Fuel forces flight cuts

At the time of writing, Qantas foreshadowed a restructure its international route network and reduced utilisation of its 747-400 fleet. Most analysts expect that the carrier will put the axe on Japanese routes, with the high Australian dollar driving many tourists away from Australia.

“The fact is that fuel prices are something we have no control over, so we have to look harder at areas where we do have control,” Qantas’s CEO Geoff Dixon said.

“Despite our fuel hedging strategy, fuel surcharges, two separate across-the-board fare increases and a recruitment freeze, we are not bridging the widening gap between the actual increase in the cost of fuel and the amount we offset. ” In a media statement, Dixon said that fuel costs for the carrier would increase by $2 billion in the 2008/09 financial year, despite the carrier having 34 per cent of its fuel for that year already hedged at US$90 (A$94) per barrel. Similarly, Jetstar has announced that it will ground one A320 and has cancelled the lease on an A321 which was to have been delivered this year (although this aircraft was rumoured to have been in poor condition anyway). The discount carrier will also withdraw from the Sydney-Whitsunday Coast, Adelaide-Sunshine Coast and Brisbane-Hobart routes. It also plans to reduce frequency on some routes from Avalon, Adelaide and Cairns by August.

Qantas’s capacity cuts came after it announced fare increases in late April, which saw domestic fares rise by an average 3 per cent, while international fares were raised by 3. 5 per cent.

Some analysts have seen the latest cuts by Qantas and Jetstar as a sign that the Qantas Group is starting to relent on its stated 65 per cent ‘line in the sand’ of marketshare which has seen both carriers add capacity to constrain competition from Virgin Blue and Tiger.

However, both of these carriers face their own issues which are likely to prevent them launching a serious challenge to the dominant carrier.

At the time of writing, Virgin Blue had yet to announce any capacity cuts, but was believed to have been considering dropping some of its less profitable routes, or down-gauging from Boeing 737s to its E-Jets on some services.

There has been some major concern over Virgin’s current fuel situation, with UBS slashing its forecast for the carrier’s next financial year to a loss of $40 million, compared with its earlier forecast of a $60 million profit if fuel prices continue to remain at current levels or higher.

And while not yet announcing any significant changes due to the higher cost of fuel, Tiger Airways will still be constrained in its growth by the small scale which it currently has, although this could change when it announces its second base (for which it has shortlisted every airport in the country!) later this year.

In the regional sector, Skywest and Regional Express have been progressively increasing their fuel surcharges to offset the higher cost of fuel (see Newsdesk), but neither carrier nor any others have announced service reductions due to fuel.

Across the Tasman, Air New Zealand also announced that it down downgrade its daily Auckland-Los Angeles-London service from a Boeing 747-400 to a 777‑200ER, cutting approximately 66 seats daily. But the 777 will burn considerably less fuel than the larger, heavier 747 it replaces.

Although all these capacity reductions have been caused by the skyrocketing price of oil and higher margins on jet fuel, Boeing’s marketing director Drew Magill said that the manufacturer still sees oil coming back to the US$80 level, with an associated fall in the cost of jet fuel likely.

“It will come back to a long term trend of about US$70 to US$80, which is considerably higher than the previous long-term trend which was about US$30 to US$40,” he said.

Magill pointed to an expected slowing of the US economy to push down oil and jet fuel prices, particularly as airlines around the globe downsize their operations.

But this could be upset if demand from China and India outstrips the downturn in the US, a major factor behind the spike in oil prices.

While it is likely that the price will fall at some point, as predicted by Magill, when that happens is currently anyone’s guess.