AYB200-Financial Accounting

QANTAS ANNUAL REPORT 2020 In November 1920, World War One veterans Hudson Fysh (left) and Paul McGinness (right) envisaged an air service connecting Australia to the world, forming Queensland and Northern Territory Aerial Services Ltd (Q.A.N.T.A.S) at Winton. By 1947, the first Qantas Constellations were flying services from Sydney to London — on what is still known as the Kangaroo Route — stopping at Darwin, Singapore, Calcutta, Karachi, Cairo, Castel Benito and Rome, finishing in London. Recognising our 100-year history From humble beginnings to becoming the national carrier, Qantas has been part of Australia for 100 years in 2020. While times have changed, the Qantas spirit remains the same — and we’ll continue to close the tyranny of distance for all the communities we serve. In 1921, operations moved to Longreach with the first Qantas aircraft — an Avro 504K built in Sydney. Five-year History 03 Chairman’s Report 04 CEO’s Report 06 Board of Directors 08 Review of Operations 12 Corporate Governance Statement 23 Directors’ Report 25 Financial Report 57 Shareholder Information 133 Financial Calendar and Additional Information 134 Arrival of the first international repatriation flight from Wuhan, China in February 2020. QANTAS ANNUAL REPORT 2020 Contents 01 01 1 Refer to the Review of Operations section in the Qantas Annual Repor t 2020 for definitions and explanations of non-statutor y measures. Unless otherwise stated, amounts are repor ted on an underlying basis. $3.5 billion CASH BALANCE 100+ INTERNATIONAL REPATRIATION FLIGHTS OPERATED ON BEHALF OF AUSTRALIAN GOVERNMENT $4.7 billion NET DEBT (net debt range: $4.5 to $5.6 billion) $1.1 billion OPERATING CASH FLOW 91% QANTAS LOYALTY PROFITABILIT Y MAINTAINED VS FY19 DESPITE COVID-19 $4.5 billion TOTAL LIQUIDITY 150,000 JETSTAR FARES SOLD IN THREE DAYS DURING BRIEF BORDER REOPENING IN JUNE Financial Snapshot 1 Other Highlights 02 QANTAS ANNUAL REPORT 2020 20202019 (restated) 201820172016 Revenue and Other Income $M14,2571 7, 9 6 6 1 7, 1 2 8 16,057 16,200 Statutory (Loss)/Profit Before Tax $M(2,708)1,1921,352 1,181 1,424 Statutory (Loss)/Profit After Tax $M(1,964)8409538531,029 Underlying Profit Before Tax 2 $M 1241,326 1,565 1,401 1,532 Underlying Earnings Before Interest and Tax (EBIT) $M 3951,608 1 ,7471,590 1,751 Operating Margin %2.89.010.2 9.910.8 Underlying Earnings per Share 2 cents per share 5.9 5 7. 3 63.0 54.6 53.1 Statutory Earnings per Share cents per share (1 29.6) 51.554.4 46.0 49.4 Return on Invested Capital (ROIC) 2 % 5.819.2 21.4 20.122.7 Share Price at 30 June $3.785.40 6.165.722.82 Dividend per Share 4 cents per share – 25 1714 7 Cash flow from operations $M1,0833,164 3,4132,704 2,819 Net free cash flow 2 $M (4 88)1,6011,442 1,309 1 ,674 Net on balance sheet debt $M3,1732,980 3,054 3,0622,880 Net Debt 2 $M 4,7344,7 104,903 5,212 5,646 Net capital expenditure 2 $M 1,5711,563 1,9711,534 1,032 Unit Revenue (RASK) 2 c /A S K 8.998.858.40 8.00 8.08 Total unit cost 2,3 c /A S K (8.87)( 7. 9 7 )( 7. 3 7 )( 7. 0 7 )( 7. 0 5) E x-fuel unit cost 2,3 c /A S K (4.41)(4.23) (5.37)(5.03) (4.7 9) FINANCIAL PERFORMANCE S TATIS TIC S 2020 20192018 20172016 Available Seat Kilometres (ASKs) 1 M 111,870151,430 152,428 150,323 148,691 Revenue Passenger Kilometres (RPKs) 1 M 92,0271 2 7, 4 9 2 126,814 121,178 119,054 Passengers carried ‘00040,47555,813 55,273 53,659 52,681 Revenue Seat Factor %82.384.2 83.2 80.6 80.1 Aircraft at end of period 314314 313 309 303 1 2019 has been restated for the impact of the adoption of A ASB 16 Leases and the IFRIC agenda decision in relation to fair value hedges. 2018 has been restated for the impact of A ASB 15 Revenue from Contracts with Customers , however 2016 and 2017 continue to be repor ted under previous accounting standards. 2 For non-statutor y measures refer to the definitions in the Review of Operations. 3 The comparative period has been adjusted for foreign exchange movements to make it comparable to the current year. 2019 and 2020 reflect the foreign exchange rates as presented in the 2020 Annual Repor t. The same applies for 2018, 2017, 2016 which have been adjusted for foreign exchange in line with the 2019, 2018 and 2017 Annual Repor t respectively. 2019 and 2020 have also been adjusted for the impact of the sale of domestic terminal leases and depreciation and amor tisation. 4 Dividend per share is calculated as the interim and final dividend in relation to the relevant financial year. Five-year History 1 03 QANTAS ANNUAL REPORT 2020 “Aviation is all about connecting people and places, which is exactly what the public health response to COVID-19 is designed to avoid.” The Qantas Group has seen many challenges in its 100 years, but none with the huge impact of the COVID-19 crisis. Aviation is all about connecting people and places, which is exactly what the public health response to COVID-19 is designed to avoid. The impact this is having on the global travel industry — and on the Qantas Group — is clear. Our revenue was $4 billion lower in FY20 compared with the prior year, with most of that fall happening within three months. Passenger numbers in that last quarter were down 98 per cent. With such a precipitous drop, it was critical that we moved quickly to protect our balance sheet. And, by extension, to protect the future of t h e c o mp any. In a matter of weeks from March 2020, we cancelled dividends, grounded most of our aircraft and stood down the majority of our people. Annual executive bonuses were cancelled, and the Board and Group Management Committee showed important leadership by taking no salary for several months, then a reduced salary for months after that. Sadly, at least 6,000 Qantas Group employees will lose their jobs as a result of this crisis. Thousands more will be stood down for an extended period, due to what IATA expects could be several years of reduced travel demand. A large number of our people have spent their whole careers at Qantas and Jetstar. Generations of families work here — sometimes, side-by- side. Many describe the airline as an extended family. So, while we know job cuts and stand downs are absolutely necessary, we also know there is a significant human impact that is deeply regrettable. Chairman’s Report 04 QANTAS ANNUAL REPORT 2020 In managing this crisis, we’re focused on preserving as many jobs as possible in the long term. That means surviving through a period of far less revenue and setting up the Group for recovery in what we know will be a different market post-COVID. In June, we announced a three- year recovery plan — the Next 100 — to achieve that. It will carve out $15 billion in costs, mostly through reduced activity, and deliver $1 billion a year in annual savings from FY23. To enable the plan, we raised $1.4 billion in an equity raising that was strongly supported by major shareholders in particular. This support has two major foundations. The first is the fundamental importance of air transport in a country as big as Australia, and the established position Qantas and Jetstar have in that market. And the second is a track record for delivering large transformation programs in trying times. Alan Joyce and his management team led one of the most successful corporate turnarounds in 2014 and he has committed to stay on as Group CEO to guide the post-COVID recovery. People at Qantas often say the national carrier shines brightest when faced with a crisis. This year, amidst all the challenges, we operated over 100 overseas flights on behalf of the Federal Government to help