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Q A N TA S A NNUA L REPOR T 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
Q A N TA S A NNUA L REPOR T 2016
Our Performance * in 2015/16
This exceptional performance
reflects the strength of our Qantas
Group strategy, with record results
and increased margins for Qantas
Domestic, Qantas International, the
Jetstar Group and Qantas Loyalty,
and Group-wide return on invested
capital of 23 per cent.
Total underlying earnings before
interest and tax (EBIT) in the
domestic market – across both
Qantas and Jetstar – rose 30 per cent
to $820 million, and total underlying
EBIT from the Group’s international
operations was $722 million, up
107 per cent.
The result also reflects the
continued delivery of the Qantas
Transformation program, which
has now unlocked $1.66 billion in
cost and revenue benefits since
beginning in 2014.
The Group’s disciplined fuel
hedging – which helped secure a
$664 million benefit from lower
global fuel prices – was another
driver.
The Group’s financial position
was strengthened during the year,
with $2.8 billion in operating cash
flow used for capital expenditure,
shareholder distributions and debt
repayments, and excess cash used
for refinancing aircraft. Qantas’
strong balance sheet and more
sustainable outlook was recognised
by ratings agencies during the
financial year, with an investment
grade credit rating restored by
Standard & Poor’s and Moody’s
Investor services.
Qantas
Domestic
$578m
Underlying EBIT.
Up 20 per cent
Qantas
International
$512m
Underlying EBIT.
Up 92 per cent
Jetstar
Group
$452m
Underlying EBIT.
Up 97 per cent
Group Performance
Record underlying profit
Statutory earnings
per share (EPS)
Return on invested capital
Operating cash flow
Ex-fuel unit cost
Net debt
$1.53 billion
( 57%)
49.4 cents per share
( 24c)
Qantas
Loyalty
$346m
Underlying EBIT.
Up 10 per cent
23%
Q ANTAS
FREIGHT
$2.8 billion
3%
$64m
Underlying EBIT.
Down 44 per cent
$5.6 billion
(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
Q A N TA S A NNUA L REPOR T 2016
The three core pillars of the
framework are consistent:
> Maintaining an optimal capital
structure that minimises the
Group’s cost of capital;
> Achieving return on invested
capital (ROIC) above 10 per cent
through the cycle; and
> Growing invested capital with
disciplined investment; returning
any surplus to shareholders.
Optimal Capital Structure
The Group maintained an optimal
capital structure throughout
2015/16, with net debt at year-end
of $5.6 billion within our target
range of $4.8 billion to $6 billion.
Credit metrics remain significantly
better than the investment-grade
metrics Qantas targets through the
cycle.
In addition to strong short-term
liquidity of $3 billion – including
cash of $2 billion – the Group’s
unencumbered asset base totals
over US$3.9 billion.
Improving Return on Invested
Capital (ROIC)
The Group’s ROIC of 23 per cent
was up from 16 per cent in 2014/15,
and well above our threshold of
ROIC above 10 per cent through
the cycle. All operating segments
continue to deliver ROIC above the
Group’s cost of capital. Efficient
allocation of capital, increased fleet
utilisation, and ongoing business
transformation all contributed to
achieving greater returns from the
Group’s existing assets.
Qantas Transformation
The Qantas Transformation
program has unlocked total
cost and revenue benefits of
$1.66 billion since 2013/14 –
including $557 million in 2015/16.
A further $450 million in benefits
will be realised in 2016/17, to reach
the Group’s increased target of $2.1
billion by 30 June 2017.
Qantas Transformation Scorecard
Target
Progress
Metric
ACHIEVING OUR TARGETS
Accelerated
Transformation
benefits
Deleverage
Balance Sheet
Cash Flow
Fleet
Simplification
Customer and
Brand
$2.1b gross benefits
>10% Group ex-fuel
expenditure reduction
Timeframe
FY17
$1.66b benefits realised.
Ex-fuel expenditure reduced by 9%
5,000 FTE reduction
FY17
4,605 FTE reduction
>$1b debt reduction
FY15
Delivered on schedule
Debt / EBITDA 45%
FY17
Delivered ahead of schedule
Sustainable positive
free cash flow
FY15 onwards
Delivered on schedule
Eleven fleet types to seven
FY16
Eight fleet types
Retaining 2 x non-reconfigured B747
Customer Advocacy (NPS)
Ongoing
NPS record achieved at Qantas
Domestic, Qantas International and
Qantas Loyalty
Maintain premium
on-time performance:
Qantas Domestic
Ongoing
Premium on-time performance
maintained with increase to 89.7%
Surplus
Capital
ROIC (%)
Qantas’ Financial Framework
guides how we create value for our
shareholders. Our overarching goal
is to achieve maintainable earningsper-share growth through the cycle,
and in turn deliver total shareholder
returns in the top quartile of global
airlines and the ASX100.
Increased
distributions,
grow invested
capital
OPTIMAL CAPITAL STRUCTURE
Our Financial Framework*
No
Surplus
Capital
Debt
reduction
focus
10% ROIC
4.8
6.0
Net Debt ($b)
Disciplined Allocation of Capital
The Group used cash in excess of
short-term liquidity requirements
to refinance 29 maturing aircraft
leases, while funds from operations
were directed to debt repayments
($1.1 billion), net capital expenditure
($1 billion), and shareholder
distributions ($1 billion).
Shareholder Returns
The Group has returned more than
$1 billion to shareholders over the
past 12 months, through a $505
million capital return (completed in
November 2015) and $500 million
on-market share buy-back
(completed in June 2016). Combined,
these two capital management
initiatives reduced shares on issue
by 12.6 per cent.
Our strong result in 2015/16
means we can return a further
$500 million via a fully-franked
ordinary dividend of 7 cents per
share – totalling $134 million – and
an on-market share buy-back of up
to $366 million.
Where there is surplus capital in
future, the Group will first distribute
to shareholders via an ordinary
dividend, in conjunction with share
buy-backs, special dividends or
a capital return should additional
surplus exist.
Refer to the Review of Operations section in the Qantas Annual Report 2016 for definitions and explanations of non-statutory measures
*
03
Q A N TA S A NNUA L REPOR T 2016
Chairman’s Report
The Group’s
portfolio
showed its
value in a
complex
market.
The business is stronger, more
efficient and more customerfocused 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
Q A N TA S A NNUA L REPOR T 2016
Disciplined investment in product
and service continues to secure
record levels of satisfaction from
customers, and the Qantas Loyalty
business is increasingly a source
of new ventures and diversified
revenue streams.
Productivity and financial discipline
underpin everything the Group
does. This was recognised by
Moody’s Investor Services, as well
as Standard and Poor’s, when they
restored our investment grade
credit rating.
Shareholder Value
The Group has increased net free
cash flow, grown return on invested
capital and further strengthened
its balance sheet, remaining in an
optimal capital position throughout
2015/16.
I’m especially pleased that we have
been able to return more than
$1 billion in cash to shareholders
over the past 12 months. Over the
same period, earnings per share
have almost doubled to reach
49 cents.
Shareholder returns will continue in
2016/17 with Qantas’ first ordinary
dividend since 2009, and a further
on-market share buy-back. Ordinary
dividends will be our first choice
for future capital management
initiatives, in conjunction with
other options including buy-backs,
special dividends and capital
returns, as appropriate.
Economic Conditions
Consumer confidence and travel
demand softened in the domestic
market through the middle of 2016.
However, Australia’s economic
fundamentals are strong and
demand in non-mining sectors is
solid; the resurgence of inbound
tourism with the lower Australian
dollar has been particularly
welcome.
Internationally, growth in our key
Asia-Pacific trading partners is
healthy, and Asia will be an engine
room of air travel demand and
Qantas Group growth for decades to
come.
The UK Brexit decision had little
direct impact on the Group, but did
create short-term volatility in global
markets, as other geopolitical
events have done over recent years.
This underlines the importance of
the Group’s focus on cost control
and diversifying revenue.
Global Forces
Looking to the long term, it’s
clear that global businesses are
dealing with accelerating change
in technology, geopolitics and
demographics.
The Board believes Qantas’ ability
to deliver sustainable growth over
the long term rests on its ability
to understand and navigate these
global forces, incorporating them
into strategic planning.
The Qantas Annual Review sets
out the Group’s approach to
sustainability, its view of the
global forces most relevant to the
business, and its strategic priorities
in responding to both the challenges
and opportunities they present.
Board Update
I was pleased to welcome Michael
L’Estrange AO to the Board as a
Non-Executive Director in April this
year. Michael was a senior public
servant and diplomat with the
Australian Government for more
than 27 years, as well as holding
academic posts and directorships.
His experience in global affairs will
be invaluable to the Board given the
wide range of geopolitical issues
influencing the Group.
Looking forward
The Group’s efforts in 2016/17 will
be focused on continuing to advance
its strategy and grow shareholder
value. In doing so, Qantas will
continue to drive trade and tourism,
serve communities, support small
business and champion Australia
on the world stage – as only the
national carrier can do.
As it moves towards 100 years
of serving Australia, Qantas is in
a position of strength. Again, I
congratulate employees on a year
of achievement and success.
Leigh Clifford AO
At the same time, the Board is
focused on measuring progress
against non-financial value drivers
across environmental, social and
governance issues.
05
Q A N TA S A NNUA L REPOR T 2016
CEO’s
CEO’S Report
REPORT
Qantas’ record financial
performance this past year is
the continuation of a remarkable
turnaround, built on the safety
standards, operational excellence
and customer satisfaction delivered
by our people. That gives us the
strongest possible foundations for
the future.
It’s a performance that enabled
us to announce a cash Record
Result Bonus for non-executive
employees, in recognition of their
outstanding contribution, as well as
rewards for our shareholders and
the next phase of investment for our
customers.
Group Performance
Every part of the Group contributed
to our record result in 2015/16.
Qantas Domestic, Qantas
International, the Jetstar Group and
Qantas Loyalty all reported record
underlying EBIT and increased their
operating margins.
Two-thirds of our earnings now
come from our domestic and
loyalty businesses, and one-third
from our international operations,
underlining the diversification and
reduced volatility the portfolio
strategy gives us through economic
cycles.
The Group continues to meet both
the short-term and long-term goals
of our Financial Framework, which
shapes the way we think about
creating value for shareholders.
Role of Transformation
The biggest single driver of our
performance is the $1.66 billion
in cost and revenue benefits that
we’ve unlocked through the Qantas
Transformation program. With the
program now entering its final year,
we expect that to increase to
$2.1 billion by June 2017.
Transformation is making Qantas’
cost base competitive. Just as
importantly, it’s changed the way
we work. We’re a far more agile
company. We’ve accelerated our
adoption of new technology, digital
platforms and data analytics.
And we’ve fostered a culture that
encourages diversity, inclusion and
innovation.
Qantas is a very different company
from just a few years ago. Together
with our well-balanced Group
strategy, transformation means
we’re resilient enough to perform
in all market conditions and
outperform many of our peers.
But of course, our environment isn’t
going to stop evolving. We need to
keep controlling our costs and being
open to new ways of doing business.
Long-Term Sustainable Future
The ultimate goal of our
transformation is to secure the
sustainability of the Group.
We’re well on the way to doing that.
But it’s not just about the actions
we take in the short-term. We also
need to think about the long-term –
something that Qantas has done a
great deal of over almost a century.
