Good morning, everyone, and welcome to the Qantas Half Year twenty twenty one Results Webcast. I am Fran Van Rijk, the Head of Investor Relations. I'd first like to acknowledge the traditional owners of the land, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging. This event is being webcast and transmitted. Alan Joyce, our CEO and Vanessa Hudson, our CFO, will present our results followed by a Q and A session.
Members of the Group Management Committee are also here today and may answer some questions. Any further questions after formalities end, please contact myself or a member of the Investor Relations team. Alan, I'll hand over the presentation to you.
Thanks, Fran. And as Fran said, I'm joined here by Vanessa, who will help me through this presentation. But we're also joined by other members of the GMC, our executive committee. And can I introduce each of them in turn? First is John Gissing, who's Head of the Qantas Link operation, all of our associated airlines, which is growing with Network Aviation and National Jet Systems now being part of it, and also all of our support services, which includes safety as well as the integrated ops center and all of our crew rostering areas.
Good morning, everyone. I'm also joined by Rob Marcellino, who's Head of Strategy, Transformation, IT and People. And Rob has been playing a key role in pulling together the recovery program with Vanessa and the rest of the team. And we've been joined by Olivia Ward, who is the CEO of Quanta's loyalty. That includes all of our loyalty business, which as you'll see are performing exceptionally well even in these circumstances as well as all of the new businesses that we've been starting over the last few years.
Also by Garrett Evans, the CEO of the Jetstar Group, which includes Jetstar in Australia, in New Zealand, in Singapore and in Japan. And we have Andrew Parker, who's Head of our Government Affairs and Sustainability, who's been dealing with the government on all of the different programs, both from a federal level and the state level and working on a lot of the border issues and the complexities around border. We have Steph Tully, who is our Chief Customer Officer, who is running our digital strategy, our call centers, our marketing and branding, as well as managing through all of the complexities of keeping our customers engaged during this period of time. And then finally, Andrew Finch, Yes, finally, Andrew Finch in the room here. He is our Chief Counsel, Corporate Secretary and Andrew has been the world expert on JobKeeper in Australia as well as dealing with a lot of issues around all of our regulators.
And on the phone, because he's just come back from New Zealand, is Andrew David, the CEO of Qantas Airways, which declared Qantas Domestic and International. Andrew, are you there?
Yes, yes, I'm here. Good morning.
Right. So we will be using obviously the team when we get the Q and A and they'll be helping us with all of the questions as we normally do when we get to that stage. So 2020, our 100 year, was one of the most challenging in our history. And now about 1 year into the pandemic, our actions to bring about structural change and to protect the balance sheet have positioned the group well to navigate the recovery from COVID-nineteen. Australia has been successful in suppressing the virus.
We are the envy of many countries struggling with massive daily case numbers and deaths. But outbreaks have continued to occur and the recovery has been choppy. In the last 6 months of 2020, we navigated the extended Victorian lockdown and the nationwide border closures, then the 3rd wave just before Christmas with outbreaks on Sydney's northern beaches and in Brisbane, and then WA and Victorian snap lockdowns. We have to be agile and flexible to minimize the impact on our customers or people on our business and we have to make some very tough decisions. And yet, there are many reasons to be optimistic for the future.
Our competitive position is likely to be the strongest in a decade with about 70% capacity share, the leading premium airline service and low cost airline carriers in the market, The leading airline loyalty program has significant structural change to our cost base. But despite the current challenges, we are optimistic about the future. We know the recovery is coming. The vaccines are being rolled out. Just this week, the first of the frontline workers and our people have commenced receiving their shots.
And across the world, we are seeing dramatic benefits from the rollout. And importantly, demand for air travel is evident when borders reopen. Our customers clearly want to fly. Turning to our results and
looking
Due to government actions to stop the spread of the virus, the group revenue fell about $7,000,000,000 compared with pre COVID level. Combined with the impact in the last financial year, we have lost a massive $11,000,000,000 in revenue as a result of the pandemic so far. We have remained focused on the things we can control, taking action to reduce and variabilize the cost base to deliver a modest profit at an underlying EBITDA level of $86,000,000 However, due to the substantial non cash depreciation and amortization charges, the group report an underlying loss before tax of just over $1,000,000,000 The statutory loss before tax was almost $1,500,000,000 On the plus side, the underlying operating cash flow was strongly positive. The record performance from Quanta's Freight and the strong cash contribution from Qantas Loyalty were both highlights. They demonstrate the value of our diversified portfolio.
Our domestic airlines generated positive underlying cash flow from only 30% of pre COVID flying activity for the half, while the international passenger airlines remained largely grounded at relatively low cash holding costs. We have maintained conservative liquidity settings. This was a prudent measure given the extended border closures. During the half, we increased our committed undrawn facilities to $1,600,000,000 This will ensure cash is available at call should we need it in the future. As expected, net debt was above our target range.