bring Australians home — including from several COVID hotspots in the early stages of the pandemic. Domestically, Qantas, QantasLink and Jetstar helped run a network that kept critical transport links across Australia open. On behalf of the Board, I’d like to extend our sincere thanks to Alan and the whole team who have worked incredibly hard under extraordinary circumstances to guide this great company. The challenges we face in FY21 are substantial but we have plenty of reasons to be optimistic. We know we have the strength and the strategy to get through this crisis, and to deliver for our customers, people and shareholders for many years to come. Richard Goyder AO 05 QANTAS ANNUAL REPORT 2020 This year was one of sharp contrasts. For most of FY20, the Qantas Group was focused on growth. We opened our pilot academy in Queensland, announced new routes and were actively hiring new people. We had completed historic non-stop research flights from New York and London direct to Sydney, and we were preparing to order the aircraft required to fly them commercially for Project Sunrise. Then came the worst trading conditions in a century. It was a sudden reversal of fortune that has been very hard for our people, customers and shareholders. But the depth of the contrast points to the fact we entered the COVID-19 crisis in a very strong position. Perhaps the strongest of any airline in the world. After years of record profits, our balance sheet is strong. That enabled us to raise over $2 billion in debt in addition to a $1.4 billion equity raising, giving us the extra liquidity to make it through to the other side of the crisis. The Group’s strengths are also clear in its FY20 performance. Despite a 21 per cent drop in revenue, the Group still posted a $124 million Underlying Profit Before Tax. That was largely due to our first half result — which mostly unwound in the second half — and the rapid action to control costs as travel demand collapsed. There were some bright spots in our portfolio. Qantas Loyalty achieved 91 per cent of its profit from last year and set a record level of member satisfaction in the last, and most challenging, quarter. Qantas Freight has benefited from the increasing shift to e-commerce. And our charter flying for resources companies performed strongly. “This company was founded 100 years ago in the wake of a world war and a devastating pandemic. We know that things will improve, and that the Qantas Group will thrive when it does.” CEO’s Report 06 QANTAS ANNUAL REPORT 2020 Support from the Australian Government — for the aviation industry and for the broader economy — was a key feature of FY20. In particular, JobKeeper provided a crucial safety net for the thousands of our people on stand down, and continues to do so. The impact of this crisis means the Qantas Group will be smaller for some time to come. The markets we operate in will be different. And we’ll need to rebuild our balance sheet. For not the first time in our history, we need to reinvent how we do things — which will result in more difficult decisions to ultimately protect the company’s future. Seeing so many people leave this organisation, and many more stood down from the jobs they love, has been the hardest part of this crisis. We continue to offer them as much support as we can. One positive is the feedback from other companies that have offered secondary employment, who describe the incredible professionalism and resilience of Qantas and Jetstar people. That spirit runs throughout the Group and it’s what will help us recover. We have received incredible support from our partners, suppliers and customers. And also from the communities we look forward to getting back to serving in the future. We thank them sincerely. This company was founded 100 years ago in the wake of a world war and a devastating pandemic. We know that things will improve, and that the Qantas Group will thrive when it does. Alan Joyce AC 07 QANTAS ANNUAL REPORT 2020 RICHARD GOYDER AO BCom, FAICD Chairman and Independent Non-Executive Director Richard Goyder was appointed to the Qantas Board in November 2017 and as Chairman in October 2018. He is Chairman of the Nominations Committee. Mr Goyder is Chairman of Woodside Petroleum Limited, the Australian Football League Commission, JDRF Australia, the West Australian Symphony Orchestra, and the Channel 7 Telethon Trust. He is an honorary Member of the Business Council of Australia and a Fellow of the AICD. Mr Goyder was the Managing Director and CEO of Wesfarmers Limited from July 2005 to November 2017. He also previously held the roles of Finance Director between 2002 and 2004, and Deputy Managing Director and CFO between 2004 and 2005. Mr Goyder was also formerly Chairman of the Australian B20 (the key business advisory body to the World Economic Forum that includes business leaders from all G20 economies). Age: 60 ALAN JOYCE AC BApplSc (Phy) (Math) (Hons), MSc (MgtSc), MA, FRAeS, FTSE Chief Executive Officer Alan Joyce was appointed Chief Executive Officer and Managing Director of Qantas in November 2008. He is a Member of the Safety, Health, Environment and Security Committee. Mr Joyce is a Director of the Business Council of Australia, a Member of the International Air Transport Association’s Board of Governors, having served as Chairman from 2012 to 2013 and a Director of the Museum of Contemporary Art Australia. He is also a Director of a number of controlled entities of the Qantas Group. Mr Joyce was the Chief Executive Officer of Jetstar from 2003 to 2008. Before that, he spent over 15 years in leadership positions with Qantas, Ansett and Aer Lingus. At both Qantas and Ansett, he led the network planning, schedules planning and network strategy functions. Mr Joyce spent eight years at Aer Lingus, where he held roles in sales, marketing, IT, network planning, operations research, revenue management and fleet planning. Age: 54 Board of Directors 08 QANTAS ANNUAL REPORT 2020 MAXINE BRENNER BA, LLB Independent Non-Executive Director Maxine Brenner was appointed to the Qantas Board in August 2013. She is a Member of the Remuneration Committee and the Audit Committee. Ms Brenner is a Director of Origin Energy Limited, Orica Limited and Growthpoint Properties Australia Limited. She is a Member of the Council of the University of New South Wales. Ms Brenner was formerly a Managing Director of Investment Banking at Investec Bank (Australia) Limited. She has extensive experience in corporate advisory work, particularly in relation to mergers and acquisitions, corporate restructures and general corporate activity. She also practised as a lawyer with Freehill Hollingdale & Page (now Herbert Smith Freehills), where she specialised in corporate work, and spent several years as a lecturer in the Faculty of Law at both the University of NSW and the University of Sydney. Ms Brenner was also formerly the Deputy Chairman of the Federal Airports Corporation and a Director of Neverfail Springwater Limited, Bulmer Australia Limited and Treasury Corporation of NSW. She also served as a Member of the Australian Government’s Takeovers Panel. Age: 58 JACQUELINE HEY BCom, Grad Cert (Mgmt), GAICD Independent Non-Executive Director Jacqueline Hey was appointed to the Qantas Board in August 2013. She is a Member of the Audit Committee. Ms Hey is Chair of Bendigo and Adelaide Bank Limited, a Director of AGL Energy Limited and Chairman of its Safety, Customer & Corporate Responsibility Committee. She is also a Director of Cricket Australia. Ms Hey was formerly a Director