Fuel pressure on Qantas

[Wirraway]

Wed "The Australian"

Fuel pressure on Qantas
From: By Steve Creedy
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 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."

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[qf 1]

looks like the shutting down of heavy maint Sydney is going to cost them a lot more than if it was to remain open in the not to distant future,2 aircraft already on the ground,which are unable to be fixed due to the lack of man power 1 requiring major sheetmetal repair under a toilet and another with fibreglass repair work required with the WBF,The aircraft that requires the sturctual work had come out of Avalon where the corrosion had been ignored due to the work not being quoted for,it was there only for a reconfig. WATCH THIS SPACE.

[Sunfish]

"Sustainable future" program??????????

What Codswallop!!!!!!!!!

It's code for "sustainable share price" - which of course is unsustainably high.

What counts is return on shareholders funds, nothing else.

Transaltion: Qantas is perfectly sustainable as it is, but not with the current share price.

[Elroy Jettson]

One would have thought a "Sustainable Future Program" would have considered fuel, or is QF the only airline who uses it? How does it make us uncompetitive when everyone else has an identical cost? :confused: Lets say fuel goes to $200 a barrel, will they still look for "further efficiencies?" Or will they just pay the bl@@dy bill as a cost of doing business? And pass it on to the consumer, not the employee? News Flash, fuel will become an even greater percentage of costs as it is a finite resource, and will continue to increase in price as it runs out. What am I missing budding economists?

Maybe the only reason we are inefficient is because managment have stuck with inefficient technology from the 80s when everyone else was upgrading to more efficient aircraft? Chickens coming home to roost?

[numbskull]

Maybe they should simply put up the price of the airfare.

They have just about exhausted all the goodwill of their workforce(in a service industry, unhappy workers makes for a poor product).

If the cost cutting continues in any significant manner then the airline is at risk of collapsing under its own inability to provide a reliable,consistent service.

[lowerlobe]

Elroy,

Exactly right,Qantas is not Robinson Crusoe ,it has exactly the same problems as any other company that uses the precious stuff.

If operating costs rise through increases in consumables such as fuel then ticket prices have to go up as well. To have a sustainable futures program is great but Darth is just using this again as an excuse to rid himself of the great liability the Australian employee.It is not the fault of employees that the cost of fuel has risen ,so why should they be penalised?

This program should be called "sustainable futures and Australian employee minimising program for corporate bonus's program"

The difference is that while other carriers have spent money to update their fleets and technology ,Darth and his merry gang have only increased their bonuses through slashing costs instead of coupling this with re investing in the company’s infrastructure and therefore future.That is one reason why our share price has not risen!

Ask any customer that has had the experience of QF’s brilliant IFE system (Inflight failure of entertainment) and you will know what I mean. Shops selling portable DVD players to take on board and newspaper shops will be selling heaps. As someone else has said

“Qantas….yesterdays technology tomorrow….”

[sling load]

Qantas to get even tougher
By Scott Rochfort SMH
May 3, 2006

THE relationship between Qantas and its 37,000-strong workforce is likely to deteriorate further in the coming year, with the airline looking to increase its cost-cutting targets.

As Qantas looks at expanding into other transport modes such as rail, it warned yesterday it would have to revise its five-year program to slash $3 billion in annual costs to buffer itself against the recent surge in fuel prices. The airline has warned this may include further cuts in labour costs.

"Clearly for us at these fuel prices … we have to make changes. The targets we set ourselves won't be large enough," Qantas chief financial officer Peter Gregg said yesterday.

"When you're sitting in a business where two of the cost elements of your total expenditure comprise more than 60 per cent - and that's labour and fuel - you have very limited responses … other than to reduce your costs," he said.

Mr Gregg said the airline faced a $1 billion increase in fuel costs next financial year and could not make up for all of this by raising fuel surcharges.

The airline's so-called five-year Sustainable Future Program, which was kicked off during the height of the SARS crisis in mid-2003, aims to save $1.58 billion in annual costs by June 30.

About $444 million of these savings will come from lower labour costs. Qantas had previously aimed to save another $1.5 billion in the two following years up to mid-2008 but, in light of Mr Gregg's most recent comments, it is now unclear where Qantas plans to cut costs further.

Asked if he believed the new round of cuts could hurt relations between Qantas and its workforce, Mr Gregg said: "This should not be seen as an attack on workers. This an attack on a cost base that makes the business inefficient. We have to make it efficient if we are to survive."

