our customers love the product, with Perth-London still achieving the highest Net Promoter Score in the Qantas network.

Qantas International continues to strengthen its airline partnerships. The partnerships with American Airlines commenced operation in October, substantially extending the network and exceeding our expectations. Associated with the changes to Qantas International network and fleet, it is continuing to invest in the overall customer experience. The new Singapore first-class lounge opened and 3 reconfigured A380s entered into services. We know our customers love to fly the A380, and these reconfigured aircraft are seeing a massive 16% increase in customer satisfaction in the premium cabins.

We do remain convinced that non-stop connections to London and New York will provide the group with a long-term strategic advantage but we must get the cost structure right. The last piece of the puzzle is flight operations. Our preference remains that our existing long-haul pilots perform Sunrise flying. The only viable option is to deliver that and the required cost certainty is to enter into a new EBA. We'll be putting an EBA out to vote in mid-March. We will do this with or without the union's endorsement because we want our pilots to have their say. Project Sunrise will only be pursued if it meets our strict business case hurdles with a final go/no-go decision at the end of March 2020 to secure production slots as we are going to use that time and we are going to use that time to get this right.

Jetstar reported an underlying EBIT of $220 million, down $33 million from the same time last year. This was due primarily to the domestic business as leisure demand softened. The domestic business was also impacted by a protected industrial action in December, one of Jetstar's busiest periods. The international business delivered a steady performance as revenue strength helped to offset foreign exchange impacts on nonfuel costs. The Jetstar Asia's portfolio of airlines was also exposed to increases in airport charges, taxings and increased competition affecting their profitability. Jetstar continued to invest in the customer experience as part of ancillary revenue growth strategy, achieving a 7% increase in ancillary revenue in the half. Maintaining a low-cost structure is vital to Jetstar's ability to offer affordable fares, selling almost 2/3 of its fares for under $100.

Qantas Loyalty continues to grow and diversify its earnings from both the coalition and new businesses. Underlying EBIT was another first half record of $169 million, up 12% compared to the same time last year. The program overhaul was key to growth in coalition earnings with strong member engagement, record profits earned and an increase in Classic Rewards activity. Importantly, about 400,000 seats were redeemed by members with no prior activity in the past 18 months. We know that when a member successfully redeems a Classic Reward, they become significantly more engaged with the program.

While co-branded credit cards continue to outperform the market, the suite of financial products that earn points was diversified into superannuation and mortgages with ANZ. Also this half, the Woolworths program was reset, increasing the number of Qantas Frequent Flyer points -- members that are engaged in that program. We also saw 26% growth in membership of the Qantas Business Rewards program, a key part of our airline SME strategy. Partners in the program have reached more than 60, including the Everyday fuel earn partner BP.

Turning to new businesses, Loyalty saw continued growth within the Qantas premium credit card portfolio and it extended the insurance portfolio, launching Qantas Car Insurance in the half. We are confident that our strategy to grow Qantas Loyalty earnings keep us on track to reach our 2020 EBIT target.

Now I'll hand you back to Vanessa, who will take you through the financial framework.

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Vanessa Hudson, Qantas Airways Limited - CFO [12]

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Thanks, Alan. Our financial framework continues to guide how we create value for our shareholders. Although we have applied AASB 16 to our accounts for reporting purposes, we have maintained the financial framework unchanged. The 3 pillars of this framework also remain consistent: Firstly, maintaining an optimal capital structure that minimizes the group's cost of capital. The group's optimal debt range is $5.1 billion to $6.3 billion. This reflects the increased cash-generating ability where ROIC is at 10%. The supplementary slides in our pack contains these calculations. Secondly, delivering ROIC above 10% through the cycle; and finally, growing invested capital with disciplined investment and returning any surplus to shareholders.

Qantas has again performed strongly against these long-term metrics, and we are pleased to say that we continue to deliver strong earnings per share performance consistent with achieving our overarching target of delivering total shareholder returns in the top quartile of ASX 100 and global airline peers.