of the Australian Foundation Investment Company Limited from 2013 to 2019, Melbourne Business School from 2013 to 2018, the Special Broadcasting Service from 2011 to 2016 and a Member of the ASIC Directory Advisory Panel from 2013 to 2016. Between 2004 and 2010, Ms Hey was Managing Director of various Ericsson entities in Australia and New Zealand, the United Kingdom and Ireland, and the Middle East. Her executive career with Ericsson spanned more than 20 years in which she held finance, marketing, sales and leadership roles. Age: 54 BELINDA HUTCHINSON AC BEc, FCA, FAICD Independent Non-Executive Director Belinda Hutchinson was appointed to the Qantas Board in April 2018. She is a Member of the Audit Committee and the Safety, Health, Environment and Security Committee. Ms Hutchinson is currently Chancellor of the University of Sydney, Chairman of the Future Generation Global Investment Company and Chairman of Thales Australia. She has over 30 years’ experience in the financial services sector, working in senior roles at Citibank and Macquarie Group. Ms Hutchinson also has extensive board experience. She was formerly Chairman of QBE Insurance Limited, a Director of Telstra Corporation Limited, Coles Group Limited, Crane Group Limited, Energy Australia Limited, TAB Limited, Snowy Hydro Trading Limited, Sydney Water and AGL Energy. Ms Hutchinson was awarded a Companion of the Order of Australia (AC) in 2020 in recognition of her service to business, tertiary education and scientific research, and for her philanthropic endeavours to address social disadvantage. Age: 67 Board of Directors continued 09 QANTAS ANNUAL REPORT 2020 MICHAEL L’ESTRANGE AO BA (Syd), MA (Oxon) Independent Non-Executive Director Michael L’Estrange was appointed to the Qantas Board in April 2016. He is a Member of the Remuneration Committee and the Safety, Health, Environment and Security Committee. Mr L’Estrange was Head of the National Security College at the Australian National University from 2009 to 2015. Prior to this, he was the Secretary of the Department of Foreign Affairs and Trade for almost five years and the Australian High Commissioner to the UK between 2000 and 2005. He served as Secretary to Cabinet and was Head of the Cabinet Policy Unit from 1996 for more than four years and, prior to that, as Executive Director of the Menzies Research Centre. He has been a Non-Executive Director of Rio Tinto plc and Rio Tinto Limited and a Director of the University of Notre Dame, Australia since 2014. He was appointed Deputy Chancellor of the University of Notre Dame, Australia in 2017. Mr L’Estrange studied at the University of Sydney and later as a Rhodes Scholar at Oxford University, where he graduated with a Master of Arts with First Class Honours. Age: 67 PAUL RAYNER BEc, MAdmin, FAICD Independent Non-Executive Director Paul Rayner was appointed to the Qantas Board in July 2008. He is Chairman of the Remuneration Committee and a Member of the Nominations Committee. Mr Rayner is Chairman of Treasury Wine Estates Limited, a Director of Boral Limited and Chairman of its Audit and Risk Committee, and a Director of the Murdoch Children’s Research Institute. Mr Rayner was formerly a Director of Centrica plc from 2004 to 2014 and Chairman of its Audit Committee from 2004 to 2013. From 2002 to 2008, Mr Rayner was Finance Director of British American Tobacco plc based in London. Mr Rayner joined Rothmans Holdings Limited in 1991 as its Chief Financial Officer and held other senior executive positions within the Group, including Chief Operating Officer of British American Tobacco Australasia Limited from 1999 to 2001. Previously, Mr Rayner worked for 17 years in various finance and project roles with General Electric, Rank Industries and the Elders IXL Group. Age: 66 TODD SAMPSON MBA, BA(Hons) Independent Non-Executive Director Todd Sampson was appointed to the Qantas Board in February 2015. He is a Member of the Remuneration Committee. Mr Sampson was Executive Chairman of the Leo Burnett Group from September 2015 to January 2017, and National Chief Executive Officer from 2008 to 2015. He was also a Director of Fairfax Media Limited from 2014 to 2018. Mr Sampson has over 20 years’ experience across marketing, communication, new media and digital transformation. He has held senior leadership and strategy roles for a number of leading communication companies in Australia and overseas, including as Managing Partner for D’Arcy, Strategy Director for The Campaign Palace and Head of Strategy for DDB Needham Worldwide. Age: 50 Board of Directors continued 10 QANTAS ANNUAL REPORT 2020 ANTONY TYLER BA (Jurisprudence) Independent Non-Executive Director Antony Tyler was appointed to the Qantas Board in October 2018. He is Chairman of the Safety, Health, Environment and Security Committee and a Member of the Nominations Committee. Mr Tyler was Director General and Chief Executive of the International Air Transport Association from 2011 to 2016. Prior to this, Mr Tyler spent over 30 years with Cathay Pacific Airways Limited. His career includes several management and executive roles in Hong Kong, the UK, Italy, Japan, Canada, the Philippines and Australia before serving in the role of Chief Executive Officer from 2007 to 2011. He is a Non-Executive Director of Bombardier Inc, BOC Aviation Limited and Trans Maldivian Airways Limited and a Fellow of the Royal Aeronautical Society. Age: 65 BARBARA WARD AM BEc, MPolEc Independent Non-Executive Director Barbara Ward was appointed to the Qantas Board in June 2008. She is Chairman of the Audit Committee, a Member of the Safety, Health, Environment and Security Committee and a Member of the Nominations Committee. Ms Ward is a Director of Ampol Limited (formerly Caltex Australia Limited) and a number of Brookfield Multiplex Group companies. She was formerly a Director of the Commonwealth Bank of Australia, Lion Nathan Limited, Multiplex Limited, Data Advantage Limited, O’Connell Street Associates Pty Ltd, Allco Finance Group Limited, Rail Infrastructure Corporation, Delta Electricity, Ausgrid, Endeavour Energy and Essential Energy. She was also Chairman of Country Energy, NorthPower and HWW Limited, a Board Member of Allens Arthur Robinson, the Sydney Opera House Trust and the Sydney Children’s Hospital Foundation, and on the Advisory Board of LEK Consulting. Ms Ward was Chief Executive Officer of Ansett Worldwide Aviation Services from 1993 to 1998. Before that, Ms Ward held various positions at TNT Limited, including General Manager Finance, and also served as a Senior Ministerial Advisor to The Hon PJ Keating. Age: 66 Board of Directors continued 11 QANTAS ANNUAL REPORT 2020 QANTAS ANNUAL REPORT 2020 Review of Operations For the year ended 30 June 2020 12 RESULTS HIGHLIGHTS The Qantas Group applied AASB 16 Leases from 1 July 2019. The results for the 12 months ended 30 June 2019 have been restated on the same basis for comparison purposes. The Qantas Group reported an Underlying Profit Before Tax 1 (Underlying PBT) of $124 million for the 12 months ended 30 June 2020, a decrease of $1,202 million from the full year 2018/19 primarily due to the impact of COVID-19 in the second half. The Group’s Statutory Loss Before Tax of $(2,708) million was down $3,900 million from the prior year. The Statutory Loss Before Tax for this financial year included a net $2,832 million of costs, mostly non-cash, which were not included in Underlying PBT. Items outside of Underlying PBT included asset impairments including the A380 fleet, Recovery Plan restructuring costs