This includes the impact of 1,900,000,000 dollars of one off cash outflows. As the recovery progresses, debt reduction and balance sheet repair will be our priority. We did launch a recovery program in late June and we are making rapid progress. Most of the decisions needed to deliver the financial year 'twenty one targets have now been made with initiatives at various stages of completion. Because of the swift actions taken in the Q4 of last year, we entered financial year 2021 in a solid position with strong liquidity and from this foundation, the process of recovery began.
This half was focused on restructuring and the restart of the domestic operation. We maintained strong liquidity despite significant cash outflows, including refunds, redundancies and deferred payables. We have improved our network planning process to dynamically respond to rapidly changing border conditions and are now a better place to capture the pent up demand as borders open or to limit the stranded costs as they quickly shut. Throughout our focus on our customers remain. We launched loyalty program enhancements and new domestic routes.
We have enhanced Fly Flexible to give customers increased confidence to Duke and fly well to ensure they feel safe throughout their journey. Domestic ramp up may be bumpy and the timing of the international restart may take longer, but as the vaccine rollout progresses, given more certainty that orders can remain open, demand for travel should improve. And the actions we are taking will allow the process of balance sheet repair to begin. We are on track to deliver our $600,000,000 in cost benefits of financial year 2021. Unfortunately, this has involved a difficult decision to reduce our workforce.
It is the harsh reality of the consequences of lockdowns and border closures. About 60% of the 8,500 exits have been completed with the remainder to leave by the end of financial year 2021. The remaining 40% of the restructuring benefit will come from digitization, automation and simplifications of services across our supplier base. This includes benefits from shrinking our property footprint, transforming our technology and system requirements and a reduction in the cost of sales to our agency network as a few examples. All group segments will contribute to the $1,000,000,000 target in financial year 'twenty three with a significant proportion allocated to Qantas domestic and international.
We will measure our progress using this balanced scorecard. It is still early in our recovery journey, but I want to call out a few items. The initial program envisions only cost reduction benefits. Now as the recovery in travel unfolds, we are reviewing opportunities to improve revenue and margin. Unfortunately, we have seen a higher number of exits than originally thought.
The target for exits is now above 8,500. About 11,000 FT feet feet feet feet feet feet feet feet feet feet feet feet feet Es were stood down at the end of the half, including 7,500 people associated with the group's international operations. There is no doubt that the consequences of the pandemic have been profound for our people, With employee engagement naturally impacted by the stand downs and restructuring, it is now strengthening on signs of the recovery. And the connection to our purpose as the national carrier remains, it is reflected in our net promoter scores. Customer satisfaction is at an all time high across Pontus, Jets Fair and Loyalties.
And it is a credit to all of our people that this has been achieved at the time when for the most part, we could not fly. We remain committed to acting responsibly, especially in what are some of the most difficult times for this company. Even while our own cash flows were affected, we have ensured that we maintained our commitment to prioritizing payments to small and indigenous suppliers. And we are keeping an eye on the long term goals, including our commitment to net 0 caraba by 2,050 and developing a viable sustainable aviation fuel sector to initiatives like our partnership with Beefy Australia, which was launched in recent weeks. I'll now hand over to Vanessa to take you through the details of the group's results.
Thanks, Alan, and good morning to everyone. Throughout this presentation, we will be comparing the group and the segment performance to pre COVID levels. FY 2019 was the last full financial year unaffected by the pandemic and will be used for comparison purposes. Despite successfully suppressing the 1st wave of infections, outbreaks have continued to occur. In the 6 months to the 31st December, this included the 2nd wave in Victoria with its protracted lockdown and other state border closures which followed.
And just as Australia was returning to being 1 country again, outbreaks in Sydney Northern Beaches and Brisbane sparked another round of border closures, impacting the usually busy Christmas holiday leisure peak. The group reported an underlying EBITDA of a positive 86,000,000 dollars Depreciation and amortization non cash charges continue to impact the Group's profitability. Underlying EBIT was a loss of $888,000,000 That's hard to say in one word. After interest, the group reported an underlying loss before tax of just over $1,000,000,000 At the statutory level, the group reported a $1,500,000,000 loss before tax. This included 433,000,000 dollars of items not included in the underlying results.
The statutory operating cash flow was a net $861,000,000 outflow and a net capital expenditure of $541,000,000 After allowing for net financing inflows of $468,000,000 the cash balance at the 31st December was 2,600,000,000 dollars I will go into more detail on the key cash movements in a moment. We extended our revolving credit facilities during the half, raising the committed undrawn facilities to $1,600,000,000 taking total liquidity to a healthy $4,200,000,000 dollars Net debt was $6,050,000,000 above the target range. Net debt will be though a priority for the group as recovery progresses. You can also see on this slide some key statistics compared to pre COVID levels. ASKs were down 89% due to the low level of flying.