When we scan our environment,
we see four global forces that are
relevant to the success of the Group
today and will have an even bigger
impact in years ahead:
06
>> New centres of customer demand
and geopolitical influence,
especially Asia;
>> Rapid digitalisation and the rise of
big data;
>> Shifting customer and workforce
preferences; and
>> The implications of resource
constraints and climate change.
All these trends come with
challenges, but they also bring new
opportunities for our business.
Clear Strategic Priorities
Preparing to take advantage of the
big, global trends shaping aviation
means continuing to deliver against
our clear strategic priorities:
>> Putting safety and security first at
all times;
>> Maximising the competitive
advantages of the Group by aiming
to be the best in every market we
serve;
>> Continuing to invest for our
customers and strengthening our
brands, including renewing our
fleet, lounges, infrastructure and
technology;
>> Focusing on our people, culture
and leadership, because our
skilled, engaged workforce is the
key to our success in everything
we do; and
>> Acting responsibly on energy,
emissions and our supply chain,
so that we reduce the costs and
emissions of the fuel we burn,
and play a positive role in the
communities that support us.
We’re committed to advancing these
priorities in 2016/17.
Q A N TA S A NNUA L REPOR T 2016
Every part
of the Group
contributed
to our record
result in
2015/16.
Role of the National Carrier
The role of the national carrier is
core to Qantas’ identity. It’s what
sets our brand apart from every
other airline serving Australia,
and it’s why we continue to invest
in promoting Australian tourism,
showcasing Australian suppliers
and speaking up on issues that go to
the heart of the Australian belief in
basic fairness.
We’re as passionate as ever about
helping unlock Australia’s potential.
And we believe the best way we
can do that is by building a strong,
sustainable future for Qantas as the
airline that represents Australia in
the world.
Alan Joyce
07
Q A N TA S A NNUA L REPOR T 2016
Board of Directors
For the year ended 30 June 2016
LEIGH CLIFFORD AO
ALAN JOYCE
BEng, MEngSci
BApplSc(Phy)(Math)(Hons), MSc(MgtSc),
MA, FRAeS, FTSE
Chairman and Independent
Non-Executive Director
Chief Executive Officer
Leigh Clifford was appointed to the
Qantas Board in August 2007 and as
Chairman in November 2007.
Alan Joyce was appointed Chief Executive
Officer and Managing Director of Qantas
in November 2008.
He is Chair of the Nominations
Committee.
He is a Member of the Safety, Health,
Environment and Security Committee.
Mr Clifford is a Director of Bechtel Group
Inc and Chairman of Bechtel Australia Pty
Ltd and the National Gallery of Victoria
Foundation. He is a Senior Advisor to
Kohlberg Kravis Roberts & Co, a Member
of the Council of Trustees of the National
Gallery of Victoria and a Board Member
of Equestrian Australia. Mr Clifford was
previously a Director of Barclays Bank plc
and Freeport-McMoRan Inc.
Mr Joyce is a Director of the Business
Council of Australia and a Member of the
International Air Transport Association’s
Board of Governors, having served as
Chairman from 2012 to 2013. He is also
a Director of a number of controlled
entities of the Qantas Group.
Mr Clifford was Chief Executive of
Rio Tinto from 2000 to 2007. He retired
from the Board of Rio Tinto in 2007. His
executive and board career with Rio Tinto
spanned some 37 years, in Australia and
overseas.
Age: 68
Mr Joyce was the Chief Executive Officer
of Jetstar from 2003 to 2008. Before that,
he spent over 15 years in leadership
positions with Qantas, Ansett and Aer
Lingus. At both Qantas and Ansett, he
led the network planning, schedules
planning and network strategy functions.
Prior to that, Mr Joyce spent eight
years at Aer Lingus, where he held
roles in sales, marketing, IT, network
planning, operations research, revenue
management and fleet planning.
Age: 50
08
Q A N TA S A NNUA L REPOR T 2016
Board of Directors continued
For the year ended 30 June 2016
MAXINE BRENNER
RICHARD GOODMANSON
JACQUELINE HEY
BA, LLB
BCom, BEc, MBA, MCE
BCom, Grad Cert (Mgmt), GAICD
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Maxine Brenner was appointed to the
Qantas Board in August 2013.
Richard Goodmanson was appointed to
the Qantas Board in June 2008.
Jacqueline Hey was appointed to the
Qantas Board in August 2013.
She is a Member of the Remuneration
Committee and the Audit Committee.
He is Chair of the Safety, Health,
Environment and Security Committee and
a Member of the Nominations Committee.
She is a Member of the Audit Committee.
Ms Brenner is a Director of Origin Energy
Limited, Orica Limited and Growthpoint
Properties Australia Limited. She is a
Member of the Council of the University
of New South Wales.
Ms Brenner was formerly a Managing
Director of Investment Banking at
Investec Bank (Australia) Limited. She
has extensive experience in corporate
advisory work, particularly in relation
to mergers and acquisitions, corporate
restructures and general corporate
activity. She also practised as a lawyer
with Freehill Hollingdale & Page (now
Herbert Smith Freehills) where she
specialised in corporate work, and spent
several years as a lecturer in the Faculty
of Law at both the University of NSW and
the University of Sydney.
Ms Brenner was the Deputy Chairman of
the Federal Airports Corporation and a
Director of Neverfail Springwater Limited,
Bulmer Australia Limited and Treasury
Corporation of NSW. She also served as a
Member of the Australian Government’s
Takeovers Panel.
Mr Goodmanson was a Director of Rio
Tinto plc and Rio Tinto Limited from
2004 to 2016.
From 1999 to 2009 he was Executive Vice
President and Chief Operating Officer of
E.I. du Pont de Nemours and Company.
Previous to this role, he was President
and Chief Executive Officer of America
West Airlines. Mr Goodmanson was also
Chief Operations Officer for Frito‑Lay Inc,
a subsidiary of PepsiCo and a Principal
at McKinsey & Company Inc. He spent
10 years in heavy civil engineering project
management, principally in South East
Asia. Additionally, Mr Goodmanson was
an Economic Adviser to the Governor of
Guangdong Province, China from 2003
until 2009.
Mr Goodmanson was born in Australia
and is a citizen of both Australia and the
United States.
Ms Hey is a Director of Bendigo and
Adelaide Bank Limited and is Chair of
its Change & Technology Committee
and is a Member of both its Credit and
Governance and HR Committees. She is
also a Director of AGL Energy Limited,
the Australian Foundation Investment
Company Limited, Melbourne Business
School and Cricket Australia, and a
Member of the ASIC Director Advisory
Panel.
Ms Hey was also formerly a Director of
the Special Broadcasting Service from
2011 to 2016.
Between 2004 and 2010, Ms Hey was
Managing Director of various Ericsson
entities in Australia and New Zealand,
the United Kingdom and Ireland, and the
Middle East. Her executive career with
Ericsson spanned more than 20 years in
which she held finance, marketing, sales
and leadership roles.
Age: 50
Age: 69
Age: 54
09
Q A N TA S A NNUA L REPOR T 2016
Board of Directors continued
For the year ended 30 June 2016
MICHAEL L’ESTRANGE AO
WILLIAM MEANEY
PAUL RAYNER
BA, MA (Oxon)
BSc, MEng, MSIA
BEc, MAdmin, FAICD
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Michael L’Estrange was appointed to
the Qantas Board in April 2016.
William Meaney was appointed to the
Qantas Board in February 2012.
Paul Rayner was appointed to the Qantas
Board in July 2008.
He is a Member of the Safety, Health,
Environment and Security Committee.
He is a Member of the Safety, Health,
Environment and Security Committee
and the Remuneration Committee.
He is Chair of the Remuneration
Committee and a Member of the
Nominations Committee.
Mr Meaney is the President and Chief
Executive Officer of Iron Mountain Inc.
He is a Member of the Asia Business
Council and also serves as Trustee
of Carnegie Mellon University and
Rensselaer Polytechnic Institute.
Mr Rayner is Chairman of Treasury
Wine Estates Limited, a Director of
Boral Limited and Chairman of its
Audit Committee, and a Director of the
Murdoch Childrens Research Institute.
Mr L’Estrange was Head of the National
Security College at the Australian
National University from 2009 to 2015.
Prior to this, he was the Secretary of the
Department of Foreign Affairs and Trade
for almost five years and the Australian
High Commissioner to the UK between
2000 and 2005. He served as Secretary
to Cabinet and Head of the Cabinet Policy
Unit from 1996 for more than four years
and, prior to that, as Executive Director
of the Menzies Research Centre.
He has been a Non-Executive Director of
Rio Tinto plc and Rio Tinto Limited and a
Director of the University of Notre Dame,
Australia since 2014.
Mr L’Estrange studied at Sydney
University and later as a Rhodes Scholar
at Oxford University where he graduated
as a Master of Arts with First Class
Honours.
Age: 63
Mr Meaney was formerly the Chief
Executive Officer of The Zuellig Group and
a Director of moksha8 Pharmaceuticals
Inc. He was also the Managing Director
and Chief Commercial Officer of Swiss
International Airlines and Executive
Vice President of South African Airways
responsible for sales, alliances and
network management.
Prior to these roles, Mr Meaney spent
11 years providing strategic advisory
services at Genhro Management
Consultancy as the Founder and
Managing Director, and as a Principal
with Strategic Planning Associates.
Mr Meaney holds United States, Swiss
and Irish citizenships.
Age: 56
10
Mr Rayner was formerly a Director of
Centrica plc from 2004 to 2014 and
Chairman of its Audit Committee from
2004 to 2013. From 2002 to 2008,
Mr Rayner was Finance Director of
British American Tobacco plc based in
London. Mr Rayner joined Rothmans
Holdings Limited in 1991 as its Chief
Financial Officer and held other senior
executive positions within the Group,
including Chief Operating Officer of
British American Tobacco Australasia
Limited from 1999 to 2001.
Previously, Mr Rayner worked for 17 years
in various finance and project roles with
General Electric, Rank Industries and the
Elders IXL Group.
Age: 62
Q A N TA S A NNUA L REPOR T 2016
Board of Directors continued
For the year ended 30 June 2016
TODD SAMPSON
BARBARA WARD AM
MBA, BA(Hons)
BEc, MPolEc
Independent Non-Executive Director
Independent Non-Executive Director
Todd Sampson was appointed to the
Qantas Board in February 2015.
Barbara Ward was appointed to the
Qantas Board in June 2008.
He is a Member of the Remuneration
Committee.
She is Chair of the Audit Committee,
a Member of the Safety, Health,
Environment and Security Committee and
a Member of the Nominations Committee.
He has been the Executive Chairman of the
Leo Burnett Group since September 2015,
having been National Chief Executive
Officer from 2008 to 2015 and also sits
on the Board of Fairfax Media Limited.
Mr Sampson has close to 20 years’
experience across marketing,
communication, new media and digital
transformation. He has held senior
leadership and strategy roles for a number
of leading communication companies
in Australia and overseas, including
as Managing Partner for D’Arcy,
Strategy Director for The Campaign
Palace and Head of Strategy for DDB
Needham Worldwide.
Age: 46
Ms Ward is a Director of Caltex Australia
Limited, a number of Brookfield Multiplex
Group companies, and the Sydney
Children’s Hospital Foundation.
