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Edited Transcript of QAN.AX earnings conference call or presentation 22-Aug-19 1:30am GMT

Full Year 2019 Qantas Airways Ltd Earnings Call

Mascot, NSW Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Qantas Airways Ltd earnings conference call or presentation Thursday, August 22, 2019 at 1:30:00am 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

* Narendra Kumar

Qantas Airways Limited - Former Acting CEO of Qantas International

* 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 - CEO of Qantas International

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Conference Call Participants

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* Cameron McDonald

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

* Jakob Cakarnis

Citigroup Inc, Research Division - Associate

* 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 welcome, everybody, to Moscow. Can I also acknowledge the traditional owners of the land, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging.

And can I say welcome here. And this is the last occasion in which Tino is going to do. We'll talk a little bit later about that. So as normal, I'm here with Tino, and we'll share this presentation.

I'd like to also introduce the senior GMC, our senior management team. First of all, I'll skip you for a second, Liv, because I want to introduce the newest member of the team, which is Steph Tully, who's the new Chief Customer Officer at Qantas. Stand up and say hello so they can see you. And we have Olivia Wirth who's the CEO of Qantas Loyalty; Naren Kumar who's acting as CEO of International until Tino gets into the role; and we have John Gissing who's Head of QantasLink and a lot of our safety services in other areas. I always forget the list of things that you have. It's too big. You have part roles all the time, John. And we have Andrew David who's -- stand up, Andrew, the CEO of Qantas Domestic.

We have Lesley Grant who's Head of People; we've got Vanessa Hudson who's taking over as the new CFO and will be doing this from next year onwards; Andrew Finch who's Head of the Office of the CEO; and our Group Counsel and Head of Legal; we've got Gareth Evans who's the CEO of Jetstar.

I did make the comment, there's a trend. Any time somebody leaves the CFO position, they grow a beard. That's a trend that we have, you could see Gareth's got one and then Tino is following the same trend.

We have Rob Marcolina who's Head of Strategy, IT and Transformation; and Andrew Parker who's Head of our Government Affairs. So I've covered everybody, haven't I?

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [2]

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Yes.

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

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So again, welcome. I'm pleased to report another strong financial results. This looks like it's working.

I'm pleased to report another strong financial result for the Qantas Group, particularly since it was achieved in -- with a number of headwinds, including significant fuel and foreign exchange. On an underlying basis, profit before tax was $1.3 billion. That compares favorably with the record set last year when you consider the group faced nearly $770 million in fuel and FX headwinds.

Statutory profit before tax was $1.27 billion. We have delivered on our goal of maintaining EPS growth over the cycle despite these headwinds. Statutory earnings per share was flat, maintaining a record $0.55 per share.

The group's return on invested capital was strong at over 18%, making financial year 2019 the fifth consecutive year of returns well above our 10% value creation threshold. And our focus on ongoing transformation has delivered benefits totaling $452 million this year, well in excess of our $400 million target.

At the segment level, all segments achieved returns greater than the group's cost of capital as the airlines delivered strong performances despite the high fuel and low Australian dollar environment.

And Loyalty delivered another record earnings, a return to double-digit growth in the second half. And now it is the second highest performing division within the group after Qantas Domestic.

Our focus on our people, customers and community hasn't changed. We have flown the world's first waste-free flight and as recognition of the contribution of our people to the strong performance, we have announced a 1,250 staff travel bonus for 25,000 nonexecutive employees.

Turning now to the balance sheet. The operating cash flow was $2.8 billion, demonstrating the significant cash flow-generating ability of the business. After net CapEx spend of $1.6 billion, we were able to generate strong net free cash flows in excess of $1.2 billion. This has allowed us to return $1 billion back to shareholders through dividends and share buyback.

Our net debt at the 30th of June 2019 was below the target range at $4.7 billion. This is a $200 million improvement since last financial year and provides the group with significant financial flexibility as it enters financial year 2020.

The strength of the balance sheet and stable outlook for earnings has given the Qantas Board the confidence to announce further capital returns to shareholders. This includes an allocation of approximately $200 million per half to the base dividend, fully franked. And we have announced an off-market buyback of up to 79.7 million shares for approximately $400 million. I think that was on yesterday's share price?

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [4]

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Yes.

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

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This will take the anticipated returns to shareholders since October 2015 to over $4 billion. The group's Domestic Airlines and Loyalty segments are at the core of the group's financial performance. They provide a stable earnings base that underpins the group's strong operating cash flows. The dual brand strategy remains key to that performance, with domestic earnings at over $1 billion for the second year running.

Qantas Loyalty delivered another record result and continues to provide a diversified earnings stream by leveraging our strong brand and our unique data assets into new businesses. And I'm pleased to say that the group's strategy to strengthen and restructure the international airlines have delivered resilient performances with strong earnings, particularly in the second half despite the challenging conditions.