Revenue was down $7,000,000,000 or 75%. But most importantly, net operating expenditure, a good proxy for the group's cash cost, was also down 75%. Turning now to the profit bridge on Slide 10. Comparing to pre COVID profitability in the first half of financial year twenty nineteen, the overall decline in group total revenue was 6,900,000,000 This was partially offset by a $5,100,000,000 reduction in expenses. Fuel, manpower, aircraft operating variable and other expenses all reduced.
This included $206,000,000 of benefits from the restructuring program. However, the savings were not enough to offset the significant decline in revenue. So the result for the first half was an underlying loss before tax of just over $1,000,000,000 This compares with an underlying profit before tax of $775,000,000 in the first half of the financial year 2019. This slide shows the items not included in the underlying results this year. The key call outs here are $884,000,000 for redundancies and restructuring costs incurred as a part of the ongoing recovery plan and non cash asset impairment of $167,000,000 including a further impairment to the Australian dollar market value of 12 A380s and the impairment of 15 aircraft deployed in Jetstar Asia.
Now turning to Slide 12. This shows the key movements in our cash position over the half. We strengthened the balance sheet by $911,000,000 including debt funding and proceeds of the retail share purchase plan. Financing cash outflows included $202,000,000 for debt repayment and other financing costs of 241,000,000 dollars including interest and lease repayments. Through our disciplined approach to capital allocation, investing cash outflows for the half were limited to $514,000,000 The majority of this related to capitalized maintenance on aircraft and the conversion of an A321 freighter.
The underlying operating cash flow was strongly positive at over $1,000,000,000 including the strong contribution from freight and loyalty and the partial rebuild of revenue received in advance. And net free cash flow was positive after excluding one offs of just over 1,900,000,000 dollars Now actually turning back to Alan.
Thanks, Vanessa. And it is hard to say 8, 8,
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8, 8, 8, 8, 8, 8, 8, 8, 8, 8,
33,000,000, I have to say when it comes to that for 8 day, David, I can imagine. Now we're going to go through the segment reviews and we are now on Slide 15 in the presentation, Qantas Domestic. Qantas Domestic generated positive underlying cash flow, a great outcome despite a 70% decline in revenue. After adjusting for depreciation, the underlying EBITDA was a profit of $28,000,000 In the context of only 30% of pre COVID flying, it is a strong result. It was underpinned by quick action to flexibly adjust the network in response to ever changing borders.
And despite these disruptions, 99% of flights net or target were cash positive flying, only 1% was cash negative, an amazing result. The closed domestic borders changed the way demand returned. Interest state routes were in the high demand like Brisbane to Cairns and Sydney to Ballina and Perra to Broome. In fact, we've doubled the capacity into Sydney, into Ballina from Sydney because there's been huge demand on that route. And as Victorians remain closed to many states, new routes like Perth to Hobart were launched to connect WA and Tasmania.
In total, Qantas Domestic launched 21 new routes, capturing the strong pent up leisure demand which emerged. The resource markets remained resilient with additional Atre 20 capacity redeployed to WA and 14 new charter routes were launched in Western Australia serviced by the A320s and F-100s. Our clear premium market position and network advantage has supported the acquisition of 29 corporate and large SME customers in calendar year 2020. The ongoing border closures meant that many routes were uneconomical And with the support of the government regional and domestic aviation network support programs, we were able to to ensure vital links to regional towns and capital cities were maintained. Ultimately, Qantas Domestic is well positioned for the recovery and we continue to improve our value proposition for our customers, putting in place initiatives to give them confidence to do and apply.
The Qantas International segment was profitable at an EBITDA level as a record profits from Qantas Freight provided a natural hedge to the passenger business and Qantas International. In an environment where almost all passenger services stopped, belly space declined and demand for dedicated international air freighters quickly accelerated. Well positioned to respond, the group's existing 747 freighters and the 330 passenger aircraft were deployed with greater frequency to capture this demand, including flights to service the government's international freight assistance mechanism. Qantas Freight maintained its leadership position in the domestic market, securing new customers and it benefited from surging e commerce trends. The first of 3 A321 passenger to freight preferred aircraft entered into service in October in time for the Christmas peak.
Meanwhile, the international passenger business remained largely grounded and the majority of the international workforce was and repatriation flights, which we operated over 200 since the start and limited flights to New Zealand under a one way travel bubble. The revenue from these services was not enough to offset the holding costs for maintaining aircraft and retaining strategic lounges and non cash employee provisions. As a result, the passenger business fell into losses. The limited passenger and freight services represented about 8% of the line performed pre COVID. However, this has provided welcome work for the base level of pilots and cabin crew, maintaining their recency and enable a substantial amount of the fleet, excluding the A380s to be operationally ready, therefore lowering the cost and time to restart Qantas International when borders open.