She was formerly a Director of the
Commonwealth Bank of Australia,
Lion Nathan Limited, Brookfield
Multiplex Limited, Data Advantage
Limited, O’Connell Street Associates
Pty Ltd, Allco Finance Group Limited,
Rail Infrastructure Corporation, Delta
Electricity, Ausgrid, Endeavour Energy
and Essential Energy. She was also Chair
of Country Energy and NorthPower and
HWW Limited, a Board Member of Allens
Arthur Robinson and the Sydney Opera
House Trust and on the Advisory Board
of LEK Consulting.
Ms Ward was Chief Executive Officer
of Ansett Worldwide Aviation Services
from 1993 to 1998. Before that, Ms Ward
held various positions at TNT Limited,
including General Manager Finance,
and also served as a Senior Ministerial
Advisor to The Hon PJ Keating.
Age: 62
11
1,532
FY16
FY15
FY14
Q A N TA S A NNUA L REPOR T 2016
FY13
Review of Operations
FY12
For the year ended 30 June 2016
RESULT HIGHLIGHTS
Underlying Profit Before Tax
1,532
Statutory Profit After Tax
1,029
$M
FY16
FY16
1,532
FY15
FY15
975
FY14
(646)
FY13
186
FY12
95
FY14
FY13
FY12
$M
FY16
FY16
1,029
FY15
FY15
560
FY14
(2,843)
FY14
FY13
FY13
2
FY12
FY12
(244)
The Qantas Group reported an Underlying Profit Before Tax1 of $1,532 million for the 12 months ended 30 June 2016, an improvement
of $557 million from 2014/15 and a record result. The Group’s Statutory Profit After Tax of $1,029 million included $108 million of
costs which were not included in Underlying PBT1 primarily driven by redundancies, restructuring and other costs associated with the
ongoing Profit
QantasAfter
Transformation
Program.
Statutory
Tax
1,029
The Group is delivering
$M against its strategy to maximise long-term shareholder value; building on our leading position in domestic
Australia, growing non-cyclical earnings at Qantas Loyalty, aligning Qantas and Jetstar with the rise of Asia and investing in our
people and our customers. Over 2015/16, strategic highlights included:
––
––
––
––
––
––
––
––
Record results for the Group and its segments2
FY16
Group Domestic EBIT3 up 30 per cent with enhanced dual brand coordination
FY15
4
Reduction in ex-fuel unit cost
of three per cent
FY14
Building a resilient and
sustainable Qantas International through continued unit cost improvement
Diversification of earningsFY13
with eight years of double-digit EBIT growth at Qantas Loyalty5
Building a pan-Asia brand at Jetstar, with an $85 million improvement in profitability from Jetstar Airlines in Asia
FY12
Record levels of customer advocacy6 with targeted investment in service and product
Record people engagement with continued focus on culture and leadership
The Qantas Transformation Program continues to underpin a maintainable earnings uplift, delivering $557 million of benefits over the
financial year – ahead of a targeted $450 million of benefits. Ex-fuel unit cost was reduced by three per cent, and the Group’s revenue
increased by two per cent, reflecting the cost reduction and revenue generation initiatives in the program. As a result of the program
exceeding targets to date, the Group has raised the target of Qantas Transformation to $2.1 billion of benefits delivered by the end of
financial year 2016/17, up from $2 billion.
The Group’s Financial Framework is at the centre of all capital allocation decisions, providing for balance sheet strength, investment
in growth, and shareholder returns. Some key achievements under the Financial Framework include:
––
––
––
––
––
Net debt7 of $5.6 billion within target range of $4.8 billion to $6 billion8
Investment grade credit metrics and rating from Standard and Poor’s and Moody’s Investor Services
Cost of capital minimised by using cash in excess of short-term requirements to refinance operating leases
$1 billion returned to shareholders in 2015/16 through a capital return and on-market share buy-back
$500 million in additional capital management initiatives announced including resumption of dividend payments with a
seven cents per share ordinary dividend totalling $134 million and the announcement of a $366 million on-market buy-back
The Group achieved a strong increase in earnings in mixed global trading conditions, with margin expansion realised through total
unit cost9 improvement of six per cent partially offset with a two per cent decrease in unit revenue10.
1 Underlying Profit Before Tax (Underlying PBT) is the primary reporting measure used by the Qantas Group’s chief operating decision-making bodies, being the Chief Executive Officer,
Group Management Committee and the Board of Directors, for the purpose of assessing the performance of the Group. The primary reporting measure of the Qantas International, Qantas
Domestic, Jetstar Group, Qantas Loyalty and Qantas Freight operating segments is Underlying Earnings Before Net Finance Costs and Tax (Underlying EBIT). The primary reporting
measure of the Corporate segment is Underlying PBT as net finance costs are managed centrally. Refer to the reconciliation of Underlying PBT to Statutory Profit/(Loss) Before Tax.
2 Based on Underlying Profit Before Tax (PBT) for the Qantas Group and Underlying EBIT (Earnings before net interest and income tax expense) for Qantas Domestic, Qantas International,
Jetstar Group and Qantas Loyalty.
3 Underlying EBIT of Qantas Domestic and Jetstar Domestic.
4 Ex-fuel unit cost is calculated as Underlying PBT less ticketed passenger revenue and fuel, adjusted for changes in: employee provision discount rates and other assumptions changes,
foreign exchange rates, share of net profit/(loss) of investments accounted for under the equity method and block codeshare flying agreements per ASK. The adjustment for foreign
exchange rates is made to the comparative year to enable comparability.
5 When normalised for changes in accounting estimates of the fair value of points and breakage expectations effective 1 January 2009.
6 Record NPS achieved at Qantas Domestic, Qantas International and Qantas Loyalty.
7 Net debt under the Group’s Financial Framework includes net on balance sheet debt and off balance sheet aircraft operating lease liabilities. Capitalised operating lease liability is
measured at fair value at the lease commencement date and remeasured over lease term on a principal and interest basis akin to a finance lease.
8 Target range calculated based on current average invested capital.
9 Total Unit cost is calculated as Underlying PBT less ticketed passenger revenue per available seat kilometre (ASK).
10 Unit Revenue is calculated as ticketed passenger revenue per ASK.
12
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
Domestic Australia experienced a stable operating environment in non-resources sectors:
–– Lower AUD and increased inbound visitor arrivals supporting domestic traffic growth
–– Resource related traffic and revenue down compared to 2014/15
–– Fourth quarter 2015/16 general demand weakness
The Group’s international operating environment was more competitive, with competitor capacity growth and sharper pricing activity
seen on key routes:
––
––
––
––
Increased industry capacity growth on the back of higher operating margins
Industry-wide pricing activity passing on a portion of fuel benefit
Geopolitical uncertainty impacting northern hemisphere travel
Qantas and Jetstar capacity growth focused on higher demand markets in Asia
FINANCIAL FRAMEWORK ALIGNED WITH SHAREHOLDER OBJECTIVES
Qantas’ Financial Framework aligns our objectives with those of our shareholders. With the aim of generating maintainable Earnings
per share growth over the cycle, which in turn should translate into Total Shareholder Returns (TSR) in the top quartile of the ASX100
and a basket of global airlines11, the Financial Framework has three clear priorities and associated long-term targets:
1. Maintaining an Optimal Capital
Structure
2. ROIC > WACC12 Through the Cycle
3. Disciplined Allocation of Capital
Minimise cost of capital by targeting a
net debt range of $4.8 billion to $6 billion
Deliver ROIC > 10 per cent through
the cycle
Grow Invested Capital with disciplined
investment, return surplus capital
MAINTAINABLE EPS13 GROWTH OVER THE CYCLE
TOTAL SHAREHOLDER RETURNS IN THE TOP QUARTILE
ROIC (%)
Surplus Capital
Increased
distributions, grow
invested capital
OPTIMAL CAPITAL
STRUCTURE
Maintaining an Optimal Capital Structure
No Surplus Capital
Debt reduction
focus
10% ROIC
–– The Group’s Financial Framework targets an optimal
capital structure with a net debt range of between
$4.8 billion and $6 billion, based on the current Average
Invested Capital of approximately $9 billion. This capital
structure lowers the Group’s cost of capital, preserves
financial strength, and therefore enhances long-term
shareholder value.
–– Capital allocation decisions, including distributions to
shareholders, are sized to remain within the target net debt
range on a forward basis.
–– The Group’s optimal capital structure is consistent with
investment grade credit metrics from Standard and Poor’s
and Moody’s Investor Services.
$4.8
$6.0
Net Debt ($B)
11 Target Total Shareholder Returns within the top quartile of the ASX100 and global listed airline peer group as stated in the 2015 Annual Report, with reference to the 2015-2017 Long Term
Incentive Plan (LTIP).
12 Weighted Average Cost of Capital (WACC) is calculated on a pre-tax basis.
13 Earnings per share.
13
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
ROIC > WACC Through the Cycle
Return on Invested Capital (ROIC) of 22.7 per cent, up
from 16.2 per cent in the prior year, was achieved through
generating higher returns from existing assets. Average
Invested Capital in 2015/16 of $8.9 billion was slightly
below Average Invested Capital of $9.1 billion in 2014/15
with disciplined capital expenditure. With increased
fleet utilisation, cost reduction through the Qantas
Transformation Program and lower fuel prices, returns were
well above the Group’s threshold target of ROIC greater than
10 per cent.
Return on Invested Capital
23
%
FY16
FY16
22.7%
FY15
FY14
FY15
16.2%
FY14
(1.5%)
Disciplined Allocation of Capital
Funds from Operations (FFO)14 increased to $3.1 billion in
2015/16. FFO were applied to:
Refinancing of
operating leases
$0.8b
Reduction in cash
balance
$0.9b
–– $1.1 billion of debt repayments15
–– $1 billion of net capital expenditure16 in line with guidance
–– $1 billion distributed to shareholders in 2015/16 through
a share buy-back and capital return
Debt reduction
$1.1b
Funds from
Operations
$3.1b
$778 million cash in excess of short-term liquidity
requirements was used to refinance 29 aircraft out of
maturing operating leases. Using the Group’s existing cash
balance in this way achieved the following benefits:
Net capex
$1.0b
–– Reduced gross debt and cost of carry, minimal impact to
net debt
–– Greater fleet and maintenance planning flexibility
–– Reduced exposure to USD lease rentals
–– Increased value of unencumbered assets to over
US$3.9 billion17
Shareholder
distributions
$1.0b
Uses
Sources
Maintainable EPS Growth over the Cycle
Earnings Per Share
49.4
cents
FY16
FY16
49.4
FY15
FY15
25.4
FY14
FY14
(128.5)
FY13
FY13
0.0
FY12
FY12
(10.8)
Earnings per share almost doubled to 49.4 cents, with an
84 per cent improvement in Statutory Profit After Tax and a
12.6 per cent reduction in shares on issue. Shares on issue
were reduced through the $505 million capital return and
related share consolidation as well as the $500 million onmarket share buy-back, both of which were completed in
2015/16.
UNDERLYING PBT
The Qantas Group’s full-year 2015/16 Underlying PBT increased to $1,532 million, compared to an Underlying PBT of $975 million
in 2014/15. The significant improvement in earnings was driven by the delivery of a reduction in ex-fuel unit cost, fuel efficiency
initiatives, and revenue benefits from the Qantas Transformation Program and the benefits of lower fuel prices captured by the
Group’s disciplined hedging program.