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 - CEO of Qantas International [6]

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Thanks, Alan. The group delivered another strong result with underlying profit before tax of $1.3 billion. Statutory EPS was $0.55 per share as the accretive benefit of the buybacks have offset the modest drop in earnings.

Return on invested capital, also strong at 18.4%, well above the group's cost of capital. Unit revenue for the group was up 5.3% for the full year and 4.9% in the second half as the aviation industry took action to address rising fuel prices.

Total unit cost was 8.4% higher, reflecting the impact of increased Aussie dollar fuel prices and the impact of the lower Aussie dollar on nonfuel expenses. The group's operating margin remains one of the strongest of our regional competitors at 8.3%.

Operating cash flow remained strong at $2.8 billion, resulting in net free cash flow of more than $1.2 billion. This cash flow performance has supported the additional returns to shareholders we're announcing today.

Starting with the 2018 earnings, the bridge to 2019 consists of the following. Fuel expense rose by $614 million, net of the transformation fuel efficiency benefit of $38 million. The group's disciplined hedging program provide continued protection from rising fuel prices during the year. Ticketed passenger revenue was up $594 million, including $149 million in net revenue benefits from transformation.

Depreciation & Rentals rose $80 million, driven primarily by investment in fleet and technology. Unfavorable foreign exchange movements on nonfuel expenditure impacted the result by $154 million.

Transformation delivered a total of $452 million, including a nonfuel cost reduction of $265 million to offset the impact of cost inflation. And there was a noncash impact of falling bond rates on certain provisions, which reduced the result by a further $90 million. As I said, this is a noncash impact.

Excluding this accounting impact, the group's underlying profit would have been circa $1.4 billion, a credible result, considering the $768 million impact of fuel and FX on the group's total costs.

The group continues to generate strong cash flows. This slide shows the full year cash flow conversion trend. The key differences in cash flow performance relate to lower working capital benefits in 2019 compared to 2018. Also the 2019 financial year includes the impact of bringing forward hedged premium spent to fully hedge our fuel exposure for the 2020 financial year. This compares with the 2018 financial year, which benefited from lower hedged premium outflows as a protection was put in place in 2017. 2019 financial year also includes the impact of recommencing company tax payments.

In summary, the headwinds of $340 million in FY '19, plus the company tax payments of $156 million, plus the reduction in underlying EBITDA, excluding the noncash bond rate, explained the $600 million reduction in operating cash flow.

I'll now hand you back to Alan.

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

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Thanks, Tino. This year's record result was underpinned again by our earnings at the domestic market, which was relatively stable at over $1 billion. This is the fifth year of disciplined capacity management that is fundamental to achieve unit revenue growth in a high fuel environment. These domestic market capacity settings align to demand environment, and our sophisticated dual brand strategy support an increase of 4.1% in group domestic unit revenue.

During the year, we continued the structural transformation of Qantas International with the introduction of a further 3 Dreamliners, taking the fleet to 8 aircraft. The 30% premium seat mix on the 787-9 Dreamliner supports revenue improvement, increases customer satisfaction and has allowed us to launch new routes. The benefit of the new fleet network and hub restructure was evident in the 6.4% unit growth for the full year, including an acceleration of 7.8% into the second half of the year. Importantly, we continue to maintain a margin advantage against our key regional competitors with Qantas one of the best-performing airlines in our region.

Turning now to the detail of the segment performance on Slide 10. Qantas Domestic reported underlying EBIT of $740 million, down just 3% from last year. As market capacity reduced in line with demand, unit revenue rose 5%, reinforcing the correlation between fuel costs and RASK in rational markets. Qantas Domestic has maintained its leader position in the domestic market and is growing share in both the corporate and the SME markets.

Combined with the growth in resource market revenue of $47 million, this has helped to insulate Qantas Domestic from the slowing demand environment experienced in the second half. Qantas Domestic continues to invest in consumer experiences, offering free in-flight WiFi and domestic fleet and upgrading its airport lounges.

And importantly, for our customers in regional centers, Qantas has expanded the regional residents' fares program, removed the change fee and is investing in refurbishing of its Turboprop fleet. And only yesterday, we announced caps on fares for regional residents in those 16 different locations.

Qantas International has strong unit revenue growth of 6.4%, which more than offset the fuel cost increase. Earnings momentum built in the second half as competitor capacity reduced. Other revenue streams partly offset the impact of FX on nonfuel cost and the cost of continuing the 747 fleet as we transition to 787 Dreamliners.

