Qantas and the 787-900

[Derfred]

I am no economist, and I openly admit that - unlike some of my fellow pilots and PPRuNers who think they are.

But I will add a contrarian viewpoint on oil prices.

This is based on pure common sense and mathematics that a 12yo should understand (does it have to be more complicated?)

Sure, a reduction in oil prices will improve every airline's bottom line in the short term.

But if those oil prices remain low, the market price for tickets will adjust accordingly, with the lower priced airlines reducing ticket prices and forcing the higher priced airlines to do likewise. In other words, the supply/demand equation for airline tickets will conspire to reduce all airlines to tiny margins again in time. What this will also do is increase the market for airline travel in general, as more people can afford to fly, so Boeing and Airbus will sell more aircraft, more airlines will pop up, and capacity will generally increase, also impacting on the bottom line of existing airlines.

Now, what happens with an increase in oil prices? All airlines suffer greatly in the short term (as we have witnessed). It takes a long time for the industry to adjust to higher oil prices and generate profits at the new oil level because it's a lot harder to downsize capacity than to upsize it. You have to sell aircraft to an industry that isn't buying aircraft. Sacking staff is a lot harder and more expensive than employing staff (in Western countries at least). It's impossible to sell half an airport terminal that you have just spent $50M building. The $500M IT/communications infrastructure you just invested in won't cost you less if you start using it less. Many other fixed costs were fixed at the existing capacity and won't reduce if you sell or park 20% of your fleet. This is why the LC/AJ strategy of cutting routes and reducing fleet was absurd. Many of the fixed costs remain, and your unit cost of operating your remaining aircraft/routes increase accordingly. Hence the huge operating losses in the course of reducing capacity.

Anyone who thinks that they can maintain profitability in a shrinking airline had better have a damn good long term plan in place. Did LC/AJ have one? Here's a clue: "We will not re-invest in QF international until it returns a profit." First prize. Are any of their KPI's based on having a damn good long term plan in place? And by long term, airline investment needs a 10-20 year outlook at least. Are any of their KPI's based on a 10-20 year outlook? Big problem right there from the top down.

The irony is that a high oil price benefits most the premium carriers. It is the LCC's that suffer most with a high oil price. The reason is that the price of fuel becomes a far greater percentage of operating costs, and that the unit staff cost becomes a far lower percentage. And it is the unit staff cost that makes LCC's competitive against the premium carriers. Also, as the ticket prices rise with fuel prices, the bottom end of the ticket market vanishes. You can't sell a $50 ticket for $100, because the folks that pay $50 won't pay $100. Whereas the folks that pay $400 will still pay $450.

So I am interested to see what happens if the oil prices do stay low - this should benefit the LCC's more than the premium carriers. It will also benefit the airlines operating out of low wage countries more than the high wage countries. Neither of these two observations are good for the future of QF mainline.

My only hope is that the short term gain QF will experience from the drop in fuel prices will provide the cash to actually order some new aircraft and get the airline back on it's feet. LC/AJ will take the bonuses to a tax haven and retire on luxury yachts. It won't be a result of any of their expert management, they were just bloody lucky that the US shale oil producers jumped into the market just in time to save their arses. They will be awarded full credit, of course, and I know you and I will see right through that and remain forever disheartened. The journalists will herald them as heroes, because we don't have journalists in Australia anymore, apart from Ben). But hopefully the next round of management will be employed to actually run an airline instead of grounding one (or selling one, as per the previous Chair/CEO) and we will all look forward to a new Qantas that isn't solely focussed on busting unions (which haven't been busted), disengaging its staff, and pissing off it's loyal passengers.