Thanks for joining us today for this market update. I'm joined by my CFO, Vanessa Hudson. Once we complete the few brief remarks that I have, we'll open it to questions. I will say that we only will have time, I think we've got over 12 analysts online. We'll only have time for everybody to have one question each. Think of your questions, the number one question you want to ask, please don't make it a five-part question when we get there. We're making several important and very positive announcements today that we'd like to talk you through. The first is an update to the market on our financial performance, which has strengthened since our results in August. We've already said that the first half of financial 2023 would mark a return to profit.
We now expect it to be a very strong half, somewhere between AUD 1.2 billion and AUD 1.3 billion underlying profit before tax. It's a remarkable turnaround that comes after AUD 7 billion in accumulated losses since 2020. Net debt will also reduce further. We expect it to finish between AUD 3.2 billion and AUD 3.4 billion by the 31st of December 2022, below the bottom end of our target range, which is now at AUD 3.9 billion. This assumes completion of our current on-market buyback, which is 26% complete to date. The main drivers of this performance are continued strength in travel demand, both domestically and internationally, the benefits of our recovery plan, and the growth in market share of the group versus pre-COVID levels.
Across our domestic network, we're seeing business purpose travel back at more than 100% of pre-COVID levels in revenue terms. Leisure over 100%. 130%. These have both strengthened since August. Internationally, pent-up demand and a more gradual return of capacity is resulting in strong RASK outcomes. This is expected to moderate as capacity returns. To date, we're not seeing inflation or interest rates impact people's desire to travel, and the research shows travel is a category that consumers will continue to prioritize. Put together, this is all supporting our ability to fully recover fuel prices, which are higher now than they were in August and likely to stay here for longer based on world events. The second update today is on our operational performance. In short, we've seen continued improvement at Qantas.
Domestic on time performance improved from 52% in July to 75% so far in October. Adjusted for the impact of extreme weather, this is almost back to pre-COVID levels. Qantas' cancellation levels are now better than pre-COVID, and mishandled bags are about on par. What's become clear is that delivering pre-COVID service levels takes more than pre-COVID resources. That's due to sick leave, supply chain log jams, and the unexpected consequences of shutting down an entire industry for two years. We know this is temporary, but we're investing to give ourselves the operational buffer to deliver the service customers expect. We estimate the cost at around AUD 200 million for the remainder of financial year 20 23 on things like increased staff levels in the contact centers and airports, having more crew on standby in case of sick leave, and having additional spare aircraft on the grounds.
Maintaining our performance means we had to trim domestic capacity by about another 5 percentage points compared with what we had planned in the second half. We'll add some of this back when we can, when we're certain that operational performance can be maintained. We'd rather, and we think our customers would rather, deliver 95% of our schedule really well compared to 105% poorly. The inroads we've made on performance has been thanks to our people. They've been amazing, and our accelerated financial recovery allows us to also share the benefits with them. Today, we're announcing a further wage increase across the organization at a cost of approximately AUD 40 million a year before compounding.
This is on top of the AUD 200 million we've already announced, made up of AUD 10,000 in bonus and incentives paid in cash and shares, an improvement to our staff travel program that has proven to be extremely popular. The past few years have been particularly challenging for our people, including long periods of stand down and a two-year wage freeze, which we applied when we were losing money. There aren't many companies in Australia that are sharing the benefits of recovery the way the Qantas Group is, and we're pretty proud of that. As I said upfront, this is a remarkable turnaround from our COVID losses. We've always expected our business would emerge from the crisis fundamentally stronger, but the speed of the rebound has come more quickly than anticipated.
With the sustained demand, the transformation of our business, our financial year 2024 targets, and the commitment of our fleet renewal, there is a lot to be positive about. We're happy to take some questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Ryan with Barrenjoey. Please go ahead.
Hey, Matt.