The new network structure and Dreamliner fleet are building the resilience of Qantas International, with London services profitable for the first time in over a decade. Importantly, our customers love the product, with Perth to London achieving Qantas' network leading customer efficacy. And that's unusual that your longest route has the highest level of customer satisfactions.

We're also pleased to have received Antitrust Immunity after 4 years of trying for the new joint business with American Airlines, which will open up new opportunities for our customers in competitive U.S. markets. And as a consequence of that, we're going to be starting Brisbane to Chicago and Brisbane to San Francisco services next year, which wouldn't have been possible around that agreement.

Associated with the changes to the Qantas International network and its fleet is an investment in the overall customer experience. The new Singapore First Lounge is set to open up towards the end of 2019, and we have expanded the Business Lounge.

Just to give you an indication of how well our Singapore hub is going. Previously, we had around 500 seats in the premium lounge. After these expansions, we'll be over 800 seats and it will be the biggest offshore first-class lounge that we have anywhere in our network. That's a confidence and growth that we're seeing in Singapore.

And in terms of fleet, the A380 cabin upgrade has commenced, consistent with the strategy to increase the premium seat mix. First aircraft is due out in September, and by the end of 2020, all aircraft will be done.

Now despite the global trade conditions, Qantas Freight has maintained resilient earnings. And recently, we announced the renewal of the Australia Post contract for a further 7 years. I'll speak later about the progress on Project Sunrise, the next exciting frontier of ultra-long haul international flying.

The Jetstar Group delivered a record revenue performance, fully offsetting the fuel headwinds. This included domestic unit revenue up 2.7% and ancillary revenue per passenger up 12%. Jetstar International, similar to Qantas International, benefit from competitor capacity rationalization and achieved strong unit revenue growth of 6%.

Despite the record revenue performance, the underlying EBIT result was down 19% as foreign exchange impacts and a significant increase in airport charges and taxes in Singapore weighed on the business.

Associated airlines in Asia were profitable. Jetstar Japan achieved a record Australian dollar profit while Jetstar Pacific also remained profitable. While airfares are rising as a result of higher fuel costs, Jetstar maintained its commitment to low airfares, selling about 2/3 of its fares for under $100. And its investment in customer experience, transformation and operational improvement continues.

The cabin enhancement program is now complete, effectively expanding capacity with 3% extra seats, the most efficient way for us to expand capacity. Ancillary revenue strength for the Jetstar Group was assisted by the successful launch of plus 3 kilograms carry-on option for our customers. And Club Jetstar is also gaining popularity, with more than 340,000 members at the end of June. You have somewhere to go before you match Qantas Loyalty, Gareth, that's another 12.7 million members you need to get. I like competition between the various segments.

The records continue that Qantas Loyalty with underlying EBIT at $374 million as it returned to double-digit profit growth in the second half. Revenue was also at record levels as engagement in the program increased.

Points earned from financial services product reached record levels, and points earned from other coalition partners grew by 17%. Points redeemed increased by 12% across airline, hotel and retail awards.

In June, we announced the biggest Frequent Flyer program overhaul in 32 years, increasing the reward seat available by over 1 million seats, launching a new program tier and adding the Points Club to underpinning our growth ambitions. The popularity of the program continues to drive member growth, with nearly 13 million members at the end of this financial year.

Turning now to our new businesses. Revenue from new business grew by 27% as they moved from start-up into scale-up. Qantas Insurance continues to perform well in the health insurance market, achieving a massive 46% growth in their persons insured while the Qantas Premier card portfolio continues to grow in both current acquisitions and spend volume.

I'll now hand you back to Tino who will go through the financial framework. Tino?

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [8]

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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 is now $5.2 billion to $6.5 billion. The supplementary slides do contain detailed calculations.

Secondly, delivering ROIC above 10% through the cycle. And finally, growing invested capital with disciplined investment, returning any surplus to shareholders. And Qantas has 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 strong cash flow performance meant that the group's net debt at 30 June 2019 was $4.7 billion, which is well below our target range. Heading into FY '20, this gives us a financial flexibility to continue with our capital investment, shareholder returns and maintain our optimal capital structure under a wide range of operating conditions.

During the year, the group extended debt tenure and diversified funding sources through 2 issuances under our corporate secured debt program for a total of $825 million. The issuances were secured by a pool of midlife aircraft. Our strong financial position allowed the group to take this midlife aircraft funding platform to investors who traditionally participate in the U.S. private placement market and successfully issued $375 million in a 12-year tranche. This facility maintains the terms and conditions of the initial 2 tranches, including no financial covenants and was drawn in June as an early refinancing of FY '20 debt maturities.

In addition, we extended our drawn $325 million syndicated loan facility out to FY '25. We continue to hold an investment-grade credit rating with Moody's, and none of our debt instruments have financial covenants. This reflects debt investor confidence in the business and our financial framework settings.