The Jetstar Group report an underlying EBITDA excluding its share of losses from Jetstar Japan. The Australian domestic business has a highly variable cost base, a leading position in the price sensitive leisure market. This position is well to benefit from the leisure levered recovery as borders open. The $43,000,000 EBITDA profit helped to offset some of the losses from the international operations. The Australian International and Jet Sklar Asia businesses were largely grounded.
Combined with the New Zealand business, they added $74,000,000 to the EBITDA loss. Japan has also suffered from multiple waves of COVID lockdowns that have significantly impacted their travel. After many years of consecutive profits, Jetstar Japan has also generated losses. The group share of the after tax losses is $67,000,000 This takes the overall loss for the Jetstar Group to $98,000,000 at the EBITDA level. The Jetstar Group is uniquely positioned to capture what will be a leisure led demand recovery.
Its low cost structure scale and a very flexible A320 fleet will make it highly competitive in the market it serves. Quanta's loyalty continues to provide valuable cash flow contribution for the group, and its strategy to diversify its earnings is driving its positive EBIT contribution. The businesses linked to the on ground points Aireann and Brewer have performed strongly. Qantas points earning credit cards are holding the market leading share of credit card spend at approximately 36%. Our Qantas store and Qantas wine saw revenue at peak levels.
I I think QantasWine was up 74%.
Something like that.
I know that I'll follow-up. I think there was a large proportion of that. Quantum Insurance continued its growth in policies and launched home insurance during the half. Through generous initiatives to support members during COVID, including status extensions, increased reward availability and new ways to earn and burn member engagement with the program continues at record levels. This includes expanded on the ground redemption options for rail journeys and with the Accor Group Hotels.
We are confident, flight redemption activity will rebound strongly once borders open fully as we saw in the Q2 and the lead up to Christmas. The relevance of the program to partners is also strong. Multi year agreements have been signed with 3 major banks, including a significant expansion with the Commonwealth Bank, all while the airline has largely been grounded. We expect an acceleration of earnings with more border certainty and when consistent travel activity resumes. And the longer term, we remain committed to the target of $500,000,000 to $600,000,000 underlying EBIT by financial year 'twenty four.
I'll now hand back to Vanessa who will take you through the group's financial framework. Vanessa?
Thanks, Alan. We are now on Slide 20. Our financial framework will continue to guide our capital decisions through the recovery phase. The first pillar is maintaining an optimal capital structure that minimizes the Group's cost of capital. The second pillar is to deliver through the cycle.
And the 3rd pillar is disciplined allocation of capital. During the early phase of the recovery, we have conservatively set the group's optimal net debt range at $4,500,000,000 to $5,600,000,000 consistent with the invested capital position as at the 30th June 20 20. With net debt above the target net debt range, capital will be prioritized to debt reduction and investment will be constrained to minimum levels. The group's conservative approach to securing additional liquidity was a prudent measure. It gives the group sufficient financial flexibility to manage through what so far has been a choppy recovery.
Financial 21 debt refinancing is already complete. Committed undrawn facilities were increased by $600,000,000 as at the 31st December. This raised total liquidity at period end to $4,200,000,000 dollars We remain investment grade credit rating with no financial covenants, reflecting debt investor confidence. And the group retains a pool of unencumbered assets valued at greater than $2,500,000,000 providing a source of additional liquidity should we need it. Looking at Slide 22, you can see the group has a track record of strong operating cash flows.
This gives us confidence that as the recovery progresses, the operating cash flows will allow debt reduction and balance sheet repair to begin. The significant one off outflows are mostly complete and operating cash flows can return to at least pre COVID levels through a number of ways. Firstly, growth in the domestic operations, recovery plan cost savings, cash flow benefits due to having no tax liability installments now for several years and working capital benefits including ongoing rebuilding of revenue received in advance receivables associated with the return to full operations over time. We estimate that this will deliver approximately $2,000,000,000 to $2,500,000,000 improvement in operating cash flows over the duration of the recovery from working capital alone. In the first half of FY twenty twenty one, fuel cost was $300,000,000 down by $1,700,000,000 from the first half of twenty nineteen.
This included the benefit of an 82% reduction in consumption due to the lower flying activity and the lower Australian dollar fuel costs. Looking ahead, in line with reduced flying, the full year 2021 fuel cost is expected to be materially lower than that of the full year FY 2020. Our fuel and foreign currency hedging is being actively managed to reflect changes in capacity that might occur due to ongoing border closures. The second half fuel cost is fully hedged in collars and outright options aligned to the current expectations for consumption, but providing protection from further delays to the recovery. We have additional outright options to cover fuel price risk if flying increases under an accelerated recovery scenario.
