Qantas Airways. San Francisco calling A$3.23 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst. Action and recommendation

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1 AUSTRALIA QAN AU Price (at CLOSE#, 10 Jun 2015) Outperform A$3.23 Valuation - EV/EBITDAR A$ month target A$ month TSR % Volatility Index Medium GICS sector Transportation Market cap A$m 7, day avg turnover A$m 46.0 Number shares on issue m 2,196 Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E Revenue m 15,352 15,823 16,348 17,083 EBIT m ,205 1,917 2,094 Reported profit m ,168 1,356 Adjusted profit m ,250 1,437 Gross cashflow m 910 1,819 2,396 2,486 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % nmf nmf PER adj x nmf PER rel x nmf Total DPS Total div yield % Franking % nmf ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x QAN AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, June 2015 (all figures in AUD unless noted) 10 June 2015 Macquarie Securities (Australia) Limited San Francisco calling Event Qantas announced an expansion of its relationship with American Airlines (AA) whereby Qantas will resume services to San Francisco (SFO) and AA will commence daily services from Los Angeles (LAX) to Sydney (SYD). Importantly, the JV between AA and QAN will shift to a revenue-sharing model from the current JBA, which is essentially a codeshare. Impact Agreement adds 9% market capacity on Australia-US route where QAN International is currently most profitable: The agreement will see QAN cut its 4x weekly SYD-LAX and 1x weekly MEL-LAX service, with AA flying a ER 7x weekly service between SYD-LAX. The capacity impact on the SYD-LAX route is broadly neutral however what is likely to cause the market some concern is the net increase in capacity resulting from the AA flights to SYD. For QAN, the agreement frees up a for service between SYD-SFO on peak days initially, ramping to 6x weekly from Jan-16. This will see a net 9% capacity increase on US-AUS routes and 6% increase between SYD and LAX. Offsetting this capacity growth is the demand for travel to San Francisco directly, which is currently served by a direct United Airlines flight, an Air New Zealand flight via Auckland and Qantas through LA with AA. Imitative is an example of effective asset utilisation with opportunity to maintain high yields. The agreement will allow QAN to pursue capacity growth absent any fleet investment. The sweetener is that AA will be pricing into their domestic market which will allow QAN to maintain, if not increase yields. The underlying benefit for QAN is an increase in asset utilisation through expansion into Australian corporates 7 th most popular destination (net passenger revenue). We estimate QAN will have ~54% of total seat capacity across the SYD-SFO route. If granted regulatory approval, agreement with AA will be akin to Emirates relationship: The current JBA with AA is a code-share arrangement, involving coordination of operations between ANZ and the US. If approved, the new agreement will be a revenue sharing agreement, whereby both carriers will pro-rata revenue across all AUS-US routes on a capacity share basis. From Dec-2015, QAN will operate 7x weekly A380 services SYD-LAX (484 seats) plus 3x weekly services SYD-LAX (371 seats), with AA operating a 7x weekly ER service LAX-SYD (304 seats). Based on this capacity share, QAN would have ~89% of the capacity share between SYD and LAX and hence will receive that proportion of the total revenue. Earnings and target price revision No change Price catalyst 12-month price target: A$4.50 based on an EV/EBITDAR methodology. Catalyst: FY15 Results Action and recommendation With consensus FY16 earnings still too low, we maintain our Outperform. Please refer to page 6 for important disclosures and analyst certification, or on our website