14 Funds from Operations of $3.1 billion is equal to operating cash flows in the Consolidated Cash Flow Statement adjusted for the principal portion of operating leased aircraft rental
payments. The principal portion of aircraft operating lease rentals are considered a debt repayment in the Group’s financial framework. After this adjustment, the interest portion of
lease rental payments continues to be recognised as an outflow in Funds from Operations.
15 Debt repayments of $1.1 billion refers to repayment of on balance sheet borrowings and capitalised operating lease liability repayments (excluding cash flows relating to aircraft
operating lease refinancing). Debt reduction is equal to the total of financing cash flows in the statement of cash flows excluding shareholder distributions and payments for treasury
shares, principal portion of operating leased aircraft rental payments and reduction of capitalised operating leases from the return of leased aircraft.
16 Net capital expenditure of $1 billion is equal to net investing cash flows included in the Consolidated Cash Flow Statement (excluding aircraft operating lease refinancing) less the
impact to invested capital of returning operating lease aircraft.
17 Based on AVAC market values.
14
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
Net passenger revenue increased by three per cent, reflecting improved passenger loads in most markets and the Group’s capacity
growth of five per cent. This stronger revenue performance was supported by network changes and capacity management which
led to increased fleet utilisation. A reduction in the Group’s fuel expense resulted from lower AUD fuel prices and fuel efficiency
measures in the Qantas Transformation Program.
Group Underlying Income Statement Summary18
Net passenger revenue
Net freight revenue
June
2016
$M
June
2015
$M
Change
$M
13,961
13,604
357
3
850
936
(86)
(9)
Change
%
Other revenue
1,389
1,276
113
9
Total Revenue
16,200
15,816
384
2
Operating expenses (excluding fuel)
(9,529)
(9,064)
(465)
(5)
Fuel
(3,235)
(3,899)
664
17
Depreciation and amortisation
(1,224)
(1,096)
(128)
(12)
(461)
(495)
34
7
–
(29)
29
100
Non-cancellable aircraft operating lease rentals
Share of net loss of investments accounted for under
the equity method
Total Expenditure
(14,449)
(14,583)
134
1
1,751
1,233
518
42
(219)
(258)
39
15
Underlying PBT
1,532
975
557
57
Operating Statistics
June
2016
June
2015
Change
Change
%
M
148,691
142,287
6,404
5
Revenue Passenger Kilometres (RPK)
M
119,054
112,543
6,511
6
Passengers carried
‘000
51,426
49,181
2,245
5
Underlying EBIT
Net finance costs
Available Seat Kilometres (ASK)19
20
Revenue seat factor21
%
80.1
79.1
1pts
1
Unit Revenue (RASK)
c/ASK
8.08
8.21
(0.13)
(2)
Total unit cost
c/ASK
(7.05)
(7.54)
0.49
6
Ex-Fuel unit cost
c/ASK
(4.81)
(4.97)
0.16
3
Group capacity (Available Seat Kilometres) increased by five per cent, and demand (Revenue Passenger Kilometres) increased by
six per cent, resulting in a one percentage point increase in Revenue Seat Factor. Unit revenue (Revenue per Available Seat Kilometres)
decreased two per cent in 2015/16 with growth in the first-half of 2015/16 and a decrease in unit revenue in the second-half of
2015/16 as a proportion of the benefit from lower fuel prices was passed on in pricing in the international market. The Group’s ex-fuel
unit cost improved by three per cent.
CONTINUED DELIVERY OF BUSINESS TRANSFORMATION
The Group’s balanced scorecard through the Qantas Transformation Program ensures a net benefit for the customer experience
in addition to permanent reduction of costs. This was seen in customer and brand highlights for the year including:
–– Record customer advocacy (NPS) results at Qantas Domestic, Qantas International and Qantas Loyalty
–– Reconfiguration of the A330 fleet, progressively adding ‘Business Suites’ with lie-flat beds on A330 family aircraft
–– Reconfiguration of the B737 fleet with 5422 completed to date, upgrading cabin interiors and in-flight entertainment at the same
time as increasing seat count for efficiency gains
–– B787 aircraft with enhanced customer offering in the Jetstar International fleet with the last three of 11 delivered during the year
–– Continuation of global lounge upgrade program, with new lounges announced for London Heathrow and Brisbane
–– Digital innovation focused on improving speed and ease of travel including auto check-in on mobile and the announced wi-fi
roll-out for Qantas Domestic
18 Underlying expenses differ from equivalent statutory expenses due to items excluded from Underlying PBT, such as adjustments for impacts of AASB 9 which relate to other reporting
periods and other items identified by Management. Refer to the reconciliation of statutory PBT to underlying PBT on page 22.
19 ASK – total number of seats available for passengers, multiplied by the number of kilometres flown.
20 RPK – total number of passengers carried, multiplied by the number of kilometres flown.
21 Revenue Seat Factor – RPK divided by ASK. Also known as seat factor, load factor or load.
22 As at 24 August 2016.
15
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
The Group has delivered total benefits from the Qantas Transformation Program of $1.66 billion as at 30 June 2016, leading to an
increase in the 2017 target to $2.1 billion. Since implementing the program in financial year 2014, ex-fuel expenditure has been
reduced by nine per cent and all major milestones have been met on time or exceeded.
In 2015/16 Transformation benefits achieved of $557 million consisted of:
–– Cost reduction of $451 million, including $51 million of fuel efficiency benefits
–– Net revenue benefits of $106 million
The target metrics and progress to date as at 2015/16 include:
ACHIEVING OUR TARGETS
Target
Accelerated
Transformation
Benefits
Deleverage
Balance Sheet
Cash Flow
Fleet
Simplification
Customer and
Brand
Progress to Date
Metric
Timeframe
$2.1 billion gross benefits
>10 per cent23 Group ex-fuel expenditure
reduction
2016/17
$1.66 billion benefits realised
Ex-fuel expenditure reduced by
9 per cent24
5,000 FTE
2016/17
4,605 FTE reduction25
>$1 billion debt reduction26
2014/15
Delivered on schedule
Debt/EBITDA27 45 per cent
2016/17
Delivered ahead of schedule
Sustainable positive free cash flow29
2014/15 onwards
Delivered on schedule
11 fleet types to seven
2015/16
Eight fleet types
Retaining two x non-reconfigured B747
Customer Advocacy (NPS)
Ongoing
NPS record achieved at Qantas
Domestic, Qantas International and
Qantas Loyalty 30
Maintain premium on-time performance
Qantas Domestic
Ongoing
Premium on-time performance
maintained with increase to
89.7 per cent31
The Group-wide policy of implementing an 18-month wages freeze, whilst not part of the Qantas Transformation Program, is helping
to offset inflation, build a more competitive and sustainable wages position going forward and closes the gap to our major domestic
competitors. Thirty agreements have been closed with the wages freeze, with all of the major unions representing employee groups
having signed up to the policy in at least one agreement.
In July 2015, Qantas announced that employees covered by the wages freeze policy will receive a bonus payment worth five per cent
of their base annual salary. In August 2016, the Group announced a non-executive bonus payment of $3,000 for full-time and $2,500
for part-time employees, subject to the employee group having signed up to the 18-month wages freeze.
23 Target assumes steady foreign exchange rates and capacity.
24 Includes underlying operating expenses (excluding fuel), depreciation and amortisation (excluding depreciation reduction from Qantas International non-cash fleet impairment) and
non-cancellable aircraft operating lease rentals, adjusted for movements in FX rates and capacity. 2015/16 vs annualised first-half 2014/15.
25 Actioned Full Time Equivalent employee reduction as at 30 June 2016. ~30 FTEs still to exit as at 30 June 2016.
26 Reduction in net debt including capitalised operating lease liabilities.
27 Management’s estimate based on Moody’s methodology.
28 Management’s estimate based on Standard and Poor’s methodology.
29 Net free cash flow – operating cash flows less investing cash flows (excluding Aircraft operating lease refinancing). Net free cash flow is a measure of the amount of operating cash flows
that are available (i.e. after investing activities) to fund reductions in net debt or payments to shareholders.
30 Measured as Net Promoter Score. Average 2015/16 compared to average 2014/15.
31 Qantas mainline operations (excluding QantasLink) for the period 2015/16 compared to average 2014/15. Source: BITRE.
16
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
BUILDING ON THE GROUP’S LONG-TERM COMPETITIVE ADVANTAGES
The Qantas Group’s integrated portfolio strategy is designed to diversify earnings and mitigate risk, with the dual brands of Qantas
and Jetstar and their presence in attractive markets across the Asia Pacific providing long-term growth opportunities. The starting
point for the Group’s strategy is understanding the global forces that will impact Qantas over the long-term – the megatrends that
present both risk and opportunity – and ensuring the Group is well positioned to respond.
Qantas has engaged with stakeholders including shareholders, sustainability thought leaders, industry partners and suppliers to
identify and prioritise the global forces of most relevance to the Group. With this long-term context in mind, the Group’s strategic
priorities allow us to navigate the right path, building on our long-term competitive advantages while recognising and responding to
the risks and opportunities arising from emerging global forces.
New Centres
of Customer
Demand &
Geopolitical
Influence
Shifting
Customer
& Workforce
Preferences
Rapid Digitisation
& the Rise of Big
Data
Resource
Constraints &
Climate Change
CLEAR STRATEGIC PRIORITIES
Maximising
Leading Domestic
Position through
Dual Brand
Strategy
Building a
Resilient &
Sustainable
Qantas
International,
Growing Efficiently
with Partnerships
Aligning Qantas
& Jetstar with
Asia’s Growth
Investing in
Customer, Brand,
Data & Digital
Diversification &
Growth at Qantas
Loyalty
Focus on People,
Culture &
Leadership
Embedding Sustainability Across Qantas Group
RAPIDLY IMPROVED CASH GENERATION
June
2016
$M
June
2015
$M
Change
$M
Change
%
Operating cash flows
2,819
2,048
771
38
Investing cash flows (excluding aircraft
operating lease refinancing)
(1,145)
(944)
(201)
21
Net free cash flow
1,674
1,104
570
52
Cash Flow Summary
Aircraft operating lease refinancing
(778)
–
(778)
>100
Financing cash flows
(1,825)
(1,218)
(607)
50
Cash at beginning of year
2,908
3,001
(93)
(3)
Effect of foreign exchange on cash
Cash at end of year
Debt Analysis
Net on balance sheet debt32
Capitalised operating lease liabilities
33
Net debt34
1
21
(20)
(95)
1,980
2,908
(928)
(32)
June
2016
$M
June
2015
$M
Change
Change
%
2,880
2,594
286
11
2,766
3,806
(1,040)
(27)
5,646
6,400
(754)
(12)
FFO/net debt
%
52
45
7pts
Debt/EBITDA
times
2.5
3.0
(0.5) times
32 Net on balance sheet debt includes interest-bearing liabilities and the fair value of hedges related to debt reduced by cash and cash equivalents.
33 Capitalised operating lease liabilities are measured at fair value at the lease commencement date and remeasured over the lease term on a principal and interest basis akin to a finance
lease. Residual value of capitalised aircraft operating lease liability denominated in foreign currency is translated at the long-term exchange rate.
34 Net debt includes on balance sheet debt and capitalised aircraft operating lease liabilities under the Group’s Financial Framework.
17
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
Operating cash flows of $2.8 billion saw a strong increase from the prior year, reflecting cost and revenue benefits realised through
the Qantas Transformation Program, and lower AUD fuel prices. When adjusted for the principal portion of operating rental
payments, Funds from Operations were $3.1 billion.