including redundancies, de- designated hedging and costs such as those associated with transformation and discretionary non-executive employee bonuses. This compares with $134 million of net costs that were not included in Underlying PBT in the prior year. In the first half of 2019/20 the Qantas Group reported an Underlying PBT of $771 million, a decrease of only $4 million from the prior year, as revenue strength offset temporary headwinds totalling $119 million including the impact of protests in Hong Kong, subdued demand in global freight markets and other increases in costs associated with foreign exchange rates on non-fuel costs. During the second half of 2019/20 the measures taken by governments across the world to slow the spread of COVID-19 severely impacted airlines, as travel restrictions and border closures were imposed. Because of these measures, the Qantas Group suffered a $3,967 million decline in total revenue as both domestic and international air travel was virtually halted in the fourth quarter. The Group quickly shifted its focus to preserving liquidity, partially mitigating the 82 per cent fall in Total Revenue in the fourth quarter through a 75 per cent reduction in net operating expenses 2, a good proxy for the Group’s operating cash costs. Due to the action taken, the Group was able to reduce the combined impact of COVID-19 on the Group earnings for the 2019/20 financial year to $1,224 million 3. Despite the grounding of most of the domestic fleet in the fourth quarter, Group Domestic 4 remained profitable, contributing Underlying EBIT of $285 million to the Group’s overall result. The international businesses 5 fell into an Underlying EBIT loss of $82 million as the record result from the Freight business could not offset the losses from the passenger airlines which were driven by international border closures. Qantas Loyalty maintained its value proposition for its members and partners despite the grounding of the Group’s airlines and was the largest contributor to the Group’s earnings. The Financial metrics for the 2019/20 financial year are: – Statutory Earnings Per Share was a loss of 129.6 cents per share, reflecting the Statutory Loss and the reduction in average shares on issue from the off-market share buy-back conducted in the first half – Return on Invested Capital (ROIC) 6 of 5.8 per cent – Operating cash flow of $1,083 million. At the end of the first half of 2019/20, Net Debt 7 was towards the bottom of the target range, the Group retained strong liquidity and had an unencumbered aircraft asset base of $4.9 billion 8. This put the Group in a strong financial position to weather the impacts of the COVID-19 pandemic. In the second half, the Group’s focus turned to safely hibernating the airlines, cutting costs and preserving liquidity. The Group’s variable cost base adjusted as activity declined, with a commensurate reduction in fuel consumption costs, aircraft operating variable and manpower costs as approximately 25,000 employees were stood down. Fixed costs and depreciation and amortisation non-cash charges continued to impact the Group’s profitability. 1. Underlying Profit Before Tax (Underlying PBT) is the primary reporting measure used by the Qantas Group’s Chief Operating Decision-Making bodies (CODM), being the Chief Executive Officer, Group Management Committee and the Board of Directors, for the purpose of assessing the performance of the Group. The primary reporting measure of the Qantas Domestic, Qantas International, Jetstar Group and Qantas Loyalty operating segments is Underlying Earnings Before Net Finance Costs and Income Tax Expense (Underlying EBIT). The primary reporting measure of the Corporate segment is Underlying PBT as net finance costs are managed centrally. Refer to the reconciliation of Underlying PBT to Statutory (Loss)/ Profit Before Tax on Page 20. 2. Net operating expenses is gross expenditure less depreciation and amortisation, on an underlying basis. 3. Underlying PBT for 2H20 compared to 2H19 excluding the movement of discount rate changes on provisions and depreciation/amortisation expense. 4. Group Domestic includes Qantas Domestic and Jetstar Domestic. 5. International businesses or Group International includes Qantas International, Jetstar International Australian operations, Jetstar New Zealand (including Jetstar Regionals), Jetstar Asia (Singapore), and the contributions from Jetstar Japan and Jetstar Pacific. 6. Return on Invested Capital is calculated as ROIC EBIT for the 12 months ended 30 June 2020, divided by the 12 month Average Invested Capital. ROIC EBIT is derived by adjusting Underlying EBIT to account for leased aircraft as if they were owned and non-aircraft leases as if they were service costs. This is calculated as Underlying EBIT excluding lease depreciation under AASB 16 and including notional depreciation for aircraft (to account for them as if they were owned aircraft) and the full cash payment for non-aircraft leases (to account for them as service costs). Refer to Note 2 for detail. 7. Net Debt under the Group’s Financial Framework includes net on balance sheet debt and capitalised aircraft lease liabilities. 8. Based on Aircraft Value Analysis Company Limited (AVAC) market values as at 31 December 2019, representing 51 per cent of aircraft in the Group’s total fleet of 316. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 13 RESULTS HIGHLIGHTS (CONTINUED) The impact of the government-imposed lockdowns, travel restrictions and border closures on the broader economy has been profound. This prompted the Australian Government and to a lesser extent the various state governments to establish a series of measures to support businesses and employees that have been severely affected. The Group and its employees benefited from a number of these programs including: – The Australian Aviation Financial Relief Package including the refunding and waiving of a range of government charges to the aviation industry including fuel excise, Airservices Australia charges on domestic airline operations and domestic and regional aviation security charges – The JobKeeper Payment, intended to help keep more Australians in jobs and support affected businesses. The majority of the benefit received by the Group was paid directly through to employees on stand down and the rest used to subsidise wages of those still working. In addition, the Australian Government commissioned Qantas to conduct various charter repatriation flights and rescue missions, including to Wuhan, Tokyo, Hong Kong, London, Lima, Buenos Aires, Johannesburg, New Delhi and Chennai. Along with other Australian domestic airlines, Qantas also performed several domestic, regional and international flights as part of the Minimum Viable Network intended to maintain vital air transport links. Qantas also secured a contract to conduct freight services under the International Freight Assistance Mechanism to ensure import and export freight routes remained open. Liquidity was boosted by cutting capital expenditure outflows, cancelling shareholder distributions and sourcing additional funding through $1.75 billion in new debt, with no financial covenants and $1.36 billion through a fully underwritten Institutional Placement initiated as part of the Group’s Three-Year Recovery Plan. At 30 June 2020, cash and cash equivalents totalled $3.5 billion with total liquidity at $4.5 billion including the undrawn revolving credit facilities. Net Debt was $4.7 billion towards the bottom of the Net Debt target of $4.5 billion to $5.6 