Qantas has announced the worst result in Australian aviation history of an underlying loss before taxation to June 30, 2014 of $646 million. In addition to this, one-off fleet and other write downs have pushed the headline number to a staggering $2.80 billion.
The write downs relate to a reassessment of the value of its international fleet.
To the relief of many, the airline will not sell its frequent flyer program nor will there be any fresh staff cuts above the 5000 announced earlier this year.
The airline said that its fuel bill was up $253 million to $4.5 billion.
However its cash liquidity is put at $3.6 billion.
On the upside Qantas is predicting a underlying profit before tax expected in the first half of FY15.
Qantas said that the underlying PBT result was driven by the cumulative impact of two years of industry capacity growth ahead of demand, leading to a $566 million decline in FY14 revenue, and by record Australian dollar fuel costs.
Qantas said that it is driving “an earnings recovery and de-leveraging the Group’s balance sheet to shape a profitable future and build long-term shareholder value.”
The $2 billion accelerated Qantas Transformation program announced in February is permanently reducing costs and laying the foundations for sustainable growth in earnings the airline said in a statement.
Transformation benefits are already flowing through with $440 million in FY14.
A further $900 million of accelerated transformation projects are in the implementation phase the airline said, with more than $600 million of benefits from these projects to be realised in FY15.
Unit costs were reduced by 3 per cent over the year, accelerating from a 2 per cent reduction in the first half to a 4 per cent reduction in the second half the airline said.
Qantas chief executive Alan Joyce said the underlying result had been foreshadowed at the Group’s half-year announcement in February.
“There is no doubt today’s numbers are confronting, but they represent the year that is past,” Mr Joyce said.
“We have now come through the worst. With our accelerated Qantas Transformation program we are already emerging as a leaner, more focused and more sustainable Qantas Group.
“There is a clear and significant easing of both international and domestic capacity growth, which will stabilise the revenue environment.
“We expect a rapid improvement in the Group’s financial performance – and a return to Underlying PBT profit in the first half of FY15, subject to factors outside our control.”
Significant one-off costs associated with Qantas Transformation are recognised in the statutory result, including restructuring and redundancies ($428 million) and primarily non-cash costs relating to early aircraft retirements ($394 million).
Of the 5,000 redundancies announced in February, 2,500 have been implemented as at 28 August.
A major part of the write down relates to a decision to separate Qantas domestic and international airlines.
Mr Joyce explained it this way:
“Since 2012, in order to strengthen accountability and performance, we have reported the Qantas International and Qantas Domestic businesses as separate segments. The Australian Parliament recently decided to soften the foreign ownership restrictions in the Qantas Sale Act. As a consequence of this decision, we have decided to create a new holding structure and corporate entity for Qantas International.
This will have no impact on the day-to-day operations, network or staffing at Qantas International.
However, this structure increases the potential for future investment. It will create the long-term option for Qantas International to participate in partnership opportunities in the international aviation market, with a view to achieving further efficiencies and improved returns to shareholders.”
Mr Joyce went on to say that the decision to create a separate holding structure and entity for Qantas International has triggered an accounting requirement to test the value of Qantas International assets on a stand-alone basis.
“The international fleet was purchased when the value of the Australian dollar averaged 68 cents against the US dollar, and in the case of the B747s, 57 cents. Today the Australian dollar is trading at 93 cents,” said Mr Joyce.
“The value of these aircraft on our books has therefore been written down by $2.6 billion to their current market value.”
“As a result future Qantas International depreciation expenses will be lower by around $200 million per year.
Mr Joyce added that “importantly, this is a non-cash charge – a book write-down to the carrying value of aircraft that Qantas has no intention to sell, and will retain in its fleet.
It will have no impact on the economics of the business or change cash flow forecasts.”
In conclusion Mr Joyce said that “everything we are doing is about building a sustainable premium airline model for the 21st century.”