The group's net debt at the 31st of December, 2019, was $5.3 billion towards the end of the target range. This gives us the financial flexibility to continue with disciplined capital investment, shareholder returns and maintain our optimal capital structure even on the challenging environment and the conditions that we are anticipating in the second half. We maintain this view due to our strong balance sheet. The 2020 financial year refinancing requirement has been completed and the tenor has extended. We continue to be investment-grade with no financial covenants, reflecting debt investors' confidence in our business and financial framework settings. We also maintain substantial short-term liquidity with $1.7 billion worth of cash and $1 billion of undrawn facilities. In addition, the group retains a significant pool of unencumbered aircraft valued at $4.5 billion or 51% of our fleet.

Our high level of participation through our hedge program allowed the group to benefit from falling fuel prices. For the remainder of FY '20, fuel expense is fully hedged with an expected fuel cost of $3.8 billion at current prices and normal consumption. On average, we have 45% participation should the U.S. dollar crude Brent price fall from here. Importantly, we are also seeing less sensitivity to adverse movements should the coronavirus situation resolve quickly, rebounding fuel prices ahead of customer demand. As the coronavirus took hold and fuel prices fell, the group also took the opportunity to significantly extend the financial year 2021 hedge program. The first half of financial year 2021 is now 90% hedged, with 75% participation to favorable price movements.

The group is at its optimal capital structure and continues to generate returns in invested capital much greater than 10%. As a result, the group continues to generate significant capital for reinvestment and distribution to shareholders. In the half, the group invested $1.3 billion and we took the delivery of 3 Dreamliners, completed the reconfiguration of 3 A380s, and continued to invest in product and technology across all segments. Looking forward, we expect gross capital for the year to be $2 billion.

The strong operating cash flow generated this half allowed us to return nearly $650 million to shareholders through a combination of fully franked dividends and an off-market share buyback. During the half, the buyback reduced issued capital by 5.1%. This takes the reduction in shares on issue since October 2015 by 32% at an average price of $4.68. Looking ahead, 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 shareholders.

Given our second half earnings and cash flow expectation, the group has surplus. So today, we are pleased to announce an increase in the base dividend from $0.13 to $0.135 per share fully franked, totaling $201 million. We are also announcing an off-market buyback of up to $150 million sized to utilize all available franking credits. Combined with the $650 million distributed in the first half, this will take our total distributions in the financial year of 2020 to $1 billion. Importantly, the group retains significant financial flexibility to respond to the potential decline in earnings beyond our current expectations.

I'll hand back to you, Alan.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [13]

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Thanks, Vanessa. Now turning to the outlook. We're on Page 26 for those following on the phone. First of all, we'll talk about the domestic demand environment. The coronavirus outbreak has dampened the modest recovery in demand seen in the second quarter with intakes falling over the last few weeks. The resource intakes are holding, but other corporates and SME intakes are down. The leisure market is also soft in the near term, but there is the potential for a shift to domestic leisure if uncertainty grows and Australians decide to holiday at home. Inbound tourists represent 8% of the domestic demand, with Asia just 2 percentage points of that. So our exposure to this market is small.

In response to the observed decline intakes, the group plans to reduce second half capacity by 2.3%, excluding Western Australia. The cuts will primarily impact capital city ports, sparing the regional centers as much as possible. The proposed changes remove the equivalent of 2 lines of 737 flying at Qantas Domestic and 2 lines of flying at Jetstar Domestic. In contrast, we'll be adding a fourth A320 into Western Australia and assessing whether to add more to support the growing resources demands there.

A sudden capacity reduction of this scale will impact our people, which we are working to minimize through extended periods of annual leave and bringing forward some maintenance on available aircraft. The situation is evolving, and while we are taking decisive action now, we have the flexibility to extend these reductions or to reinstate capacity in response to further changes to demand or the competitive environment. And our strategic and competitive position is always going to be very important for us domestically.