billion. Importantly, the Group maintained its investment grade credit rating of Baa2 from Moody’s Investor Services. The Group’s usually strong cash flow generation ability was impacted by lower earnings and the working capital movements associated with lower revenue received in advance, lower receivables, payables (including refunds) and hedge settlements. Net capital expenditure 9 of $1.6 billion was invested in the business, skewed towards the first half, and $647 million of surplus capital was returned to shareholders through $204 million of fully franked dividends and $443 million of off-market share buy-backs completed in the first half. Giving consideration to the requirement to protect the strength of the balance sheet, maintain a minimum level of liquidity and the uncertainty of the near-term outlook for the business, the Board has decided not to make further shareholder distributions until the Group’s earnings and balance sheet have fully recovered in accordance with the Financial Framework. The off-market share buy-back of up to $150 million and the interim dividend of $201 million announced in February 2020 were cancelled in March 2020 and revoked in June 2020 respectively. THREE-YEAR RECOVERY PLAN The measures taken to cut costs and preserve liquidity through the fourth quarter ensured the Group was well positioned to launch its Three-Year Recovery Plan to rightsize the business, restructure its cost base and recapitalise its balance sheet through the fully underwritten Institutional Placement. A retail Share Purchase Plan was launched on 2 July 2020 consistent with listing requirements, with the $71.7 million raised providing an additional liquidity buffer in the 2020/21 financial year. The Recovery Plan is targeting a total of $15 billion in savings over the three years, including significant activity-based savings structuring that are expected to deliver $1 billion in ongoing annual savings from 2022/23. 9. Net Capital Expenditure is equal to net investing cash flows in the Consolidated Cash Flow Statement of $1,571 million. During the year ended 30 June 2020, there were no new aircraft leases entered into and no returns of leased aircraft. Target Key area of focus Metrics Timeframe As at end of August 2020 Cost Savings Restructuring benefits of $0.6b in FY21, $0.8b in FY22, $1b by FY23 FY23 On track to achieve FY21 target 6,000 FTE reduction FY21 On track Group Unit Cost (ex-fuel and depreciation) 10% less than FY20 FY23 Restructuring in progress Deleverage the Balance Sheet Gross debt reduction of $1.75b FY23 Capital allocation is prioritising debt reduction Net debt/ EBITDA 0) From FY21 Disciplined restart of the network with flexibility to adjust for border closures Capex for FY21 WACC 12 Through the Cycle Deliver ROIC > 10 per cent 13 through the cycle 3. Disciplined Allocation of Capital Grow Invested Capital with disciplined investment, return surplus capital MAINTAINABLE EPS 14 GROWTH OVER THE CYCLE TOTAL SHAREHOLDER RETURN IN THE TOP QUARTILE Maintaining an Optimal Capital Structure The Group’s Financial Framework targets an optimal capital structure to achieve ange of $4.5 billion to $5.6 billion, based on the Invested Capital as at 30 June 2020 of approximately $6 billion. It is defined as net debt/ROIC EBITDA range of 2.0-2.5 times where ROIC is fixed at 10 per cent. This capital structure optimises the Group’s cost of capital and preserves financial strength with the objective of enhancing long-term shareholder value. At 30 June 2020, net debt was $4.7 billion which is towards the bottom of the net debt target range. The Group’s optimal capital structure is consistent with investment grade credit metrics. The Group is rated Baa2 with Moody’s Investor Services. ROIC > WACC Through the Cycle Return on Invested Capital (ROIC) for the 12 months to 30 June 2020 was 5.8 per cent, below the Group’s target for value creation of 10 per cent. This was due primarily to the impact of government-imposed travel restrictions and border closures impacting earnings in the second half of the 2019/20 financial year. Disciplined Allocation of Capital The Qantas Group takes a disciplined approach to allocating capital with the aim to grow Invested Capital and return surplus capital to shareholders where earnings permit. – $647 million was distributed to shareholders in the first half of 2019/20 through $204 million fully franked dividends and an off-market share buy-back of $443 million. Distributions for the second half were cancelled as the Group took steps to conserve cash. Maintainable EPS Growth Over the Cycle Statutory Earnings Per Share was a loss of 129.6 cents, due to the significant Statutory Loss After Tax and reduction in average shares from the off-market share buy-back in the first half of 2019/20. The Group purchased 79.7 million shares or 5.1 per cent of issued capital for $443 million at an average price of $5.56. 10. Target Total Shareholder Returns within the top quartile of the ASX100 and the global listed airline peer group as stated in the 2019 Annual Report, with reference to the 2019- 2021 Long Term Incentive Plan (LTIP). 11. Based on the Invested Capital of approximately $6 billion as at 30 June 2020. 12. Weighted Average Cost of Capital, calculated on a pre-tax basis. 13. Target of greater than 10 per cent ROIC allows ROIC to be greater than pre-tax WACC through the cycle. 14. Earnings Per Share. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 15 GROUP PERFORMANCE Underlying PBT for 2019/20 was $124 million, including the impact government-imposed travel restrictions and border closures due to the COVID-19 pandemic had on second half earnings. This was 91 per cent lower than the Underlying PBT of $1,326 million in 2018/19. Ticketed passenger revenue 15 declined by 25 per cent as the airlines were virtually grounded during the fourth quarter. Net freight revenue increased by $74 million as increased demand for freight in the second half coincided with a significant reduction in available passenger aircraft bellyspace. Other revenue declined 21 per cent due primarily to the decrease in third-party service revenue as the impact of COVID-19. Actions taken to cut variable costs reduced total underlying expenditure by $2.5 billion, which helped to partially offset the steep decline in revenue in the fourth quarter. Group Underlying Income Statement Summary 16 June 2020 $M June 2019 (restated) $M Change $M Change % Net passenger revenue 12,183 15,696 (3,513) (22) Net freight revenue 1,045 971 74 8 Other revenue 1,029 1,299 (270) (21) Revenue and other income 14,257 17,966 (3,709) (21) Operating expenses (excluding fuel) (8,893) (10,599) 1,706 16 Fuel (2,895) (3,846) 951 25 Depreciation and amortisation 16 (2,021) (1,936) (85) (4) Share of net (loss)/profit of investments accounted for under the equity method (53) 23 (76) (330) Total underlying expenditure (13,862) (16,358) 2,496 15 Underlying EBIT 395 1,608 (1,213) (75) Net finance costs (271) (282) 11 4 Underlying PBT 124 1,326 (1,202) (91) Operating Statistics June 2020 June 2019 (restated) Change Change % Available Seat Kilometres (ASK) 17 M 111,870 151,430 (39,560) (26) Revenue Passenger Kilometres (RPK) 18 M 92,027 127,492 (35,465) (28) Passengers carried 000 40,475 55,813 (15,338) (28) Revenue Seat Factor 19 % 82.3 84.2 (1.9)pts n/a Operating Margin 20 % 2.8 9.0 (6.2)pts n/a Unit Revenue (RASK) 21 c/ASK 8.99 8.85 0.14 1.5 Total unit cost 22 c/ASK (8.87) (7.97) (0.90) (11.3) Normalised ex-fuel unit cost 23 c/ASK (4.41) (4.23) (0.18) (4.3) Group capacity (ASK) decreased by 26 per cent mainly due to the grounding of the airlines in the fourth quarter, while demand (measured by RPK) decreased by 28 per cent, resulting in a 1.9 percentage point decrease in Revenue Seat Factor. Group Unit Revenue increased by 1.5 per cent from the prior year, with an increase 24 of 2.8 per cent in the first half and a decline 25 of 2.5 per cent in the second half. The Group’s Total Unit Cost increased by 11.3 per cent as a result of higher fuel prices, foreign exchange impacts and other costs. TRANSFORMATION In the fourth quarter, the focus shifted to preserving liquidity and transformation activities essentially ceased. The Group’s significant track record in delivering transformation including $3.2 billion in benefits over the past five years give it confidence that it will deliver on the Three-Year Recovery Plan initiated to assist the Group to recover from the consequences of COVID-19. 