Hi, Alan. G'day. Just had a question on the AUD 200 million investment to improve operational performance and whether you think that's a permanent increase. Also just to confirm, in August, you talked about AUD 300 million of one-off costs being incurred in FY 2022. I was just looking for a simple yes, no answer as to whether any of those costs were included in the PBT guidance today?
Yeah. I'll go with the first one and get Vanessa to comment. The AUD 200 million is temporary. The AUD 200 million is there in a number of different forms, as we said. That essentially, we have latent capacity on the ground, of the 20 aircraft that we're essentially having as spare, to manage a lot of the issues and crew resources associated with them. That's to cover what we think is going to be still elevated levels of sick leave. There's an expectation that there may be another wave of COVID coming over the December, January period. We need to make sure we have enough reserves to be able to cover that. There's also supply chain issues.
We made the example in the Jetstar recent issues of where the spare part, which usually would be delivered in 12-24 hours, took nearly nine days to get here. That meant the aircraft was on the ground for that length of time. We think we have been talking to Airbus and Boeing. They're saying the supply chain issues are with third of four tier suppliers, but they expect it to get back to normal towards the mid 2023 or by the end of 2023. That's our expectation. We think gradually, by the end of financial year 2023, we should be having confidence to add this capacity back in, and into 2024, we should be back to normal. These costs and other temporary costs will be renewed from the operation.
Just on the last part of your question, Matt, the guidance that we've given today has been first half, and the transitionary cost that we outlined in August, plus the AUD 200 million from today through to the end of the year, and also the adjustment to the wage policy is incorporated into our guidance today for the first half.
Next question.
Thank you. Your next question comes from Anthony Longo with JP Morgan. Please go ahead.
Hey, Anthony. We got your name right this time?
Yeah. No, that's great, Alan. Apparently I'm just some other person known as Anthony. No, I appreciate that. Just take your comments first. Congratulations, firstly, on a very strong update today. Can you perhaps probably give a bit more clarity as to why you think cost of living or travel continue to be prioritized versus other categories, particularly while I appreciate the shorter term, you know, still looks very strong. Now going into next year, at what point do you think, you know, maybe some of these factors might start to bite?
I'll have an initial go, and I get Vanessa to come in as well. The first thing is the surveys that we do, the propensity to travel, which we've tested for years, is twice the levels it was before COVID domestically and 70% higher internationally. There's still a massive amount of pent-up demand. We still see from what the banks are telling us that the priority of travel is above other discretionary spending. That if people are squeezed, they're gonna cut back on other things like entertainment, eating out, but they still want to have the family holiday, the trip to see grandmother, all of those, all of those issues. Secondly, there is a supply and demand issue because there is, we think for a number of years, less supply, particularly internationally in the market.
We are seeing that we will be now this year 69% of pre-COVID levels internationally. The market will be less than that. Our market share actually goes up to 31% from 24%, we think that trend will continue into 2024 and into 2025 cause activating long-haul aircraft is just taking a lot longer. What we can see also is domestically that there is the dynamic that our competitor is also adjusting for these issues, and it's also adjusting to manage fuel and other activity. We still think on a two carrier basis, we're sitting at 33%, 67% market share at the moment. That will eventually, I think, but it's no rush, get to 70/30.
At the moment, we're seeing that play out going forward, and certainly they have an incentive, to make sure that they're ready for an IPO. We see the supply-demand equation domestically, staying in balance on what that situation is going forward.
Yeah, and Anthony, the only thing I would add to that, I thought there was a very interesting article that or commentary that the RBA put out last week where, their estimate was with interest rates and the inflation environment, their estimate is that 50% of Australians may have u p to a 20% impact on their discretionary expenditure. Even if you were to take the worst case scenario and say that that is a proxy for demand impact next year, as Alan was saying, demand for domestic is double what it was pre-COVID and 70% up on international. Even if you did see that, there's still excess demand in the market for the capacity that is planned. I think that that just coupled with Alan's comments, is why we are still optimistic about the outlook.
