A look At Qantas Airways Limited

  • Oct 22, 2019 AEDT
  • Team Kalkine
A look At Qantas Airways Limited

Qantas Airways Limited (ASX: QAN)

Introduction:

Qantas Airways Limited is engaged in providing international and domestic air transportation services with its headquarters present in Mascot, Australia. On 20 October 2019 QAN announced its first ever non-stop flight between New Work and Sydney. As reported the flight flew for more than 19 hours at stretch and covered close to 10,000 miles. The above journey by Qantas was in respect of a test flight scheduled under project ‘Sunrise”. The above project was designated for commencement of regular commercial flight services from Sydney to London and from Sydney to New York. The flight flew roughly at an altitude of 34,000 feet -42,000 feet above the mean sea level.

Quant reported that the flight would be utilized for testing the reaction of the pilots, crew, fellow passengers and the efficiency of a new cabin services the airline proposes to launch during this type of an extended journey. Due to the lower numbers of customers, the company allotted each of the passengers a business-seat which would convert into a bed!

FY19 Operating Highlights for year ending 30 June 2019:

Qantas Airways Limited announced its FY19 financial results wherein the company posted revenue of $17,966 million, ~5% higher than that during FY18. The company reported underlying PBT of $1,302 million which declined ~17% from FY18. The company reported available seat kilometers (ASK) at 151,430 million depicting a -0.7% decline over 152,428 million in FY18. Revenue seat Kilometer stood at 127,492 million in FY19 as compared to 126,814 million during FY18. Unit revenue of the company, during FY19 stood at 8.85 cents per ASK as compared to 8.40 cents per ASK in previous financial year. The company reported ex-fuel unit cost at 5.40 cents per ASK during FY19 as compared to 5.37 cents per ASK during FY18. During FY19, statutory EBITDA came in at $3,115 million as compared to $3,062 million during FY18 followed by operating cash flow at $2,807 million as compared to $3,413 million during FY18. Operating margin for FY19 stood at ~8.3% versus ~10.2% in previous financial year. QAN reported Underlying EBIT in FY19 down $113 million at $285 million on account of increased revenue which was offset by higher increase in expenses. One of the major highlights of FY19 is that QAN announced launched of new routes such as i)Melbourne t- San Francisco ii) Melbourne–Queenstown and iii) Sydney–Nadi, while the company launched flights for three new routes i) Brisbane– Chicago ii) Brisbane–San Francisco and iii) Sydney–Sapporo. The business reported ~30% premium seat-mix on 787 Dreamliner which has aided revenue resilience and has helped report higher customer satisfaction on the Perth–London route.

The company reported fuel costs at $3.85 billion where effective hedging limited the fuel cost rise at $614 million. The company has initiated operational flexibility to mitigate increasing fuel costs from the medium-term and long-term perspectives. The company achieved efficiencies across supply chain, operations support, procurement and in information technologies.

Segment Performance:

As per the segment performances are concerned, the business has four segments namely Qantas Domestic, Qantas International, Jetstar Group and Qantas Loyalty. Let’s have a quick look on the performance highlights of these segments. QAN also successfully reduced fuel burn through Flight Pulse App enhancements, on board weight reduction etc.

Qantas Domestic reported underlying EBIT for FY19 at $740 million, unit revenue was higher by 5% on y-o-y. This segment witnessed revenue increases which more than offset fuel cost increase, partially offset FX impacts on non-fuel costs. QAN reported market capacity in line with customer demand while the business witnessed higher share of Corporate and SME segments. The business witnessed $47 million higher resources market revenue during FY19. During the year, the company continued investments in customer service achieving 83% on time performance, which is a premium to the competitors. The company announced second pilot academy in Mackay, followed by roll out Wi-Fi by November 2019.

Qantas International reported strong growth in unit revenue of ~6.4% more than offset fuel higher fuel costs. The company witnessed addition of networks, hub restructure and fleet renewal helped it to be resilient. The Perth–London service witnessed network leading customer advocacy during the year. During FY19, the business witnessed higher competition across the USA market while the approval of American Airlines Antitrust Immunity is likely to open up new opportunities for the business.

Jetstar Group reported revenue at $3,961 million, up 4.4% on y-o-y basis while the company reported 12% y-o-y growth in ancillary revenue per passenger. International unit revenue grew ~6% over FY18. The business witnessed higher revenues even more than the growth in fuel expenses. This segment reported record profit with seat factor which came in at ~86.1% as compared to ~85.6% in previous financial year. The segment continued to invest in improved customer experience, transformation and higher operational efficiencies.

Qantas Loyalty segment reported revenue at $1,654 million as compared to $1,519 million during FY18. Underlying EBIT, during the year came in at $374 million, up ~8.4% over FY18, with the segment reporting double digit profit growth during the second half of the financial year. During the year, the company announced the biggest Frequent Flyer program overhaul in last thirty-two years. The estimated investment was expected at $25 million, which is expected to be offset in the first year. During FY19, Qantas Insurance witnessed a ~46% y-o-y growth across the Health Insurance market.

Outlook:

As per the Management guidance, the company expects FY20 fuel costs to be between $3.95 billion to $4.08 billion. The company is expecting return on invested capital to improve from ~18.4% achieved in the financial year 2019. The company expects FY20 gross capital expenditure to be around $2.0 billion which includes payments for six 787-9, continuation of A380 fleet reconfiguration and execution of first business lounges for Singapore flights. Qantas would continue to invest across Investment in technology and digital including enhancements in coming financial years.

Qantas Airlines

FY20 Fuel Cost Outlook (Source : Company’s Reports)

FY20 Return on Investment Outlook (Source : Company’s Reports)

Stock Update:

The stock of QAN closed at $6.540, flat with respect to its previous close, as on 22 October 2019. The market capitalization of the stock stood at $10.27 billion followed by an annualized dividend yield of ~3.82%. The stock is available at a price to earnings multiples of 11.98x.


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