ECONOMY

Airfares set to take off as oil price soars

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Qantas CEO Alan Joyce says hedging allows the company to adjust to higher fuel costs.

Qantas CEO Alan Joyce says hedging allows the company to adjust to higher fuel costs.Credit:AFR

There are a few levers that Joyce can pull to mitigate the need for Qantas/Jetstar customers to pay the full price of Qantas’s increased fuel costs.

Since COVID hit, Qantas has undertaken a massive cost-cutting program, has retrenched thousands of staff, negotiated with suppliers and taken on unions to improve productivity. But it won’t be enough to offset the damage from an oil price currently hovering above $US120 a barrel.

For investors that have endured two years of Qantas losses and without dividends, the oil price spike is a particular blow.

But Joyce was keen to use his speech at The Australian Financial Review‘s business summit on Tuesday to update the audience on how quickly travelers are returning to the skies and that Jetstar, which services the leisure market, is back to pre-COVID capacity and expected to hit 120 per cent of pre-COVID capacity by the middle of the year.

Small- to medium-sized business travel has still not reached 100 per cent, nor has the corporate market, which is lagging further behind on a return to pre-COVID flying. But both have picked up significantly over the past three weeks and seem to be following an encouraging recovery trend.

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It’s a mixed bag on the international market, with London and Los Angeles demand now outstripping supply and other destinations yet to open.

A surge in demand, at least for some destinations, will give Qantas (and its competitors) much-needed pricing power, better enabling it to increase fares.

Qantas can also curtail supply (ie capacity) to further enhance its ability to raise prices. But there is a portion of the market that is very fare sensitive, one for which fresh demand has been spurred by the low fare available over the past year.

A report on airlines published on Tuesday by the Australian Competition and Consumer Commission noted that lower domestic fares had been the result of increased competition from new entrants, particularly Rex.

But the oil price will be hurting Qantas’ domestic competitors — and Joyce reckon they have less hedging in place and that many international airlines have none.

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