QANTAS ANNUAL REPORT 2016 Contents
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500 500 VVVV VYTF ZISA VVTS VTBB WBKK WSJC WABB H H 540 540 500 500 500 500 500 450 450 QANTAS ANNUAL REPORT 2016 Contents Qantas Annual Report 2016 Our Performance in 2015/16 02 Our Financial Framework 03 Chairman’s Report 04 CEO’s Report 06 Board of Directors 08 Review of Operations 12 Corporate Governance Statement 24 Directors’ Report 26 Financial Report 51 Shareholder Information 103 Financial Calendar and Additional Information 104 The Qantas Transformation program has reshaped the Qantas Group, delivered record results and unlocked shareholder value. From this position of strength, and with our people more engaged than ever, we’re looking ahead to a new phase of innovation and growth. With world demand for air travel set to double over the next 20 years, Qantas and Jetstar have the ability to lead the aviation industry at a time of unprecedented global change. 01 QANTAS ANNUAL REPORT 2016 Our Performance* in 2015/16 This exceptional performance The Group’s disciplined fuel reflects the strength of our Qantas hedging – which helped secure a Qantas Group strategy, with record results $664 million benefit from lower Domestic and increased margins for Qantas global fuel prices – was another Domestic, Qantas International, the driver. $578m Jetstar Group and Qantas Loyalty, The Group’s financial position Underlying EBIT. and Group-wide return on invested was strengthened during the year, Up 20 per cent capital of 23 per cent. with $2.8 billion in operating cash Total underlying earnings before flow used for capital expenditure, interest and tax (EBIT) in the shareholder distributions and debt domestic market – across both repayments, and excess cash used Qantas and Jetstar – rose 30 per cent for refinancing aircraft. Qantas’ Qantas International to $820 million, and total underlying strong balance sheet and more EBIT from the Group’s international sustainable outlook was recognised operations was $722 million, up by ratings agencies during the $512m Underlying EBIT. 107 per cent. financial year, with an investment Up 92 per cent grade credit rating restored by The result also reflects the Standard & Poor’s and Moody’s continued delivery of the Qantas Investor services. Transformation program, which has now unlocked $1.66 billion in cost and revenue benefits since Jetstar Group beginning in 2014. $452m Underlying EBIT. Up 97 per cent Group Performance $1.53 billion Qantas Record underlying profit ( 57%) Loyalty Statutory earnings 49.4 cents per share $346m Underlying EBIT. per share (EPS) ( 24c) Up 10 per cent Return on invested capital 23% QANTAS Operating cash flow $2.8 billion FREIGHT $64m Underlying EBIT. Ex-fuel unit cost 3% Down 44 per cent $5.6 billion Net debt (within target $4.8-$6b) *Refer to the Review of Operations section in the Qantas Annual Report 2016 for definitions and explanations of non-statutory measures 02 QANTAS ANNUAL REPORT 2016 Our Financial Framework* Qantas’ Financial Framework In addition to strong short-term Surplus No Capital Surplus guides how we create value for our liquidity of $3 billion – including Capital shareholders. Our overarching goal cash of $2 billion – the Group’s is to achieve maintainable earnings- unencumbered asset base totals per-share growth through the cycle, over US$3.9 billion. and in turn deliver total shareholder Increased Debt Improving Return on Invested distributions, reduction returns in the top quartile of global grow invested focus Capital (ROIC) (%) ROIC capital airlines and the ASX100. The Group’s ROIC of 23 per cent The three core pillars of the STRUCTURE CAPITAL OPTIMAL was up from 16 per cent in 2014/15, framework are consistent: and well above our threshold of 10% ROIC > Maintaining an optimal capital ROIC above 10 per cent through structure that minimises the the cycle. All operating segments Group’s cost of capital; continue to deliver ROIC above the 4.8 6.0 Net Debt ($b) Group’s cost of capital. Efficient > Achieving return on invested allocation of capital, increased fleet Disciplined Allocation of Capital capital (ROIC) above 10 per cent utilisation, and ongoing business through the cycle; and The Group used cash in excess of transformation all contributed to short-term liquidity requirements > Growing invested capital with achieving greater returns from the to refinance 29 maturing aircraft disciplined investment; returning Group’s existing assets. leases, while funds from operations any surplus to shareholders. Qantas Transformation were directed to debt repayments Optimal Capital Structure ($1.1 billion), net capital expenditure The Qantas Transformation ($1 billion), and shareholder The Group maintained an optimal program has unlocked total distributions ($1 billion). capital structure throughout cost and revenue benefits of 2015/16, with net debt at year-end $1.66 billion since 2013/14 – Shareholder Returns of $5.6 billion within our target including $557 million in 2015/16. The Group has returned more than range