Qantas Maps Out Path To Higher Margins

By Glenn Dyer | More Articles by Glenn Dyer

Qantas shares have hit a new series of all-time highs after an investor briefing proved to be what investors wanted to hear from the airline.

Qantas revealed it had set a 2024 target for the EBIT (earnings before interest and tax) margin of its domestic business (which is its main profit centre) to about 18%, from 12%.

It was a similarly ambitious target for its budget arm Jetstar where Qantas management sees the earnings margin rising from 9.3% today to about 22% over the next five years, with this airline continuing to target Asia.

The shares ended the day at an all-time high of $7.13 on Tuesday, after touching an intraday high late in the session of $7.15.

And investors liked the tougher attention Qantas will be paying to costs this financial year.

The presentation to investors contained this line: “FY20 more focused on cost than revenue compared to previous years” which means that although Qantas has made deep cost cuts from 2015 onwards, the slowdown it warned about a week or so ago in a trading update has forced it to look closer at the way it is doing business.

In the quarter ended September 30, Qantas reported a near one percent fall in unit revenue in its domestic business, which typically dominates profits, driven by a fall in demand for its budget carrier Jetstar.

But Qantas remains under pressure domestically (international operations saw lower margins) because of weak business travel.

Qantas CEO Alan Joyce said the greater attention to costs would be achieved through efficiency measures – such as digitisation, changes to its fleet and network, and cost-cutting – which will deliver $400 million in annual benefits.

“We are working quite extensively on our transformation program and in the year ahead there will be a lot more focus on cost, and in the next five years we think there is a path to achieve significant improvement in margins,” Mr. Joyce said in the briefing.

“We look around the world and we see that full-service airlines are getting to margins in the high teens so we’ll continue to target that for Qantas domestic and low-cost carriers get to margins in the low 20s.”

Meanwhile, the briefing was also told that the airline is targeting annual spending of about $2 billion and expects its capacity growth to be little changed in the second half of 2019-20 (which is again music to investors wallets).

Qantas said in August it would spend $2 billion on CAPEX in 2019-20, up from $1.6 billion the prior year, as it pays for new Boeing Co 787-9 planes and refurbishes the cabins of its Airbus A380s.

Qantas is also expected to place an order next year to replace its domestic fleet, which is dominated by 75 737 NGs but also includes 20 717s and 17 Fokker 100s.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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