Exclusive: Qantas CEO flags higher fares as fuel


Australia’s largest airline Qantas Airways flagged an industry-wide rise in airfares to help offset soaring oil prices that threaten to stall the global aviation sector’s recovery.

Qantas chief executive Alan Joyce also reiterated he was still seeking an out-of-court settlement with Rolls-Royce (RR.L) after a mid-air engine explosion in an A380 last year grounded Qantas’ fleet of the superjumbos and shook confidence in the national flag carrier.

Qantas may raise prices and fuel surcharges if global competitors did the same thing, Joyce said on Thursday, spelling an end to the rock-bottom airfares experienced during the height of the credit crisis, Reuters reports.
“The fuel price has gone up considerably so I think it’s in every airline’s interest to recover these costs,” Joyce said in an interview with Reuters in his Sydney office.
“It is a two-edged sword because rising fuel prices are indicative of a rising economy.”

Singapore Airlines signaled an increase in its fuel surcharges on December 2, while other big carriers have said their charges were under review but Joyce’s comments were the clearest signal yet that price hikes may be imminent.


Like other global carriers, Qantas’ long-haul operations are recovering from a prolonged downturn which claimed many of their valuable business and first-class passengers. More recently, Qantas has been dealing with the fallout from the engine blowout which forced it to ground its fleet of A380 aircraft in the lead up to the busy Christmas holiday period.

Joyce said the airline’s prime objective was reaching a settlement outside of court with Rolls-Royce over the incident, though it has initiated a lawsuit in an Australian court in case a settlement is not possible.
“We are talking to Rolls and our primary objective is to resolve this commercially. The dialogue will continue as long as it takes,” Joyce said.

Rolls-Royce declined to comment on the matter.
“There is no way this makes sense to go to court because these are two companies that have to work together in the future,” said Nomura analyst Jason Adams.
“It is an industry where there are very few companies airlines can go to for engines and maintenance so it is in both parties best interests to settle this, either in cash or a payment in kind.”

Dublin-born Joyce, who described the November 4 safety scare as the most intense day of his aviation career, said Qantas was recovering both commercially and from a public relations perspective, denying suggestions the airline’s brand had been damaged permanently.

He indicated bookings from passengers wanting to fly on the reinstated A380 services were strong, while a healthier global economy pointed to a stronger year financially as yields recovered from the worst downturn in aviation history.

Qantas shares have fallen about 13 percent since television footage showed debris from the aircraft scattered over an Indonesian town, although analysts attribute part of the decline to soaring fuel prices, heavy snow in Europe and severe floods in Queensland.
“I joked at the time that all we need is the locusts,” Joyce said of the string of hurdles, including a volcanic ash cloud over Europe, which have hit the aviation industry since he took the top job at Qantas over two years ago.


Analyst estimates of the impact of the A380 incident vary from A$65 million to A$80 million but are more focused on the outlook for demand and costs.
“If you look at the operating environment the planes are relatively full again but the question is whether they have enough pricing power to increase it to where they were pre-GFC (global financial crisis),” said Investors Mutual portfolio manager Jason Teh.
“On the other side you have to worry about input costs with the latest issue being the oil price.”

Fuel purchases typically account for a third of airline costs and jet fuel prices quoted in Singapore have risen by a third in the past five months, pressuring the industry’s razor-thin margins.

Macquarie analysts said this week they expected Qantas’ 2011 fuel bill to grow to A$3.7 billion before rising to A$4.4 billion in 2012, lowering earnings estimates by 15-20 percent.

Joyce would not give forecasts ahead of the company’s half-year results next month but indicated yields, the revenue it makes on each passenger for every kilometer travelled, were improving. The airline’s yields fell 24 percent during the economic downturn but have recovered by about 14 percent.

Joyce also said freight volumes, often a leading indicator for passenger traffic, looked strong.

Qantas and Rolls-Royce had disagreed over the best way to handle the engine incident from a public relations perspective, Joyce said, but there were no plans to change existing orders for Airbus A380s or Rolls-Royce engines.

Qantas operates seven Airbus A380s — the world’s biggest passenger jet with a list price of about US$375 million — and has another 13 aircraft on order.

Qantas also has orders for 50 of the long-delayed 787 Dreamliner jumbos, which maker Boeing said this week it would start delivering in the third quarter of 2011.

Boeing had indicated to Qantas that it would get its deliveries of the quieter and more efficient aircraft by mid-2012 and Qantas was happy with that timeframe, Joyce said.

Joyce, who came from a working class background in Dublin, migrated to Australia in the 1990s where he worked for Ansett Airlines before overseeing the rapid growth of Qantas’ successful low-cost subsidiary Jetstar.

Jetstar plans to aggressively expand in Asia this year, while the airline hopes a return to business travel will lead to higher profits. No major mergers with other carriers were planned, he said.

Qantas was one of the world’s few profitable global carriers during the downturn after its profitable frequent flyer program and Jetstar helped offset the damage from falling ticket prices and stiff competition.

The chief executive, who managed to take a Christmas break in Queensland state before heavy floods hit, said he was hoping for a quieter year but jokes that the aviation industry is subject to “constant shock syndrome.”