At 30 June 2019, we held substantial short-term liquidity of $3.2 billion, including cash of $2.2 billion and undrawn facilities of $1 billion. In addition, another source of liquidity is the group's significant pool of unencumbered aircraft, currently valued at USD 3.1 billion. This includes the 8 new Dreamliners we brought in, in financial year '18 and '19.

Our high level of participation through our hedging program allowed the group to benefit from falling oil prices through the year. Fuel costs for the group, inclusive of consumption changes, rose 19%. This compares favorably with what would have been a 26% increase had we not hedged.

Through the year, the group took the opportunities to significantly extend and restructure the financial year '20 hedge program. FY '20 expected fuel cost is now $3.95 billion at forward prices. The group's fuel exposure for FY '20 is fully hedged, and the worst case fuel cost, based on a correlated fuel and FX movement, is around $4.1 billion. Importantly, we still retained 53% participation to favorable price movements from here.

Turning now to transformation. This year, we delivered $452 million in transformation benefits, exceeding the minimum annual target of $400 million. This includes net revenue benefits of $149 million. Examples of initiatives include the full year benefits of structural changes, such as the Dreamliner introduction, the Singapore hub restructure, the Perth-London direct service as well as revenue management system enhancements.

We've continued our focus on continuing cost -- on containing costs with a nonfuel cost reduction of $265 million. $38 million in fuel benefits were achieved through a range of initiatives, including FlightPulse app enhancements and onboard weight reductions.

In addition, there were fuel burn benefits from additional 787s that have enabled the retirement of the less fuel-efficient 747. The pipeline of initiatives for FY '20 is progressing well, and we're on track to deliver at least $400 million in benefits across operational efficiency, customer experience, revenue optimization and other initiatives.

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. The group reinvested $1.6 billion during the 2019 financial year, net of the proceeds from the sale of the catering business and the Melbourne domestic terminal. We took delivery of 3 Dreamliners and continue to invest in product and technology. And we expect gross capital expenditure for FY '20 to be $2 billion.

The strong operating cash flow generated this year has also allowed us to return $1 billion to shareholders through a combination of fully franked dividends and on-market share buybacks. During the year, the buybacks reduced issued capital by nearly 7%. This takes the reduction in shares on issue since October 2015 to 28.5% at an average price of $4.58.

As Alan said earlier, this is the largest reduction in shares on issue of any company in the All Ordinaries in the last 5 years. 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. The group's forecast net debt position relative to its earnings prospects defines where the surplus capital exists. And today, we're pleased to announce an ordinary dividend of $204 million or $0.13 per share fully franked. The base dividend has been set at approximately $200 million per half in recognition of the group's sustained strong cash flow performance.

We're also announcing an off-market share buyback of up to 79.7 million shares or circa $400 million at current prices. This is the most efficient form of distribution at this time. The shareholder distributions totaled around $600 million this half.

Looking forward, the group intends to distribute future surplus capital via a base dividend totaling circa $200 million every 6 months. Qantas will continue to evaluate its surplus capital position as defined by its target net debt range under our financial framework.

Our balance sheet strength will remain our priority. Post this buyback, if we maintain the base distribution of at least $400 million per annum, the base dividend would rise to $0.27 per share, representing a gross yield of circa 6.7% when you incorporate the franking credit.

The size of future distributions over and above the $200 million base dividend per half will be based on a forward view of the surplus capital at that time and would be distributed through a share buyback, special dividend or capital return, considering the most efficient form of distribution at that time.

I'll now hand you back to Alan.

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

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Thanks, Tino. We're now on Slide 22. Fundamental to the creation of long-term shareholder value is the successful execution of our strategic priorities. And as you have already heard, we have made good progress and delivered some outstanding results in the face of significant headwinds.

Right now I'd like to briefly touch on a few of the highlights. This year, we have further optimized the dual brand strategy, delivering over $1 billion in earnings for the domestic market, even in the rising fuel environment. We continue to build earnings resilience at Qantas International with a new Perth-London service, the fleet renewal and the network and hub evolution. And we received Antitrust Immunity approval for our joint business with American Airlines, providing further opportunities going forward.

The additional capacity directed to Singapore has improved the connectivity to Jetstar Asia service, delivering additional benefits to the group. Loyalty is well positioned at both the coalition and in new business to provide a growing and diversified earnings stream, which is not exposed to higher fuel prices. And for our customers, there have been lots of exciting investments in fleet and customer experiences.

We do know that our people are key to our success, that's why we're offering the staff travel bonuses announced today. We track our progress against our strategic priorities using the balanced scorecard. Our financial performance is measured by segment performance and transformation. I am pleased to say our progress to date has us on track with all our operating segments delivering ROIC in excess of our cost of capital.