The impact from the outbreak on the international demand environment is unfolding and the outlook is uncertain. Governments have taken unprecedented action to close borders and forcing quarantine periods. And the impact of social media is profound, making parallels to SARS epidemic somewhat problematic but there are still some learnings we can take from SARS. We are seeing -- what we are seeing is demand softens primarily on the North Asian markets of China, Hong Kong and Japan.

The group is acting swiftly in response with Qantas International cutting capacity by 16% to at least the 25th of May, and this includes bringing forward the Beijing route exit; suspending Shanghai services now all the way through to the 24th of May; expanding cuts on Hong Kong, reducing frequencies, including dropping to a single daily service from Sydney; downgrading the Melbourne and Sydney services from an A380 to a 787; and cutting Trans Tasman capacity by 6%. This removes the equivalent of 1 A380, 1 737 and 2 A330 lines of flying.

Jetstar's international and Asian operations is reducing capacity to Asia by 14% in the fourth quarter. The Asian airline portfolio has canceled all charter and scheduled services to China and Hong Kong. Capacity to Japan will be cut by 13%, and Tasman back of the clock flying to Queenstown and Wellington will cease, removing 10% to 15% capacity on the New Zealand route. This removes the equivalent of 1 787-8 and 9 A320 lines of flying, including 3 A320s from the charter services. It's important to state that the U.K. and U.S. markets are largely unaffected with the benefits of the American Airlines partnership and the launch of new routes flowing through.

Turning to the freight markets. We expect belly space volumes to reduce linked to the above capacity actions. We will continue to closely monitor demand trends as they develop, and we do retain the flexibility to significantly extend these cuts or reinstate them in response to change in demand or the competitive environment.

Turning now to the financial impact. Slide 28 outlines the key drivers of that result. Through mitigants such as capacity cuts and the anticipated benefits from recent material falls in fuel costs, the group expects the net negative impact of coronavirus to be between $100 million and $150 million on EBIT in the second half. You can see all other guidance for the full year on this slide.

Ultimately, when you look across our portfolio of leading domestic airlines in the Australian market, leading loyalty business and the whole market strength of our international airlines, we're in a much stronger position than many of our peers. And we know from previous experience that demand recovers quickly once the situation resolves. That gives us the confidence in our business despite the uncertain environment.

With that, I think it's time that we open it up to questions. I will start in the room here and then go to the phones. So questions in the room? Can you please wait for the microphone to come to you as well, so people online can actually hear the question? Any questions in the room, no? None in the room? Okay, we might go to the phone lines and we can come back to the room. On the phone lines, first question?

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Questions and Answers

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Operator [1]

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Your first question comes from Matt Ryan with UBS Investment Bank.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [2]

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Alan, I just had a question on the comments around domestic weakness and the 2% reduction that you're putting through for capacity. Obviously, that's a 6-month figure. Just curious on what the capacity reductions will be in the really near term over the next couple of months. And I guess I'm just looking at the data coming out of the airport this morning saying that domestic traffic was down 5% to 10% month-to-date. And also, I guess just coming off Virgin already cutting by about 2, maybe just help us out on that sort of capacity profile.

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

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Sure, Matt. I might get the guys to help me with this with Andrew David and then Gareth. 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, sure. Yes. Matt, so just to retrace what we saw, first quarter, we're rolling over a very, very strong first quarter FY '19, and we did have a bit of misalignment between supply and demand in the market. We started to see improvements in second quarter, particularly resource but across corporate and SME. And we are outperforming our competitor because of our footprint in the resource market and because of the strength in our SME program. Now that continued through January. And what we've seen in the last 3 weeks is that demand come off correlated with coronavirus concerns. What we're doing is taking 2.3% capacity out for second half.

Really -- and a couple of really important points that Alan referred to before, one, we will maintain a very, very strong focus on our strategic long-term positions in the market and react accordingly if we need to protect those. But two, we also remain ready to either adjust with more capacity out if demand comes off further or indeed add back in. We continue to see resource market strength. We've seen no weakness in that particular sector, which is why we're adding a fourth A320 into that market. Gareth, I don't know if you want to add to that.

