the devil in the detail-Fuel costs and pricing
 

Have been pondering the paradox that is J*.

Qantas have announced significant price rises to offset increasing fuel costs as have most other airlines. The price of Jet fuel is a major component in operating cost as prices soar far outweighing labour costs which has been the mantra of the Low cost (low wage) model.

Why is it that "J* are considering their position with respect to raising prices to offest fuel rises" (i am paraphrasing Simon Goebels I mean err Westaway)?

In my considered opinion there are a few possible reasons, none of them very positive for the J* model, given Dixon noting the "softening of J* demand"....

• J* is so price elastic that any rise will significantly reduce revenue
• The yield increase from a price rise will be outstripped by the demand elasticity
• J* don't use any fuel
• Qantas is paying for all fuel
• Qantas as a model is with its significant business travel less price elastic

Either way as we see the continual unwinding of the world's economy, the pressure being placed on J* will only mount. It is happening in Europe, marginal yields and falling demand from the target demographic put an end to the Dixon mantra that somehow J* has a way to make money that the rest of the group has not.

Perhaps when the departure of Dixon finally arrives, there will be sufficient pressure placed on revenue to focus on building yield and preserving margin, rather than destroying what clearly is the underlying strength of the Qantas brand, the sadly ignored mainline product.

QFinsider, some interesting observations, but for what its worth, this is really about using the current climate to gain a bit more lolly for Qantas.

Peter Gregg said at the half yearly announcement that 94 per cent of fuel for the financial year ending June this year had been hedged (I can't recall at what amount but US$70 seems to be about right). A significant amount of the next year's fuel has also been hedged. Now, granted that they are still paying for some fuel at spot prices which are much higher, if most of your costs are fixed at a lower price, then why increase the cost of tickets?

The answer is to deliver that nice increase in profit which GD says he will still do at the end of the year.

JQ are in the position where they are really waiting to see what Tiger does, or they are just hoping to build it into the yield management system and assume that nobody notices. For all the conspiracies about not paying for fuel etc, I can see that its more logical, given that they are in the elastic end of the market, to wait and see before making a move.

The hedge for fuel isn't significant in the next financial year, I think you will find a 30% hedge at around US$90 a barrel.

I think that Tiger presents significant downside risk. Tamesek won't mind diluting the imaginary yield for J*...


I suspect this year's number will be fine, but I think also the building downside momentum on world markets will produce an entirely different set of numbers next year....

Prophecy perhaps, however the insistence that the model is sustainable simply does not hold water, in my opinion.

Probably holds as much water as a colander!:}