OREANDA-NEWS. Qantas today announced an Underlying Loss Before Tax of USD 646 million and a Statutory Loss After Tax of USD 2.8 billion for the 12 months ended 30 June 2014.

The Underlying PBT result was driven by the cumulative impact of two years of industry capacity growth ahead of demand, leading to a USD 566 million decline in FY14 revenue, and by record Australian dollar fuel costs of USD 4.5 billion - up USD 253 million from FY13.

In response, Qantas 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 USD 2 billion accelerated Qantas Transformation program announced in February is permanently reducing costs and laying the foundations for sustainable growth in earnings.

Transformation benefits totalled USD 440 million in FY14, including USD 204 million of second-half benefits from the accelerated Qantas Transformation program.

A further USD 900 million of accelerated transformation projects are in the implementation phase, with more than USD 600 million of benefits from these projects to be realised in FY15.

To date, projects equivalent to more than half the USD 2 billion target have been delivered or are underway.

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.

Qantas CEO 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 (USD 428 million) and primarily non-cash costs relating to early aircraft retirements (USD 394 million). Of the 5,000 redundancies announced in February, 2,500 have been implemented as at 28 August.

At the same time as delivering cost reduction, the Group has taken action to adjust its capacity and network in response to shifts in demand and the competitive environment - while retaining flexibility to make further adjustments if required.

International competitor capacity growth is expected to be 2.4 per cent in the first half of FY15 and domestic market capacity growth is expected to be around 1 per cent, significantly below recent trends for both markets.

Financial Position

Group liquidity at 30 June was USD 3.6 billion, comprising USD 3 billion in cash - up around USD 600 million from the half-year - and USD 630 million in undrawn committed facilities. With operating cash flow of USD 1.1 billion, the Group was net free cash flow neutral in FY14.

The Group significantly extended its debt maturity profile through two landmark bond issuances totalling USD 700 million, with no major unsecured refinancing required before April 2016. Net debt including operating lease liability was reduced by USD 96 million.

Overall capital investment has been reduced to maximise net free cash flow for debt reduction, while the Group has maintained targeted investment in fleet, product and service to sustain brand and yield premiums for Qantas and Jetstar.

Capital investment was USD 874m in FY14. Planned capital investment in FY15 has been reduced from USD 800 million to USD 700 million, with a forecast of USD 800m in FY16.

The Group's average fleet age remains at a 20-year low of 7.7 years, with 35 per cent of the fleet debt-free. Thirty-one new debt-free aircraft have been added since FY10, including seven in FY14.

Outcome of Structural Review

Qantas today also announced the outcomes of the structural review that commenced in December 2013.

The Group has identified, valued and will continue to assess opportunities to sell non-core assets such as airport terminals, property and land holdings. Any proceeds from such sales will be used to repay debt.

After detailed strategic and structural assessment of Qantas Loyalty, the decision has been made to retain this highly valuable business within the existing Group structure. It was determined that there was insufficient justification for a partial sale. Qantas Loyalty continues to offer major profitable growth opportunities.

No new Jetstar ventures will be established while the Group is focused on transformation. Substantial value exists across the Jetstar Group airlines, to be realised over time.

Since 2012, Qantas' international and domestic airlines have reported their financial performance as separate segments, to strengthen accountability and performance. Following the partial repeal of the Qantas Sale Act, the Group will establish a new holding structure and corporate entity for Qantas International. This decision will create the long term option for Qantas International to attract external investment and participate in partnership opportunities in the international aviation market, with a view to achieving efficiencies and improved returns to shareholders.

Fleet Writedown

Under accounting standards, the decision to establish a new holding structure and corporate entity for Qantas International requires a change to Qantas' Cash Generating Units (CGUs) for impairment testing. The previous 'Qantas Brands' CGU has been split into four separate CGUs: Qantas International, Qantas Domestic, Qantas Loyalty and Qantas Freight.

The CGUs for Qantas Domestic, Qantas Loyalty and Qantas Freight all have strong surpluses.

After being tested on a standalone basis for the first time, the Qantas International CGU requires a writedown of USD 2.6 billion. The size of the writedown is largely due to the historic cost of aircraft purchased with an average exchange rate from Australian dollars to U.S. dollars of USD 0.68.

This writedown is a non-cash charge, recognised in the statutory result, with no cash impact on the Group's or Qantas International's operations. It is a writedown to the carrying value of aircraft that Qantas has no intention to sell and intends to retain in its fleet.

Following the writedown, the carrying value of Qantas International aircraft will be more reflective of the current market value of the fleet, and future depreciation expense will be approximately USD 200 million per year lower as a result of this change.

CEO Comment

Mr Joyce said the Group's priority now was to push forward with the accelerated Qantas Transformation program after a positive start.

“After an extremely difficult period, we are focused on building momentum with our turnaround in FY15,” Mr Joyce said.

“Our cash balance and liquidity position is strong, and the Group's overall financial performance is rapidly improving. We are removing costs to drive earnings growth. And the work we've done over recent years to renew our fleet and improve service has been recognised with a string of awards and record customer satisfaction.

“In February we made a deliberate choice to continue investing in core initiatives for customers in order to hold our competitive position, keep our brands strong and maintain a yield premium in a challenging market. As we transform our business at pace, our airlines are providing better service than ever.

“The structural decisions we announce today give the Group maximum scope to attract capital in a fiercely competitive international aviation market. Standing still while the world changes around us is not an option.

“With our structural review complete, we can move forward with certainty.”