In the following year, in FY FY 2022, fuel and foreign currency hedging is in line with forecast flying and is consistent with our long term approach to hedging. We have a bias to options to allow higher participation to lower fuel prices and to accommodate a range of consumption profile. Capital allocation will be prioritized to debt reduction and net capital expenditure will be mostly directed towards capitalized maintenance. The forecasted spend for this year will be around 750,000,000 dollars During the recovery phase, our fleet strategic priorities will be focused on minimizing capital expenditure and redeploying existing aircraft. The core principles of the Group fleet strategy remains consistent.
Right aircraft, right routes, maintain flexibility and maintaining competitiveness. During the recovery, we are dynamically shifting our multi gauge fleet to meet demand. This includes the recently announced deal with Alliance Aviation to secure up to 14 B190s. That will release 737s for thicker domestic routes on the East Coast and short haul international. We have the flexibility to rapidly scale up domestic capacity by redeploying aircraft from Jetstar Asian Businesses or to substitute capacity by returning up to 16 higher cost leased aircraft.
Whilst fleet utilization has been low through COVID, this has deferred the timing of fleet replacement. We have confidence in the future. So as the recovery progresses and the balance sheet commits, reinvestment in the fleet will be on the agenda again with no impact to reliability. As will the opportunity for Project Sunrise and the ability to fly nonstop to places like London and New York. I'll pass back to Alan.
Thanks, Vanessa. Now we're going to cover what we see in the outlook and turning first to the domestic market. Border closures since December have disrupted the positive momentum of the recovery. Consumer confidence to book has been dented and we have not seen the usual uptick in business travel apart from the resilient resource and government sectors. We believe this has delayed the group recovery by about 3 months and reduced the expected second half earnings by about $350,000,000 to $450,000,000 But we know that the desire and intention to travel remains high.
So when borders remain open consistently, we expect a strong rebound in demand and we will continue to deliver improvements to the customer experience to give customers increased confidence to do and fly. International border closures and quarantine restrictions are expected to remain in place throughout the rest of the financial year. Our planning assumptions are for the start of the trans Tasman travel bubble in July and the rest of the world from the end of October 2021. While preparing for the restart, the holding cash at cost for international will be limited to a relatively modest $5,000,000 per week. Qantas freight is expected to continue to perform well, although not at the peak level seen in the first half.
Qantas Loyalty is also expected to continue to deliver strong cash flow contribution to the group and its earnings are expected to rebound in the second half as the economy and domestic travel demand recurrence. Financial year 'twenty one will be a tough year and the key assumptions are outlined on this slide, including the estimated impact of the recent border closures. Group domestic capacity is now expected to increase to 60% of pre COVID levels in the 3rd quarter and to 80% in the 4th quarter. That's been a pretty good progression because in the Q1, we're down 20%, 2nd quarter, we're down 40%, then 3rd quarter, 60% and 4th quarter, 80%. So absolutely going in the right direction.
And group international capacity is expected to be negligible apart from the trans Tasman and repatriation flights. And we will continue to manage the business to a positive net free cash flow excluding ONCEOS. The group's conservative approach to securing funding and the ongoing strong contributions for Qantas Freight, Qantas Loyalty and cash positive flying ensures it has sufficient liquidity for a range of recovery scenarios. Through our improved network planning processes and multi gauge fleet, we have the agility and flexibility to scale capacity and ship the aircraft to capture changing demand patterns. While with leaderships in both the premium and price sensitive markets and the share in corporate SME and leisure segments will ensure we capitalize on the recovery in domestic demand.
We're on the path to recovery and the latest data on vaccine effectiveness and the increased pace of global rollout gives cause for optimism and our progress towards restructuring gives confidence that the overall recovery plan remains on track. As does the strength of the group's portfolio of businesses, the group's domestic airlines are highly leveraged in recovery in domestic demand. Qantas Llonte has a clear path to sustained earnings growth. Qantas Freight is benefiting from consumers shifting to e commerce. The group's international business remain poised for the restart with low holding and restart costs.
Combined with our financial strength and the 3 year recovery plan initiatives, the group is well positioned to benefit as flying returns. And looking beyond the recovery phase, we remain committed to our long term targets. Our ambition is to deliver best in class domestic margin for both Qantas domestic and Jetstar domestic businesses. We continue to believe the Australian domestic market can support these margins. With borders opened, the international business will concentrate on where they have sustainable competitive advantage.
This includes home market strength, taking Australians to where they want to fly and leveraging our partnerships and applying aircraft technology that allows those to efficiently fly longer distances. For Qantas Loyalty, our growth ambition is still to achieve profits of between $500,000,000 $600,000,000 at the EBIT level. And our progress on the recovery plan gives us increased confidence that we will be successful. So thank you for listening to us and now we'll be happy the entire team will be happy to take questions.
Your first question comes from Jacob Kaunas with Jarden Australia. Please go ahead.
Good morning, Alan. Good morning, Vanessa. Just wanted to get some indications from you just about the working capital rebuild. Firstly, just around what's required to get more confident in the Ria rebuild. It still looks as though that's trending well below pre COVID levels.