And Loyalty remains on track to reach its medium-term growth objectives, and we're also on track to deliver $452 million of transformation benefits, which were delivered this year. For people, we are revising our listening strategy to be deployed in financial year '20, which will provide those more valuable insights on how to continue to improve the record engagement we have for our employees.

And on customer advocacy, measured through Net Promoter Scores, we are at a significant premium to what our domestic competitors are offering. Meanwhile, our focus on innovation has identified new product, services and process that will drive revenue and efficiencies.

As I said earlier, we have announced a $1,250 staff travel bonus to around 25,000 employees, taking the total allocated to nonexecutive bonus to over $340 million over the past 5 years. That's obviously in addition to the annual payroll of $4.3 billion that goes to our staff overall.

We are building a more inclusive employee experience to our diversity and inclusion programs as we deliver for better business outcomes. And we are making good progress on our pilot academies, with Toowoomba expecting to open in September and Mackay expected to open up next year.

Qantas is acutely aware of the impact that aviation has on the environment. So in recognition of this, Qantas has taken the lead in developing sustainable aviation as we move to carbon-neutral growth. We have continued to grow Fly Carbon Neutral, which is aviation's largest carbon-offsetting program, increasing uptake since awarding Qantas Frequent Flyer points to customers who offset their flights.

But it's not just about offsetting. We have improved the group's fuel efficiency during financial year '19 by 2.2%, the largest fuel efficiency improvement since 2009. And we continue to raise our ambition and on offsetting -- and we are continuing to invest in the development of sustainable aviation fuels in our Centenary year.

On waste, we have set the most ambitious reduction goals to reduce single-use plastics by $100 million by the end of 2020 and reduce waste to landfill by 75% by the end of 2021. And earlier this year, we flew the world's first zero-waste flight.

We continue to make significant gains in maintaining our high operational standards, acting responsibly and being transparent to ensure we maintain our social license to operate. Some highlights include strong improvement in workplace safety in our regional airlines and in other manually intensive work environments.

And essentially, to our risk management approach, Qantas is at the forefront of improving security outcomes. As the national carrier, we are well aware of our role in supporting the communities where we operate. This includes our commitment to our indigenous communities through our support for the Uluru Statement from the Heart's campaign and support from indigenous suppliers. We're now up by $25 million worth of product from indigenous suppliers every year.

And also to support Australian's regional communities that have been doing it tough through the drought, we have committed to deliver $3 million for drought relief and launched the Qantas regional grants program, delivering over $5 million over the next 5 years, and that is in addition to our regional spares program.

Now moving on to talk about Project Sunrise. We do continue to evaluate the viability of nonstop services to London and New York from the East Coast. It involves 4 key streams of work, including commercial, regulatory, employee and product.

Detailed evaluations of best and final offers for the manufacturers are currently underway, and we have the senior management teams from both Airbus and Boeing visit Sydney in the last few weeks to present there. On the regulatory front, we are continuing discussions to adjust existing crew operating limits, which apply to every airline around the globe. And we continue to investigate the product solutions that will ensure our customers' and crew well-being throughout these flights.

The challenge remains in the negotiation of productivity flexibility with pilots, and discussions on this front are continuing. You, our investors, can rest assure that Project Sunrise will only be pursued if it meets strict business hurdle rates. We are on track for a final decision by the end of calendar year 2019.

Now turning to the outlook on Page 29. As we've said, demand is mixed in the domestic market. Revenue for the Qantas corporate market is expected to be flat as the resources sector strengthens, and this will offset some weakness that we're seeing in other sectors, particularly in telecommunications or financial services. Pleasingly, Qantas continues to grow its corporate market share.

Overall, the SME market growth is moderating, it's still positive. But we also believe that Quanta's continues to gain market share, insulating us from the weakening demand environment from this customer segment that we believe is occurring.

Weakness is also evident in the price-sensitive leisure market, but the premium leisure market is steady. The international capacity environment remains stable, and a positive outlook remains for premium demand, although growth will moderate as we cycle over the strong first half of 2019. In the price-sensitive market, strong Asian demand is offsetting currency-related weakness and leisure demand to places like Honolulu.

Our capacity guidance for the first half is that the group capacity is expected to increase by about 1%. Breaking this down, we expect that the group domestic capacity to be flat and group international capacity to increase by circa 1.5% while international competitor capacity is expected to contract in the first half.

You can see all the other guidance for the full year on this slide, including our expectations to deliver at least $400 million in gross transformation benefits again this year. The noncash increase of approximately $130 million is for depreciation and optimization and also included in our forecast.