Net capital expenditure of $1 billion included investment in replacement fleet such as the Boeing 787 for Jetstar International and
customer experience initiatives including airport lounges and the continuation of Airbus A330 and Boeing 737 cabin reconfigurations.
Qantas generated $1.7 billion of net free cash flow in the period facilitating net debt reduction and returns to shareholders of
$1 billion in the financial year.
With reduced financial leverage and minimal near-term refinancing risk, the Group has optimised the mix of liquidity with less
requirement for short-term liquidity held in cash. The Group used cash in excess of its short-term requirements to purchase aircraft
out of maturing operating leases, reducing the cash at period end and increasing the value of the Group’s pool of unencumbered
aircraft to over US$3.9 billion. Qantas continues to retain significant flexibility in its financial position, funding strategies and fleet
plan to ensure that it can respond to any change in market conditions.
At 30 June 2016, the Group’s leverage metrics were well within investment grade (BBB/Baa range) with FFO/net debt of 52 per cent
(2014/15: 45 per cent) and Debt/adjusted EBITDA of 2.5 times (2014/15: 3.0 times).
FLEET
The Qantas Group remains committed to a fleet strategy that provides for long-term flexibility and renewal. The fleet strategy
is designed to support the strategic objectives of the Group’s two flying brands and the overarching targets of the Qantas
Transformation Program. At all times, the Group retains significant flexibility to respond to any changes in market conditions
and the competitive environment.
At 30 June 2016, the Qantas Group fleet35 totalled 303 aircraft. During 2015/16, the Group purchased six aircraft and reclassified one
aircraft from assets held for sale back into the fleet:
–– Qantas – two B717–200s, one Bombardier Q300 and one Fokker 100
–– Jetstar – three B787–8s
The Group removed three aircraft from service in 2015/16 including two lease returns. These included two A330–200s and one
B747–400. The Qantas Group’s scheduled passenger fleet average age is now 8.6 years36, within the targeted 8–10 year range.
The benefits of fleet investment include improved customer satisfaction, improved environmental outcomes, operational
efficiencies and cost reductions.
SEGMENT PERFORMANCE
Segment Performance Summary
June
2016
$M
June
2015
$M
Qantas Domestic
578
Qantas International
512
Change
$M
Change
%
480
98
20
267
245
92
Qantas Freight
64
114
(50)
(44)
Jetstar Group
452
230
222
97
Qantas Loyalty
346
315
31
10
Corporate
(168)
(163)
(5)
3
(33)
(10)
(23)
>100
1,751
1,233
518
42
(219)
(258)
39
(15)
1,532
975
557
57
Unallocated/Eliminations
Underlying EBIT
Net finance costs
Underlying PBT
35 Includes Jetstar Asia, Qantas Freight and Network Aviation and excludes aircraft owned by Jetstar Japan and Jetstar Pacific.
36 Based on Group’s scheduled passenger fleet, excluding freighter aircraft and Network Aviation.
18
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
QANTAS DOMESTIC
Revenue
5,710
Underlying EBIT
578
$M
$M
FY16
FY16
5,710
FY16
FY16
578
FY15
FY15
5,828
FY15
FY15
480
FY14
FY14
5,848
FY14
FY14
30
FY13
FY13
6,218
FY13
FY13
365
FY12
FY12
6,063
FY12
FY12
463
Metrics
June 2016
June 2015
Change
Operating margin37
%
10.1
8.2
1.9pts
ASKs
M
36,260
36,638
(1.0)%
Seat factor
%
75.2
74.2
1.0pts
Qantas Domestic reported a record Underlying EBIT of $578 million, a stand out performance in a year that saw a continued drop
off in revenue from the resources sector and general demand weakness in the final quarter 2015/16. Operating margin increased to
10.1 per cent, with ex-fuel unit cost38 improvement offsetting a decrease in revenue that was driven by the downturn in the Australian
resources sector. Key drivers of the result included:
–– Unit revenue was flat while ex-resources unit revenue39 increased by one per cent
–– Ex-fuel unit cost improvement of one per cent on capacity decrease of one per cent
Qantas Transformation delivered an increase in aircraft utilisation of two per cent40. In response to the two-speed Australian
economy, with passenger growth on east coast and leisure markets and contraction in intra-Western Australia and other resources
markets, Qantas Domestic continued to shift aircraft to higher-growth markets. Resource-related passenger revenue was down
$121 million41 in the year, not including a reduction in charter activity.
Qantas Domestic saw strong improvement in all key operational metrics including:
––
––
––
––
Record on-time performance increasing to 89.7 per cent from 88.3 per cent in 2014/1542
Customer advocacy (NPS)43 increased five percentage points to a record result with investment in B737 and A330 cabin upgrades
15 x A330–200 and 54 x B737 reconfigurations completed44
Passenger seat factor increased one percentage point to 75.2 per cent
QANTAS INTERNATIONAL
Underlying EBIT
Revenue
5,750
512
$M
$M
FY16
FY16
5,750
FY16
FY16
512
FY15
FY15
5,467
FY15
FY15
267
FY14
FY13
FY14
5,297
FY14
FY14
(497)
FY13
5,496
FY13
FY13
(246)
FY12
FY12
5,770
FY12
FY12
(484)
Metrics
June 2016
June 2015
Change
%
8.9
4.9
4.0pts
ASKs
M
63,599
59,263
7.3%
Seat factor
%
81.7
81.5
0.2pts
Operating margin
37 Operating margin calculated as Underlying EBIT divided by total segment revenue.
38 Ex-fuel unit cost is calculated as Underlying PBT less ticketed passenger revenue and fuel, adjusted for changes in: employee discount rates and other assumptions, and foreign
exchange rates.
39 Ex-resources unit revenue is unit revenue other than specific routes that are classified as resources.
40 Average block hours per aircraft per day compared to 2014/15.
41 Regular Public Transport (RPT) resources routes revenue compared to 2014/15.
42 On time performance (OTP) of Qantas Mainline (excluding QantasLink) operations. Measured as departures within 15 minutes of scheduled departure time. Source: BITRE.
43 Average 2015/16 net promoter score based on internal Qantas reporting.
44 As at 24 August 2016.
19
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
Qantas International achieved a record Underlying EBIT of $512 million, a $1 billion turnaround since 2013/14 that reflects the
successful restructure of the segment’s cost base, network and alliance partners, and a more dynamic approach to scheduling that
has created new revenue opportunities. Highlights of the 2015/16 result included:
––
––
––
––
Revenue increased five per cent with capacity growth and seat factor improvement
Unit Revenue decline of one per cent for 2015/16 with a second-half 2015/16 decline of five per cent amid competitive market pricing
Ex-fuel unit45 cost improvement of four per cent driving margin uplift
Qantas Transformation delivering utilisation increase of five per cent46
Aircraft were reallocated from Qantas Domestic to Qantas International in response to shifting demand, facilitating additional
services to higher growth markets in Asia. Over the course of the financial year Qantas International added services to Japan, China,
Singapore and Bali, consistent with its strategic objective of aligning with the region’s passenger growth.
Qantas International continued to broaden its network and strengthen offshore distribution with new alliance partnerships
announced with American Airlines and China Eastern47. The early integration of each alliance tracked according to plan, with
synergies to begin being realised in 2016/17.
Record customer advocacy48 results at the segment were the result of continued investment in product and service with all
10 International A330–300 cabin reconfigurations completed.
JETSTAR GROUP
Revenue
3,636
Underlying EBIT
452
$M
$M
FY16
FY16
3,636
FY16
FY16
452
FY15
FY15
3,464
FY15
FY15
230
FY14
FY14
3,222
FY14
(116)
FY13
FY13
3,288
FY13
FY13
138
FY12
FY12
3,076
FY12
FY12
203
Metrics
FY14
June 2016
June 2015
Change
%
12.4
6.6
5.8pts
ASKs
M
48,832
46,386
5.3%
Seat factor
%
81.5
79.9
1.6pts
Operating margin
Jetstar Group reported a record Underlying EBIT of $452 million, almost double the segment’s prior record result in 2014/15. The
result saw a strong contribution from across the Jetstar Group’s domestic and international businesses, with highlights including:
––
––
––
––
––
Jetstar Domestic result up 62 per cent to $242 million, leveraging brand and network advantage
Strong Jetstar International profit with B787–8 efficiencies and growth in core Asia-Pacific markets
Operating margin49 improvement, up 5.8 pts to 12.4 per cent
Controllable unit cost50 reduction of three per cent
Successful launch of New Zealand regional operations
A stand out of the Jetstar Group result was the performance of Jetstar Airlines in Asia51 which delivered an $85 million improvement in
profitability compared to 2014/15. Jetstar Japan reported its maiden full year profit with international expansions and realising scale
benefits. Jetstar Asia in Singapore had a strong result with the launch of four new destinations (including charters into China) and total
unit cost reduction, notwithstanding a challenging competitive market. Jetstar Pacific in Vietnam’s earnings were lower in a highly
competitive low fares market in the country, but continues to represent an attractive growth option for the Group in South East Asia.
Jetstar’s focus on driving customer advocacy and ancillary revenue growth continued with investment in innovative service training
and digital sales. A re-design of jetstar.com, including data-driven ancillary product offering, has enhanced the customer experience.
45 Ex-fuel unit cost is calculated as Underlying PBT less ticketed passenger revenue and fuel, adjusted for changes in: employee provision discount rates and other assumptions, foreign
exchange rates, and block codeshare flying agreements per ASK.
46 Calculated as average block hours per aircraft per day. Compared to 2014/15.
47 American Airlines partnership is subject to regulatory approval.
48 Average 2015/16 Net Promoter Score, based on internal Qantas reporting.
49 Operating margin calculated as Underlying EBIT divided by total segment revenue.
50 Controllable unit cost excludes Jetstar New Zealand Regionals which commenced in December 2015, and is calculated as Underlying expenses less fuel, adjusted for changes in foreign
exchange rates, share of net profit/(loss) of investments accounted for under the equity method, charter revenue and changes in sector length per ASK.
51 Includes Jetstar Asia (Singapore), Jetstar Japan and Jetstar Pacific.
20
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
QANTAS LOYALTY
Underlying EBIT
Revenue
1,454
346
$M
$M
FY16
FY16
1,454
FY16
FY16
FY15
FY15
1,362
FY15
FY15
315
FY14
FY14
1,306
FY14
FY14
286
FY13
FY13
1,205
FY13
FY13
260
FY12
FY12
1,157
FY12
FY12
231
Metrics
346
June 2016
June 2015
Change
Operating margin
%
23.8
23.1
0.7pts
Deferred revenue growth
M
56
108
(48)%
QFF members
M
11.4
10.8
5.4%
Qantas Loyalty reported a record Underlying EBIT of $346 million, the eighth consecutive year of double-digit earnings growth52.
