Qantas, Air NZ Go on Rations as Fuel Costs Soar

Australasia's two main carriers, Qantas and Air New Zealand, tightened their belts further on Wednesday in the face of soaring fuel costs, with Qantas taking more seats out of the air.

Qantas passenger jets parked at their terminal at Sydney Airport.
Mark Baker
Qantas passenger jets parked at their terminal at Sydney Airport.

Air New Zealand forecast a steep drop in annual profit and said it would switch to more fuel-efficient planes on some key long-haul routes and continue to review fares, routes and costs.

"We have to look harder at areas where we do have control," Qantas Chief Executive Geoff Dixon said in a statement, adding the airline was carrying out a range of fresh cost-cutting measures, including canceling five percent of capacity.

He said it was equivalent to grounding six planes.

"Despite our fuel-hedging strategy, fuel surcharges, two separate across-the-board fare increases and a recruitment freeze, we are not bridging the widening gap between the actual increase in the cost of fuel and the amount we offset."

Crude oil prices have surged nearly 40 percent this year to record highs of around $130 per barrel, sending airline profits and share prices into a tailspin. Qantas shares have fallen 36 percent this year and Air New Zealand 41 percent.

Only last week, Qantas lifted its fares for the second time in less than a month but the move did not stop credit-rating agency Standard & Poor's from signaling on Wednesday a possible downgrade to the carrier's rating with a negative outlook.

S&P affirmed Qantas's BBB+ rating but said Qantas's cash flows were under pressure from high fuel prices.

Qantas shares ended up 4.9 percent at A$3.45.

Air New Zealand said it expected full-year earnings to be at least 25 percent below last year, its second downgrade in a month, sending its shares skidding to a 21-month low of NZ$1.08. The stock ended down 2.6 percent at NZ$1.11.

Air New Zealand said it now expected operating profit before tax and unusual items for the year to June 30 to be below NZ$200 million (US$157 million). In April, it forecast between NZ$200 million and NZ$220 million, having said in February it expected to better last year's comparable result of NZ$268 million.

"Since then the price of crude oil has continued to rise to $130 a barrel and the refining margin has widened to over $40 a barrel," the airline said in its monthly update.

It said it would replace Boeing 747 planes on its service to London through Los Angeles with more fuel efficient Boeing 777s.

The airline raised domestic and short haul international fares by an average 3 percent this month, and warned that long haul international fares looked certain to rise again.

The pain is spread right across the region. On Monday, South Korea's top airline, Korean Air Lines, said would cut some passenger flights from June to mid-July to cope with surging jet fuel prices.