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First On CNBC: CNBC Transcript: Alan Joyce, CEO, Qantas

Below is the transcript of a First On CNBC interview with Alan Joyce, CEO, Qantas. If you choose to use anything, please attribute to CNBC, Martin Soong, Sri Jegarajah and Will Koulouris.

Martin Soong (MS): Mr Joyce, a pleasure having you with us, and appreciate your time, and hope you're keeping safe. There's so many things to talk to you about – update us on the cost cutting, first off.  

Alan Joyce (AJ): Yeah, well, obviously the big driver for all of us at the moment is COVID-19. And it impacted us by $4 billion in revenue in the last financial year, a $1.2 billion at the underlying level, we still made a slight profit at the underlying level. And as a result of COVID-19, we've now launched a recovery plan, a restructuring plan that involves us making 20% of our workforce redundant, standing down 15,000 people for maybe up to a year, and dramatically changing a lot of what we do. We're probably in one of the best positions of any airline group in the world, and we're burning less than $40 million a week in total cash, and that includes financing and reinvesting costs. And we've raised our nearly 2 billion in debt and a billion and a half in equity. So, we have four and a half billion on liquidity. So, we have enough bandwidth to get through 21 and well into 22.

MS: Alright, let me push a little bit harder on the cost of cuts, if I could, Mr. Joyce here. Three-year plan - you're hoping or wanting or planning to cut a staggering $15 billion out of your costs. Can you say confidently that you are on track to hit that number?

AJ: Yes, so a large element of that is not flying because we're grounding the aircraft and putting them into long term storage, like the A380s. The ongoing benefits that we believe we will have by financial year 23 is a billion dollars of cost reductions out of our cost base. And we think we need to do that because the environment is going to be very different, post-COVID. We're going to go into probably a massive recession worldwide. We're probably going to be in a position where competition is a bit different, where there will be opportunities and challenges for us. So, getting that annual billion-dollar cost reduction is very important to us. And we have a track record of delivering on this. In 2013, we did a restructure of the group back then we have plans to get 2 billion and cost savings on an annual basis we delivered or over delivered on that. And it led to a period of really strong profits on Qantas, and nearly over $4 billion of return to shareholders once we implemented that strategy. It's an aggressive plan but our track record is we do deliver on these.

Sri Jegarajah (SJ): Alan, when do you reckon the dividend is going to come back? Because your announcement today from the board said distribution to shareholders is going to be essentially frozen. When could you restore it?

AJ: So obviously the first base that we have to do is making sure we get back to a positive cash flow position. We have to make sure that we're in a position where we strengthen our balance sheet post-COVID. Then once we are there, we've got a financial framework that is very clear and that we have surplus capital available. We give it back to shareholders. We've been very disciplined in doing that. As I said, over the last five or six years, we've given 4 billion back to shareholders in that period of time. And once the group has recovered, it's in a position that has strengthened its balance sheet, it's starting to grow again, because we think our investment opportunities as well that we want to balance out, then we look at reinstating the dividend.

SJ: Alan, the future of flying in a post COVID era. Is it looking more regional to you and if so, how are you going to be tailoring the fleet accordingly for this new normal? And can you give us a line on Project Sunrise as well? Is that categorically a no go now given the current environment?

AJ: Oh, yeah, it's interesting. We're doing as you can imagine a lot of research of our customers and 95% of Qantas' customer base is saying that they want to fly again in the next year. There's a huge interest in domestic firms. So, people want to see family and friends taking the domestic holiday. And we think given that most of our profits used to come from Qantas domestic and Jetstar, that's a real positive for us. That in the domestic Australia market, we think we'll do exceptionally well, particularly because our competitive position is really strong now, a major competitor that's going on into administration and come out of it differently, or even internationally. A lot of our customers and Aussie's love traveling around the globe and say that they want to get back and fly internationally. And I can say, you know, some of the borders opening recently showed us a massive pent up demand. So, some routes that we have open today like Brisbane to Cairns or in Queensland, we're now getting more traffic on that route at nearly eight flights a day than we had pre-COVID-19 because the borders open. So, we were very confident that there is demand, there's pent up demand, and that we should be able to benefit from that domestically. And internationally, we think we'll take a bit of time to recover. So, we in financial year 22, we're only expected to get 50% of our international operation back. And we're thinking we'll take three years before we can get our A380s back in the air. And then when we do, we'll start getting back to pre-COVID-19 levels.

Will Koulouris (WK): Now, Alan, you had an exceptional result when it did come to your frequent flyer loyalty program, underlying EBIT 341 million, but I want to ask you about how you're functioning when it does come to that, because a lot of people can't travel right now, because there's 13.4 million people, a lot of people focus on those status credits. Is there any thought of perhaps easing off that support mechanism that you've got currently in place and just waiving off this entirely, considering many people aren't just going to be able to get back to travel?