Diversifying the Group’s non-cyclical earnings at Qantas Loyalty remains a key pillar of the Group’s long-term strategy. Highlights in
2015/16 included:
––
––
––
––
––
Revenue up 6.7 per cent; strong margins maintained
3.8 per cent growth in Qantas Frequent Flyer co-branded credit cards, outpacing industry53
Continued growth of core Qantas Frequent Flyer coalition
44 per cent of revenue growth coming from Loyalty businesses other than Qantas Frequent Flyer
Record customer advocacy after program enhancements
The Qantas Frequent Flyer and Aquire programs continued to attract new partners or extensions with existing ones. Significantly for
Qantas Frequent Flyer, a new Woolworths proposition was announced that includes better member earn rates than under previous
proposition. Core to the Loyalty strategy is diversification into new businesses that leverage the assets of the 11.4 million member
base, in-house marketing expertise and digital capability. New ventures announced in the year were:
–– Qantas Assure health insurance on target to deliver two to three per cent market share with a differentiated offering
–– Investment in Data Republic – Australia’s first secure public data exchange platform
QANTAS FREIGHT
Revenue
982
Underlying EBIT
64
$M
FY16
$M
982
FY16
FY16
64
FY15
1,067
FY15
FY15
114
FY14
1,084
FY14
FY14
24
FY13
FY13
1,056
FY13
FY13
36
FY12
FY12
1,013
FY12
FY12
45
FY15
FY14
FY16
Metrics
Operating margin
International capacity
International load
55
54
June 2016
June 2015
Change
%
6.5
10.7
(4.2)pts
B
3.3
3.2
4.7%
%
53.4
57.0
(3.6)pts
52 Qantas Loyalty record Underlying EBIT result compared to prior periods normalised for changes in accounting estimates of the fair value of points and breakage expectations
effective 1 January 2009.
53 Based on number of personal credit card accounts with interest free periods; growth comparison for 12 months to June 2016; RBA credit and card charges statistics.
54 International capacity measured as international available freight tonne kilometres.
55 International load is measured as international revenue freight tonne kilometres divided by International available freight tonne kilometres.
21
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
Qantas Freight reported an Underlying EBIT of $64 million, a $50 million decrease from the prior year in line with guidance provided
at the Group’s full year 2014/15 results. The performance reflected challenging global cargo markets, and more in keeping with
historical performance. Key drivers of the result included:
–– Revenue performance reflecting flat demand against a six per cent global capacity increase
–– Conclusion of favourable Australian air Express legacy agreements in 2014/15
–– Continued cost reduction through Qantas Transformation
Qantas Freight retains a leading position in the Australian cargo market with Australia Post and Toll Group, Australia’s largest air
freight customers, under contract. With yields likely remaining under pressure, the segment is focused on delivering on strategic
objectives to ensure sustainable performance in the future:
––
––
––
––
Integrated ground to air operations
Continued cost reduction through Qantas Transformation
Developing growth opportunities into China through tactical freight deployment to Zhengzhou and Chongqing
Agile scheduling to adapt to changing markets – for example new freighter stop-off into Dallas
RECONCILIATION OF UNDERLYING PBT TO STATUTORY PROFIT BEFORE TAX
The Statutory Profit Before Tax of $1,424 million for the year ended 30 June 2016 is $635 million higher than the prior year.
Underlying PBT
Underlying PBT is the primary reporting measure used by the Qantas Group’s chief operating decision-making bodies, being the
Chief Executive Officer, Group Management Committee and the Board of Directors, for the purpose of assessing the performance
of the Group. The primary reporting measure of the Qantas International, Qantas Domestic, Jetstar Group, Qantas Loyalty and
Qantas Freight operating segments is Underlying EBIT. The primary reporting measure of the Corporate segment is Underlying PBT
as net finance costs are managed centrally. Underlying PBT is derived by adjusting Statutory Profit Before Tax for the impacts of
ineffectiveness and non-designated derivatives relating to other reporting periods and certain other items which are not included
in Underlying PBT.
2016
$M
Ineffectiveness
relating to
other reporting
Statutory
periods
Net passenger revenue
Net freight revenue
Other
2015
$M
Other items
not included
in Underlying
PBT
Underlying
Ineffectiveness
relating to
other reporting
Statutory
periods
Other items
not included
in Underlying
PBT
Underlying
13,961
–
–
13,961
13,604
–
–
13,604
850
–
–
850
936
–
–
936
1,389
–
–
1,389
1,276
–
–
1,276
Revenue and other income
16,200
–
–
16,200
15,816
–
–
15,816
Manpower and staff related
3,849
–
(22)
3,827
3,604
–
(13)
3,591
Fuel
3,250
(15)
–
3,235
3,937
(38)
–
3,899
Aircraft operating variable
3,362
–
(5)
3,357
3,206
–
(3)
3,203
Depreciation and
amortisation
1,224
–
–
1,224
1,096
–
–
1,096
461
–
–
461
495
–
–
495
–
–
–
–
40
–
(11)
29
2,411
–
(66)
2,345
2,390
–
(120)
2,270
14,557
(15)
(93)
14,449
14,768
(38)
(147)
14,583
1,643
15
93
1,751
1,048
38
147
1,233
Non-cancellable aircraft
operating lease rentals
Share of net (profit)/loss of
investments accounted for
under the equity method
Other
Expenses
Earnings Before Interest
and Tax
Net finance costs
PBT
(219)
–
–
(219)
(259)
1
–
(258)
1,424
15
93
1,532
789
39
147
975
Underlying PBT is derived by adjusting Statutory Profit Before Tax for the impacts of:
i. Ineffectiveness and non-designated derivatives relating to other reporting periods
The difference between Statutory Profit Before Tax and Underlying PBT results from derivative mark-to-market movements being
recognised in the Consolidated Income Statement in a different period to the underlying exposure.
22
Q A N TA S A NNUA L REPOR T 2016
Review of Operations continued
For the year ended 30 June 2016
ii. Other items not included in Underlying PBT
Items which are identified by Management and reported to the chief operating decision-making bodies as not representing the
underlying performance of the business are not included in Underlying PBT. The determination of these items is made after
consideration of their nature and materiality and is applied consistently from period to period.
Items not included in Underlying PBT primarily result from revenues or expenses relating to business activities in other
reporting periods, major transformational/restructuring initiatives, transactions involving investments, impairments of assets
and other transactions outside the ordinary course of business. Other items not included in Underlying PBT of $93 million includes
transformation costs relating to the Qantas Transformation Program of $183 million, the wage freeze employee bonus of $91 million
relating to the Enterprise Bargaining Agreements (EBAs) announced on 3 July 2015 and other costs of $20 million offset by the net
gain on disposal of property, plant and equipment of $201 million relating to the disposal of Sydney Airport Terminal Three and
related assets to Sydney Airport Corporation Limited announced on 18 August 2015.
MATERIAL BUSINESS RISKS
The aviation industry is subject to a number of inherent risks. These include, but are not limited to, exposure to changes in economic
conditions, changes in government regulations, fuel and foreign exchange volatility and other exogenous events such as aviation
incidents, natural disasters, war or an epidemic.
Qantas is subject to a number of specific business risks which may impact the achievement of the Group’s strategy and financial
prospects. The nature of these risks has not changed with the focus remaining on improving the controls in place to manage or
mitigate these risks.
–– Competitive intensity: Market capacity growth ahead of underlying demand impacts industry profitability.
• Australia’s liberal aviation policy settings coupled with the strength of the Australian economy relative to global economic
weakness in recent years has attracted more offshore competitors to the Australian international aviation market,
predominantly state-sponsored airlines. Qantas is responding by building key strategic airline partnerships with strong global
partners and optimising its network. Qantas brings domestic strength and the unrivalled customer offering of Qantas Loyalty.
Qantas International has embarked on a major restructure of its legacy cost base through the Qantas Transformation Program
with the objective of achieving a cost base comparable to direct competitors.
• The Australian domestic aviation market is a highly competitive environment. The Qantas Group’s market-leading domestic
position and dual-brand strategy allow Qantas to effectively mitigate the impact of any market changes. This strategy leverages
Qantas Domestic (including QantasLink) to serve business and premium leisure customers and Jetstar to serve pricesensitive customers. Qantas Domestic is focused on removing the cost base disadvantage to its competitor through Qantas
Transformation initiatives while maintaining a revenue premium. Jetstar is working to maintain its lowest seat cost and yield
advantage. These priorities deliver Qantas Domestic and Jetstar Domestic the highest operating margins in their respective
markets enabling the Group to retain market share of Underlying EBIT in excess of capacity share.
–– Fuel and foreign exchange volatility: The Qantas Group is subject to fuel and foreign exchange risks. These risks are an inherent
part of the operations of an airline. The Qantas Group manages these risks through a comprehensive hedging program. For 2016/17
the Group’s hedging profile is positioned such that the worst case total fuel cost is $3.256 billion with 87 per cent participation
rate in lower fuel prices (at current forward market price total fuel cost for 2016/17 is $3.157 billion)58. Complementing the hedging
program, increased focus on forecasting and operational agility of our aviation operations supports the Group to manage the
residual uncertainty.
–– Industrial relations: The associated risks of transformation including industrial action relating to Qantas’ collective agreements
with its employees. The risk is being mitigated through continuous employee engagement initiatives and ongoing, constructive
dialogue with all union groups and other relevant stakeholders. In 2015/16 the Group’s engagement score was at a record 79 per
cent up four percentage points since 2014/15. The Group has successfully closed 30 Enterprise Bargaining Agreements (EBAs)
subsequent to the commencement of the Qantas Transformation Program inclusive of an 18 month wage freeze. To support
the implementation of the 18 month wage freeze a bonus payment of five per cent was announced in July 2015 to be made to all
employees covered by an 18 month wage freeze. In addition, in August 2016 in recognition of the contribution towards a record
result, the Group announced a further $3,000 bonus to all full-time employees and $2,500 to all part-time employees covered by
an 18 month wage freeze.
–– Integrity of data and continuity of critical systems: The Group’s operations depend on the continuity of a number of information
technology and communication services and the integrity and protection of the privacy of data. The Group’s ongoing investment
in cybersecurity, together with its extensive Control and Risk Framework59 work to reduce the likelihood of outages, ensure early
detection and the mitigation of impact.
–– Key business partners and alliances: The Qantas Group has relationships with a number of key business partners. Any potential
exposures as a result of these partnerships are mitigated through the Group Risk Management Framework.
56 The worst case total fuel cost is based on a two standard deviation correlated move in the Brent forward market prices to US$56/bbl with the AUD/USD rate at 0.78 for the remainder of
2016/17.
57 The current forward market price total fuel cost is based on a Brent forward market price of A$67/bbl for the remainder of 2016/17.
58 As at 23 August 2016.
59 An overview of the Group Risk Management Framework is available through the Qantas Group Business Practices Document on www.qantas.com.au.
23
Q A N TA S A NNUA L REPOR T 2016
Corporate Governance Statement
For the year ended 30 June 2016
OVERVIEW
THE BOARD IS STRUCTURED TO ADD VALUE
Corporate governance is core to ensuring the creation,
protection and enhancement of shareholder value. The Board
maintains, and requires that Qantas Management maintains,
the highest level of corporate ethics.
The Qantas Board currently has 10 Directors. Eight Directors are
Independent Non-Executive Directors elected by shareholders
and one has been appointed by the Board to fill a casual vacancy.
The Qantas CEO, who is an Executive Director, is not regarded
as independent.
The Board comprises a majority of Independent Non-Executive
Directors who, together with the Executive Director, have
an appropriate balance of skills, knowledge, experience,
independence and diversity to enable the Board as a collective
to effectively discharge its responsibilities.
The Board endorses the ASX Corporate Governance Principles
and Recommendations, 3rd Edition (ASX Principles).
