Chicken Little is at it again
First it was “the Asian financial crisis”, then came “9/11”, then it was “SARS”, and then “bird flu”. Now Qantas’ Chicken Little CEO is screaming the sky will fall in because of high oil prices. Whatever. We’ve heard it all before Geoff!
Granted, there is the usual panicked bleating in the media about high oil prices. But read a little deeper than the headlines and you’ll find these gems:
“BOEING believes oil prices will come back to a longer-term trend of $US70-80 a barrel.
The US aerospace giant does not itself analyse fuel trends but said the long-term view of its advisers was that the oil price would decrease.”
http://www.theaustralian.news.com.au/story/0,25197,23741779-23349,00.html.
And…
“Economists, however, believe crude could soon fall back to $US100, taking pressure off petrol and aviation fuel prices.” http://www.theaustralian.news.com.au/story/0,25197,23744412-23349,00.html
My point is, GD would have the best analysts in the business looking at fuel price trends, so he knows that these high oil prices are a speed hump and that they will eventually fall. He is using that knowledge and the current blip in prices to drive down wages.
A few more interesting points:- Qantas and Jetstar aircraft are flying slower to save fuel. “The unannounced moves, which follow similar actions by US airlines, are expected to save the carriers millions of dollars and reduce upward pressure on airfares… We have been conducting a trial where aircraft flights are taking a bit longer and burning less fuel. Early indications are that we are seeing positive savings in terms of fuel… This practice has led to fuel savings and lower carbon emissions without any significant impact on flight times." http://www.theaustralian.news.com.au/story/0,25197,23744412-23349,00.html. Once those procedures are locked in, does anyone sane think a company would willingly relinquish those savings? And does a passenger really care if it takes 6 minutes longer to get to Perth. Indeed, it could be a selling point if QF badges it as “a green-house gas reduction measure”.
- Qantas is increasing airfares. I quote an article in today’s Australian Business Backpage entitled “Dixon may be lucky buyout failed”: “The oil prices might be higher but so are airfares… so long as Dixon can get people paying higher fares and keep travelling, he is fine.” http://www.theaustralian.news.com.au/story/0,25197,23743151-5013408,00.html. (This is a very interesting article and I urge everyone to read it in its entirety. I have quoted from it further below.)
- We are experiencing massive growth in air travel in the Asia Pacific region. Higher airfares may cut a few percentage points off this growth, but so what. There is that much growth in the pipeline that airlines simply can’t keep up. Not in capacity, nor pilots nor engineers. This growth will more than compensate for any drop-offs in demand from the US slowdown/recession. And keep in mind that the US is still an economic behemoth, so there will always be demand to a greater or lesser extent for air travel from that market.
- The $200 million compensation from Airbus for A380 delays, and Qantas’ own forecast that compensation from Boeing for the B787 delays will be greater than that of the Airbus compensation; http://www.theaustralian.news.com.au/story/0,25197,23741631-23349,00.html.
- The possible sale of 40% of the Frequent Flyers program: another $1 billion. http://www.theaustralian.news.com.au/story/0,25197,23743151-5013408,00.html.
- Qantas breaking into the next emerging market: Vietnam/South East Asia with its stake in Pacific Airlines.
We all know Qantas is investing in increased capacity. With increased capacity comes the ability to fly slower and save fuel. New aircraft with lower maintenance requirements will provide savings per aircraft once the older fleet start getting retired. Also, the airlines are working with Air Services Australia, the EU, the FAA etc to streamline flying routes to save fuel. And AA is joining UAL to charge pax for baggage. How long before other airlines including QF follow their lead?
Airfares have been jacked up in Aus, as they have in the US. Chicken Little is also pointing to the US airline industry as a warning to us all. Job losses, mergers, bankruptcies, capacity cuts. But there are big differences between the US and Australia and their respective airlines: - The US is heading for or in recession.
- The US airline industry is a bloated dead man walking. It needs structural adjustment to survive. So many of the airlines are flogging a dead horse by persisting with flying non-profitable routes with thirsty, expensive older aircraft. Change, downsizing etc is inevitable.
Contrast this with Australia and Qantas.- We are ideally positioned to cash in on the new driver of the world economy, the Asia-Pacific region. Boeing says that 90% of its aircraft sales are to this region. Clearly, it’s where the growth is! The US is losing its position as the sole engine of the world’s economy.
- QF “going forward” will be flying fuel-efficient aircraft types. QF has made the biggest order of B787s, after all!
- QF has Jetstar to pick up lower profit routes.
If, worst case, Qantas has to cut capacity well, OK, is that such a bad thing? “American Airlines has cut its by 12 per cent and the US industry association forecasts 20 per cent cuts across the industry. Given his domestic dominance, Dixon, in theory, has this angle covered as well, because his fleet is varied in age, which means much of it is completely written down in value. This makes it easy for him to shut down capacity by as much as 14 per cent without costing a cent. Then, of course, he has a low-cost carrier in Jetstar to pick up marginal routes.” http://www.theaustralian.news.com.au/story/0,25197,23743151-5013408,00.html.
Well how many times has GD said he is angling for capacity growth, not reduction? Orders for 65 B787s,12 A380s, umpteen A320s/A321s and more B737-800s to come.
And as you can imagine, like trying to claw back interest rate falls from the banks once they start falling, once airfares go up, they’ll probably stay up. The world airline industry will want to recoup some of those profits lost to high oil prices, so Qantas will benefit from that aspect of “competition”.
My point: all these factors will help pad Qantas’ bottom line. Both lots of compensation from Airbus and Boeing alone could pay for a 5% pay rise for ALL Qantas staff over the next few years and still leave the company with tens of millions in change. In a few years time, the US will be out of recession and helping drive the world economy; India, China, indeed the whole region will still be booming; our new fleet will be operating very efficiently both in terms of reduced maintenance costs per airframe and fuel, and things will be on the up and up for Qantas.
Has anyone heard QF announce forecast profit falls lately? Exactly. The silence is deafening.
And MY bottom line? I think QF can afford 5% for everyone, not just us.