2 Agreement will add ~15% capacity to and from US for QAN (& AA) QAN currently operates 7x and 3x weekly services from SYD-LAX and MEL-LA X via its B747. The agreement will mean QAN will cut its 4x weekly service from SYD to LAX and 1x weekly service from Melbourne to LAX. In replacement, American Airlines will fly a ER 7x weekly between Sydney and LAX. This will allow QAN to free up the service between Sydney and San Francisco on peak days initially, then ramping to 6x weekly from Jan-16. The new total market increase is 9% capacity across US-AUS routes and 6% increase between Sydney and LAX. Fig 1 Current QAN weekly services into US market Aircraft Arrival Airport Departure Airport Weekly Services Airbus Industrie A Dallas/Fort Worth International Apt Sydney Kingsford Smith Apt 7 Los Angeles International Apt Melbourne Airport 7 Los Angeles International Apt Sydney Kingsford Smith Apt 7 Airbus Industrie A Boeing 747 Los Angeles International Apt Brisbane 7 Los Angeles International Apt Melbourne Airport 3 Los Angeles International Apt Sydney Kingsford Smith Apt 7 Boeing Source: OAG, Macquarie Research, June 2015 We estimate the new agreement will see ~15% capacity growth for QAN across US-Australian routes. Whilst the new additions from American Airlines across the SYD-LAX routes will broadly offset the reduction from QAN, the new capacity will be across the SYD-SFO route on which QAN will add a 6x B747 weekly service. Fig 2 Capacity changes for QAN and American Airlines across US-Australia routes Capacity changes Weekly seat capacity Total current capacity (Seats) Less 4 x 747 service SYD-LAX 1450 Less 1 x 747 Service MEL-LAX 364 Add 6 x 747 SYD-SFO 2175 Add American 7x777 SYD-LAX 2125 Total new capacity (Seats) % Increase 15% Source: OAG, Macquarie Research, June 2015 Offsetting this capacity growth is the demand for travel to San Francisco directly which is currently served by a direct United Airlines flight, an Air New Zealand flight via Auckland and Qantas through LA with American. The United Airlines service, which is currently the only airline to fly direct across the SYD-SFO route operates a 7x weekly via its B777. QAN will add 6x B747 weekly services which would almost double exisiting capacity along this route. If United were to continue its 7x weekly service, we estimate QAN will have a 54% capacity share across the route. 10 June

3 Fig 3 SYD-SFO route % expected seat capacity share Fig 4 Current expected capacity share into and out of US between QAN and American Airlines under new agreement American Airlines 11% Qantas 54% United 46% QAN 89% Source: OAG, Macquarie Research, June 2015 Source: OAG, Macquarie Research, June 2015 Opportunity to increase asset utilisation whilst maintaning high yields selling into a domestic market The agreement will allow QAN to add capacity to the US market without the need to increase existing fleet as it will be able to re-route its B747 aircraft onto the SYD-SFO route. After terminating its service into SFO in 2011, QAN believes the route metrics are now stacking up. At its recent investor day, QAN highlighted SFO as the 7 th most popular destination for Australian corporates based on a net passenger revenue metric. Whilst QAN does not fly to Houston which is regarded as another top 10 market, this is arguably justified given its proximity to Dallas to which QAN flies frequently. The agreement will also arguably present the opportunity for QAN to realise higher yields across the SYD-LA route as American airlines would be able to price relative to its domestic market. Importantly, the JV between AA and QAN will shift to a revenue-sharing model from the current JBA, which is essentially a codeshare. Under the agreement, QAN will operate ~89% of total capacity provided by the two airlines, with American Airlines re-entering the Australian market for the first time in over 20 years. Fig 5 Top markets served by Qantas Source: Qantas 10 June