It is the second time Qantas has stepped up its cost-cutting targets. When oil prices began to rise in 2004 the airline doubled its targets to $3 billion.

Mr Gregg downplayed the potential for widespread industrial strife if Qantas decided to accelerate its cost cutting program.

"The great bulk of the Qantas workers have got jobs because the company and the management has pursued an efficiency drive over a period of time.

"That's what made us one of the more successful airlines in world and we won't resile from that. We'll keep going with that, we have to," Mr Gregg said.

There is speculation Qantas might accelerate the expansion of its Jetstar International subsidiary to speed up its austerity drive, and possibly cut the wage conditions of a wide segment of its staff, from pilots and cabin crew to engineers.

Qantas is already pushing in enterprise bargaining talks to slash the overtime provisions of 2500 maintenance workers, a move unions say will result in a 30 per cent cut in take home pay.

Australian International Pilots Association president Ian Woods said: "If they are so serious [about cutting costs] the first thing they would do is remove their bonuses and get on board with the rest of the people in Qantas."

Qantas senior management team earned $3.8 million in "cash incentives" last financial year, with chief executive Geoff Dixon earning half of that figure.

Mr Dixon and Mr Gregg also made $1.8 million in "equity benefits" on top of their respective $1.9 million and $1.2 million base salaries.

[Ron & Edna Johns]

Elroy, exactly right. Rather than replacing them, the airline spent millions on refurbishing the Classics and now they are unsustainable $$-guzzlers with oil prices where they are. Ideally you'd sell them, but you'd only get $x for them whereas they're on the books as worth $x+y due to the refurb. $y is pretty large. And $x is probably going south daily - who would want to buy $$-guzzlers at the moment? Significantly, in any sale process $y would have to be written off - which is recorded in the yearly Profit & Loss. That could easily turn an accounting profit into a loss, and that wouldn't be good for bonuses, eh?!

Why do you think management are so keen to have depreciation rules changed? So that they can write off $y quicker!!

No doubt the economists are calculating that it's reaching a point where it maybe cheaper to sit the things on the ground than fly them. Oh, that's right.......

[Scumfish]

A five year plan hey? This is not sustainable as it only looks for short term game. For the health of a company, a business plan must be valid for at least ten years otherwise you're just pissing in the wind.

[TwinNDB]

60% is labour AND fuel. How much is which? I have a funny feeling a greater percentage would be fuel rather than labour, it just happens that if you heap the two together for long enough, it gives an excuse to cut labour costs and further piss of the people that actually do the work to bring in the profits.

Twin.

[Hippolite]

"As Qantas looks at expanding into other transport modes such as rail, it warned yesterday it would have to revise its five-year program to slash $3 billion in annual costs to buffer itself against the recent surge in fuel prices. The airline has warned this may include further cuts in labour costs."

Expanding into rail......would that make them QANTARS then? Hardly a marketing coup is it?

[Going Boeing]

the airline spent millions on refurbishing the Classics and now they are unsustainable $$-guzzlers

Sorry to spoil rumour with fact but senior management made the decision to refurbish the B743's instead of buying 6 more B744ER's because they needed some aircraft hulls to retire from the fleet when the A380 deliveries start. The 6 classics were the perfect age but needed an expensive refit. The economics of the decision was undone during the SARS crisis when a senior operations manager conspired with some engineering managers (who wanted to get rid of the classics) to misinform the CEO and the board about the time/hours remaining on the classics before their next major maintenance. The board made the decision to ground two of the classics pending the market returning to normal after the SARS crisis had passed. Many months later, when these aircraft went into maintenance to bring them back into service, GD discovered that they were not due (at the time of the grounding) for "D" checks and that millions of dollars worth of revenue potential had been wasted by their grounding - manager concerned was sacked on the spot. The economics of the decision was further undone by the subsequent failures of many can liners in the RB211-524D4 donks. Although a number of engines with significant hours remaining had been freighted back from the US desert when the -200's & SP's retired, the bean counters saw all this money tied up and promptly sold them (to Malaysian I believe) which left no spares when the can liner problem occurred. This resulted in VH-EBU (the painted one known as Jensen Dreaming) being grounded at Avalon to supply engines to keep the other five flying. This aircraft had already had the Flight Deck and Cabin refit so a large amount of money was spent for minimal revenue service. The original classic refurbishment included an engine upgrade (for 24 engines)which was guaranteed by Rolls Royce to significantly reduce fuel consumption and improve the reliability of the engines. Management elected not to take up this option, which they would probably regret as the can liner problem would not have happened and they would be consuming less of the currently expensive fuel.

