Qantas will raise domestic and international airfares by as much as 3.5% early next month to offset the soaring cost of jet fuel prices.
The decision comes as the price of oil hit a record of $US119.93 a barrel due to a strike closing a major pipeline in Britain and more violence in Nigeria where rebels attacked a police station in the main producing area, the Niger Delta.
And there was another small start up airline in the US which failed over the weekend, thanks to the rising cost of fuel and the US recession. Eos Airlines, which offered business class flights between New York and London filed for Chapter 11 bankruptcy protection, becoming the latest carrier to fail in the face of record fuel prices and a softening economy.
Eos joined a number of other carriers to shut down in recent weeks, including Aloha Airlines, Champion Air, Skybus Airlines, ATA Airlines and Frontier, and the Hong Kong based long distance budget carrier, Oasis.
In Australia, Virgin Blue two weeks ago cut its earnings forecast because of higher fuel costs and the sharp rise in the number of seats available in the Australian market as Qantas, Jetstar, Tiger and others flooded the market.
Air New Zealand has also downgraded its earnings forecast, but Qantas sees no reason to follow suit.
Qantas yesterday reaffirmed its guidance of a 40% at least rise in pre tax earnings for the 12 months to June 30.
But domestic fares across all classes of flights on Qantas and its regional subsidiary, QantasLink, will rise by about 3.5% from May 9, while the price of international tickets will increase 3% per cent.
The airline already has fuel surcharges in place, but these increases are to the base fares.
Qantas says its low-cost offshoot, Jetstar, is also likely to increase fares as it undertakes a review of prices, while the airline is looking at the cost of its fares sold outside Australia.
Qantas’s chief executive, Geoff Dixon, said in a statement to the ASX that the airline was raising fares, making cutbacks to "non-essential" expenditure and instituting a hiring freeze to minimise the impact of the surging jet fuel prices.
It had also dropped its share buyback as a ‘prudent’ measure at this time of increased volatility in fuel prices.
"An increase in base fares is now necessary to partially bridge the widening gap between the actual increase in the cost of fuel and the amount we offset through surcharges or non-fuel cost improvements," Mr Dixon said in a statement today.
"We will continue to monitor fare and surcharge levels and review our network and schedule to optimise capacity."
Virgin Blue, is also set to raise one-way fares by up to $12 next month because of the high fuel prices. Virgin could also introduce a further fuel surcharge because of its inability to keep absorbing the fuel costs.
The Qantas statement came the same day as CEO, Geoff Dixon told The Australian newspaper that he wasn’t leaving the airline right now.
In the interview Mr Dixon said he expected to deliver next financial year’s first-half results (that would be in February, 2009).
"Qantas is bucking a local trend by sticking to its previous profit guidance that its pre-tax profit will be at least 40 per cent higher than last year’s result of just over $1 billion.
"The Qantas chief’s optimism does not mean the airline is not seeing some impact from the shake-up.
"Demand is softening for Jetstar at the discount end of the market, while competitors Virgin and Tiger are cutting prices. Several analysts have cut price targets for the airline and warned that profits could suffer in 2009," Mr Dixon said.
But Mr Dixon said Qantas was "extremely strong" on domestic and global markets, despite continuing weakness on Japanese routes and fluctuations in the British market.
In its statement to the ASX, Qantas started with the Public Relations stuff, and buried the higher air fares down around the 6th paragraph.
"Qantas said today it was accelerating initiatives to protect its profitability as fuel prices continued to reach record highs.
"The Chief Executive Officer of Qantas, Mr Geoff Dixon, said the Group’s successful fuel hedging program, the benefits of its Two Brand Strategy and efficiency gains through the Sustainable Future Program had enabled it to manage higher fuel costs to date."
But then the bad news:
"Mr Dixon said the company was taking immediate steps to minimise the impact of the fuel cost rise, including an increase in domestic and international airfares sold in Australia from 9 May 2008.
"The fare increase will apply to all Qantas and QantasLink routes across all fare classes:
"Domestic fares will increase by approximately 3.5 per cent.
"International fares will increase by approximately 3 per cent.
"Jetstar is reviewing its fare levels and increases to Qantas fares sold outside Australia are also under consideration."
No wonder the Reserve Bank is worried about inflation and inflationary expectations. Qantas can do this to "protect its profitability". We consumers and air travellers can’t do anything to protect our profitability!
The cost of domestic travel and accommodation fell 1.4% in the March quarter, according to the Consumer Price Index. Qantas’ fare rises will reverse that, especially if followed by a Virgin fare hike.
Qantas shares closed 1.8%, or 6c, higher to $3.43.