And as a result of the scale of the airport domestic terminal leasings, earnings are expected to reduce by $100 million, including $70 million which is noncash. All of this points to another strong year ahead, and all of this points for our continued confidence in the performance of the Qantas Group.

With that, I think it's time that we wrap up. And we might open it to questions. I'll start in the room, and then we'll go to the phone.

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Questions and Answers

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

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Anybody in the room? Very shy lot in the room typically, aren't they? Yes. We might go as -- any phone questions?

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Operator [2]

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(Operator Instructions) Your first phone question comes from Matt Ryan with UBS.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [3]

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Just looking at the domestic market, it looks like unit revenue was up about 3% in June quarter, which would've been supported a little bit by April and Easter. Just curious on, I guess what you saw after that period and whether you've seen any pickup in the new financial year?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [4]

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Yes. I might ask Andrew David and Gareth to talk about what they're seeing in the domestic market. So Andrew?

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Andrew Paul David, Qantas Airways Limited - CEO of Qantas Domestic & Freight [5]

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Yes, Matt. So first of all, from our Qantas Domestic perspective, just very quickly, just reflecting on FY '19 performance, second best result ever at $740 million, and that's inclusive of headwinds from fuel and FX, as Alan and Tino spoke to, and we did see a much softer fourth quarter. If you stare into first quarter FY '20 and look at the outlook for first half, we are seeing market capacity flat. Our corporate growth is flat. Our share is increasing. We are seeing significant growth in resource market. And if you reflect back on 2012, the boom that we saw there, we saw $300 million of revenue come out of the resource market. In FY '18, we saw $50 million go back in. In FY '19, we saw $47 million go back in. And in FY '20, we've spoken publicly about the 13% capacity increase we put into the west to meet the demand we're seeing in that market. That is offset by weakness we're seeing in financial sector and in telco. In the SME market, we continue to grow our share. The growth is moderated of what we saw first quarter last year. There is still growth in that market, and we are still growing. And the premium leisure market continues to hold up for us. Underpinning all of this is the flexibility we have in our capacity.

The Jetstar and the Qantas businesses work together on a daily basis to analyze demand and adjust the capacity accordingly. Gareth, Alan, Tino and I meet on a monthly basis to review market, and we have the ability to adjust accordingly. And with the benefit of all of the entities and airlines that John runs, we have everything from a Q200 all the way through to an A330, and that allows us to adjust our capacity to meet demand as it moves across the various markets we operate in.

Gareth, perhaps you want to talk to, yes.

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Gareth R. Evans, Qantas Airways Limited - CEO of Jetstar Group [6]

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That was very comprehensive. So look, just even from a Jetstar perspective, for the year, strong revenue performance. We had good underlying yield growth, both fair growth, but also load factor growth and really pleasingly ancillary revenue growth as we brought on our new products and services. We did have a strong Easter, as Matt mentioned in the question, but we have seen weakness subsequent to that. So post-Easter, May, June and into the first couple of months of this year, there's no doubt there's been a weakening effect, and I think a number of people across the economy are seeing that. For us, though, we are also continuing to see strength from an ancillary revenue perspective as we continue to grow and build that ancillary revenue portfolio and deliver it to our customers in the ways that they want through more and more digital means. Obviously, we're also part of the group approach, so capacity settings currently looking flat, and we will continue to monitor those with an eye to the strategic position. But if we see further weakening, then clearly, we will adjust accordingly.

And just as a point from a zero-capacity perspective for Jetstar, we have added about 2% to 3% from increasing the seat density on the aircraft through our CEP program. So that under -- there's an underlying efficient capacity growth even within that flat position, and there is an extra day next year from a leap year as well. So all of those build to that flat position.

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

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And we'll just make a comment as well that retail sales is interesting, looking at what's happening in our retail sales. So when retail saw a bit of a decline, we didn't see any decline in the leisure market when that first started to occur at the end of last year. We're hearing that there's a bit of a rebound in recent weeks. We haven't seen that rebound coming through in the price-sensitive leisure market, but maybe a lagging effect is just there, and we're keeping a very close eye on that. And so hopefully, that is part of what we'll see going forward. And I really emphasize, just staying with demand, at capacity, matching supply with demand is the best thing you can do to manage this, no matter what occurs. We're unique when it comes to a lot of businesses. We have mobile assets. We have assets that we don't have to fully utilize. We have assets that we can move around. So the way in this year we've seen a big drop in Darwin demand, as an example, a big increase in demand in Western Australia, the fact we've moved assets around to meet those challenges and grab those opportunities, has improved our performance significantly. And we're looking forward to this year to be able to do the same thing. I will say on top of that, we believe our competitive position is a lot stronger than our competitor. So the position on the domestic capacity I think at a minimum is likely to be flat to slightly negative. And again, maintaining our strategic position, we will look at further reductions in capacity in the domestic market if we think they're needed in order to maintain or continue to improve earnings.

