Geoff Dixon has been in Istanbul this week with other airline executives from around the globe swapping stories on the financial chaos that has engulfed the industry, thanks to the skyrocketing price of fuel.
Back in Australia Qantas passengers have been dealing with a different challenge – getting on flights that have been seriously delayed or simply cancelled.
This week some economy passengers who had been waiting more than 24 hours for their flight to London took matters into their own hands and barged into the business class lounge in protest against being offered tea in foam cups as a refreshment.
Security staff sorted this situation out but these extreme circumstances have to bring into question whether the years of operational cost-cutting may be stretching the airline’s resources too thin.
The situation is being exacerbated by the engineers’ union, which is seeking a 5 per cent pay rise and is using overtime bans as its negotiating weapon.
What is not clear is whether this industrial action is the largestcause of the airline schedule mayhem or whether there is an underlying problem in the airline.
The consensus appears to be that the overtime bans are not the primary culprit but have pushed the airline over the edge.
It makes for a particularly difficult juggle for Dixon. The cost of fuel has put unprecedented pressure on Qantas to take more costs out of the system but there is a view that the airline is currently so stretched that it can’t afford any disruption from any part of the workforce.
The official word from the airline executive last night was that the troubles over the past fewweeks were all about the engineers and its on-time record was normally better than its local competitor’s and good by international standards.
Qantas has the option of taking more of its maintenance overseas and will dangle this threat over the engineers.
The warring parties are holding more talks tomorrow.
To the extent that Qantas is otherwise stretched, the fuel price might perversely work in itsfavour.
Last week it said it would cut capacity by dropping some routes and retiring aircraft early because the rising fuel price had made some routes uneconomic.
The falling demand that the industry is experiencing will also allow Qantas and other airlines to further cut capacity and/or try to increase fares.
If investors take the view that the current fuel price is a short-term aberration then this is a buying opportunity.
But if one believes that the longer-term fuel price could be $US150 to $US200 a barrel then airlines are operating with an economic model that is not particularly attractive.
In particular, discount airlines around the world will be under pressure. While no-frills services run on the smell of an oily rag the price of that fuel is the same as it is for a full-service airline.
If fares are increased to compensate for rising fuel costs, the budget airlines, which have expanded the market to customers for whom air travel had been out of reach, will feel demand fall sharply.
The fuel price is not an external shock like SARS or the terrorist attacks of September 11, 2001. It could well result in a permanent shift in the economics of the industry.
The newer, more fuel-efficient planes that have been ordered will help mitigate cost increases but, in the current environment, aircraft will need to be taken out of the system more rapidly than new ones are introduced.
So we can expect Dixon to continue to play hardball with the engineers and we should expect an announcement tomorrow of more cuts to capacity and routes, both domestic and international.
In a couple of months Dixon will need to front investors with a full-year result for the last time. It’s already locked in.
It’s the 2009 financial year that is causing some concern among investors and there is wild variation among analysts about what may ultimately be delivered.
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June 5, 2008 at 1:10 am