Next question.
Thank you. Your next question comes from Jakob Cakarnis with Jarden. Please go ahead.
Hey, Jake.
Morning, Alan. Morning, Vanessa. Can I just ask a question just about the fuel guidance? You've said now that you're expecting to be 75% ahead of where you were on a pre-COVID level, up from 60% in August. I noticed that you haven't changed the fuel guidance of around AUD 5 billion for FY 2023. Can you just help us understand what you're trying to illuminate in that commentary around the change in the fuel level?
Yeah.
Versus pre-COVID, please?
Yep. I think there's two things impacting that guidance. One is that we have reduced our capacity, so our volume has declined from where we were in August. That's the first point. The second point is that actually the all-inclusive Aussie dollar cost of fuel has actually increased in the outlook to where we were in August. We've got a higher unit price flowing through our forecast, and that forecast was based on the forward curve as at the 10th of October. That is kind of the balance that we see. Ultimately our fuel guidance remain unchanged with a lower volume and a higher assumed price.
Next question.
Thank you. Your next question comes from Anthony Moulder with Jefferies. Please go ahead.
Hey, Anthony.
Good morning, all. Listen, it sounds like demand remains strong. Obviously, the demand difference between August and now incredibly strong and sounds like you're seeing that through second half 2023. Operational issues seem to be more under control than what they were back in August and improving we would think into second half 2023. Just interested as to why cut or trim capacity in the second half if things are strong. I appreciate that you don't want to overdo capacity, just can you talk through the decision as to trimming that second half capacity, please?
Yeah. A couple of things. We'll talk about domestic and international separately. The domestic, what we had been planning, originally was a ramp up of capacity increasing all the way through the year. What we have done is said, well, let's take a conservative view on that going forward because of what we've experienced over Easter and over July school holidays. There is a view from some of the chief health officers that it won't be a lockdown wave, but there is going to be potentially a northern European wave that will come and hit us like Omicron did last year. We just want to be conservative on that.
We want to make sure that we have enough backup, we have enough spare resources, and we're in a position that if things are better than we expect, we can add capacity back. We're not taking capacity out at late notices 'cause that disrupts customers, it's causing angst, and it's the wrong thing to do. You're better off staying on a minimum base of what you think is appropriate and then building onto it. That's domestically. We're seeing our competitors doing the exact same thing, from the schedules going forward. It comes to international, and international problems are a bit different.
What we are discovering is that as we're ramping up more and more of our operation, and we have a big ramp up taking place in November and December with services going to Seoul, our services Melbourne, Dallas, more services happening into Japan and then eventually Hong Kong starting in January. The in-international operation is ramping up in the second half. What we are finding is everybody's full. Usually if an airline, not just Qantas, but if Cathay Pacific went unserviceable, they would be able to accommodate people on our flights and other airlines. That is no longer an option at the moment because we're finding there's no recovery options. We've decided to take a conservative view and protect aircraft for our own recovery.
We will have, I think, three wide-body aircraft over the Christmas and New Year period with resources around it, and we'll be keeping an A380 in reserve all the way through to the end of the year, so that if there are disruptions, we can add the aircraft ourselves to recover our passengers. And Anthony, I mentioned what we're finding is this supply chain issue, which we don't see out of the system until the middle or the end of next year from what we're being told. That is causing us a problem where an aircraft that may have been on the ground for 12 hours are on the ground for nine days, and we just can't have the type of passenger disruptions that Jetstar had in Bali and other places. It's just bad for the brand, it's bad for our customers.
At the moment, given what we're seeing in terms of the yield, given what we're seeing in terms of demand, it's not damaging our financial outcome in protecting it. We think it actually ensures positive financial outcome for the future. Next question.
Thank you. Your next question comes from Justin Barratt with CLSA. Please go ahead.
Justin.