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

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Yes. Look, I echo those comments. From a leisure point of view, I think over the last 3 or 4 weeks, we've definitely seen a weakening of demand. As Andrew said, the demand profile was improving into the second quarter. Obviously, from a Jetstar point of view, some of this is being a little bit muddied by industrial action as well. So together with Qantas, we're making the decision to pull some more capacity. Now in the short term actually, our forward load factors are reasonably good because they've been presold before coronavirus came out, and then you hit the Easter holiday period, which is traditionally a very strong period for leisure travel anyway.

So a lot of the capacity reductions that we're talking about are more focused out in the weaker months of May and June further out when we had less forward load. Having said that, we may see -- as Alan said in the speech, we -- I think we're in a pause period for domestic leisure demand at the moment as people wait and see. We could well see it strengthen again as people make that decision to take the holiday or we see some switching from international leisure back to domestic leisure depending on how the situation plays out.

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

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And Matt, just to give the stats, there is a lot of focus on that last quarter. So we are excluding Western Australia. Qantas will be taking nearly 2% out and Jetstar 6% out in that last quarter. So we are being very focused on that. There is still capacity reduction in the third quarter. Jetstar still has a significant reduction, Qantas less so because of this Western Australian number.

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Operator [7]

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Your next question comes from Owen Birrell with Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [8]

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Just a couple of questions from me. Just firstly, looking at the guidance on the coronavirus impact, I really appreciate the fact that you've gone to the effort of actually trying to quantify and provide that guidance. I just wanted to get a sense of what you're assuming within that guidance particularly around the duration of the outbreak and also what sort of load factors you're expecting to see during that period of time.

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Vanessa Hudson, Qantas Airways Limited - CFO [9]

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That's a great question. And I think my starting point for that would be we have really grounded ourselves in focusing on what we can see and not speculating on what we can't. So based on how we've come up with that guidance, we've looked into our forward intake loads and trends and we've forecast that through to the end of the year. That's actually, I think, really important for just being clear about what we can see and what we can't.

In addition to that though, I think we've been very mindful through the whole process to make sure that we retain flexibility and we retain flexibility to be able to extend if we need to, if the demand softness continues to deepen the cuts as well if demand continues to deteriorate or, as has been discussed, to reinstate the capacity quickly if demand returns.

I think the one thing that we have learned and we did learn from the SARS -- the recent SARS event was that when demand comes back, it actually comes back really quickly and it comes back at a higher level. So I think that it is particularly important that we retain that flexibility through this period, and I would suggest that as well. The other thing that we learned from SARS is that when the Northern summer period comes and the warmer weather occurs, that is actually when the virus struggles to survive and continue to spread. So we would anticipate that, that would be the period that we would start to see a recovery. And I would also see that, that would actually occur in 2021, so next financial year. If there's any kind of demand weakness that moves into quarter 1, I think that we would be seeing the recovery later that year and at a higher level than what we're seeing now.

In terms of seat factors, I think that we would be hoping that we would continue to maintain our seat factors as we have across both domestic and also Jetstar, and that's about getting capacity right with demand.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [10]

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I think it's a great answer. And I may add that we are trying to maximize the seat factors that we can by having a lot of promotions out there to help a lot the tourism industry. So today, for those that are listening, there's a double Status Credit point earned on all Qantas flights. I know that's going to get people very interested. It has the biggest lever on demand that we know. And hopefully, that will fill up the Qantas flights. And Jetstar has a Northern Territory sale at the moment. We have...

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Andrew Paul David, Qantas Airways Limited - CEO of Qantas Domestic & Freight [11]

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There's going to be full domestic sale after that.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [12]

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Yes, the full domestic sale coming. So keep an eye particularly in Northern Territories today. There are some fares, I think $119, from Sydney to Darwin, and from Brisbane less than $100. So we are trying to maximize the seat factor. So we're not only pulling the capacity lever, but we are pulling the demand lever and trying to stimulate as much demand as we possibly can.

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Operator [13]

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Your next question comes from Anthony Longo with CLSA.

