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The Flying ‘Roo – Qantas announces record profits

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What a dramatic turnaround it has been for everyone’s favorite flying Kangaroo. Just a few years back they were on the brink of collapse – dealing with a newly resurgent Virgin Australia, battling with union issues, grasping at the fact that not a single QF international route was independently profitable and left ruing at their missed 777 and 787 orders.

Now look at them.

Unquestionably one of the star performers of the industry, Qantas has just announced an underlying pre tax profit of $1.56 billion, up an astounding 57% YoY. As per the official Qantas press release, here are some other remarkable numbers the airline has posted – CEO Alan Joyce and his team are surely reading these numbers over and over again over bottles of 21 year Scotch. 

•Record underlying profit before tax: $1.53 billion, up 57%
•Record statutory profit before tax: $1.42 billion, up 80%
•Record results for Qantas Domestic, Qantas International, Jetstar Group, Qantas Loyalty
•Near-doubling of earnings per share: 49c, up 24c
•Return on invested capital: 23%, up 6.5 points
•Operating cash flow: $2.8 billion, up 38%
•Net free cash flow: $1.7 billion
•$500m shareholder return: fully-franked 7c per share ordinary dividend and onmarket share buy-back
•Additional cash bonus totalling $75 million for 25,000 non-executive employees

I mean – what? These are simply some astounding results for Qantas Group to release, especially given their previous struggles with their international network and their sluggishness with the JetStar brand in the Asian market. And yet essentially every sub-category of the business sees numbers soaring. I think it boils down to a few major developments and/or strategies:

  • Alan Joyce and his team taking the bullet – absorb all the losses, right size the fleet and work force and write everything off within one fiscal year to bolster your next and following years’ financial results. The accelerated retirements of the ageing 737-400 fleet, the downsizing of QantasLink and the redistribution of QF New Zealand all played major roles in this. Even taking that into consideration these numbers do look very, very healthy indeed.
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  • oneworld and British Airways as partners simply wasn’t working for Qantas. On the Kangaroo Route to Europe, BA has one 777 flight a day via Singapore to London and whilst Cathay has a much larger footprint in the Aussie market, the airline simply refused to work with QF – the frosty relations remain to date between Hong Kong and Sydney. So what did Qantas do? Get into bed with the devil – signed a comprehensive, all reaching, unprecedented code and revenue sharing agreement with Emirates. If you can’t beat ’em, join ’em they say – and much to the chagrin of other oneworld members, Qantas joined – and went all in. The new agreement meant that all Qantas flights headed to Europe now went through Dubai rather than the traditional Bangkok or Singapore stops and connected seamlessly with Emirates flights headed to more than 60 destinations further west in Africa, the Middle East, Central Asia, Eastern Europe and Western Europe. This proved to be a game changer for Qantas as the airline was able to axe their perennially loss making Paris and Frankfurt flights and hand them over to Emirates. Qantas also gained one stop access to a wealth of destinations through Dubai that was previously unavailable due to either back tracking or visa restrictions at Heathrow. The Emirates product also proved to be a hit with Qantas elite frequent flier members – so with the completely interchangeably miles and points system between QF and EK, the Emirates options seems to have been used extensively by current QF elite.
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  • The emergence of JetStar Asia as a legitimate force in the Japanese market as well as the massive expansion the group is seeing in Vietnam, Singapore and indeed at home in Australia has been a boon for the group as a whole. While JetStar Hong Kong has failed to get off the ground, its other sister groups have been thriving. The introduction of the 787 to the JetStar long haul fleet in place of the A330 has proved to be a master stroke, so much so that parent company Qantas will be taking their own 787-9s in 2017/18.
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  • Sticking with the A380 on the airlines’ trunk American routes and going forward with American Airlines to bring them to Sydney has been key as well. QF strictly enforced the ‘Qantas’ standard on AA flights (you might notice AA Australia flights feature an upgraded service in comparison to any other destination in their network) and the fact that the two are metal neutral across the Pacific shows just how close this cooperation has developed to. With the A380s now being able to make the nonstops from Australia to the US without any payload penalties (to even Dallas), the North American network has become a cash cow for Qantas.
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It all seems as though these were vital cogs that were being moved around the table to achieve the right fit for Qantas becoming a major player in the international market once again, despite their hub’s remote location. The partnership with Emirates basically opened up the world for them, their right sizing of their subsidiares mitigated some of the $ bleed they were seeing and sticking with the A380 on the American market even during tough times and high oil prices is paying off dividends for them now.

All one has to do is look at their closest competitor, Virgin Australia – who just posted over a quarter of a billion dollar loss – and see within this context just how well Qantas is doing. With extensions on the Emirates agreement, continued JetStar expansion and 787 deliveries all on the horizon, the future is definitely looking bright for the Flying Kangaroo.

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