High fuel prices burning airlines' profits

Fuel prices are expected to put pressure on airlines. Picture / Dean Purcell

The aviation industry is in for a tough time this year as fuel prices continue to soar, says Qantas.

The Australian carrier says business conditions will worsen, while the global aviation sector is not expecting profitability until next year - underlining turbulence ahead for Air New Zealand, which is yet to make a decision on cutting engineering jobs.

Jet fuel prices in the new year have continued an upward climb that began in early December. They are now nearly 70 per cent higher than at the same time last year.

Last year, the price of Singapore jet fuel rose from US$45 ($64.8) a barrel to nearly US$85 at its peak, before falling back to around US$77.

Falling prices late last year prompted Air NZ to upgrade its profit forecast in November by $40 million.

It had told shareholders at its October annual meeting that pre-tax profit for 2006 would be $100 million, down from $235 million.

Air NZ yesterday declined to comment on the impact of this month's fuel price rises on its bottom line.

The company's interim financial results for the six months to December 31 are due in late February.

Air NZ's share price has entered the new year on something of an upswing, with a recovery starting late last year continuing.

The share price hit a record low of $1.07 in October - a fall for the year of 35 per cent.

Since then it has risen, closing trading yesterday down a cent at $1.34.

Qantas executive general manager John Borghetti said yesterday high jet fuel prices would mean a worsening of business conditions this year.

The business environment for the aviation industry would be "very, very tough. It is not going to get easier. In fact it is going to get tougher".

His comments come as the International Air Transport Association predicts another year of losses for the global airline business, despite a jump in passenger numbers.

IATA director general and chief executive Giovanni Bisignani said airlines would have lost US$6 billion last year - on top of US$36 billion in losses accumulated between 2001 and 2004.

Airlines have reduced non-fuel unit costs by 14 per cent since 2001. Based on continuing cost reduction and an oil price of US$53 a barrel, airlines are expected to lose a collective US$4.3 billion this year.

Bisignani said profitability was expected to rebound in 2007, with a return of US$6.2 billion - a net profit margin of just 1.5 per cent - not enough to cover the cost of capital and nowhere near recovering all the billions lost since 2001.

Air NZ and Qantas are looking at aircraft maintenance and engineering as a way of cutting costs. Air NZ is still in talks with unions over its proposal to send all heavy maintenance of its long-haul aircraft offshore. By doing so, it hopes to save $100 million over a five-year period.

Qantas is trying to cut costs of A$3 billion ($3.24 billion) by 2008 and told its workers in October that it might move "significant parts" of its engineering and maintenance divisions overseas unless the unit's 6900 workers agreed to a cost-cutting programme. An announcement is due next month.