And then just any color on changes to supplier terms and some of the data help that you would see as well just as that working capital rebuilds?
Yes, sure. So just focusing on what you can see in the accounts as at December. Our RIA rebuilders remain relatively static, almost actually though declining slightly. And I think there are a couple of things that are happening underneath that number. One is, we are working through and have paid a substantial amount of refunds in the half, almost $800,000,000 in the half.
We've also seen a decline in our credit balance as well from $1,400,000,000 to about $1,200,000,000 as of December. I think importantly, what we're seeing though in terms of consumption of credit is around 10% to 15% across both sponsors domestic and Jetstar as a percent of revenue. So I think that we're seeing a very consistent consumption in credit, and I think it actually demonstrates the confidence that customers have in the group, both in terms of generosity and extension of credit terms as we announced today, but also their view about the longevity of the group. So looking as well though that we have actually seen a small amount of rebuild start. We saw that in December.
We both across Qantas and also Jetstar, despite the fact that the Northern Beaches lockdown occurred midway through December, we did see growth in revenue received in advance. And also another part of the growth story performance that the loyalty business has generated in terms of billings across partners and we're still seeing a substantial amount of engagement in that program and also earning on credit cards and spending on the ground. So in terms of looking forward and confidence that we actually have in that rebound, I think that we're feeling incredibly optimistic around that. We are definitely moving into a period where more certainty is coming in terms of certainty around the vaccine program and beyond that, our view is that domestically, we should have very little risk of the lockdowns because once quarantine workers, once and frontline workers, where the big risks of lockdowns have come from the COVID escaping from quarantine, we believe that certainty is going to come back into the domestic market. But then obviously, an opening of international in October is the next phase of the rebuild long term rebuild in the RIA balance.
In terms of payables, again, the next part of the benefits that we'll see in the rebuild of working capital will be through the payables balance as our flying grows over domestic and also grows over international. That payables balance will rebuild and it will rebuild on longer trade terms that we've been able to negotiate with our suppliers. So I think both of those, we're feeling very confident that over the period of our recovery, we will see that working capital benefit flow.
Your next question comes from Matt Ryan with UBS. Please go ahead.
Hey, Matt.
Hi, Alan. Just got a question on the domestic demand environment. Obviously, you've got guidance out there, but we are in or at least approaching the last month of that March quarter. So just curious on what you're actually seeing with traffic. Would we be closer to, I guess, that 80% guidance for the Q4 compared to the 60% that you've sort of talked about in the March quarter at the moment?
I'll get Andrew David first to comment on this and then Garrett. Andrew?
Yes, Matt. The answer is we are seeing it build, especially for the April period where we've got the Anzac holiday, Easter and school holidays all lined up. So on the basis that borders remain open and we don't see a further lockdown, you can expect the demand to build to that 80%. We are seeing it's leisure led, but we're also seeing recovery coming in. And in parts of corporate as well, but if I can touch on that.
Yes. Look, as Andrew said, it is leisure led. So we are seeing where borders are open and there's no restrictions, we're seeing very strong demand that's higher than the pre COVID FY 2019 levels where you've got borders closed or any sort of restrictions in place, demand is virtually 0. So the outlook is very dependent on an easing of the border restriction environment. A very strong month.
The alignment of holidays is very good, and we're seeing strong demand building for that. And the opening of Queensland to Victoria that was announced today that happens on Friday, I think is going to be very positive for that as well. And for Jetstar, we're looking at circa heading towards 100% of our pre COVID levels in that final quarter as long as we see borders stay open. Obviously, what happened around the Avalon cluster was probably the worst time of the year for that. We were hoping to fly about 80% of pre COVID levels in December, January.
We've ended up at sort of 50% to 60% because of those border closures. But if borders stay open, then there's definitely very strong leisure demand now.
And I think we're getting a lot more confidence and I think more confidence is coming in every day as the risks start reducing with hotel quarantine, which is the reason why the borders have closed down because as the vaccine rolls out and the workers in hotel quarantine and our staff that are flying the repat flights have started being vaccinated in the last few days, that risk dramatically reduces and that should ensure that domestic borders remain open, which is why we're optimistic. We're seeing more, I think just about all of the borders are open now after the Queensland to Victoria 1. So, our assumption about April being we're over 90% for Jetstar, 79% for Quanta's, both of them will be over 80% in May June. Hopefully, we'll get to 90%. We still are seeing So as you can imagine, in the next couple of months, we see strong bookings, but past that, it's not visible at the moment, but our expectations is those levels of capacity could be maintained.
We'd like to get Andrew David to talk a little bit about, because there's some discussion about what's going to happen with business and what the business is going to lead down to pre COVID levels with the use of technology. Explaining how we're looking at the recovery of the business market and where that stands, Andrew?
