Qantas, Virgin Australia to target costs, fuel prices

Australian airlines have delivered a bumper profit season but face pressure to keep a continued lid on costs amid rising fuel prices.

Qantas posted a record underlying profit before tax of $976 million.

Australian listed airlines have delivered a bumper profit season but face pressure to keep a continued lid on costs amid rising fuel prices.

During the half-year profit reporting season, Qantas posted a record underlying profit before tax of $976 million.

Virgin ­Australia declared its highest underlying profit before tax in 10 years at $102.5m.

Underscoring the situation ahead, Ord Minnett analysts said in a note on Virgin’s result: “Attention should now switch to ­operational issues, and in that ­regard we believe investors are ­under­estimating the challenges ahead, including relatively weak industry demand, excess capacity, rising competition and higher fuel costs.”

UBS analysts told clients in a note this week that there was “ a continuation of favourable conditions for all operators”, with “rational” behaviour across the main carriers.

Last week, after Qantas’s result, Citi analysts said in a note to clients that rising costs, particularly fuel, “will need to be offset through productivity gains or underlying ticket price increases”.

“Additionally, competitors are likely to experience the same cost increase pressures,” they said.

Globally, the impact of higher oil prices has been a theme that has weighed on the minds of ­investors, though the two main Australian carriers have hedging strategies on fuel.

Qantas accounts show that its fuel costs rose from $1.489 billion to $1.547bn for the first half.

It says its fuel bill is likely to be $3.24bn for the full year, compared to $3.04bn the previous year.

Virgin’s accounts show that for the first half to December 31, fuel and oil costs rose from $448.9m to $477.1m.