4 Fig 6 Investment Fundamentals Year ending 30 June 2012A 2013A 2014A 1H15E 2H15E 2015E 2016E 2017E Year ending 30 June 2012A 2013A 2014A 2015E 2016E 2017E STATEMENT OF OPERATIONS BALANCE SHEET Passengers (000's) 38,714 39,491 39,940 20,869 19,448 40,317 40,605 40,237 Intangible assets International ASK mn 87,922 85,500 86,006 43,697 44,272 87,969 85,718 89,696 Receivables Domestic ASK mn 46,445 49,174 49,982 25,133 24,064 49,197 49,794 48,591 PPE 14,139 13,827 10,500 10,626 10,536 10,570 ASK mn 139, , ,631 71,936 71, , , ,107 Other non-current assets Change 4.6% 0.3% 1.2% 0.1% 2.0% 1.1% -1.2% 2.0% Non-current assets 15,718 14,955 12,386 12,472 12,293 12,248 International RPK mn 70,720 68,595 67,360 35,418 34,546 69,964 68,085 71,020 Trade & other receivables 1,575 1,980 1,685 1,887 1,907 1,934 Domestic RPK mn 37,568 38,896 38,742 20,121 18,651 38,772 40,045 39,375 Other current assets RPK mn 111, , ,580 57,576 54, , , ,987 Cash & equivalents 3,398 2,829 3,001 2,892 2,892 4,233 Change 4.6% -0.7% -1.2% 2.1% 3.2% 2.6% -0.7% 2.0% Current assets 5,460 5,245 4,932 5,082 5,102 6,470 International Load Factor 80.4% 80.2% 78.3% 81.1% 78.0% 79.5% 79.4% 79.2% Total assets 21,178 20,200 17,318 17,554 17,395 18,718 Domestic Load Factor 80.9% 79.1% 77.5% 80.1% 77.5% 78.8% 80.4% 81.0% Load factor 80.1% 79.3% 77.4% 80.0% 77.1% 78.6% 79.1% 79.1% Trade & other payables 2,245 1,945 2,033 2,331 2,408 2,388 Average sector length (km) 2,885 2,808 2,744 2,759 2,823 2,790 2,751 2,833 Other current liabilities 3,754 3,590 4,282 4,407 4,584 4,801 Change 1.8% -2.7% -2.3% 0.5% 0.5% 1.7% -1.4% 3.0% Current liabilities 5,999 5,535 6,315 6,738 6,993 7,189 International Yield (c/rpk) Borrowings < 1 Year 1, , Change 3.4% 1.2% -1.6% 4.7% 2.8% 3.8% 5.5% 3.2% Borrowings > 1 Year 5,430 5,245 5,273 5,109 3,679 3,783 Domestic Yield (c/rpk) Debt 6,549 6,080 6,483 5,730 4,300 4,404 Change 2.8% -3.4% -2.8% 3.0% 4.0% 3.6% 2.0% 2.0% Deferred tax ,205 Jetstar International Yield (c/rpk) Maintenance provisions Change 3.0% -0.7% -5.3% 2.0% 2.0% 2.0% 3.9% -0.3% Other non-current liabilities 1,360 1,240 1,249 1,348 1,415 1,497 Jetstar Domestic Yield (c/rpk) Net assets 5,889 5,954 2,866 3,186 3,645 4,040 Change 8.3% -1.3% -4.5% -3.0% 2.0% -0.7% 1.5% 1.5% Total Yield (c/rpk) Share capital 4,687 4,650 4,614 4,621 4,621 4,621 Change 7.5% 1.7% -2.0% 0.5% 1.4% 0.9% 3.7% 2.1% Reserves 1,202 1,304-1,748-1, Shareholders' equity 5,889 5,954 2,866 3,186 3,645 4,040 Qantas Mainline Revenue 10,009 9,645 9,266 4,828 4,817 9,645 9,809 10,305 Jetstar Revenue 2,917 3,131 3,017 1,671 1,545 3,216 3,411 3,430 Net debt / (cash) 3,151 3,251 3,482 2,838 1, Other Revenue 2,797 3,127 3,069 1,572 1,390 2,962 3,128 3,348 Net debt / EBITDA 2.6x 2.0x -1.5x 1.3x 0.5x 0.1x Revenue 15,724 15,902 15,352 8,071 7,752 15,824 16,348 17,083 Net debt / (cash) (incl. Op Leases) 7,212 7,264 7,457 7,011 5,642 4,075 Change 5.6% 1.1% -3.5% -48.7% -51.3% 3.1% 3.3% 4.5% Net debt / EBITDAR (grossed up) 4.1x 3.3x -4.1x 2.6x 1.6x 1.1x Unit Pax Revenue (c/ask) Interest and Op. Lease cover 2.4x 3.1x -2.5x 3.4x 4.7x 5.6x Change 7.5% 0.6% -4.3% 24.5% 25.9% 2.5% 4.3% 2.2% RASK - unit Revenue (c/ask) CASH FLOW 2012A 2013A 2014A 2015E 2016E 2017E Change 0.9% 0.8% -4.6% -0.5% -4.2% 2.0% 4.6% 2.5% EBITDA 1,211 1,654-2,350 2,195 3,001 3,080 + Inc. in Working capital , Manpower & staff related costs 3,774 3,825 3,717 1,839 1,730 3,569 3,546 3,584 - Net Interest Paid Aircraft Operating - variable 2,980 3,066 3,142 1,598 1,349 2,947 2,791 2,761 - Tax Paid Selling & Admin Other Fuel 4,220 4,154 4,461 2,190 1,768 3,958 3,891 4,551 Net cash in Op Activities 1,810 1,417 1,069 1,721 3,107 3,203 Depreciation & Amortisation 1,384 1,450 1, ,092 1,147 1,049 Non-Cancellable Operating Lease Rentals Proc. of P,P&E Tour & Travel Cost of Sales Proc. of Sale & Lease Back Computer & Communications Proc. of Investments Property + other lease rentals Capex 2,304 1,247 1,161 1, ,004 Capacity Hire & Insurance Acquisitions Associate Loss/(Profit) Investments Hedge loss/(gain) Other Other Expenditure 1, , Net cash in investing -2,282-1,045-1, ,004 Total Expenditure 15,897 15,698 19,124 7,649 7,072 14,721 14,494 15,052 Change 10.0% -1.3% 21.8% -51.9% -55.0% -23.0% -1.5% 3.9% - Dividends Paid (before DRP) CASK - unit cost (c/ask) Equity Movements (inc. DRP) Change 5.1% -1.6% 20.3% -6.7% -11.5% -23.8% -0.3% 1.8% + Debt Movements CASK (ex-fuel) (c/ask) Other Change 3.1% -1.5% 25.5% -9.4% -9.7% -27.4% -0.2% -2.9% Net cash in financing EBIT , ,102 1,854 2,031 Net Increase in Cash ,328 1,341 Margin -1.1% 1.3% -24.6% 5.2% 8.8% 7.0% 11.3% 11.9% + Net Exchange Differences Exceptionals , Net Cash/Borrowing movement ,328 1,341 Underlying EBIT ,205 1,917 2,094 Operating cash flow per share (c) Margin 1.7% 2.4% -2.9% 6.2% 9.1% 7.6% 11.7% 12.3% Growth 7% -21% -23% 62% 81% 3% Net finance cost Underlying PBT ,720 1,965 Key Assumptions 2012A 2013A 2014A 2015E 2016E 2017E Tax Average currency (AUDUSD) Non-recurring Tax Average Jet Fuel price (US$/bbl) NPAT , ,168 1,356 Minorities Valuation multiples at A$3.23 share price 2012A 2013A 2014A 2015E 2016E 2017E Attributatble net profit , ,168 1,356 PE Adjusted EPS (c) EV/EBITDAR Change -84.1% 94.4% nm 377.8% 238.7% % nm nm Dividend yield Dividend (c) Price/Book ROFE 5% 5% -2% 15% 24% 29% EBITDA 1,211 1,654-2, ,235 2,195 3,001 3,080 RoE 1% 2% -18% 23% 34% 36% EBITDAR 1,760 2,179-1,830 1,201 1,540 2,741 3,555 3,590 Source: Company data, Macquarie Research, June June

