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Fuel pressure on Qantas fares
Steve Creedy, Aviation writer
May 03, 2006
QANTAS would have to accelerate its recently revised $3 billion cost savings program to cover an extra $1 billion in fuel costs, the national airline warned yesterday.

Analysts estimate Qantas will need to find an extra $250 million in savings on top of the target of $3 billion set for 2008.

Chief financial officer Peter Gregg admitted the "Sustainable Future" program target was inadequate and refused to rule out fare rises in addition to recently announced fuel surcharge increases of up to $23 per sector that take effect from Friday.

Mr Gregg said labour and fuel now accounted for 60 per cent of the airline's expenses and the higher fuel bill meant responses other than cost-cutting were limited. "We're in new territory now," he said.

"Inflation's moved a little bit. Clearly, at these fuel prices - fuel is $1 billion higher in 2007 than it was in 2006 - you have to make changes.

"The targets we set ourselves for Sustainable Future won't be large enough."

Mr Gregg would not be drawn on which areas would be affected by the accelerated efficiency drive, but said details would be released "in due course".

He also declined to say how much extra the airline needed in savings or how much additional revenue the fuel surcharge would provide. "We're finalising a lot of plans right now," he said.

However, analysts believe the higher fuel surcharge will only cover about $250 million of an estimated additional $1 billion in fuel costs in fiscal 2007.

With the $500 million the airline expects to save from the Sustainable Future program, there is a shortfall of $250 million.

Some analysts have already reduced their fiscal 2007 profit expectations by up to 25 per cent, saying it is getting increasingly difficult for Qantas to reduce costs. The airline's shares fell 6c to $3.40 yesterday.

Mr Gregg said that the new round of cost cuts should not be seen as an attack on workers.

"This is an attack on a cost base that makes the business inefficient, and we have to make it efficient if we are to survive," he said. "And the great bulk of Qantas workers have got jobs because (we) have pursued an efficiency drive over a period of time."

He said there was a combination of events - potentially rising interest rates, increasing fuel prices and higher living costs - that had to be watched closely.

Qantas could reduce capacity if demand fell but that "would be pretty extreme at this stage".

The domestic environment remained robust, a strong Australian dollar was helping outbound international traffic, and inbound traffic was strengthening.

"It's very hard to see a drop off at this stage," he said. "The real issue is how long fuel prices stay this high."

Mr Gregg also confirmed the airline's interest in widening its freight operations and possibly spinning them off as a separate company. He said Qantas saw freight and logistics as a natural area into which Qantas could expand. While time-sensitive freight remained important to it, the company was also looking at general freight opportunities.

Asked whether this included a partnership with Queensland Rail, he said: "Clearly they're unaligned in the Australian context with the Toll-Patrick deal and clearly that's someone you would talk to. But until we've got a case or a proposal, it's just speculation really." www.theaustralian.com.au