Accordingly, Qantas has taken the opportunity to disclose
its 2016 Corporate Governance Statement in the Corporate
Governance section on the Qantas website (http://www.qantas.
com/travel/airlines/governance-structure/global/en). As
required, Qantas has also lodged the Corporate Governance
Statement with the ASX.
Details of the current Directors, their qualifications, skills,
experience and tenure are set out on pages 8 to 11 of the Qantas
Annual Report 2016.
The Board has four Committees:
––
––
––
––
Audit Committee
Nominations Committee
Remuneration Committee
Safety, Health, Environment and Security Committee
Each of these committees assists the Board with specified
responsibilities that are set out in Committee Charters, as
delegated and approved by the Board.
Following is a summary of the key aspects of the Corporate
Governance Statement.
Membership of and attendance at 2015/2016 Board
and Committee Meetings is detailed on page 26 of the
2016 Annual Report.
THE BOARD LAYS SOLID FOUNDATIONS FOR MANAGEMENT
AND OVERSIGHT
THE BOARD PROMOTES ETHICAL AND RESPONSIBLE
DECISION-MAKING
The Board has adopted a formal Charter which is available in the
Corporate Governance section on the Qantas website
(http://www.qantas.com.au/infodetail/about/
corporateGovernance/BoardCharter.pdf).
The Board has established a corporate governance framework,
comprising Non-Negotiable Business Principles (Principles)
and Group Policies, which forms the foundation for the way in
which the Qantas Group undertakes business. The Principles
and Group Policies, including the Qantas Group Code of
Conduct and Ethics, are detailed in the Qantas Group Business
Practices document. This framework is supported by a rigorous
whistleblower program, which provides a protected disclosure
process for employees.
The Board is responsible for setting and reviewing the strategic
direction of Qantas and monitoring the implementation of that
strategy by Management.
The CEO is responsible for the day-to-day management of the
Qantas Group with all powers, discretions and delegations
authorised, from time to time, by the Board.
The Company Secretary is accountable directly to the Board,
through the Chairman, on all matters to do with the proper
functioning of the Board.
The Qantas Group Employee Share Trading Policy sets out
guidelines designed to protect the Qantas Group Directors and
its employees from intentionally or unintentionally breaching
the law. The Qantas Group Employee Share Trading Policy
prohibits employees from dealing in the securities of any
Qantas Group listed entity while in possession of material nonpublic information.
In addition, certain nominated Qantas employees are also
prohibited from entering into any hedging or margin lending
arrangement or otherwise granting a charge over the securities
of any Qantas Group listed entity, where control of any sale
process relating to those securities may be lost.
24
Q A N TA S A NNUA L REPOR T 2016
Corporate Governance Statement continued
For the year ended 30 June 2016
THE BOARD SAFEGUARDS THE INTEGRITY OF CORPORATE
FINANCIAL REPORTING
The Board and Audit Committee closely monitor the
independence of the external auditor. Regular reviews occur
of the independence safeguards put in place by the external
auditor. Qantas rotates the lead external audit partner every
five years and imposes restrictions on the employment of
personnel previously employed by the external auditor.
Policies are in place to restrict the type of non-audit services
which can be provided by the external auditor and a detailed
review of non-audit fees paid to the external auditor is
undertaken on a half-yearly basis.
At each meeting, the Audit Committee meets privately with
Executive Management without the external auditor, and with
the internal and external auditors with Executive Management.
THE BOARD MAKES TIMELY AND BALANCED DISCLOSURE
Qantas is committed to ensuring that trading in its shares takes
place in an orderly and informed market, with transparent
and consistent communication with all shareholders. Qantas
has an established process to ensure that it complies with its
continuous disclosure obligations at all times, including a biannual confirmation by all Executive Management that the areas
for which they are responsible have complied with the Group’s
Continuous Disclosure Policy.
Qantas proactively communicates with its shareholders via the
ASX and its web-based Newsroom, with all materials released
by the Group made available to all shareholders at the same
time. Additionally, Qantas actively conveys its publicly-disclosed
information and seeks the views of its shareholders, large and
small, in a number of forums, including at the Annual General
Meeting (AGM), the Qantas Investor Day and, as is common
practice among its major listed peers, through periodic
meetings with current and potential institutional shareholders.
THE BOARD RESPECTS THE RIGHTS OF SHAREHOLDERS
Qantas has a Shareholder Communications Policy which promotes
effective two-way communication with shareholders and the
wider investment community, and encourages participation at
general meetings.
Shareholders also have the option to receive communications
from, and send communications to, Qantas and its Share
Registry electronically, including email notification of significant
market announcements.
The external auditor attends the AGM and is available to answer
shareholder questions that are relevant to the audit.
THE BOARD RECOGNISES AND MANAGES RISK
Qantas is committed to embedding risk management practices
to support the achievement of business objectives and fulfil
corporate governance obligations. The Board is responsible
for reviewing and overseeing the risk management strategy for
the Qantas Group and for ensuring the Qantas Group has an
appropriate corporate governance structure. Within that overall
strategy, Management has designed and implemented a risk
management and internal control system to manage Qantas’
material business risks.
During 2015/2016, the two Board committees responsible for
oversight of risk-related matters, the Audit Committee and
the Safety, Health, Environment and Security Committee,
undertook their annual review of the effectiveness of Qantas’
implementation of its risk management system and internal
control framework.
The internal audit function is carried out by Group Audit and
Risk and is independent of the external auditor. Group Audit and
Risk provides independent, objective assurance and consulting
services on Qantas’ system of risk management, internal control
and governance.
The Audit Committee approves the Group Audit and Risk Internal
Audit Charter, which provides Group Audit and Risk with full
access to Qantas Group functions, records, property and
personnel, and establishes independence requirements. The
Audit Committee also approves the appointment, replacement
and remuneration of the internal auditor. The internal auditor
has a direct reporting line to the Audit Committee and also
provides reporting to the Safety, Health, Environment and
Security Committee.
THE BOARD REMUNERATES FAIRLY AND RESPONSIBLY
The Qantas executive remuneration objectives and approach are
set out in full below.
Information about remuneration of Executive Management is
disclosed to the extent required, together with the process for
evaluating performance, in the Remuneration Report from page
30 of the 2016 Annual Report.
Qantas Non-Executive Directors are entitled to statutory
superannuation and certain travel entitlements (accrued
during service) that are reasonable and standard practice in
the aviation industry. Non-Executive Directors do not receive
any performance-based remuneration (see pages 47 to 48 of
the Qantas Annual Report 2016).
25
Q A N TA S A NNUA L REPOR T 2016
Directors’ Report
For the year ended 30 June 2016
The Directors of Qantas Airways Limited (Qantas) present
their Report together with the Financial Statements of the
consolidated entity, being Qantas and its controlled entities
(Qantas Group), for the year ended 30 June 2016 and the
Independent Audit Report thereon.
DIVIDENDS
DIRECTORS
SIGNIFICANT CHANGES IN STATE OF AFFAIRS
The Directors of Qantas at any time during or since the end
of the year are:
Leigh Clifford AO
Alan Joyce
Maxine Brenner
Richard Goodmanson
Jacqueline Hey
Michael L’Estrange AO (appointed 7 April 2016)
William Meaney
Paul Rayner
Todd Sampson
Barbara Ward AM
In the opinion of the Directors, there were no significant changes
in the state of affairs of the Qantas Group that occurred during
the year under review.
Details of current Directors, their qualifications, experience
and any special responsibilities, including Qantas Committee
Memberships, are set out on pages 8 to 11.
The Qantas Group’s strategies, prospects for future financial
years and material business risks have been included in the
Review of Operations to the extent that they are not likely to result
in unreasonable prejudice to the Qantas Group. In the opinion of
the Directors, detail that could be unreasonably prejudicial to the
interests of the Qantas Group, for example, information that is
commercially sensitive, confidential or could give a third party a
commercial advantage, has not been included.
The Directors have declared a fully franked dividend of seven
cents per ordinary share in relation to the year ended 30 June
2016, totalling $134 million (2015: nil). No interim dividend was
paid during the year.
Any matter or circumstance that has arisen since the end of
the year that may affect the Qantas Group’s state of affairs
in future financial years has been included in Note 27 to the
Financial Statements.
REVIEW OF OPERATIONS
A review of, and information about, the Qantas Group’s
operations, including the results of those operations during
the year together with information about the Group’s financial
position appear on pages 12 to 23.
PRINCIPAL ACTIVITIES
The principal activities of the Qantas Group during the course
of the year were the operation of international and domestic air
transportation services, the provision of freight services and
the operation of a frequent flyer loyalty program. There were no
significant changes in the nature of the activities of the Qantas
Group during the year.
EVENTS SUBSEQUENT TO BALANCE DATE
Refer to page 87 for events which occurred subsequent to balance
date. Other than the matters disclosed on page 87, since the
end of the year and to the date of this Report no other matter or
circumstance has arisen that has significantly affected or may
significantly affect the Qantas Group’s operations, results of
those operations or state of affairs in future years.
DIRECTORS’ MEETINGS
The number of Directors’ Meetings held (including Meetings of Committees of Directors) during 2015/2016 is as follows:
Qantas Board
Scheduled
Meetings
Directors
Unscheduled
Meetings
Audit Committee1
Safety, Health,
Environment
and Security
Committee1
Remuneration
Committee1
Nominations
Committee1
Sub-Committee
Meetings2
Attended
Held3
Attended
Held3
Attended
Held
Attended
Held3
Attended
Held3
Attended
Held
Attended
Held
Leigh Clifford
7
7
1
1
2
24
–
–
–
–
–
–
2
2
Alan Joyce
7
7
1
1
2
2
–
–
4
4
–
–
–
–
Maxine Brenner
7
7
1
1
–
–
5
5
–
–
3
3
–
–
4
Richard Goodmanson
7
7
1
1
–
–
–
–
4
4
–
–
2
2
Jacqueline Hey
7
7
1
1
–
–
5
5
–
–
–
–
–
–
Michael L’Estrange5
2
2
–
–
–
–
–
–
1
1
–
–
–
–
William Meaney
7
7
1
1
–
–
–
–
4
4
3
3
–
–
Paul Rayner
7
7
1
1
–
–
–
–
–
–
3
3
2
2
Todd Sampson
7
7
1
1
–
–
–
–
–
–
3
3
–
–
Barbara Ward
7
7
1
1
2
24
5
5
4
4
–
–
2
2
1 All Directors are invited to, and regularly attend, committee meetings in an ex-officio capacity. The above table reflects the attendance of a Director only where he or she is a member of
the relevant committee.
2 Sub-Committee meetings convened for specific Board-related business.
3 Number of meetings held during the period that the Director held office.
4 Number of meetings held and requiring attendance.
5 Mr L’Estrange was appointed as a Director on 7 April 2016 and as a Member of the Safety, Health, Environment and Security Committee on 21 June 2016.