5 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a strong positive view on. The strongest style exposure is Price Momentum, indicating this stock has had strong medium to long term returns which often persist into the future. The weakest style exposure is Valuations, indicating this stock is overpriced in the market relative to its peers. 55/382 Global rank in Transportation % of BUY recommendations 90% (9/10) Number of Price Target downgrades 1 Number of Price Target upgrades 6 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Transportation) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Asset Turnover DPS Revisions 3 Month Operating Leverage NTM 250d Volatility Quick Ratio (Worldscope) Earnings Certainty (NTM) Merton Score Earnings Stability -32% -33% -33% -33% Negatives Positives 39% 39% 38% 37% -40% -20% 0% 20% 40% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/382) Percentile relative to market(/414) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 10 June

6 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2015 AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients) Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients) Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients) QAN AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, June month target price methodology QAN AU: A$4.50 based on a EV/EBITDAR methodology Company-specific disclosures: QAN AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates is providing Ltd ongoing restructure advisory services, for which it expects to receive or intends to seek compensation. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 13-May-2015 QAN AU Outperform A$ Feb-2015 QAN AU Outperform A$ Feb-2015 QAN AU Outperform A$ Dec-2014 QAN AU Outperform A$ Nov-2014 QAN AU Outperform A$ Aug-2014 QAN AU Outperform A$ Jul-2014 QAN AU Outperform A$ Feb-2014 QAN AU Outperform A$ Dec-2013 QAN AU Neutral A$ Nov-2013 QAN AU Neutral A$ Aug-2013 QAN AU Outperform A$ Aug-2013 QAN AU Outperform A$ Jul-2013 QAN AU Outperform A$ May-2013 QAN AU Outperform A$ Mar-2013 QAN AU Outperform A$ Feb-2013 QAN AU Neutral A$ Feb-2013 QAN AU Neutral A$ Nov-2012 QAN AU Neutral A$ Oct-2012 QAN AU Neutral A$ Aug-2012 QAN AU Neutral A$ June

7 Target price risk disclosures: QAN AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include introduction of improved products or increased capacity by competitors eiother domestically and internationally. The results of operations may be materially affected by global economic conditions especially changes in oil prices and currencies, as well as passenger demand shocks driven by terrorism, natural disasters or sudden outbreaks of disease. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. 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