Qantas Airways (ASX: QAN) is forecasting domestic travel will exceed pre-COVID levels by February, but until then the company is flying into a $1.1 billion underlying loss for the first of FY22 as it continues to be weighed down by excess baggage from the pandemic.
Qantas has reported strong forward bookings for its Qantas and Jetstar services over the Christmas and New Year holiday period, although demand slowed down in November due to the outbreak of the Omicron variant.
The group is expecting its domestic services to reach 75 per cent of pre-COVID levels in December and more than 100 per cent in February. As a result, Qantas is planning to bring back on board all Australian-based employees who had been stood down.
CEO Alan Joyce says despite the turnaround taking shape, the first half of FY22 was among the most challenging in recent times.
“This has been one of the worst halves of the entire pandemic, where most states had their borders closed and the majority of Australians were in lockdown,” says Joyce.
“Domestically, our capacity fell to around 30 per cent of pre-COVID levels for several months. Fortunately, the structural changes we made earlier in the pandemic put us in a good position to weather these extremely poor trading conditions while the national vaccination rate reached a point where states started to open back up.
“Australia now has one of the highest levels of vaccination and it’s still rising. That sets us apart from many other countries and puts us in a much better position to manage uncertainty around variants and seasonal surges.”
The forecast $1.1 billion EBIT loss, which includes non-cash depreciation and amortisation costs, compares with a $407 million loss a year earlier.
The underlying EBITDA loss is expected to fall between $250 million and $300 million, assuming there are no further disruptions to domestic travel. This compares with an underlying EBITDA profit of $71 million a year ago.
Qantas says the deteriorating profit performance reflects ‘stranded costs due to sudden lockdowns and a lower level of aircraft hibernation to facilitate a faster ramp-up based on the national recovery roadmap’.
However, the airline has started to chip away at repairing its balance sheet with net debt falling due to the $802 million sale of land at Mascot in Sydney. Net debt is expected to be about $5.65 billion by the end of December.
Qantas says its recovery program is also on track to deliver $850 million in annual cost benefits by the end of FY22.
Joyce says the strength of the Qantas business has been its ability to respond quickly to change in the face of the challenges over the past 18 months.
“We’ve significantly reduced our cost base which improves our ability to recover. We were able to switch on an initial wave of international flights in time for the accelerated border opening in November, which meant we could capitalise on pent-up demand.
“We added new domestic routes based on changing demand patterns and we’re now doing the same internationally. Our new flights to India are some of the fastest selling Qantas has ever had, with virtually all flights in December full.
“The news of the Omicron variant had a clear impact on people’s confidence to book international trips in particular, but we haven’t seen large numbers of cancellations.”
Joyce says customers are keen to travel ‘if the border and quarantine settings are right’.
“In the past few days, we have seen intakes improve. Domestic demand has started to pick up again and we’re expecting a strong performance over the Christmas period and continued strength into early next year as more restrictions ease.”
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