When you look at decisions like this and the A330 floors, it really gets up your nose when management screw the staff to save money. A lot more money could be saved by getting the management decisions right.

[airamerica]

"When you're sitting in a business where two of the cost elements of your total expenditure comprise more than 60 per cent - and that's labour and fuel - you have very limited responses … other than to reduce your costs," he said.

Where does management fit here? 40%!No mention of that burden, or is that classifed as labor as well.

"Clearly for us at these fuel prices'' and ''our bonuses'' … we have to make changes.-good-
'' The targets we set ourselves won't be large enough," -what bonuses, you mean-Qantas chief financial officer Peter Gregg said yesterday.


True, so halving management could be a start Gregg ,me old matey or didn't they tech you that rhetoric at the university of Wa*****rs.

[dodgybrothers]

cut costs eh? Time to cut loose jet* asia then or would that be admitting to the faux pas?
The bonus might come down then, another way to cut costs.

[webber1]

And here was me considering a move from the soon to be defunct Sydney H/M to Sydney ACS. Talk about out of the Frying Pan and into the Fire.
F that for a joke , I'm going to take the money and run.
Any one else with the chance should do likewise.
There is no future for engineers in Dixon Cox and Clarkes Qantas.

[Nudlaug]

I never thought it would happen, but I fear webber1 is right, there might be no future for engineers in Qantas. I thought of buying a house in Australia in the near future (i am an immigrant) but in the current climate i don't think it is a good idea and i rather stay ready to head back overseas at a few days notice if the **** hits the fan :{

[webber1]

I can hear the hum of the fan and the smell of sh!t is lingering in the air.
It won't be long before the two paths cross.

[Ron & Edna Johns]

I said:

the airline spent millions on refurbishing the Classics and now they are unsustainable $$-guzzlers

To which you said:
Sorry to spoil rumour with fact....

Ummm, so somehow spending millions was only rumour and not fact?

I stand by what I've said. I also agree with everything you wrote. You have just provided a lot more detail - on some of the thinking and events as they transpired.

The facts remain: a great deal of money was spent on aging aircraft for whatever reason at a time when serious consideration should have been to turn to newer generation jets, such as B777's. So we are stuck with old aircraft that burn 30% more fuel than an aircraft offering similar ASKs. With oil prices high, the Classic sale value must be diving. At the same time the book value is much higher due to the refurb and will take some years to write-off due to depreciation rules in Aust.

Not exactly a great situation to be in with oil at US$75....

Still, don't worry, the employees can pay for it!!

[Victor India]

While on the topic of Ron and Edna's suggestion that "employees can pay for it" - does anyone (QF I mean) know if the increased fuel surcharge on Fri 5 May will flow on immediately to QF Staff Tickets?

VI

[slimmac]

Victor India, I bought a ticket yesterday (04/05) and no mention of increased fuel surcharge on the web site, but given QF's latest bleatings noone should be surprised if the surcharge is hiked. This one really gets up my nose so I've done a bit of basic research.

The oil price per barrel just prior to 9/11 was around $US23 and has basically been on an upward trend ever since. It is now peaking (we all hope) at around $US75 per barrel. At approximately 159 litres per barrel that works out at 47 cents (US) per ltre and at an SG of 0.78kg/litre just over 60 cents (US) per kg. At todays conversion rate we come to a total cost of about 78 cents (AUS) per kg. Remember that this is the total cost, not the percentage increase which the fuel surcharge is presumably intended to cover.

Now for a number of reasons I believe that it is reasonable to calculate the cost in fuel to load your last passenger (that is, the staff traveller) by looking at the fuel cost per extra tonne loaded. Interested to see other figures, but on my little ol' aeroplane, the last time I flew SYD-MEL this figure was only around 30kg/tonne and internationally around 300kg/tonne. So per 100kg of staff traveller with suitcase it costs QF about $AUS2.35 on the busiest routes (BNE-SYD-MEL). Have to admit it's a fair bit more SYD - PER - around $15.70. Still, having used pessimistic figures for all the calculations (no hedging here!), I can only conclude that the current $22 (plus GST!) per domestic sector and $70 per international sector is a gigantic rip-off and smacks of commercial exploitation. To further increase the surcharge would add insult to injury, or should I say, further lower the engagement level.