of $4.8 billion to $6 billion. A further $450 million in benefits $1 billion to shareholders over the Credit metrics remain significantly will be realised in 2016/17, to reach past 12 months, through a $505 better than the investment-grade the Group’s increased target of $2.1 million capital return (completed in metrics Qantas targets through the billion by 30 June 2017. November 2015) and $500 million cycle. on-market share buy-back (completed in June 2016). Combined, Qantas Transformation Scorecard these two capital management initiatives reduced shares on issue Target Progress by 12.6 per cent. Metric Timeframe Our strong result in 2015/16 $2.1b gross benefits $1.66b benefits realised. >10% Group ex-fuel FY17 means we can return a further Accelerated Ex-fuel expenditure reduced by 9% Transformation expenditure reduction $500 million via a fully-franked benefits 5,000 FTE reduction FY17 4,605 FTE reduction ordinary dividend of 7 cents per >$1b debt reduction FY15 Delivered on schedule share – totalling $134 million – and Deleverage an on-market share buy-back of up Balance Sheet Debt / EBITDA <3.5x FY17 Delivered ahead of schedule FFO / net debt > 45% to $366 million. Sustainable positive Cash Flow FY15 onwards Delivered on schedule free cash flow Where there is surplus capital in Fleet Eight fleet types future, the Group will first distribute Eleven fleet types to seven FY16 Simplification Retaining 2 x non-reconfigured B747 to shareholders via an ordinary ACHIEVING OUR TARGETS NPS record achieved at Qantas Customer Advocacy (NPS) Ongoing Domestic, Qantas International and dividend, in conjunction with share Customer and Qantas Loyalty buy-backs, special dividends or Brand Maintain premium Premium on-time performance on-time performance: Ongoing a capital return should additional maintained with increase to 89.7% Qantas Domestic surplus exist. *Refer to the Review of Operations section in the Qantas Annual Report 2016 for definitions and explanations of non-statutory measures 03 QANTAS ANNUAL REPORT 2016 Chairman’s Report The Group’s portfolio showed its value in a complex market. The business is stronger, more efficient and more customer- focused as a result – and positioned well for the future. A Strong 2015/16 Once again, the Group’s balanced portfolio of businesses and brands showed its value in a complex market. The Group’s domestic two-brand strategy has proven resilient throughout Australia’s economic transition, and that continued in 2015/16 with record domestic earnings. In the international market, Qantas and Jetstar have grown to meet rising demand in Asia- Pacific markets, while the Emirates partnership gives the Group wide access to European markets without significant invested capital. 04 QANTAS ANNUAL REPORT 2016 Disciplined investment in product Economic Conditions The Qantas Annual Review sets and service continues to secure out the Group’s approach to Consumer confidence and travel record levels of satisfaction from sustainability, its view of the demand softened in the domestic customers, and the Qantas Loyalty global forces most relevant to the market through the middle of 2016. business is increasingly a source business, and its strategic priorities of new ventures and diversified However, Australia’s economic in responding to both the challenges revenue streams. fundamentals are strong and and opportunities they present. demand in non-mining sectors is Productivity and financial discipline Board Update solid; the resurgence of inbound underpin everything the Group tourism with the lower Australian I was pleased to welcome Michael does. This was recognised by dollar has been particularly L’Estrange AO to the Board as a Moody’s Investor Services, as well welcome. Non-Executive Director in April this as Standard and Poor’s, when they year. Michael was a senior public restored our investment grade Internationally, growth in our key servant and diplomat with the credit rating. Asia-Pacific trading partners is Australian Government for more healthy, and Asia will be an engine Shareholder Value than 27 years, as well as holding room of air travel demand and academic posts and directorships. The Group has increased net free Qantas Group growth for decades to His experience in global affairs will cash flow, grown return on invested come. be invaluable to the Board given the capital and further strengthened The UK Brexit decision had little wide range of geopolitical issues its balance sheet, remaining in an direct impact on the Group, but did influencing the Group. optimal capital position throughout create short-term volatility in global 2015/16. Looking forward markets, as other geopolitical I’m especially pleased that we have events have done over recent years. The Group’s efforts in 2016/17 will been able to return more than This underlines the importance of be focused on continuing to advance $1 billion in cash to shareholders the Group’s focus on cost control its strategy and grow shareholder over the past 12 months. Over the and diversifying revenue.