Yes, happy to do so. So there has been a lot of talk about a lot of travel not coming back and various comments and studies done that, that reduction could be as high as 30%. That applies to professional services and tech areas where there's no doubt that some meetings travel will be replaced with technology for some meetings. But 60% of our business travel in Qantas Domestic is government resource and construction. And all of those sectors are expected to fully recover.
That's both from studies conducted overseas and our own studies. So we're in a strong position there and indeed the resource continues to grow and you can see as evidenced by the fact we've added 14 new charter operations. So we're seeing growth in that sector. The 29 accounts that came across to us last year, corporate and large SME accounts, majority of those were all virgin accounts that have moved across. And so you continue to see growth in sectors.
You could also add to that the fact that if you look at the capacity in the market, Virgin has shrunk considerably. Tiger's gone. And even with RECs adding 10 aircraft, you're still going to see when the market fully recovers, the capacity is market capacity is down on FY 2019 levels. Add to that, the cost base that we've got underway. And in fact, we're more confident now about hitting that FY 'twenty five full target for us to meet than we were 15 months ago pre COVID.
So we are in a strong position. We do expect business travel in this market to perform well because of the heavy weighting we have to the government resource and construction sectors. Thanks, Alan.
Thanks, Andrew. Next question.
Your next question comes from Owen Birrell with Goldman Sachs.
Just a couple of questions from me. Just first, I just want to look at the domestic network. You mentioned in this slide, it says load factors are 53%. I'm just wondering whether that's being dragged down by, I guess, a government funded flights. And if you were to exclude that, what would be what would be the load factor that you're seeing across the rest of the network?
Yes, we
want to get cards and Android ten cards first?
Yes, you're right. So it is pulled down because it includes the flights that were supported by the government, where we've been operating across borders and through periods of the year where there was virtually no demand. I think from a Jetstar point of view, it's about a 10 point seat factor increase if you're only looking at the purely commercial flights that we've undertaken. Andrew?
And from the perspective, the other overlay there is we're with the flying we're doing at the moment, there's much more resource flying in there. And that resource sector flying tends to be one way directional. Obviously, people flying in or flying out of mines. So that's a factor in that. If you take that out, we're probably similar to Gareth.
And the other factor for Quantas, of course, is its leisure led recovery. And we're more weighted to it as corporate and as both of those sectors return, you would expect to see our load factors to return to the pre COVID levels of that 79%, 80%.
I hope I could comment the yield is holding up pretty well on both carriers. So, seed factor is the issue, but over time as that certainly comes back on the borders, we will fill that C factor up. And our big driver at the moment is to be cash positive. So all of these lines with 99% that are cash positive. So it absolutely makes sense to get more of our people back in the air, get the capability up and maintain our strategic position by getting the flying there.
And over time, we'll certainly fill that C factor back up, but that's a huge opportunity and where cash flow even with C factors being that little bit depressed.
That's great. Can you indulge me just one last question, just on fuel hedging. We've seen oil prices rise recently. And I've just a question for Vanessa, I guess, is how should we think about the fuel rate or the cost going forward? Are you able to give us a sense of, I guess, roughly when you hedged and for how long?
So in terms of the this half through to June, we are fully hedged for what we can see is our consumption. We've got collars some collars in place, but at a very minimum level and we have no committed risk around those collars. We've also got some hedging and they're in the form of options that was from pre COVID hedging profile, which we've left in place because we think that that also gives us good protection against, as you said, fuel price increasing and a faster recovery scenario if our capacity increases. Looking beyond June and into FY 2022, we are starting to rebuild that hedge profile based on what flying we are expecting, but we are being very cautious in that regard. We are placing more hedges in options outright options right now.
And we are, as we have in the past, are building that in that wedge shape, which is higher in the near term and much lower hedging profiles in the outer term. But I think that just in terms of the relationship between fuel and demand, we would expect also to continue. So a higher fuel price should reflect a higher demand environment and recover through revenue.
Next question.
Thank you. Your next question comes from Richard Jones with JPMorgan. Please go ahead.
Alan, just in relation to JobKeeper, can you just talk through the implications of that rolling off and whether you've had discussions with government around that being extended for aviation and tourism?
Okay. I might get Andrew Parker to talk about it.
Yes, thanks. Clearly, the government's indicated quite strongly its intent to end JobKeeper at the end of March. So, we've continued to discuss. Clearly, we'll have a significant number of employees still stood down beyond that date. But most of the discussions are what would be appropriate in terms of ongoing support for particular sectors, which airlines and aviation and tourism are the most exposed.
And as Alan has said, those conversations are progressing well and we should have an outcome on the government's thinking in the next few weeks.
We just say that the number is that if international is back to where we expect it to be by the end of the year, we'll have 7,500 people that are fully allocated international flying and that will be stood down still from the end of March until international borders open, which we're now forecasting will be the end of October at 7,500 people that there is a blockage of work as far as we're concerned. So, they will continue to be slowed down. So there's no payroll implications for those. But we do want to work on the government given its support because it is a unique position. It's a position where the government control them getting back employed and we have jobs for them.