[Victor India]

Slimmac,

I agree! I think it's terrible that QF make profit back from their staff, particularly those who use Staff Travel to commute to and from work. I know it may universally unpopular, but as a commuter, I'd love to see QF exempt commuters from paying the surcharge on their way to/from work. Small consolation when you think some fellas are spending $100+ each way in Home Transport on their way to work from the Sydney extremities, whilst our Staff Travel tickets are worth half that!!

VI

[Sunfish]

QANTAS EXPANDING INTO RAIL??????????? Didn't Margaret Jackson learn anything from John Roses's lectures on Economics?

Qantas has no expereince in rail. The Qantas Board has no experience in Rail. Qantas management has no expereince in rail.

Where is the defendable competitive advantage? What skills does Qantas bring to rail that do not already exist there? Is there a secret freight siding at YSSY?

I actually had a few tank cars in my first job, and I watched rail mechanics literally "get a bigger hammer" to fix things.

As a McKinsey bloke confided - companies that make above average returns focus on only one market. If they focus on two or more, the Board will inevitably make bad investement decisions because of the internal competition for funds.

Look at BHP and Magma copper, and the subsequent restructuring of BHP into separate businesses with totally seperate Boards and funding.

[B A Lert]

Victor India complains about the cost of Staff Travel for commuters. If I were VI, I would shut up and bear it as a price for being able to enjoy life away from Sydney. There is an argument that use of Staff Travel by commuting crew is prima facie against Staff Travel policy as Staff Travel is not to be used for commercial or business purposes. If travel to work to earn a living by selling your skills is not a commercial/business practice, tell me that it's not! Acceptance of commuting for many years will probably not change the Qantas position but why should commuters gain benfeits that aren't avialable to the vast mass of Qantas staff who reside in the SYdney area. Their travel to and from work is not subsided by the Airline.

There is also another issue that I won't raise as it could alert others but all people eligible for Staff Travel do need to be circumspect about its availability and benefits - many who are not elegible are quite envious of those who are.

[Victor India]

B A Lert,

This thread is wandering I know but I'd like to respond to your post.

I do appreciate having access to Staff Travel.

why should commuters gain benfeits that aren't avialable to the vast mass of Qantas staff who reside in the SYdney area. Their travel to and from work is not subsided by the Airline.

Qantas ALREADY subsidises thousands of it's non-commuting crew every week to get to and from work. It's called HOME TRANSPORT!

I wasn't comparing commuters to "the vast majority" - I was comparing them to other crew who rack up bills which can run into many thousands of dollars per head per year. In this case, the company doesn't just "subsidise" the travel - it pays the whole thing. As a commuter, I've not yet spent one cent of this "Home Transport" entitlement. A small subsidy (your word not mine) to commuters by way of an exemption from the fuel levy would not cost the airline anything and would bring some balance to the current situation.

I'm not after any larger chunk of the company's budget for myself or other commuters, just some balance.

Also, I believe your comments about Staff Travel by commuters possibly being against policy are unfounded. You said There is an argument that use of Staff Travel by commuting crew is prima facie against Staff Travel policy as Staff Travel is not to be used for commercial or business purposes. If travel to work to earn a living by selling your skills is not a commercial/business practice, tell me that it's not!

According to the Australian Taxation Office, the cost of travelling to/from work is a private expense, which is why it cannot be claimed as an income tax deduction. In that light, I think it's hard to argue that using Staff Travel to get to/from work is "commercial/business practice". I wish it was - then I could claim it as a deduction...

Anyway - I'll get off that soapbox and what was the thread topic again? Oh yeah - "Fuel Pressure on Qantas"...

[B A Lert]

VI...it's all about choice. If you choose to live in the vicinity of Sydney, you too can enjoy the full benefits of your Terms and Conditions, as do many many of your colleagues. No one is preventing this, and you can rectify the position but as you chose to live elsewhere, then you have to be prepared to offset the pros of one with the cons of the other. It's really quite simple.

[The_Cutest_of_Borg]

VI: "As a commuter, I've not yet spent one cent of this "Home Transport" entitlement."

If you choose not live in the prescribed area, then you have no entitlement.

So what are you complaining about?