15. Uplifted passenger revenue included in net passenger revenue. 16. Underlying expenses differ from equivalent statutory expenses due to items excluded from Underlying PBT such as those items identified by Management as not representing the underlying performance of the business. Refer to the reconciliation on page 20. 17. ASK – total number of seats available for passengers, multiplied by the number of kilometres flown. 18. RPK – total number of passengers carried, multiplied by the number of kilometres flown. 19. Revenue Seat Factor – RPKs divided by ASKs. Also known as seat factor, load factor or load. 20. Operating Margin is Group Underlying EBIT divided by Group total revenue. 21. Unit Revenue (RASK) is calculated as ticketed passenger revenue divided by Available Seat Kilometres (ASK). 22. Total Unit Cost is Underlying PBT less ticketed passenger revenue per ASK. 23. Normalised ex-fuel unit cost is measured as Underlying PBT less ticketed passenger revenue, fuel, depreciation and amortisation and share of profit/(loss) of investments accounted for under the equity method, adjusted for the impact of changes in foreign exchange rates and the non-cash impact of discount rate changes on provisions per ASK and normalised for the impact of the sale of domestic terminal leases. 24. Compared to the first half of 2018/19 financial year. 25. Compared to the second half of 2018/19 financial year. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 16 CASH GENERATION Cash Flow Summary June 2020 $M June 2019 (restated) $M Change $M Change % Operating cash flows 1,083 3,164 (2,081) (66) Investing cash flows (1,571) (1,563) (8) (1) Net free cash flow (488) 1,601 (2,089) (130) Financing cash flows 1,853 (1,150) 3,003 261 Cash at beginning of year 2,157 1,694 463 27 Effect of foreign exchange on cash (2) 12 (14) (117) Cash at end of year 3,520 2,157 1,363 63 Debt Analysis June 2020 $M June 2019 (restated) $M Change $M Change % Net on balance sheet debt 26 $M 3,173 2,980 193 6 Capitalised aircraft lease liabilities 27 $M 1,561 1,730 (169) (10) Net Debt 28 4,734 4,710 24 1 Net Debt/EBITDA 29 times 2.2 1.6 0.6 38 Operating cash flows for 2019/20 were $1,083 million, $2,081 million lower than the prior year, reflecting the lower earnings and working capital movements associated with lower revenue received in advance, lower receivables, payables (including refunds) and hedge settlements. Net capital expenditure of $1.6 billion was skewed to the first half and included investment in replacement fleet such as the final delivery payments for three 787-9 Dreamliners for Qantas International, customer experience initiatives including lounges, the A380 reconfigurations and Wi-Fi installation on the Qantas Domestic fleet. Net financing cash inflows of $1,853 million included $2,155 million draw down of debt, offset by scheduled debt repayments of $625 million, dividends of $204 million and an off-market share buy-back totalling $443 million. Net proceeds from the fully underwritten placement totalled $1,342 million. At 30 June 2020, the Group’s unencumbered asset base had an approximate value of $2.5 billion 30, including 46 per cent of the Group fleet 31, land, spare engines and other assets. Qantas continues to retain significant flexibility in its financial position, funding strategies and fleet plan to ensure that it can respond to changes in market conditions and earnings scenarios. At 30 June 2020, the Group’s leverage metrics were within investment grade metrics Baa2, with Net Debt/EBITDA of 2.2 times. 26. Net on balance sheet debt includes interest-bearing liabilities and the fair value of hedges related to debt reduced by cash and cash equivalents. 27. Capitalised aircraft lease liabilities is a non-statutory measure. It is measured at fair value at the lease commencement date and remeasured over the lease term on a principal and interest basis. Residual value of capitalised aircraft lease liability denominated in foreign currency is translated at a long-term exchange rate. Where leased aircraft were classified as finance leases under the previous accounting standard (AASB 117), the capitalised amount and notional depreciation for ROIC is consistent with the recognised accounting values. 28. Net debt is a non-statutory measure. It includes on balance sheet debt and capitalised aircraft lease liabilities under the Group’s Financial Framework. 29. Management’s estimate based on Moody’s methodology. 30. Aircraft valuations based on the average of AVAC and AVITAS market values 30 June 2020. 31. Based on number of aircraft as at 30 June 2020. The Group’s fleet totalled 314 aircraft including Jetstar Asia (Singapore) owned fleet and excludes Jetstar Pacific (Vietnam) and Jetstar Japan. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 17 FLEET The determination of the optimal fleet age for the Qantas Group balances a number of factors and varies by fleet type, including the availability of any new technology, the level of capacity growth required in the markets that it serves, the competitive landscape and whether the investment is earnings accretive. At all times, the Group retains significant flexibility to respond to changes in market conditions and the competitive landscape by deploying several strategies including fleet redeployment, refurbishment, renewal and retirement. In the first half of 2019/20, the Group took delivery of three additional 787-9 aircraft for Qantas International, taking that fleet to 11 aircraft, and retired one 747-400, while five Q300s and one A320-200 were transferred from Jetstar to QantasLink. At 30 June 2020, the Qantas Group fleet 32 totalled 314 aircraft. Fleet Summary (Number of aircraft) June 2020 June 2019 A380 12 12 747-400/400ER 4 7 A330-200/300 28 28 737-800 75 75 787-9 11 8 717-200 20 20 Q200/300/400 50 45 F100 17 17 A320-200 4 2 Total Qantas (including QantasLink and Network Aviation) 221 214 Q300 - 5 A320/A321-200 76 78 787-8 11 11 Total Jetstar Group 87 94 737-300/400F 5 5 767-300F 1 1 Total Freight 6 6 Total Group 314 314 Through the second half of 2019/20, the Group’s fleet strategy adjusted to the new demand environment post-COVID. The Group has accelerated the retirement of the 747-400s, with all having left the fleet by the end of July 2020. The A380 fleet has been put into long- term storage for the foreseeable future. Jetstar Asia’s fleet will reduce from 18 to 13 with a mixture of lease returns and aircraft redeployment to Australia. Jetstar Group A320ceos continue to be transferred to QantasLink for redeployment into the growing resources sector market in Western Australia. SEGMENT PERFORMANCE Segment