Qantas is flying steady towards a return to profit in a dramatic turnaround which could prove an early vindication of Alan Joyce's tough 'transformation' of the airline.
Earlier this year, Joyce made a brave but measured forecast that Qantas would chalk up an underlying pre-tax profit by the end of this year.
Analysts are now tipping this at around $136 million based in part on falling oil prices, along with an end to the 'capacity wars' between Qantas and Virgin Australia, a lower Australian dollar, early benefits from the cost-cutting scheme and increased passenger umbers and per-seat revenue for Qantas' domestic and international arms.
Qantas already nailed a profit in the July-September 2014 period, says airline CFO Gareth Evans, driven by the 'transformation' program designed to carve out $2 billion dollars in costs by mid-2017.
"The transformation program is going well, although it's still early days – we are nine months into a three to three-and-a-half year program, but so far so good," Evans told Australian Business Traveller on the sidelines of the delivery of Qantas' new Boeing 737-800 in funky 1970s livery last month.
"The domestic market is also in a more stable situation than it's been for some time, albeit that it's quite weak on the demand front, but there's also very little capacity growth so demand/supply is matched better than it has been."
Lower fuel costs deliver only modest benefits
However, Evans pegs lower fuel prices as having only a relatively small impact on the July-December numbers owing to the timing of fuel purchases and Qantas' 'hedging' program.
"Lower fuel prices is more of second-half [January-June 2015] issue than a first half issue – the price benefit to us in the first half is going to be relatively modest" he said.
"The impact (of lower fuel prices) in the first half is going to be about $20 million, that's the Aussie dollar price benefit driven by fuel."
"The dollar's been lower for pretty much the whole period than it was in the previous year but fuel prices really only started to drop dramatically from October, which prices November, so really we're only getting a benefit for a couple of months in the first half of the [fiscal] year."
"But if the fuel price stays where it is at the moment then there's a bigger benefit in the second half."
How to save $100 million a year...
The larger wins towards December "are being driven by the transformation program," Evans said. "That's the engine that is turning the business around."
Evans revealed that the airline will recoup over $100 million per year just from smarter scheduling of its Airbus A380 superjumbos.
"We've taken those two A380s and deployed them on Dallas and retired two older Boeing 747s. The A380 can make Dallas a direct flight in both directions where the Boeing 747 had to drop into Brisbane."
"That all adds up to over $100 million a year in terms of the cost benefit."
A smaller saving comes from not filling up the tanks of its Airbus A330s on their Sydney-Melbourne legs.
"The A330s have big water tanks and we've been substantially filling up those tanks for Sydney-Melbourne, but on those flights you're not even going to use 25% of the water tank capacity. But that weight means you have to burn more fuel, and of course in this game weight is cost."
"So one initiative we undertook was to decide that for A330s flying those short domestic sectors we'll only fill the tank up to 25%. That's a few hundred dollars saving on each sector in fuel, but when you add all those sectors up over a year that's another $1 million to $1.5 million in savings."
"You've got to do the big things and you've got to do the little things, but they all add up" Evans said.
At the same time, Evans is keen to stress that "it's a clear tenet of the transformation program that we don't want to take things away from the customer."
"In fact we will continue to invest in the customer where it makes sense. That's why you're seeing flat beds on the A330s, new lounges in Los Angeles and the new economy meal product."
Fleet re-shuffle also saves
The reshaping of Qantas' fleet also plays its part in this turnaround, and again ties into lower fuel bills as older gas-guzzling aircraft are put out to pasture.
"The fleet is the big key that unlocks a significant amount of this change" Evans said.
"The arrival of the Boeing 787s into Jetstar allowed us to retire the Boeing 767s, and getting rid of the old 747s really changes the fundamentals of the business. But there options weren't available to us two years ago or even one year ago, and it just so happens that are arriving now."
David Flynn visited Seattle as a guest of Qantas and Boeing.
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