We want to fly the 7, 8 and all the A380s eventually as this blockage progressively comes off. It will be there in some form for some time. But there is a need, I think, to try and help them and the government recognizes that and we're trying to figure out what that help could look like. It won't be JobKeeper and it's probably going to be very targeted, but that is good. If that's the case, then we're trying to work through those solutions.
Next question?
Your next question comes from James Tia with Bloomberg Intelligence. Please go ahead.
Hi, good morning. I've got a question on the 3,000,000,000 net designation of new hedges. Would you be able to give more color on the breakdown between, say, mark to market gain, newly designated ineffective hedges or even redesignated as effective hedges, if possible, please? Thank you.
I think I understood the question, which was just the accounting treatment of the ineffective hedges that we've had. The largest, I suppose, recognition of hedging effectiveness actually was in the
June
closed out a significant amount of hedging as we look forward and saw a significant reduction in consumption. There has been a small amount of hedge de designation in this half. I think it's circa at a net level of $3,000,000 that we've recognized in items outside of underlying.
Thanks Vanessa. I think we've got one question left.
Your last question comes from Cameron McDonald with Evans and Partners. Please go ahead.
Hi, Cameron. Hi, Eoin. Quick question for Olivia, if I can, just on Qantas Loyalty. What is the current points balance that's outstanding given that if we look at the slide, you've obviously had a reduction of cash contribution, which is the sale of points to partners. And then there's obviously been a reduction in the redemption through that period.
So when we think about the business going forward, you've got a larger outstanding balance of points, which will redeem them over the next 2 years on average, isn't that a drag on cash?
Thanks for the question. Look, there is a $3,000,000,000 deferred revenue liability. Obviously, what we are seeing is that our members during this period have continued to earn, which is a great thing for us, right? So they have continued to earn 2 thirds of all points earned on the ground. Obviously, with no international flying, they haven't been able to redeem.
So that's a fairly logical conclusion that we obviously have higher than normal. However, we expect and we know what will happen when borders open, because we've seen it and Alan referred to that before, that as soon as borders open, we do see significant take up of redemption seats and we expect that that will happen when we get more certainty, both domestically and internationally. Obviously, we're also building out more opportunities for our members to redeem on non flight activity. And we have seen a take up of that because that's on our online store or our wine and also on many other travel related activities and products, like hotels, for example, holiday packages. So we're very confident that our members will be looking for great opportunities to burn over the next 12 months.
And Vanessa has talked about certainty that we're going to get with international borders opening in October. We expect that there will be a flood of our members looking to book their dream holiday.
I'd say Cameron, I think we can walk and chew gum at the same time on this one because our seed factor is, the guys pointed out, is lower. We need to and want to fill up the seeds. If we can fill them up with frequent flyer redemption, we will. We've made 50% more seeds available domestically. There was huge demand for them.
We can do that at the same time of regenerating REIT and managing our suppliers and taking revenue in. So, I think you can win across the board on this and our plan is structured in that way to make sure people have enough seats to redeem their points because Lea is sliding new deals all the time. BP has happened since lockdown, it's generating cash. If you just saw the new deal with Commonwealth Bank, it's going to generate more cash. So, there is cash coming in for these points.
So, don't take it as a negative on cash as well. They are a significant positive and that significant positive is unique to any airline on the globe at the moment. I think a lot of airlines would love to have had in the 6 months of $450,000,000 cash contribution from loyalty from those points being sold. So we see it in a very positive light that people are that engaged with those points. Okay.
One more, it disappears. Okay. Let's do the last question then.
The next question comes from David Fabrice with Macquarie. Please go
ahead. Good afternoon. Look, I've just got a question on the loyalty business. So I was just wondering why was the Qantas linked credit card usage down 10% given strong retail spending and we've seen a switch from cash to credit cards given COVID?
So look, what we can see in the market there, obviously the credit card spend is has been impacted by macroeconomic conditions. So we did see a decline and that was across all credit cards, not just Qantas Point earning credit cards. Importantly for us, we've actually grown market share during this period, which is great. We've obviously got 35% of the market out there and we've actually seen that Qantas Pointe ending credit cards actually outperform the market. What we have seen when there is stability that's come back in November December, for example, and when there is stability with state borders, we've actually seen credit card spend return to pre COVID levels.
So, we're very confident that that will continue into the second half.
Great. Thanks.
That's all
for me. Thanks, Liam. And I think that was all the questions we had. So thank everybody for joining us. I'm sure we'll be seeing some of you as we do the roadshows with the analysts and shareholders.
And thanks to my colleagues here for joining us and answering the questions. And we'll see you in 6 months' time if we don't see you in the next few weeks. Thank you.