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Anthony Longo, CLSA Limited, Research Division - Research Analyst [14]

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Just a quick question from me and just following up from the previous one. So you talked to load factors and the like, but I do take your capacity comments in both international and domestic from the presentation. But what's your expectation then for RASK? So -- because that's where I actually see the real risk near term particularly in light of those promotions that you've just mentioned, which could see yield compression coming through. So any additional comments on both the capacity cuts and the multiplier effect with RASK as well.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [15]

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So I think we've given very clear guidance of where we're going to be, which is that the impact of all of this, the mix of seat factor and yield will -- and the movement in capacity and the movement in oil will generate $100 million to $150 million. We couldn't be clearer than that. Drilling it down into the precision of what RASK is going to be on each of the businesses is probably getting to a spurious level of forecasting. So I think -- take the outlook we have and I think you can work out a lot of the different movements that are taking place on that, but getting to further detail, I'm not sure, is going to be productive.

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Vanessa Hudson, Qantas Airways Limited - CFO [16]

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Yes, I agree.

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Operator [17]

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Your next question comes from Jakob Cakarnis with Citi.

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Jakob Cakarnis, Citigroup Inc, Research Division - Assistant VP & Analyst [18]

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Just one for Vanessa on the transformation savings. So there's about $212 million that's left to fall in the second half. Can you just highlight for us which buckets where you think these savings will fall into and also some of the potential benefits that you guys will realize from the reduction in capacity that you've announced today?

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Vanessa Hudson, Qantas Airways Limited - CFO [19]

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Yes, sure. So transformation is focused on efficiency and really driving across our business through that. So we're looking at productivity, particularly how technology helps to unlock efficiency. We will also be driving ongoing fuel efficiency benefits that we have been rolling out across the network. We also have efficiencies that are coming through our network and fleet restructure, including the 787 deployment across international and also new routes and hub -- the Singapore hub that we've been opening up. And also, we are looking at obviously opportunities to drive utilization and deploy technology and digitization to drive efficiency across the business.

Also though in the revenue environment that we have, we are upping a lot of that focus in terms of looking at discretionary expenditure and also a very disciplined approach to capital expenditure. But we do have revenue benefits that are in that transformation pipeline, including benefits from personalization that's been rolling out across all our segments and also loyalty. But also Jetstar have been driving the ancillary revenue very aggressively and they've been doing an amazing job with 7% up in the first half, and we would see continued activity around that in the second half. I don't know whether I've answered your question totally. Was there a second part to that question?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [20]

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it's unusual for Jake not to ask 2 parts to a question, but he didn't on this occasion, I think. Did he? Unless I missed it.

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Operator [21]

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Your next question comes from Anthony Moulder with Jefferies.

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Anthony Moulder, Jefferies LLC, Research Division - Equity Analyst [22]

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If I can ask the second part of Jake's question on transformation. You talked about the skew being more skewed obviously to the second half. That would suggest that there's more than $400 million. Can you comment on what is the sort of target that you're looking for in transformation benefits in fiscal '20, please?

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Vanessa Hudson, Qantas Airways Limited - CFO [23]

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We are targeting $400 million, and that is a part of our outlook and that's sufficient in offsetting inflation. And I think that that's our guidance and that's what we're delivering against.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [24]

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Yes. And I think -- and you look back in previous years. Not all of the transformation benefits have been evenly spread during the years. We've lots of different projects that we're working on. We have the personalization project and some of the activity we're doing on revenue management, which really kicks in, in the second half. We have a lot of activities that are taking place with the full period of use of the 787s, routes like Brisbane-Chicago starting, the full benefit of the American Airlines partnership coming through. So they're never always fully balanced between first and second half. That's never been the position, Anthony, as you know. And we're very confident about our ability to get them in the second half.

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Operator [25]

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Your next question comes from Paul Butler with Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [26]

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I just wanted to ask about the industrial relations with pilots and also other staff. I mean I think you've been fairly clear that the offer's on the table, I think, with Jetstar involve a 3% wage rise. And I just wonder if you comment on why you think sticking with that is realistic given that, I imagine, many of your staff look at the very strong financial performance of the business over the past couple of years.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [27]

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I might get Gareth to talk about the Jetstar position and Tino may talk about where we are with the pilots. Gareth?