Performance Summary June 2020 $M June 2019 (restated) $M Change $M Change % Qantas Domestic 173 778 (605) (78) Qantas International 56 323 (267) (83) Jetstar Group (26) 400 (426) (107) Qantas Loyalty 341 376 (35) (9) Corporate (134) (171) 37 22 Unallocated/Eliminations (15) (98) 83 85 Underlying EBIT 395 1,608 (1,213) (75) Net finance costs (271) (282) 11 4 Underlying PBT 124 1,326 (1,202) (91) 32. Includes Qantas Airways, Jetstar Australia and New Zealand, Jetstar Asia (Singapore), Qantas Freight and Network Aviation, and excludes aircraft operated by Jetstar Japan and Jetstar Pacific (Vietnam). QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 18 QANTAS DOMESTIC Metrics June 2020 June 2019 Change ASKs M 25,773 33,866 (23.9%) Seat factor % 75.9 77.8 (1.9)pts Qantas Domestic remained profitable despite the impact of government-imposed travel restrictions, reporting an Underlying EBIT of $173 million, compared with $778 million in 2018/19. The near record performance in the first half more than offset the second half underlying loss. Excluding the impact of depreciation and amortisation the second half was profitable at an EBITDA level. As the travel restrictions took hold, Qantas Domestic experienced a sharp decline in demand, with the airline virtually grounded in the fourth quarter. Flying was reduced to the government-sponsored Minimum Viable Network to provide vital links to regional Australia and between capital cities. The high variable versus fixed cost mix meant that as the fourth quarter ticketed passenger revenue decreased by 97 per cent, net operating expenses were able to be reduced by 83 per cent. This variable cost base provides Qantas Domestic with the flexibility to respond to changing demand profiles while minimising cash costs as the recovery unfolds. To support the recovery of domestic travel, Qantas Domestic: – Introduced a “Fly Well” program for the health and safety of our customers at each point of the journey – Is adding capacity, routes and lounges as demand returns, including new regional routes to Ballina and Orange – Is deploying further A320 capacity to Western Australia to support resources sector demand growth. QANTAS INTERNATIONAL Metrics June 2020 June 2019 Change ASKs M 50,484 69,571 (27.4%) Seat factor % 84.1 86.0 (1.9)pts Qantas International remained profitable, reporting an Underlying EBIT of $56 million for 2019/20 even as the international passenger operations moved into losses as a result of international border closures. The result was supported by a record performance from freight due to increased air freight demand while passenger aircraft bellyspace capacity remained constrained. The impact of the grounding of the passenger fleet in the fourth quarter resulted in a 100 per cent decrease in ticketed passenger revenue. Qantas International acted swiftly to mitigate the fall in revenue by reducing net operating expenses by 89 per cent. The Australian Government engaged the Group to conduct charter repatriation and rescue flights, and along with the Minimum Viable Network and International Freight Assistance Mechanism, this ensured that vital transport and freight links were maintained despite the grounding of the passenger fleet. The fleet plan for Qantas International has been realigned to the recovery profile: – A321 freighter conversion is in progress, with first delivery expected in October 2020 to meet demand for increased dedicated freighter capacity – Deferred delivery of three 787-9 Dreamliners in line with the Group’s requirements – A380 fleet moved to long-term storage in July 2020 for the foreseeable future – Retirement of the remaining 747-400ER fleet early, completed in July 2020. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 19 JETSTAR GROUP Metrics June 2020 June 2019 Change ASKs M 35,613 47,993 (25.8%) Seat factor % 84.3 86.1 (1.8)pts The Jetstar Group reported a small loss of $26 million at an Underlying EBIT level including the combined losses from Jetstar’s International businesses. The Jetstar Australia and New Zealand business was profitable despite the profound impact of travel restrictions due to COVID-19 and the $33 million impact of industrial action. This was due to the large variable cost base of the Jetstar operations where net operating expenses were reduced by 95 per cent in the fourth quarter as Ticketed Passenger Revenue declined by 99 per cent. Jetstar’s Domestic business delivered an Underlying EBIT of $112 million, while the combined international business fell into losses of $138 million driven by international border closures across the Jetstar Group’s airlines in Australia, New Zealand and Asia. Jetstar’s airlines in Asia fell into losses as the impact of COVID-19 spread through South East Asia, Vietnam and Japan. The previously announced exit of Jetstar Pacific is well advanced, with commercial functions transitioned and rebranding to Pacific Airlines and reservation system cutover completed. Jetstar Asia’s fleet will be reduced from 18 to 13 with a mixture of lease returns and aircraft redeployment to Australia, resulting in redundancies of 25 per cent of staff. Jetstar Japan is implementing its own restructuring program and operated at approximately 75 per cent of its 2018/19 capacity during the August peak holiday period. The New Zealand domestic operation was returning to near full capacity by the end of August 2020 but remains flexible to evolving domestic travel restrictions in the country, providing confidence for Australian domestic leisure demand recovery when borders open. QANTAS LOYALTY Metrics June 2020 June 2019 Change QFF members M 13.4 12.9 4.2% Qantas Loyalty reported an Underlying EBIT of $341 million, after reporting a record first half of 2019/20. It provided an important source of diversified earnings and positive cash flow as the Group’s airlines moved into hibernation. Second half revenue from points sales to external partners and other non-airline revenue was down 13 per cent. Points earned from flying on the Group’s airlines declined in the fourth quarter, reducing intercompany revenue, but had no impact on EBIT. Qantas Loyalty experienced a short-term decline in points earned through credit card spend and engagement in travel-related products, particularly in the fourth quarter. Meanwhile, the retail businesses such as Qantas Wine, Qantas Shopping and Qantas Store delivered growth, supporting earnings diversification. Despite the grounding of the airlines, the program maintained its relevance to both members and partners, achieving record customer satisfaction in the fourth quarter, demonstrating the success of the program enhancements including tier status extension and increased availability of Classic Reward seats to popular destinations, improving the redemption value proposition. Demand for Qantas Points remains strong with expanded opportunities to earn ‘on the ground’ including the launch of the Afterpay partnership and BP fuel partnership, with 500,000 members linking their accounts. Growth of new businesses and program launches continue to diversify member offerings with the Points Club and Qantas Insurance expanding into car insurance through the year, and the launch of home insurance expected in the next financial year. