Qantas plays zero-sum game as fuel surcharges fall

Qantas yesterday said overall fares would not be changing and was candid about wanting to improve yields.

Airline says overall fares will not be changing despite the plunge in jet fuel price.

Qantas will cut fuel surcharges but will replace them with higher base charges as the airline tries to improve margins.

Virgin Australia last week also moved to end surcharges and also reduced fares on routes to the United States. Air New Zealand has declined to say whether fares will be lowered, saying only the airline was "entering a strong growth phase and will ensure demand continues to be generated with competitive pricing".

In its last reference to the benefits of falling fuel prices in operational updates, Air New Zealand in November said: "Should the current level of jet fuel price persist, there will be significant additional improvement in earnings in the second half of the financial year."

The price airlines pay for fuel depends on how much they have hedged at a certain price. The swing in currency movements also affects costs.

The sharp drop in fuel prices has led Moody's Investors Service to change its outlook on the global airline industry to positive from stable. Moody's projects adjusted operating profit margins for the industry of 12 per cent to 14 per cent this year, significantly above 8.5 per cent to 9.5 per cent for 2014.

"US carriers will continue to garner the largest increases, leading to stronger performance relative to airlines based in increasingly competitive developing markets, and in Europe," said Moody's vice-president Jonathan Root.

The US airlines' savings are unlikely to be passed on to customers as record-high load factors and sustained demand lessen the incentive to do so. Moody's says the windfall will be used for debt reduction, aircraft purchases and shareholder returns.

Qantas yesterday said overall fares would not be changing and was candid about wanting to improve yields.

Qantas chief executive Alan Joyce said that during the past decade costs and competition had been increasing while fares and airline margins had been falling.

"The dynamics of this market have seen Qantas International post significant losses in the past two years. Even now, yields remain significantly below pre-GFC levels and like the rest of the industry our strategy is to keep strengthening them."

Joyce cited International Air Transport Association estimates that the net profit airlines make per passenger this year would rise by just US$1 compared with last year to US$7.

"In a highly competitive environment where customers are already paying less than they were several years ago, lower oil prices can help put the industry on a more sustainable footing. It means airlines are in a better position to invest in the new aircraft, new lounges and new routes that ultimately benefit customers," Joyce said.

"While global fuel prices have fallen in recent months, international air fares are extremely competitive and are significantly lower than when surcharges were first introduced 10 years ago."

Last week Qantas lowered economy fares to Asia, the US and Europe by more than A$300 as part of asale.

Falling fuel price
International Air Transport Association says jet fuel is down 47% on last year.

Total airline fuel bill picked to fall US$20 billion to US$114 billion over the next year.

Net profit per passenger to rise by US$1 compared with last year to US$7.