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Gareth R. Evans, Qantas Airways Limited - CEO of Jetstar Group [28]

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Yes. Look -- thank you. Look, obviously, the 3% wage structure has been in place in the Qantas Group now for many, many years, and it's stood us in extremely good stead. It strikes the balance between providing a reasonable level of reward to our staff and ensuring that the business has got the robustness in the balance sheet and its performance so that it can reinvest in itself and grow like we've talked about today with 787s, Project Sunrise, A321neo is coming along, and also that it can be robust through the periods of unknown outcomes like we're about to go into with coronavirus. Currently, private sector wage growth in Australia is averaging 2.4%. So a 3% offer is incredibly generous in those circumstances and certainly much better than most other organizations are offering.

But we will not be moved beyond that point because it does threaten the strength of the balance sheet, the future of the business and our ability to resist these sorts of environment. And as I've said repeatedly and I think Alan said this morning as well, industrial action will not change our position on that. We've got a strong offer now on the table with our ground handlers, the TWU. They'll vote on that and we'll get the results of the vote on Tuesday. We've had to go directly to our employee base and around the union because the union simply isn't interested in negotiating. But 3% stood us in good stead for well over 10 years, well beyond that, and that's why we hold that line because we have to be focused on costs to keep us strong through these sorts of uncertain times.

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

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And can I say I might -- before Tino comes in, that the 3%, we have, in addition to that, given over $350 million in bonuses outside of the EBA to our employees. So everybody has shared in the success of the company. We've also seen a huge amount of growth in promotions where people have gotten pay increases with those promotions outside of the 3%. I think there's been nearly 1,600 pilots that have gone on promotion, which has been amazing over that period. The biggest pay increase you can get as a pilot has gone from a first officer to a captain.

And I just want to add to what Gareth said. I mean I think the way the TWU has been behaving is outrageous and disgraceful. With the challenges that we have with the tourism industry in Australia today, with the bushfires and with coronavirus, for them to take this disruptive action is a complete disgrace. And they are a militant union. And what they're doing is playing, as Gareth said yesterday, using our employees as pawns in a bigger game. They have a campaign for 2020. These poor guys in Jetstar are being used as a pawn to progress that campaign, and I think that is disgraceful.

But yesterday filled me with a lot of confidence. It was a vote of no confidence in the TWU. Less than 1/3 of our employees took industrial action. The TWU had to pay them $100 vouchers to try and get them out to do that action. In some parts, it was less than 10%. So Gareth and the team have gone behind the TWU direct to our employees with an offer that we think is a great offer, and we think most of the employees will recognize that. And I urge them to vote in favor of it and have a second vote of no confidence in the TWU because they deserve that. They've cost these people money. They shouldn't cost them any more money. And I'm hopeful that we will have a positive outcome of that vote next week. I think the action is deteriorating in impact every time they call it, and yesterday filled us with confidence that whatever is going to happen, we will stand by our position. Tino, do you want to talk about the Qantas pilots?

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [30]

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Yes. Thanks, Alan, and thanks, Paul. With respect to the Qantas pilots, let's remember that Project Sunrise reflects a growth business case. So we are expecting 12 additional aircraft to come into the fleet. What that means for our pilots is about 400 new positions and over 1,000 promotions. And as Alan rightly said, the biggest pay rise you can get is a promotion. These are being offered on top of the standard 3% pay increase. And so we think that we've got a great deal being put to the pilots. We've actually put it to the union. We're looking for union endorsement of the proposal. Up until now, that's not been forthcoming. We're still continuing to work with them. We hope to get them there in the next week or so but we're running out of time. We've got a 31 March deadline. And what we've said to our guys is if we don't get that union endorsement in the next week or so, then we will go to our pilots directly. We've been doing that anyway. We've run about 13 webinars. We've had -- just in the last 2 webinars we had, we had about a total of 800 pilots join the webinars. The previous 11, we had an average of 200.