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 20 RECONCILIATION OF UNDERLYING PBT TO STATUTORY PROFIT BEFORE TAX The Statutory Loss Before Tax of $2,708 million for 2019/20 compares to a Statutory Profit Before Tax of $1,192 million for 2018/19. Underlying PBT Underlying PBT is the primary reporting measure used by the Qantas Group’s Chief Operating Decision-Making bodies (CODM), being the Chief Executive Officer, Group Management Committee and the Board of Directors, for the purpose of assessing the performance of the Group. The objective of measuring and reporting Underlying PBT is to provide a meaningful and consistent representation of the underlying performance of each operating segment and the Qantas Group. The primary reporting measure of the Qantas Domestic, Qantas International, Jetstar Group and Qantas Loyalty operating segments is Underlying EBIT. The primary reporting measure of the Corporate segment is Underlying PBT as net finance costs are managed centrally. Underlying PBT includes the impact of COVID-19 on the operating performance of the Group. Group Revenue for 2019/20 as recognised within Underlying PBT is down $3.7 billion compared to 2018/19, which is consistent with the impact on Statutory Loss primarily due to the impact of COVID-19. Likewise, the impact of the decisive actions taken by the Group to mitigate the impact of COVID-19 including a reduction in flight capacity domestically and internationally (including a reduction in costs from fuel and variable cost reductions), workforce stand downs and operational cost-out measures have also been recognised in Underlying PBT. Government support to mitigate the impact of COVID-19 from travel restrictions and border closures including the Australian Aviation Financial Relief Package, JobKeeper Payment, Minimum Viable Network flights and International Freight Assistance Mechanism payments, together with costs to operate or payments to employees are also recorded in Underlying PBT. Items which are identified by Management and reported to the CODM bodies as not representing the underlying performance of the business are not included in Underlying PBT. The determination of these items is made after consideration of their nature and materiality and is applied consistently from period to period. Items not included in Underlying PBT primarily result from revenues or expenses relating to business activities in other reporting periods, transformational/restructuring initiatives, transactions involving investments, impairments of assets and other transactions outside the ordinary course of business. The impact of COVID-19 and the Group’s Recovery Plan have resulted in items not included in Underlying PBT, including asset impairments (including the A380 fleet), Recovery Plan restructuring costs including redundancies and de-designated hedging due to significant decrease in flying activity. These are in addition to transformation costs directly incurred to enable the delivery of transformation benefits. 2020 $M 2019 (restated) $M Reconciliation of Underlying PBT to Statutory (Loss)/Profit Before Tax Underlying PBT 124 1,326 Items not included in Underlying PBT – Transformation costs and discretionary bonus for non-executive employees (191) (254) – Recovery Plan restructuring costs (642) - – Impairment/(reversal of impairment) of assets and related costs (1,428) 39 – De-designation of fuel and foreign exchange hedges (571) - – Net gain on disposal of assets - 192 – Unrealised foreign exchange movements from the adoption of AASB 16 and the IFRIC Fair Value hedging agenda decision - (105) – Other - (6) Total items not included in Underlying PBT (2,832) (134) Statutory (Loss)/Profit Before Income Tax Expense (2,708) 1,192 In the 2020 financial year, the items outside of Underlying PBT included: Items Outside of Underlying PBT Description Transformation costs and discretionary bonus for non- executive employees $191 million including $161 million directly incurred to enable the delivery of transformation benefits and $30 million of discretionary bonus for non-executive employees announced in previous financial years. Recovery Plan restructuring costs $642 million including people restructuring costs of $575 million and fleet restructuring costs of $67 million resulting from the announced post-COVID Recovery Plan. People restructuring costs primarily relate to the announced restructure, resulting in the reduction of around 6,000 roles. Impairment of assets and related costs Impairments of assets and related costs includes: – $1,087 million impairment of the Group’s A380 fleet, including related spares, inventories and onerous contracts. With the impact of COVID-19 and the closure of international borders, the Group’s A380 fleet is expected to be grounded for the foreseeable future – $341 million of other impairments of assets. De-designation of fuel and foreign exchange hedges $571 million of de-designated hedging resulting from significant decrease in flying activity in the last quarter of the 2019/20 financial year and into the 2020/21 financial year. Refer to Note 2(B) of the Financial Report for details of items not included in Underlying PBT. QANTAS ANNUAL REPORT 2020 Review of Operations continued For the year ended 30 June 2020 21 MATERIAL BUSINESS RISKS The aviation industry is subject to numerous inherent foreseeable risks that can impact operations if left untreated. In rare circumstances ‘black swan’ risk events can materialise, resulting in unexpected consequences such as those that the aviation industry is experiencing due to COVID-19. The COVID-19 pandemic has impacted Qantas’ operations significantly, including its strategic and financial objectives. Material business risks arising from COVID-19, notably liquidity risks, are being critically managed to ensure the ongoing sustainability of the Group. To minimise this consequence, Management has established a Three-Year Recovery Plan to rightsize and transform the Group in response to COVID-19 impacts to guide the Group’s recovery and return to growth. As the impact of COVID-19 evolves, the Group continues to plan for a wide range of scenarios and risks. Other inherent risks that can impact the Group’s operations include exposure to changes in economic conditions, changes in Government regulations, fuel and foreign exchange volatility and other exogenous events such as aviation incidents, natural disasters, or international conflicts. General economic conditions post-crisis: As air travel is closely linked with economic growth, the Qantas Group’s operating and financial performance is influenced by a variety of general economic and business conditions in Australia and overseas. A sustained decline in consumer and business demand as part of a broader deterioration of economic conditions is likely to have a material adverse effect on the financial condition and business of the Qantas Group. COVID-19 has created considerable uncertainty and volatility surrounding these macroeconomic factors, and any further deterioration may have a material adverse impact on the business, financial condition and prospects of the Qantas Group. Human resources and industrial action risk: The Qantas Group operates in a highly regulated employment market and a portion of the Qantas Group’s employees are represented by unions and are party to collective bargaining arrangements. Any significant enterprise bargaining dispute between the Qantas Group and its employees, including in relation to the Recovery Plan could lead employees to take industrial action, including work stoppages. This could disrupt the Qantas Group’s day-to-day operations as well as lead to reputational damage. The COVID-19 crisis has necessitated the standing down of a significant portion of employees. While the need to stand down employees will decrease over time, any significant successful