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Qantas Eyes Significant International Expansion and Profit Growth With New Planes

Edward Russell
May 30th, 2023 at 3:17 PM EDT

A kangaroo-adorned Qantas tail

Qantas to Paris? Jetstar to Manila? Both are markets that the Qantas Group could serve by the end of the decade as it sets its sights on profitable new growth opportunities with the hundred-plus new planes it has on order.

The aircraft, part of separate deals to renew its narrowbody fleet and for the Project Sunrise ultra-longhaul nonstops flights to both London and New York, are a backbone of the group’s strategy through fiscal 2030, or the year ending in June 2030. During that period, executives have ambitious goals to boost margins — thanks in part to expectations of international demand outstripping airline capacity for the rest of the decade — while expanding and cutting costs, all at the same time.

To paraphrase crooner Johnny Nash, it could be a bright, bright sunshiny decade ahead for Qantas.

The group, which includes Qantas and budget airline Jetstar, laid out its vision through the end of the decade to investors Tuesday. It targets international annual operating margins of 10-12 percent for Qantas, or about double pre-pandemic levels, and at around 12 percent for Jetstar, on par with its pre-Covid returns. Domestically, Qantas anticipates margins 5 points better than pre-pandemic of roughly 18 percent, and Jetstar margins comparable to its best years of around 15 percent. And don’t forget things like loyalty, where high-margin operating profits are forecast to jump to A$800 million to A$1 billion ($521-651 million) by the end of the decade from a pre-pandemic peak of less than half that.

Qantas’ new fleet forms the foundation for those returns. The group has orders and commitments for more than 150 Airbus A220, A321neo, and A350, and Boeing 787 aircraft with deliveries stretching into the next decade. While many of the planes, particularly the narrowbodies, will replace older models in the Qantas and Jetstar fleets, their larger size and improved capabilities enable a long list of potential new network opportunities for both airline businesses.

The biggest of those is Project Sunrise. Qantas aims to launch the nonstops to London and New York from Sydney from around 2025. The routes will be flown with the 12 A350-1000s on order, and are expected to generate as much as A$400 million in incremental revenue for the airline by fiscal 2030.

“People are willing to pay a premium to fly direct, and it’s even more so since Covid,” Qantas Head of International and Domestic Andrew David said at the investor event. That premium for the nonstop flights would drive the additional revenues.

But Project Sunrise is not only about new nonstops to London and New York. When those flights launch, Qantas will find itself with freed-up 787-9s that currently fly one-stop routings to both cities. Those planes could then be put to use to — you may have guessed it — Paris, or Chicago or Seattle. The latter two cities are Oneworld alliance strongholds with Chicago a hub for joint venture partner American Airlines, and Seattle one for Alaska Airlines.

The A220s and A321neos, notably the long-range A321XLR variant, will open up new opportunities closer afield to Australia for both Qantas and Jetstar. The group’s investor presentation said Qantas will be able to “profitably participate on routes that were previously unfeasible” without giving specifics. However, a range chart showed the A321XLR potentially able to fly routes like Brisbane-Manila or Perth-Bangkok nonstop. Neither Qantas nor Jetstar flies either route today, according to Cirium Diio schedules.

On the Jetstar side, the expansion opportunities are much more explicit. The discounter could potentially add flights to “Philippines, Vietnam, Thailand, Korea, India, Sri Lanka, and Pacific Islands.” Some of those, for example the Philippines, Thailand, Vietnam, and the Pacific Islands, would be within range of the A321XLR. Others, for example, India and Sri Lanka, would be possible with Jetstar’s 787s that the group said would be “redeployed” to markets outside of the XLRs range once the new Airbuses arrive.

Further boosting the Qantas Group on the international front was Virgin Australia’s decision to exit longhaul flying during its Covid restructuring. The airline removed its widebody Airbus A330 and Boeing 777 aircraft and ended service to destinations like Los Angeles as a result. Virgin still flies international routes that it can serve with its Boeing 737s, for example to Bali and New Zealand. It will also begin flying to Tokyo Haneda with a 737 next month in a move that is seen by most as protecting its coveted slot at the airport.

The new fleets will also help the Qantas Group cut operating costs. Qantas estimates a 21 percent reduction in unit costs, measured by cost per available seat kilometer (CASK), with the A220s that replace Boeing 717s, and a 9 percent reduction with the A321neos that replace Boeing 737-800s.

Total group unit costs, excluding fuel, were up 13 percent during the six months ending in December compared to 2019. That increase was more than offset by a 44 percent increase in group unit revenues over the same period.

Operating expense savings estimates do not include the capital costs of the new fleet. The group expects capital expenditures to rise from A$2.6-2.7 billion this fiscal year to A$3-3.2 billion in fiscal 2024. Outgoing CEO Alan Joyce told investors the group secured “very attractive pricing” for all of the aircraft, and that incoming CEO Vanessa Hudson was pivotal to securing those terms.

Key to the group’s margin targets, however, is the expected supply and demand imbalance. While not new, the fact that it could continue through the end of the decade is. This stands to boost international yields where the imbalance is most pronounced, something Qantas expects to be the case on routes to and from Australia.

International seats to and from Australia, excluding New Zealand, are scheduled to be down roughly 17 percent this year compared to 2019, Diio data show. Schedules more than six months out, including during the peak season in the southern hemisphere, are still subject to change.

Edward Russell
May 30th, 2023 at 3:17 PM EDT

Tags: Asia-Pacific

Photo credit: A kangaroo-adorned Qantas tail Flickr / shebalso

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