Hi, Alan. Hi, Vanessa. I was just wondering if you could give us an idea of where your RASK has been at, in so far in FY 2023, just, you know, in relation to the 20% above pre-COVID levels you needed for group international and the 10% above pre-COVID levels for group domestic that you announced in FY 2022 result that you'd need to be at in order to offset your higher fuel costs.
Yeah. Justin, both domestic and international, for both brands, across both markets are exceeding the 20% and 10% levels that we set. In particular, we set our exit rate, international for Qantas, was 35% internationally, and we are getting more than that right now. What we do expect is that as capacity increases next year for international, that capacity, that RASK will moderate into the second half. We still are very confident that the airlines will be able to generate sufficient RASK to cover the cost of fuel and these unit cost impacts that, Alan, we're talking about from the capacity decisions that we've made.
Next question.
Thank you. Your next question comes from Sam Seow with Citi. Please go ahead.
Oh, hey, guys. Congrats on the result.
Thanks.
Just interested in your thoughts on FY 2023 guidance? I guess you gave it the full year essentially after seeing the first couple of months of this trading update. I'm guessing you're not trying to say you're expecting a weak second half? Just kind of your thoughts on how you came to that guidance after seeing the first couple of months of this result?
I might have a first go and then get Vanessa to come in as well. I take the way to look at the second half, I mean, there's a lot of volatility, so we're not giving guidance on the second half. What we are saying is that yields would moderate as capacity is added, particularly international capacity, 'cause not only ourselves but our competitors are adding it. It's still well below where it was in 2019, but there are a significant amount of capacity that's being added. We will see yields moderating 'cause our route mix changes. As you can imagine, our capacity at the moment is on the best routes.
We're going to the next routes that are added don't have the same yield improvements that you would have had on the big markets that we're already operating to. The next thing that you need to consider is we think we're gonna get back to normal seasonality between the first half and second half, 'cause we're essentially back to full capacity domestically in both halves. There's always been seasonality between the two, which I think is a 60/40 split between them. You will see that occurring 'cause that's what we think we're back to. If that is achieved, that shows you our confidence that demand is going to continue at these levels 'cause we're assuming essentially just normal seasonality, no weakening from that occurring on the domestic market.
Alan.
Next question.
Thank you. Your next question comes from Andre Fromyhr with UBS. Please go ahead.
Thanks. Good morning. Just on the net debt guidance, I guess it sort of suggests that cash flow generation has been pretty strong in the half so far as well. I appreciate you've flagged that that target for 31 December already includes completion of the on-market buyback. Maybe you could relate that net debt guidance to the use of credits versus cash payments to fares, firstly, in terms of what you're seeing at the moment, but also your assumptions for the remainder of FY 2023.
Yeah. Our, our assumption hasn't changed from the update that we gave at the end of the year. Our credit usage is running at around AUD 80 million a month, and that is what we have incorporated into our forecast.
Next question.
Thank you. Your next question comes from Paul Butler with Credit Suisse. Please go ahead.
Hey, Paul.
Hi, Alan. Hey, Vanessa. I guess my question is how sustainable is this level of profitability? You know, you pointed to domestic demand being double pre-COVID levels. I think in the answer to just the previous question, you were saying you expect that to remain the case in the second half this year. Just with the visibility you've got on what is happening with that demand, how long can we expect that elevated level of demand to continue for?
I think you need to look at demand and supply on it, Paul, is our view. Demand, we think is going to be there. Our research goes out next 12, 18 months and asking people what it's like. If the desire to travel is twice what it was before COVID, there isn't enough capacity in the next 12 months to meet that. If that continues, that's going to last for some time because what we are seeing, as we said, is that we're in the 60 s this year of pre-COVID levels of international capacity. We think it gets to the 80s in financial year 2024. It gets to 100 in financial year 2025, there's six years of growth that you need to build in for 2025.
