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Qantas aims for $200m tech-driven saving amid $2.8b loss

As Qantas looks down the barrel of an AU$2.8 billion loss for the financial year ending June 2014, the airline is hoping to see cash savings of AU$200 million by the end of FY15 with efficiency enhancements driven by new technology.
Written by Leon Spencer, Contributor

Qantas expects to see a savings benefit of AU$200 million by the end of FY15, with the enhancement of efficiency through the employment of new technology.

Australia's national airline plans to see cost savings through the rollout of new technology in the coming financial year, in the form of a "next-generation" check-in system, a single-point buying model, application rationalisation, a supply chain/terminal improvement program, and the rollout of Jetstar's B787 fleet.

Such a saving would make up for less than half of the AU$428 million that the company paid out in FY14 for redundancies, restructuring, and other transformation costs, including the reduction of management and non-operational roles.

Qantas, which released its annual financial results (PDF) today, also reported fleet restructuring costs of AU$394 million, including the impairment of aircraft, together with associated property, plant, equipment, inventory, and other costs, following strategic network changes and accelerated fleet retirements.

In all, the airline reported a statutory loss after tax of AU$2.84 billion for the financial year ending June, representing more than a 100 percent drop from its post-tax profit the previous year of AU$2 million.

Meanwhile, the company reported an underlying loss before tax of AU$646 million, also more than 100 percent down from its FY13 underlying profit before tax of AU$186 million.

However, the company said that its AU$2 billion accelerated Qantas Transformation program, announced in February, is permanently reducing costs and laying the foundations for sustainable growth in earnings.

According to Qantas, its transformation benefits in the financial year ending June 2014 came to AU$440 million, including AU$204 million of second-half benefits from the accelerated Qantas Transformation program.

"After an extremely difficult period, we are focused on building momentum with our turnaround in FY15," said Qantas CEO Alan Joyce in a statement (PDF). "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."

Of the 5,000 jobs that Qantas announced it would cut as part of the transformation, it has ploughed its way through 4,000, leaving a further 1,000 to go in the coming financial year.

Qantas revealed that it has a further AU$900 million of accelerated transformation projects in the implementation phase, with more than AU$600 million of benefits from these projects expected to be realised in FY15.

In addition to redundancies, the devaluation of Qantas' aircraft fleet was one of the main drivers of the year's loss, with the airline's International CGU requiring a writedown of AU$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 US dollars of AU$0.68," the company told shareholders (PDF). "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."

The Qantas Group's scheduled passenger fleet average is now 7.7 years. The benefits of fleet investment, according to the company, include improved customer satisfaction, environmental outcomes, operational efficiencies, and cost reductions.

While the airline reported a multibillion-dollar statutory loss, its revenue for the year, at AU$15.35 billion, was only slightly lower than the previous year's result of AU$15.9 billion.

One of the company's best-performing segments for the year was its Qantas Loyalty business, which recorded underlying earnings before interest and tax (EBIT) of AU$286 million, up 10 percent on the prior year. The company also saw an 8 percent rise in member numbers for the year, up to 10.1 million members.

New growth initiatives, in the form of Qantas Cash and Aquire, have already exceeded expectations, the company told investors. Only 10 months after its initial launch, Qantas Cash is providing incremental EBIT to the business.

Over 300,000 members have activated the facility, and almost AU$500 million has been loaded onto cards, making it one of the largest prepaid products in Australia.

However, most of the company's other businesses struggled to show a clear after tax profit in FY14, with Qantas International reporting an underlying EBIT loss of AU$497 million, and its budget brand Jetstar recording an underlying EBIT loss of AU$116 million.

Meanwhile, Qantas Freight reported an underlying EBIT of AU$24 million, down the previous year's result of AU$36 million.

While the airline was hit by a fuel cost increase of 6 percent over the year, the company is hopeful that the repeal of the carbon tax will help its bottom line. With the government moving to soften its foreign ownership stance for the company, it intends to establish a foreign holding company to enable future foreign investment.

"The Qantas Sale Act foreign ownership restrictions have been a long-standing barrier to Qantas' participation in industry consolidation at a g group level," Qantas said in a statement (PDF). "The partial repeal of the Act's 25 percent and 35 percent foreign airline ownership caps removes a substantial barrier to consolidation that was unique to Qantas.

"The decision has been made to create a new holding structure and corporate entity for Qantas International. The new structure increases potential for future external investment, and creates long-term options for Qantas International to participate in partnership and consolidation opportunities," it said.

Joyce stressed that the move to create the new holding company would not impact the day-to-day running of the airline.

As of June 30, the company's group liquidity was AU$3.6 billion, comprising AU$3 billion in cash, with operating cash flow of AU$1.1 billion. The company was net free cash-flow neutral in FY14.

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