AJ: Yeah, so we have very recently launched an adjustment for all of our frequent fliers, to maintain people status to allow people that still to earn points through all our mechanisms and allow them to redeem points through all mechanisms. And what we've seen is actually the MPS, the customer satisfaction, loyalty has reached record levels. And a lot of our earnings through loyalty come from other businesses now - it's very diversified. Credit cards and credit card expenditure is a big part of it. The fact 33% of all credit card expenditure in Australia is on the Qantas points earning credit cards. We have a health insurance business, a life insurance business, we have a range of new businesses that are performing very well. So that's helped us very different from a lot of other airlines. It gives us the first revenue stream and we're very conscious of keeping that engagement with our customers. And the research is telling us that the frequent fliers will initially want to use the points domestically when the borders opened up but giving them access to hotels for points and other ways of using those points. And in fact, some of our ways, like the Qantas Wine Club, has gone through the roof and people using the points to get wine. So, we know that engagement is still very high and will continue to make it very high going forward.

WK: Now, there wasn't a number of government assistance that you did receive you got the 267 million for JobKeeper, 515 million the total. You've had really strong engagement with the government as of yet, but is there anything that perhaps you want or need from the Australian government that you are discussing currently with them that you're hoping to see coming forth over the next couple of months?

AJ: Yeah, we're still talking about the continuation of these programs while the borders are closed. The big one is JobKeeper, which is the way we actually subsidize our people that are stood down, they get the money, the company doesn't get money for those people who are stood down. And that's been unbelievably helpful. And the Prime Minister has extended it to next March, it's helped a lot of people. There are a couple of other programs to help the business. There's a minimal viable network that the government subsidizes. And we have, we're having constructive dialogue with the government about extending that. The big thing we need is about certainly around borders. So at the moment, there's very inconsistent approach between the states about when borders open and when they close, and we're talking to the federal government of the state governments about having a rule based, medical advice based criteria for when the borders open, and when they close. I think that will give certainty to our business for a lot the tourism industry in Australia, which supports a billion jobs. And we need to get that industry back up and working when the program ends, because there's going to be a big, big hit to the economy.

SJ: Alan, are we only really going to see a sustainable and a meaningful recovery in air travel demand once we get a vaccine and effective vaccine, and does imply that we're about 18 months, two years away from that.

AJ: So, I think it'll be different in different parts of the world, like domestically, I think Australia has done very well with suppression of the virus except for the second wave that's occurred and the audience. And the strategy here has always been about suppression and New South Wales, so far, has managed to keep the virus at extremely low levels of cases here, less than 10 a day in recent times. And if that can continue, and then you could see the borders opening up and travel resuming in that environment. And we think we're very optimistic about domestic getting there. For international, it's very clear that there could be borders opening up with countries that are in a similar position from New Zealand and Australia - potentially a bubble may exist there. And the governments are still talking about that, that could happen in early 21, is our view, if we can keep the suppression strategy working in both countries. And then that may expand to other destinations. But some of the big markets like the United States, I think we're going to be dependent on the vaccine, and I think the optimism now is that that's likely to happen maybe in the middle of next year towards the end of next year, could cause some good progress being made on vaccines. Our chief medical officer is a lot more optimistic than he was a couple of months ago.

MS: And Mr Joyce, on a lighter note, I know Sri is very keen to find out how he can get ahold of some of those smoked almonds that you have in your first class online. But before that, though, you know, just over your right shoulder I'm noticing you've got some models of airplanes if I'm not mistaken. I think that's a 787 Dreamliner. You are mothballing pretty much your entire Dreamliner fleet, together with your A380s. And this is over the Mojave Desert in the US. I'm just curious, in terms of cost savings, that's one thing, but how much does it actually cost you to mothball these planes? In the desert, in the sand?

AJ: Yeah, so there is a bit of work in preparing the aircraft for long term storage, which our engineers have done. And then we have a big maintenance base in LA and the engineers drive out to the Mojave Desert to review the aircraft, to look after the aircraft to make sure that they'll be ready when we want to get them back into service. And we have made the decision the A380s are probably the last aircraft we'll put back in the air because they're very big and we don't think the demand will be there for at least three years. And the 787s we're keeping that more flexible, we don't think there'll be a need extensively for them until the middle of next year, or keeping two available if we need to get them in the air. And of course, we have a lot of A330s that can fly internationally. So if international recovers earlier than that, places like New Zealand, we'll have plenty of aircraft that we can operate. But of course, every airline is trying to minimize the amount of cash burn they have at the moment. And making decisions like that help get us to less than $40 million a week, which is one of the best cash burns of any major airline group in the world. And that includes investing cash. So we compare to the some of the other airlines, it's less than 20 million a week. And that gives us a long, long way. And we want a long runway with four and a half billion dollars in liquidity. This gets us all the way through to 2022. And that's important I think for the airlines.

SJ: It's so important to get that first visibility and have that visibility during these very, very challenging market conditions and times, especially for your staff and workers. We wish you all the best, Alan, thank you very much indeed for joining us today. Alan Joyce, the CEO of Qantas.


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