There's under supply, and there will be since 2019, there will be demand growth on the line to get to 2025. We take this going to be this position. Yields will moderate, as we said, but this is this position of more demand than there is supply going out for a number of years. I will point out, I think Willie Walsh said at our recent conference, I was with him, that even after the global financial crisis, air travel still kept on growing. It didn't go into the client. The yield changed a bit, but air travel still kept on growing. It's worthwhile looking back at any other periods of recession, decline, and see what actually occurred, 'cause I think people can be naysayers on this, and it won't be as bad as people think.
Domestically, what we are seeing is, as we thought would happen, we're just seeing that the market playing out with really good capacity discipline. People are trying to recover oil prices and are making sure that we don't have an oversupply. Our view is that domestic capacity will adjust to whatever that demand dynamic is. That's, I think, our ongoing assumption. If it's strong and continues to be strong, people will add the capacity back in. We certainly will. That's our intent. If it's weak, we'll keep the capacity out. I think our competitors, I think, will do the same.
The only other thing I would add to what Alan was saying, don't forget that we're carrying transitionary costs this year, and we're very confident that the AUD 1 billion will be a permanent part of our cost base going forward. As we head into FY 2024 and those transitionary costs, you know, roll off in terms of our cost base, we're then gonna have the benefit of the transformation coming through into our profitability and also that that is gonna help underpin our FY 2024 targets, particularly for Qantas domestic. If fuel as well moderates, which we would anticipate it should, Jetstar will be on a pathway to their 2024 targets. Also don't forget about our loyalty as well in terms of hitting their 2024 targets.
In February, we will update the Qantas international targets as well.
Yeah, I'd, I think it's a great point. You will see there is a lot of transitory costs in this year. These results are really good despite that. There's the once-off bonuses to people. There's this investment in schedule and resources to get through. It is significant, Paul. That will disappear. If revenue does come down, Vanessa's point is a big one 'cause you will get these costs coming out at the same time in financial year 2024, and they are substantial. Despite that, we're making this significant amount of money. Next question.
Thank you. Your next question comes from Owen Birrell with RBC. Please go ahead.
Hello. Yeah, good morning, guys. Just a quick question about the capacity settings, you know, at the moment and as you move forward. Just wondering, you know, you obviously highlight that demand is very strong and that customers are sort of willing to pay for air travel. I'm just wondering what is the major capacity constraint here? Is it physical in terms of the availability of the fleet, or is it operational in terms of availability of the staff and the slots and so forth? Is the capacity settings really a result of just ensuring that the RASK is continuing to cover all of the cost base that has obviously escalated through? It's sort of backward engineered.
I think you've answered your question. It's a combination of all of them, I think. Long-haul, it's different than short-haul. In long-haul, you've got a combination. It's taking a lot longer to reactivate long-haul aircraft. We were in a position where, for example, explain the Qantas position, where we parked the A380s, the view, and you only have to go back a year where people thought we were crazy reactivating international in December and calling everybody back up. People thought there was gonna be a long tail to international. We had some analysts saying it's three, four, five years before it gets back. A lot of companies retired aircraft, parked aircraft, saved on the maintenance, saved on cash. We did. We put the A380s, didn't do the big checks that were needed on the A380s.
We put them in the desert. To reactivate them, lucky enough last year, we decided that that was not going to be the case, and we started reactivating them before a lot of our competitors. Some of these checks are three months checks. The MROs are all full 'cause they're catching up where all of these long-haul aircraft have significant maintenance to be able to recover them. We are finding that there are supply chain issues that are significant in getting parts that are delaying the MRO checks, and they're also delaying ongoing maintenance. We're finding that a lot of people left the industry. Depending on which country you're in, it can be really significant.
