Airline Fares Set To Jump

The Age

Monday March 17, 2008

Mathew Murphy, Aviation Reporter

VIRGIN Blue has refused to rule out a further fuel surcharge on fares as the airline industry struggles to cope with record high oil prices that show no signs of easing.

Earlier, Qantas chief financial officer Peter Gregg had told BusinessDay that Qantas might pass on fuel costs.

In a leaked email from Qantas chief executive Geoff Dixon to senior staff, Mr Dixon said the fuel bill could be $1 billion higher than this financial year.

"Consequently, our operating costs will increase significantly," Mr Dixon said in the email.

Mr Gregg said: "We're looking at increasing the fuel surcharge, but we haven't made any decision yet and we will wait and see how the market settles down."

Virgin Blue chief financial officer Keith Neate said he was alarmed by the price of oil, now at about $US110 a barrel, but that the airline had a strong hedging position for this financial year.

"We will continue to monitor these (hedging) levels, but obviously the current record prices for crude are a major concern for us," he said.

Mr Neate said Virgin Blue would try to balance the rising cost of fuel on its business with the risk that raising ticket prices could halt demand for air travel.

"We announced last December that we would introduce an increase in our fuel surcharge in February this year - which Qantas subsequently followed - and we will continue to monitor our surcharge levels," he said. "But the reality is we operate in a price-sensitive market. Any increase in pricing has a corresponding impact on demand."

Qantas' fuel costs are fully hedged for this financial year but the airline has only 25% hedged from July, at $US83 a barrel.

A spokesman for Tiger Airways, Matt Hobbs, said the airline did not have a fuel surcharge on its tickets and did not foresee imposing one.

"I think the oil price is a challenge for everybody, but we are confident with our position that we can meet that challenge," he said.

"We don't expect there will be a fuel surcharge on ticket prices any time soon because we manage our costs better than the legacy airlines do. We have no office blocks, no huge overheads.

"We also have a very proactive hedging position on fuel and are confident that it will help us remain the leader in low fares."

Mr Dixon's email also issued a freeze on staff hiring unless personally cleared by himself or Mr Gregg. Virgin Blue and Tiger said they did not have a freeze on hiring.

The blow-out in fuel costs is also likely to affect Qantas' budget carrier Jetstar, especially as it moves towards its international expansion.

Analysts expect the news to hit Qantas' already vulnerable share price when the sharemarket opens today.

Qantas shares have slumped 26% from this time last year and are now at $3.71

© 2008 The Age

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