Despite losing millions due to a string of natural disasters and rising fuel prices, Qantas Group (ASX: QAN) expects to report $500m to $550m profit for the year ending 30 June 2011.

Disruption from the Chilean volcano remains a material variable to the Group’s final FY11 result. As of Monday 20 June 2011, the disruptions caused by volcanic ash were estimated to have cost the Group $21 million. Given the disruptions are continuing this week, Qantas said it is not in a position to provide a more specific guidance range at this stage.

A number of factors have impacted the FY11 result. Qantas has today reached an agreement with Rolls-Royce plc in relation to the QF32 incident. The full settlement of $95 million will be recognised in the FY11 result.

There were several significant weather events and natural disasters during the period, with a total financial impact of $206 million, compared with previous guidance of $140 million. This includes the estimate of $21 million for the disruptions caused by ash from the Chilean volcano up to 20 June 2011, as well as an update of the impact of the Queensland floods, Cyclones Yasi and Carlos, the Japan tsunami and the Christchurch earthquake (totalling $185 million).

In addition to these events, the Group’s second half financial performance reflects a more challenging operating environment, with significantly higher fuel prices than in the first half. While fuel hedging has provided some protection against these increases, prices remain at historically high levels.

Qantas CEO Alan Joyce said the forecast FY11 result reflected the underlying strength of the Qantas Group portfolio.
“Considering the challenges facing the aviation industry, this is a very good result – the Qantas Group’s best since the global financial crisis,” Mr Joyce said.

“The combination of our two domestic flying brands, Qantas and Jetstar, together with Jetstar International, Qantas Frequent Flyer and Qantas Freight, has enabled us to withstand a number of major events affecting our performance. On a combined basis, these businesses are profitable and are returning in excess of their cost of capital.

“In FY11, Qantas International is forecast to generate a loss before interest and tax of approximately $200 million, on invested capital of over $5 billion, with a weaker result expected next year.

“Qantas International is the Group’s weakest business – it has achieved required returns only three times in the past 15 years. Clearly the situation is not sustainable. However, we are developing a long-term strategy aimed at restoring competitiveness and profitability.

“We have a proud history and unmatched experience in international flying and will take the hard steps necessary to turn this airline around. Our review of Qantas International is progressing in line with expectations and we will announce plans for its strategic renewal later this year.”

Full details of Qantas Group’s FY11 result will be announced on 24 August 2011.

Commercial agreement with Rolls-Royce

Qantas also said it had reached an agreement with Rolls-Royce in relation to the disruption incurred as a result of the QF32 uncontained IP disc failure of a Rolls-Royce Trent 900 engine on 4 November 2010 and the subsequent temporary grounding of Qantas’ entire A380 fleet.

The settlement reached today includes the discontinuance of the legal proceedings initiated by Qantas in the Federal Court of Australia on 2 December 2010.

While the terms of the agreement are confidential, the profit and loss impact of the settlement, which will be recognised in Qantas’ financial results for FY11, is A$95 million.

In its interim report released on 18 May 2011, the Australian Transport Safety Bureau (ATSB) states that "the disc failure was initiated by a manufacturing defect in an oil feed pipe that resulted in a wall thickness reduction". The ATSB’s investigation is ongoing and a final report is expected in mid-2012.

Following the incident, Qantas immediately grounded its A380 fleet in order to carry out a comprehensive engine inspection and replacement program. Qantas and Rolls-Royce worked closely together to address the concerns raised by the incident. Qantas A380 services to London resumed on 27 November 2010. The remainder of the airline’s A380 services (between Australia and Los Angeles) resumed on 16 January 2011.

Qantas and Rolls-Royce have had a long and successful commercial partnership spanning several decades. Qantas looks forward to a continued strong relationship with Rolls-Royce on the basis of the settlement announced today.