26
Q A N TA S A NNUA L REPOR T 2016
Directors’ Report continued
For the year ended 30 June 2016
DIRECTORSHIPS OF LISTED COMPANIES HELD BY MEMBERS OF THE BOARD AS AT 30 JUNE 2016
– FOR THE PERIOD 1 JULY 2013 TO 30 JUNE 2016
Leigh Clifford
Qantas Airways Limited
–– Current, appointed 9 August 2007
Alan Joyce
Qantas Airways Limited
–– Current, appointed 28 July 2008
Maxine Brenner
Qantas Airways Limited
–– Current, appointed 29 August 2013
Origin Energy Limited
–– Current, appointed 15 November 2013
Orica Limited
–– Current, appointed 8 April 2013
Growthpoint Properties Australia Limited
–– Current, appointed 19 March 2012
Richard Goodmanson Qantas Airways Limited
Rio Tinto Limited
Jacqueline Hey
–– Current, appointed 19 June 2008
–– Ceased, appointed 1 December 2004 and ceased 5 May 2016
Rio Tinto plc
–– Ceased, appointed 1 December 2004 and ceased 5 May 2016
Qantas Airways Limited
–– Current, appointed 29 August 2013
AGL Energy Limited
–– Current, appointed 21 March 2016
Australian Foundation Investment Company –– Current, appointed 31 July 2013
Michael L’Estrange
William Meaney
Paul Rayner
Todd Sampson
Barbara Ward
Bendigo and Adelaide Bank Limited
–– Current, appointed 5 July 2011
Qantas Airways Limited
–– Current, appointed 7 April 2016
Rio Tinto Limited
–– Current, appointed 1 September 2014
Rio Tinto plc
–– Current, appointed 1 September 2014
Qantas Airways Limited
–– Current, appointed 15 February 2012
Iron Mountain Inc
–– Current, appointed 7 January 2013
Qantas Airways Limited
–– Current, appointed 16 July 2008
Treasury Wine Estates Limited
–– Current, appointed 9 May 2011
Boral Limited
–– Current, appointed 5 September 2008
Centrica plc
–– C
eased, appointed 22 September 2004 and ceased
31 December 2014
Qantas Airways Limited
–– Current, appointed 25 February 2015
Fairfax Media Limited
–– Current, appointed 29 May 2014
Qantas Airways Limited
–– Current, appointed 19 June 2008
Caltex Australia Limited
–– Current, appointed 1 April 2015
Brookfield Capital Management Limited1
–– Current, appointed 1 January 2010
Brookfield Funds Management Limited2
–– Current, appointed 22 October 2003
1 Responsible entity for the Brookfield Prime Property Fund and the Multiplex European Property Fund, both of which are listed Australian registered managed investment schemes.
Previously responsible entity for the Brookfield Australian Opportunities Fund, which was wound up on 30 October 2012.
2 Responsible entity for the Multiplex SITES Trust, which is a listed Australian registered managed investment scheme.
QUALIFICATIONS AND EXPERIENCE OF EACH PERSON WHO IS A COMPANY SECRETARY OF QANTAS AS AT 30 JUNE 2016
Andrew John Finch
––
––
––
––
––
Anna Rachel Pritchard
––
––
––
––
––
Appointed as Company Secretary on 31 March 2014
Joined Qantas on 1 November 2012
2002 to 2012 – Mergers and Acquisitions Partner at Allens, Sydney
1999 to 2001 – Managing Associate at Linklaters, London
1993 to 1999 – Various roles at Allens, Sydney (previously Allens Arthur Robinson and Allen Allen
& Hemsley), including Senior Associate (1997 to 1999) and Solicitor (1993 to 1997)
–– Admitted as a solicitor of the Supreme Court of NSW in 1993
John David Francis Morris ––
––
––
––
––
Appointed as a Company Secretary on 22 June 2016
Joined Qantas on 23 August 2010
2005 to 2010 – Solicitor at Allens Arthur Robinson, Sydney
2001 to 2005 – Solicitor at the Australian Government Solicitor
Admitted as a solicitor of the Supreme Court of NSW, the High Court of Australia and the High Court
of New Zealand in 2001
Appointed as a Company Secretary on 9 April 2014
Joined Qantas on 28 March 2010
2002 to 2008 – General Counsel and Company Secretary at KAZ Group
1997 to 2002 – Solicitor then Senior Associate at Ashurst (previously Blake Dawson Waldron)
Admitted as a solicitor of the Supreme Court of Victoria in 1992
27
Q A N TA S A NNUA L REPOR T 2016
Directors’ Report continued
For the year ended 30 June 2016
DIRECTORS’ INTERESTS AND BENEFITS
Particulars of Directors’ interests in the issued capital of Qantas at the date of this Report are as follows:
Number of Shares
Directors
Leigh Clifford
Alan Joyce
2016
2015
362,613
291,622
2,728,924
5,379,721
Maxine Brenner
30,065
21,900
Richard Goodmanson
18,780
20,000
Jacqueline Hey
38,170
30,000
Michael L’Estrange
–
n/a
William Meaney
–
–
220,324
201,622
Paul Rayner
Todd Sampson
4,695
5,000
Barbara Ward
44,694
47,597
In addition to the interests shown, indirect interests in Qantas shares held in trust on behalf of Mr Joyce are as follows:
Deferred shares held in trust under:
2014/15 Short Term Incentive Plan
258,0621
2015/16 Short Term Incentive Plan
490,738
274,826
–
2
1 The number of deferred shares awarded under the 2014/15 Short Term Incentive Plan were impacted by the share consolidation completed on 6 November 2015 through the conversion of
each share into 0.939 shares.
2 The deferred shares under the 2015/16 Short Term Incentive Plan are awarded to Mr Joyce on 2 September 2016.
Number of Rights
2016
2015
Rights granted under:
2014–2016 Long Term Incentive Plan
2015–2017 Long Term Incentive Plan
2016–2018 Long Term Incentive Plan
Total rights
–1
3,248,000
2
2,151,000
3,248,000
947,0003
–
4,195,000
5,399,000
1 100 per cent of the 2014–2016 Long Term Incentive Plan Rights awarded to Mr Joyce on 18 October 2013 vested and converted to 2,151,000 shares following the performance hurdle
testing conducted as at 30 June 2016.
2 Shareholders approved the award of these Rights on 24 October 2014. Performance hurdles will be tested as at 30 June 2017 to determine whether any Rights vest to Mr Joyce.
3 Shareholders approved the award of these Rights on 23 October 2015. Performance hurdles will be tested as at 30 June 2018 to determine whether any Rights vest to Mr Joyce.
RIGHTS
Performance Rights are awarded to select Qantas Group Executives under the Qantas Deferred Share Plan (DSP) and the Qantas
Employee Share Plan (ESP). Refer to pages 38 to 40 for further details.
The following table outlines the movements in Rights during the year:
Number of Rights
Performance Rights Reconciliation
2016
2015
80,309,588
33,579,432
Rights granted
6,086,500
64,317,000
Rights forfeited
(3,995,000)
(1,914,000)
Rights lapsed
(1,719,450)
(15,614,000)
Rights exercised
(9,790,023)
(58,844)
Rights outstanding as at 30 June
70,891,615
Rights outstanding as at 1 July
1 The movement of Rights outstanding as at 30 June 2016 to the date of this Report is explained in the footnotes on page 29.
28
1
80,309,588
Q A N TA S A NNUA L REPOR T 2016
Directors’ Report continued
For the year ended 30 June 2016
Rights will be converted to Qantas shares to the extent performance hurdles have been achieved. The Rights do not allow the holder
to participate in any share issue of Qantas. No dividends are payable on Rights. The fair value of Rights granted is calculated at the
date of grant using a Monte Carlo model and/or Black-Scholes model.
The following Rights were outstanding at 30 June 2016:
Number of Rights
Value at
Grant Date
2016
Net Vested
2016
Unvested
2016
Total
2015
Net Vested
2015
Unvested
2015
Total
Name
Testing Period Grant Date
2005
Performance
Rights Plan
30 Jun 08 –
30 Jun 101 22 Nov 05
$2.67
–
–
–
38,517
–
38,517
2006
Performance
Rights Plan
30 Jun 09 –
30 Jun 111 4 Oct 06
$2.95
111,115
–
111,115
119,071
–
119,071
2013–2015
Long Term
Incentive Plan
30 Jun 152
2 Nov 12
$0.88
–
–
–
– 11,272,000 11,272,000
2013–2015
Long Term
Incentive Plan
30 Jun 152
13 Jun 13
$0.70
–
–
–
–
2014–2016
Long Term
Incentive Plan
30 Jun 163
18 Oct 13
$0.83
– 10,208,000 10,208,000
– 10,463,000 10,463,000
2015–2017
Long Term
Incentive Plan
30 Jun 17
15 Sep 14
$0.972
– 48,024,000 48,024,000
– 50,925,000 50,925,000
2015–2017
Long Term
Incentive Plan
30 Jun 17
24 Oct 14
$0.97
–
4,457,000
4,457,000
–
4,582,500
4,582,500
2015–2017
Long Term
Incentive Plan
30 Jun 17
3 May 15
$3.05
–
2,202,000
2,202,000
–
2,580,500
2,580,500
2016–2018
Long Term
Incentive Plan
30 Jun 18
1 Sep 15
$2.09
–
4,893,500
4,893,500
–
–
–
2016–2018
Long Term
Incentive Plan
30 Jun 18
23 Oct 15
$2.46
–
996,000
996,000
–
–
–
Total
111,115 70,780,500 70,891,615
329,000
329,000
157,588 80,152,000 80,309,588
1 These Rights convert to Qantas shares on the 10th anniversary of the date of award, however Executives may call for the Rights to be converted sooner at their request.
2 85 per cent of Rights vested subsequent to 30 June 2015 and before the issuance of this Report following the performance hurdle testing conducted as at 30 June 2015.
3 100 per cent of Rights vested subsequent to 30 June 2016 and before the issuance of this Report following the performance hurdle testing conducted as at 30 June 2016.
29
Q A N TA S A NNUA L REPOR T 2016
Directors’ Report continued
For the year ended 30 June 2016
REMUNERATION REPORT (AUDITED)
COVER LETTER TO THE REMUNERATION REPORT
Dear Shareholder,
The Remuneration Report sets out remuneration information for the Chief Executive Officer (CEO), direct reports to the CEO
(Executive Management) and Non-Executive Directors.
In addition to the detailed Remuneration Report, we have provided an introduction to the Report which contains a summary of:
–– The Remuneration Framework and how it was applied for the 2015/2016 financial year
–– The remuneration outcomes for the CEO
Qantas’ Remuneration Policy
Qantas is committed to having remuneration outcomes that are aligned with performance and the creation of shareholder value.
The commitment and practice is demonstrated in 2015/2016 and also in the five years prior where:
–– Annual incentives were not paid to the CEO in two years (2011/2012 and 2013/2014), partial awards were paid in two years
(2010/2011 and 2012/2013), and above ‘At Target’ was paid once (2014/2015)
–– Long Term Incentive Plan (LTIP) awards partially vested once (2014/2015) and did not vest at all in the four previous years
The Remuneration Report includes further details of the history of incentive plan outcomes on page 33.
Qantas’ Performance in 2015/2016
2015/2016 was an outstanding year for Qantas. Over the financial year, Qantas continued to improve the customer experience,
exceeded its commitments under the Qantas Transformation program, and has delivered a record financial result and returned
over $1 billion to shareholders.
All employees can be very proud of their contribution to these results.
Remuneration Outcomes in 2015/2016
Fixed Remuneration – During 2015/2016 our restrained approach to fixed remuneration increases continued.
Variable Remuneration – The 2015/2016 remuneration outcomes for the CEO and Executive Management align with Qantas’
performance and the creation of shareholder value.
Annual Incentive Outcomes:
Annual incentives were paid to the CEO and Executive Management based on their contribution to the achievement...
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