Alan Joyce sets a new record for Qantas

It’s a mixture of tough disclipline and surprising imagination that has enabled Alan Joyce to produce a bumper Qantas result.

Qantas boss Alan Joyce Picture: Hollie Adams/The Australian

Alan Joyce’s presentation of Qantas’ first-half results made several references to the group’s “momentum”. It’s hard to argue with that after the group produced a record result, outstripping the high-water mark recorded in the first six months of Qantas’ boom 2015-16 year.

The underlying pre-tax profit of $976 million was above the guidance of a profit of $900m to $950m Qantas provided with its first-quarter trading update last year, 15 per cent ahead of the same period last financial year and solidly above the $921m in the same period of 2015-16.

On a statutory basis, including $119m of one-off costs, the growth rate was even stronger, up 20 per cent to $857m.

It was a result built, as Qantas’ recent results have been built, around its core domestic operations, where continued capacity discipline by the two domestic carriers — capacity in the domestic market was reduced by 0.9 per cent — saw Qantas and Jetstar’s domestic businesses generating underlying earnings before interest and tax (EBIT) of $652m, with the Qantas brand lifting its earnings 20 per cent to a record $447m.

We’ll have to wait and see how Virgin Australia has fared but the cessation of the capacity wars that decimated both groups at the start of the decade, and the continued discipline the carriers, have maintained has produced a more positive trajectory in its financial performance and gives it the opportunity to finally move back into the black.

Ahead of the implementation of the results of its renegotiation of its alliance with Emirates and other major shifts in its international strategy — which will enable Qantas-branded flights to London via Singapore, direct flights to London from Perth and, potentially, Qantas metal flying into other European ports — Qantas International produced a creditable result.

The international business experienced a 5.5 per cent decline in EBIT to $222m despite revenue growth of 7.3 per cent. The international routes have seen a lot of competitor capacity growth and intense price competition.

The Jetstar group, apart from its record domestic result, had “strong” international earnings and, overall, increased EBIT by 15.6 per cent. Its sometimes-maligned portfolio of Jetstar-branded Asian joint ventures was, Qantas said, profitable.

Qantas Loyalty, in the midst of a major extension to its scope into financial services, grew EBIT by a modest 1.7 per cent to $184m.

The past three-and-a-half years have seen a remarkable transformation, not just in Qantas’ profitability, but in its overall financial position and its capacity to invest and grow.

A key element was the $2 billion three-year transformation program that concluded last year, with Joyce now targeting an ongoing $400m a year of productivity gains — a target that he expects to exceed this financial year.

The combination of strong top-line performance and the radical and structural improvement in Qantas’ cost base has seen cash pouring through the group, with operating cash flow rising $561m, to $1.73bn, in the half and free cash flow rising $484m to $772m.

Qantas has been able to reduce net debt to $5.1bn — scraping the bottom of its target range of $5bn to $6.2bn — while also, if the $122m of interim dividends and on-market share buyback of $378m that were announced today are included — returning more than $2.5bn of cash to shareholders through dividends, capital returns and buybacks since 2015-16.

The strength of its financial position, with all its business units more than covering their cost of capital, is also enabling Qantas to invest in upgrading its fleet and lounge and contemplate initiatives — like the announcement today that it will establish a pilots’ academy that could morph into a major regional training centre (and a profit centre) — that would have been inconceivable only a few years ago.

Its capital expenditures this financial year and next are expected to total about $3bn.

Without providing any precise guidance, Qantas is upbeat about the near-term outlook. It says it expects “healthy” consumer demand growth in line with the improved global outlook.

It is remaining, however, conservative in its deployment of capacity. Total group capacity is expected to rise about 1 per cent in the June half, with domestic capacity reducing by about one per cent and international capacity rising by 2 per cent to 3 per cent — about half the rate at which competitors are expected to grow their capacity on Qantas routes.

It is that curious mixture of really tough disciplines and sometimes surprising imagination that has characterised the Joyce era at Qantas and remade the group into a modern and highly profitable airline with the financial flexibility to adapt to whatever the conditions throw at it or take advantage of opportunities as they arise. It remains one of the compelling continuing stories of 21st century Australian business.