Qantas in damage control as jet fuel price soar amid Iran war
Canceled flights, $20,000 one-way international airline tickets, moves to shore up the bottom line – sound familiar? Qantas is in the eye of the US-Iran storm as it tries to use every weapon in its arsenal to prevent additional fuel costs of up to $800 million.
It has a COVID-like feel, without the existential hue, ghost flights being sold to customers, or the airline’s passenger service disaster. But make no mistake, Qantas is in damage control as its profits have been devastated by Donald Trump’s Middle East war.
Like all airlines, Qantas is coping with a rapidly evolving crisis using every operational and pricing tool available, including reducing capacity on domestic and some international flights and redeploying aircraft to in-demand routes to Europe.
Thanks to skyrocketing demand for long-haul flights that avoid stopovers in the Middle East, some short-term fares on the kangaroo route have approached $20,000 one-way for business class. Still, it is not enough to maintain the airline’s profits in this half of this financial year.
Fares could be increased further as the airline has made no promises about additional measures “to mitigate fuel cost increases”.
Travel agents say many travelers with short-term bookings on carriers in the Middle East are booking completely flexible and expensive replacement flights to Europe via Asia and may cancel those flights if the conflict ends in time.
Qantas flights to Europe are operating at almost 100 per cent capacity, even after capacity was increased. (Qantas does not fly its planes via the Middle East but uses codeshare partner Emirates for these routes.)
Qantas mostly hedged its fuel costs until June, but its refining margin remained vulnerable to jet fuel prices, which have risen fivefold in the war.
The airline has increased domestic ticket fares as it tries to recover some of its higher fuel costs. Higher ticket prices have led to larger-than-previously expected gains in revenue per seat kilometer, a key measure of airlines’ business performance. In the international segment, the growth rate of revenue per seat kilometer has doubled.
But even using these mitigation measures, Qantas would still make a profit of between $400 million and $500 million in the first half, according to aviation analysts.
It will suspend the already announced $150 million share buyback (despite the drop in the airline’s share price, which would make the buyback cheaper) and keep the capital expenditure burden as light as possible.
Qantas is taking a conservative approach to strengthening its balance sheet due to the lack of a sunset clause on this conflict and the reopening of the Strait of Hormuz, which is necessary for fuel prices to fall.
Whether this fiscal blow will be reflected in the second half of the calendar year depends entirely on the volatile US president. While stock markets are taking into account the end of the conflict, this is not reflected in the public statements of the warring parties.
Regardless of whether the missiles will be stopped tomorrow, the Australian company’s profits have already taken a significant hit. Westpac warned investors on Tuesday it would remove loan provisions to reflect potential losses to borrowers from fuel-intensive operations. Waste management company Cleanaway cut its earnings forecast due to rising fuel and logistics costs due to the war.
Other companies will need to warn investors about adjustments to profit expectations in the coming months.
Without visibility into the duration of the conflict, it has been difficult for companies to provide an accurate picture of the damage to their earnings.
For travelers, meanwhile, there’s likely to be a flood of discounted seats on carriers like Emirates and Qatar to restock planes once the immediate danger has passed.
Some have already been tempted to book cheaper flights on these airlines and continue the challenge.
Welcome to the flying circus.
The Business Briefing newsletter delivers big stories, exclusive news and expert insights. Sign up to receive it every weekday morning.