So we're getting out there. We're making sure -- ultimately, we're going to give our pilots the opportunity to vote this up. That's what we want to do. And we have a strong preference. We've said quite publicly our #1, #2 and #3 preference is to get our existing pilots to do Sunrise flying. So it's incumbent on us. I mean Andrew and I have been attending all the webinars and working tirelessly to make sure that our pilots have all the information available to make the right decision they do at the -- when they go to vote. And ultimately, the call they make, we'll respect whichever way they want to go.

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

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Thanks, Tino. I think we've got one more question on the phones, and then I'll come back to the room and we might wrap up after that.

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Operator [32]

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Your next question comes from Cameron McDonald with Evans & Partners.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - MD & Head of Research [33]

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Can I just ask sort of one question relating to the -- well, they both relate to coronavirus. But the first one is, is there any consideration about transitioning back to the Dubai hub rather than continuing to fly in -- through Singapore? And what would the implications and costs associated with doing that involve? And then the second question was you've made a comment that the capacity cuts were through to the -- effectively the end of May, and then you're expecting that the Northern Hemisphere moving into summer should see a reduction in the number of cases of coronavirus being transmitted by flu. I would point out though that the -- that then corresponds with an increase in the Australian flu season and transmissions for coronavirus are expected to spike in the first half of the FY '21 period. So what advice and considerations are you making around your current plans given that we won't necessarily have seen the spike in coronavirus hitting the Australian population until the first half of 2021?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [34]

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Well, maybe I'll have a go with that. I mean there's no -- we're not considering the option of moving the Qantas flights back to Dubai on the first part. We have a very good diversified portfolio when you think we're into London. We have the Perth-London service which has seen some strong demand. There are some companies that have switched people to go that way. We benefit from that when it happens, which is great. There's also a benefit because we have a partnership with Emirates, which means that we have a codeshare on all of the flights Emirates have into Dubai and onto Europe. So if people switch to using that on the Qantas code, we get a benefit out of that. And of course, Singapore will recover and our position in Singapore is very strong. We have invested in that new first-class lounge. After SARS, it did recover very rapidly. We think that's going to be the case. And that diversification should be seen as a positive by the share market because it is seen as a positive by our customers. I'd rather keep that diversification -- Tino would, going forward.

When it comes to predicting what's going to happen with coronavirus, nobody is going to be able to do that. Your view could be equally there. We have a medical department that has 8 people in it, 3 of the best aviation doctors in the world with huge amount of experience, and they can give you a hell of a lot of different scenarios going forward. What we try and do is keep the flexibility and making sure that if it does recover, we can adapt to it. If it gets worse, we can adapt to it or if it stays the same. And all we said in our outlook is that what we're forecasting is if it stays the same, here's what will happen and here's what we will do and here's what the impact is. We have plans if it gets worse. We have plans if it gets better. And I know there's difference to SARS, what SARS did, the same risk was there with SARS that could have transferred into Australia. It didn't. When the Northern summer occurred, it was contained.

And I will say that the government has acted very aggressively and very fast on this. We've seen the containment of flights from China. And since that's occurred, we haven't seen any new cases here. So the government is very focused on that and maintaining that position to make sure the containment is in place. And I have to say we have been working hand in hand on these rescue flights with the Prime Minister and the Deputy Prime Minister. I think they've -- these wouldn't have happened without their involvement. The Prime Minister is running a couple of times and the Deputy Prime Minister. They've been very active in this. This couldn't have happened without Qantas' efforts, without the Commonwealth's efforts. And I think the Prime Minister and the Deputy Prime Minister are doing a great job on this and making sure this is contained as much as possible, which gives us confidence that, that scenario portrayed shouldn't happen in our winter and the Northern summer.

I think we're done on the phone. We might go to the room and ask people. Is there any questions in the room before we wrap up? Is there none? None here?

Okay. Well, thank you very much, everybody. We'll see you back in 6 months' time. Thank you.