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Operator [8]

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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 [9]

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Just congratulation on a good result. Just as firstly for me, into the questions just on the international business. You talked about the contracting capacity from the peers. I'm just wondering, are you seeing any comparable rates or pricing increases on the back of that contracting capacity?

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

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Yes. I might get Naren to talk about this a little bit. Naren?

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Narendra Kumar, Qantas Airways Limited - Former Acting CEO of Qantas International [11]

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Yes. It's -- you would have seen the capacity changes that actually happened with our competitors actually kicked in, in the second half of the financial year. We still saw capacity increases in the first half. But when you look at the rest performance that we have, obviously, the comment just made in terms of the domestic market with supply sort of and demand being better matched, is the first time we have seen capacity contraction in the international market in about 10 years. And we were able to see, as a result of that, both yield improvements, but more importantly, when you look at our rest performance, we also see improvement in our load. Our load actually improved by 1.8 percentage points, so we were also able to stimulate demand and make sure we were better utilizing the capacity that we put in the market. Also more importantly, the arrival of the 789s enable us to restructure our network. Not only what we have done in Singapore and at Perth, but also late last year, in the early part of FY '20, Brisbane-Los Angeles, JFK services to New York was restructured, the introduction of Melbourne-San Francisco, all of that gives us the ability to actually take passengers to the destinations that they want to get to directly, and therefore, we are disaggregating the markets that we perform in and that yielded better returns in the second half.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [12]

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I guess what I'm asking is the, what is it, circa 6% RASK improvement you saw in that second half as that capacity is coming out, can we expect that same level of RASK growth to continue into at least I guess the first half of fiscal '20?

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Narendra Kumar, Qantas Airways Limited - Former Acting CEO of Qantas International [13]

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Yes. The RASK improvements that I referred to, you saw in the second half. The first half, we reported a RASK of 5%. The second half was 7.8%, yielding us an average of 7 -- 6.4% that we talked about. The RASK improvements kicked in, in the latter part of the last -- of the first half, and so we saw the full benefits in the second half. We will see that momentum carrying through in the first quarter, in the first half. But as Alan mentioned, our RASK will actually moderate as we cycle through the higher RASK that we achieved in the second half of the year.

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

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And maybe offsetting some of that as well. We still have to see the benefits of the joint venture with American Airlines kicking in and the new routes to places like Chicago and San Francisco. We do expect some significant benefits to come from the joint venture, which is only really starting from now. So that'll take a little bit time to ramp up. It should be starting to come through in the second half.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [15]

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That would offset the RASK improvement or it'll supplement the RASK improvement?

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

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No. Supplemental -- healthy for the -- manage our RASK growth or revenue growth, particularly on the Pacific routes going forward.

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Operator [17]

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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 [18]

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If I could ask a question about the increase in market share of corporate and SME that you're seeing. Could you sort of talk about what you are doing to drive this or alternatively, what your competitor is doing to drive this, and how much of an opportunity there realistically is for higher shares there?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [19]

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Paul, give us some credit. It's all about what we're doing. Nothing else. Could I ask someone -- I'll ask Andrew David to talk -- and maybe Liv can talk about a little bit about the SME market with Qantas Business Rewards. Andrew?

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Andrew Paul David, Qantas Airways Limited - CEO of Qantas Domestic & Freight [20]

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Well, as demonstrated with my first answer, I'm very well briefed, so I'm not going to comment on Virgin. But I will comment on us. So from a corporate perspective, what is driving our share growth is principally the resource market where we have a much heavier weighting of capacity into that market. As that market grows, it lifts our share. And we are holding in all the other sectors and doing very good job. On the SME side, what's principally driven our growth is our Qantas Business Rewards program, and that's a good segue to, Liv, Olivia to give an update on that. That Qantas Business Rewards program now has 0.25 million members, and it's that program that is driving our share growth. That market was growing considerably in FY '19. That growth has moderated, but our share continues to grow, and it's principally off the investment we've made in the rewards program.

