Michael Pascoe writes:

The latest hike in Qantas’s fuel surcharge hasn’t been enough to stop ABN AMRO slicing a sharp 25% off its profit forecast for the
airline this year and whacking a $3.06 target price on the shares. Qantas
shares were trading at $3.51 this morning.

And according to ABN transport analyst Anthony Srom, it all could
get worse:

We
believe further earnings risk is possible should
additional cost savings (above and beyond those in the Sustainable Future
Programs) not materialise. We estimate that QAN needs to generate an extra
A$550m of synergies in FY07 in order to maintain our current earnings projection.
However, with the revenue environment softening we do not hold much hope for a
yield recovery and suspect the cost position will have to be re-examined.

It’s not just the oil price that’s
threatening the airlines. Srom reckons the jet fuel refining margin will rise
as the region’s surplus refining capacity is rapidly disappearing with minimal
new capacity on the horizon until at least 2008.

The ABN downgrade follows a
similar call from Macquarie Equities and comes amidst a general re-rating of transport stocks as the threat of
sustained higher fuel prices sinks in.

Interestingly, an American aviation
newsletter
is arguing that higher fuel charges will actually help restructured legacy
airlines in their battle with new low-cost carriers. (Un-restructured legacies
are dead in the water anyway.) In part, the Boyd Group argues:

  • Legacies have reduced their operating
    costs, so they aren’t wildly at variance with LCCs any longer.
  • Higher fuel costs will lead to higher
    fares. Higher fares will hit discretionary, price-driven passenger segments
    first. Passengers who in the past were created by low fares to Orlando will think twice with
    higher ticket prices and $3-per-gallon gas for the SUV.
  • Most importantly, legacies are not as
    vulnerable to traffic down-turns as are LCCs. That’s because several legacies
    have significant fleets they can quickly park, and have limited aircraft on
    order, unlike most LCCs. In fact, the new-airliner orderbook may well be the
    Achilles Heel of the LCC segment in the next 18 months.

Qantas, the restructuring legacy airline, has
plenty of new planes on order, but they are more fuel efficient? Meanwhile, it
certainly has some old planes ready to park. Anyone want a Boeing 767 for the
backyard?

But where Qantas the company could be hurt
is on some of its Jetstar routes and where it’s already suffering – the
haemorrhaging Jetstar Asia, as Eric Ellis reported in yesterday’s Smage. It’s not a good time to be wanting another capital injection:

The $S60 million
($A50.7 million) injected when Dixon merged Jetstar Asia with Temasek’s other Singapore-based
start-up Valuair in July has just about run out. Singapore’s mostly good-news-only paper, the Straits Times was
uncharacteristically muscular when it described Jetstar Asia as facing a cash
crunch. Jetstar-Valuair has had five CEOs in two years, and the latest – Madame
Chong – has no aviation experience.

Peter Fray

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