In Amsterdam, I was there for a conference recently, they've reduced the movements in Amsterdam as an example, from 550,000 to 440,000 movements a year. There's huge issues with security and immigration at the airport. There's massive queues. Still in Heathrow, there are issues. British Airways canceled 10,000 flights over the northern winter period. We have the Middle Eastern carriers. A lot of the Middle Eastern carriers just had cabin crew and pilots leave the Middle East during COVID, and they're in a massive recruitment phase. The recruitment also is a big lead time because to recruit, to train cabin crew, as an example, it's eight to nine months we're taking 'cause the significant lead times in doing it.
You have security checks, you have regulatory training that needs to be done on other staff as well. Even reactivating things like an A380 pilot. I think we put our captains, our pilots through 21 simulator sessions, three hours each. Pilots that could have been flying for us for 30, 40 years, but they haven't been flying for two years. The simulators are completely full with a backlog taking to get there. You got these log jams, as we've been calling them, across the board in just about every part of the logistics of getting long-haul aircraft back up and running. Now, as we talked about, we're ahead of our competitors 'cause our market share is gonna go up this year to 31% from 24% pre-COVID internationally. We think that's gonna take some time.
Then on top of that, there are some airlines that just radically restructured. I think Garuda is one. They have 1/3 of the fleet they had before COVID. Etihad is a lot smaller than it was before COVID. One last thing I would add, one advantage of having the weak dollar here in Australia is that we do find overseas carriers, particularly those that have a cost base in U.S. dollars, do not find this market as attractive as other markets, particularly the U.S. That's the Middle Eastern carriers, and that's the North American carriers, which is a big part of our network. You also have a reluctance for people to put capacity on with a weak Aussie dollar. You get the combination of all of those items. Next question.
Thank you. Your next question is from Cameron McDonald with E&P. Please go ahead.
Hey, Cameron.
Morning, Alan. Morning, Vanessa. I think I've understood most of the operational update. Can I ask a separate question just relating to another topic that's making a lot of headlines, and that relates to sort of cybersecurity. Can you sort of just outline how much you spend on cybersecurity and data security and prevention activities per annum, and what the outlook for that is given the amount of data that you actually hold relating to all of your customers? Secondly, have you been subject to or how many cyberattacks have you thwarted over the last, say, the last 12 months?
Well, a lot of that I can't comment on, Cameron. You wouldn't expect us to. We have a very robust and a very mature cybersecurity process that has been there in place for years, given the data that we have, and it's something we didn't cut back on during COVID. We kept on investing in all the way through. Can I say we're also, Andrew Finch, our Legal Counsel, our Head of our Privacy group, has been relentless in making sure we hold on to the minimum amount of data that we need across the company, so that there's very few data points of where we hold like 100 points of people's information.
I think you have to change your name in our system before we actually ask for that information. So we, while you might think we have a lot of personal information, it's a lot of information about the interaction with Qantas rather than information on what people have to create bank accounts or other activity like that. It's very different. Now, of course, as in travel, we do carry passport information, which every airline in the world does, but you can imagine how protected those systems are. They're in the general systems that we work on an international standard on. Again, we minimize the amount of information we hold there. So the time period is very minimal that we use.
You know, if, if the sense of information like how many points that you've used on in the Apple Store, that's there, but it's very well-protected. I would say also that this is an area that everybody's continuing to review. Like in aircraft incidents, I always relate this to airline safety. When there is an incident, when we have an accident worldwide in aviation, everybody looks at it, says, "What could we learn from this? What could you see that could occur in our business, and what extra protections do you put in place?" I think what's happened recently, we're gonna do the exact same thing, and I would have thought every company in the country is.
The other thing you have to be sure of is don't get complacent 'cause this can happen to anybody, and you have to make sure that you learn and understand what happening and put extra protections in place. I think, you know. I know people say we have 14 million frequent flyers, et cetera, but we also have very small levels of data that are in the category of stealing people's identity. It's a very different risk from the one we've seen recently. That's it. I think we finished all the questions.
Thank you very much, everybody, and hopefully then we can catch up with you guys as we get to our half-year results in February and give a lot more details going down to the sector level of how the business is performing. Thanks again, everybody.