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Olivia Wirth, Qantas Airways Limited - CEO of Qantas Loyalty [21]

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I'm not too sure that's a segue, but anyway. Thank you, Andrew. As Andrew said, look, the (inaudible) [going about] by 25%, there's about 250,000 members in our Qantas Business Rewards program. And you'd be very familiar with the coalition program that we have for our customers. That's obviously up to $13 million. And what we're really trying to do is replicate that strong coalition that we have for our members program, just as small business. So we are seeing more members join, absolutely. But importantly, we are growing out the QBR proposition. So we expect that we'll be able to continue this growth into FY '20 and beyond as we strengthen out the coalition and as we make it more rewarding for our small business members. That obviously is supporting the growth that we're seeing from an airline perspective as well.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [22]

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And can I say, Paul, there's other initiatives in the pipeline prior to transformation for next year which we think will improve our position even further. We've launched the new Quanta’s distribution capability on the 1st of August. We've been investing very heavily in what we're calling personalization, our ability to pull offers directly to small businesses, individuals. And we think both of those are going to have a significant impact going forward. And we're going to give you a little bit of more color and detail at the Investors Day in November about how those 2 programs, we think are going to be very important for our future growth in these segments.

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Operator [23]

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Your next question comes from Jakob Cakarnis from Citi.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [24]

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Can I just get an understanding of the sequencing of the transformation benefits that we can expect into FY '20? Are they going to be skewed to any particular half? Or are they progressive through the year?

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [25]

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I might ask Rob Marcolina who's running the transformation program.

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Robert Marcolina, Qantas Airways Limited - Group Executive of Strategy, Innovation & Technology [26]

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Yes. I think as Alan mentioned earlier, we are targeting $400 million for next year. I think, as you've seen, they're fairly evenly split across the 2 halves. And as we've done over the last couple of years, revenue initiatives on that revenue initiatives have been around, so between that 30% and 40%. And we understand and recognize the importance of cost transformation initiatives, so that's probably a guide as we think about the next year as well.

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Operator [27]

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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 - Head of Research [28]

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Can I just delve into the CapEx guidance of $2 billion, is that anticipating putting orders in around Project Sunrise or -- because that's obviously a step-up from the previous guidance of maintaining your fleet age at around the 1.5 level.

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [29]

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Not sure about that. Our previous guidance, what we've been saying for a long time there, Cam, is that when we look at our fleet, our fleet plan, we can replace our entire fleet and be able to do that and all the other capital expenditure that we have in the group and not have to exceed $2 billion in any 1 year. Reality is, even last year, we spent $2 billion. It just sort of came out at a net $1.6 million because we sold the catering business and some terminal assets. So the $2 billion is really what we see as the cap of spend that we would need to spend on average to maintain our business. Clearly, growth is above that. So if we're talking about Project Sunrise, that would obviously be something that -- and that's why we're working so hard in building a business case because we'll only do it if it makes sense, but that would be on top of that.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [30]

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Okay, great. And does that (inaudible) include that you're not forecasting to sell with Perth terminal during that year?

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [31]

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Does that include....

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [32]

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Do we have assumption that we're selling Perth.

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [33]

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Yes, the -- so Perth would be included in the proceeds for there. We've got an assumption built in for that. We're in dispute with Perth. As you well know, that the terminal 4, the process for resolving that dispute will be an arbitrated outcome, which we think will be done within this time frame no matter what. The dispute, which may last a little longer than that, is in relation to the ongoing charges. And as you know, we've been discussing with Perth airport why they're seeking to overcharge us going forward, especially where they believe that their cost of capital is higher than an airline. So we're going to be in dispute for a while whilst they continue to hold that view.

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

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I don't think we have any more questions on the phone. Any more questions in the room? No. Going, going, gone. Okay. Thank you very much, everybody, and we'll see you back.

And can I finally (inaudible) I can't forget about this. Can I give a big thank you to Tino who's led as CFO for the last 5 years, and he was deputy CFO before that. He's built up an amazing team in the finance division, in the treasury and in finance overall. He's done a phenomenal job at putting the structure in on the financial framework, which a lot of other companies are now adapting -- adopting and using as a basis. So thank you, Tino, for the amazing 5 years. And he's looking forward, I think, to being CEO of Qantas International.

I kind of welcome Vanessa who will be up here at 6 months' time doing the role as the CFO. Vanessa's been 20 years in the company. She started in the finance division but has been in commercial roles, has been in operational roles.

And it's one of the great things about the bandwidth and the capability of the Qantas management, people can move around, run different divisions, have that experience of doing it and are better rounded people with better knowledge and better -- as you can see, the team works really well together, and it's partly because people have moved from different divisions and understand how different divisions operate. And that's why I think we've got such great collaboration, such a great team overall. And I'm glad we'll have that continuation with both Vanessa and Tino in the new roles.

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Tino La Spina, Qantas Airways Limited - CEO of Qantas International [35]

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All is well for the future given Vanessa's judgment and her first decision-making, which is clearly what I could have made 5 years ago, was to get the right clicker for the job.

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Alan Joseph Joyce, Qantas Airways Limited - CEO, MD & Executive Director [36]

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No, Tino. You're too tight. Vanessa is very tight, but she's got a little bit more flexibility than you have.

Thank you very much, everybody.

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