Last updated: March 30, 2011 4:19 pm

Qantas cuts flights to offset high fuel prices

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Qantas said it was facing its toughest environment since the global financial crisis as the Australian flag-carrier announced plans to cut flights to counter the corrosive effects of high fuel prices.

Alan Joyce, chief executive, said on Wednesday that the rise in fuel prices coinciding with a string of natural disasters in Japan, Australia, and New Zealand would erode second-half profits by an estimated A$140m (US$144m).

“There has never been a time when the world faced so many natural disasters, all of which have come at a significant financial cost,” Mr Joyce said. “We need to act decisively.”

Qantas’s action is among the most dramatic of any airline since fuel prices began rising earlier this year.

Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, a research group, said Qantas was typically quick off the mark when tough times demanded capacity cuts. “They did that as far back as the Asia financial crisis 14 years ago,” he said.

Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, a research group, said when oil passed $100 a barrel, most airlines had to consider cutting capacity and axing unprofitable routes. Brent crude was trading around $115 per barrel on Wednesday. The problem was “not just the increase in the fuel price but the rapidity of that increase,” Mr Harbison said.

Airlines, one of the most energy-intensive sectors in the world, could accommodate gradually rising oil prices by raising fares and fuel surcharges but a spike over a short time period “does not allow them to adapt”, Mr Harbison added.

Qantas said fuel costs in the second half of its financial year would be A$2bn, with the price of Singapore jet fuel, a benchmark for the regional industry, having surged by nearly half in the past six months, from US$88 per barrel in September to US$131 this week.

Carriers ranging from Thai Airways to Aer Lingus have in recent weeks warned of the ill effects of high oil prices. International Airlines Group, owner of British Airways and Iberia, said this month it was “likely” that fares would rise again, following fuel surcharges already imposed, if the volatility in oil markets continued. Australia-listed Virgin Blue last week warned of a full-year loss.

There has been a spate of fare rises among US airlines since fuel prices started rising but the last week has seen signs of the trend easing. This may be because consumer demand is not strong enough to support more price increases, though some analysts believe airlines are merely pausing and plan to resume boosting fare prices as the summer travel season nears.

Qantas said it would cut capacity growth on domestic routes from 14 to 8 per cent in the second half, with international capacity growth down from 10 to 7 per cent. It also announced plans to cut some management jobs, primarily through voluntary redundancy.

The airline did not give full-year profits guidance but said earnings in the second half would be A$140m lower due to natural disasters, including a A$45m hit from the earthquake and tsunami in Japan and A$60m from the Queensland floods.

Qantas in February said lost revenues and costs due to the grounding of its A380 passenger fleet, after an engine exploded mid-air near Singapore last year, would be A$80m in its 2010-11 financial year, with repairs to damaged aircraft and engines adding at least another A$100m.

Goldman Sachs said it was reviewing its full-year earnings estimate for Qantas: “We note that the geopolitical issues driving the spike in the oil price remain a key headwind for the sector”.

Qantas shares, which have fallen 12 per cent so far in 2011, rose 4 cents to close at A$2.19 in Sydney.

Additional reporting by Pilita Clark in London

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