KEY POINTS:
Motorists are accustomed to oil suppliers being much more eager to raise prices than to lower them. Now, it seems, air travellers are to suffer the same treatment. Airlines, having hiked their prices by substantial amounts to offset the rising price of jet fuel, are declining to make meaningful reductions as that price tumbles. Qantas has made a token gesture, cutting its fuel surcharge by a trifling $5 on some routes booked in Australia. But Air New Zealand will not even go that far, saying it has yet to be able to fully recover its fuel costs.
The national carrier says it forward-purchased its fuel at higher prices than other airlines. That is another way of saying it misjudged oil-price trends when it hedged much of its supply. While Air New Zealand was not alone in this, its attitude will ring hollow with many customers, who are used to similarly convoluted explanations from the major petrol companies. In their eyes, with every justification, fare reductions should follow a fall in the price of fuel.
Air New Zealand can advance a defence for its policy, but not a totally compelling one. Fuel accounts for something like a third of its costs, and is a hugely volatile influence on its fortunes. The airline says its annual fuel bill is now about $1.1 billion, more than double the figure three years ago. Hedging is the obvious means of trying to exert some control on this cost. Air New Zealand said last year that 60 per cent of its supply was hedged at US$71 a barrel. This, in other words, was the maximum sum it would have paid for almost two-thirds of its fuel. At present, it is 72 per cent hedged at between US$62 and US$72 a barrel.
As motorists know through falling prices at the pump, fuel costs did not move the way the airline expected. The price of a barrel of Singapore jet fuel has dropped almost 30 per cent since last September, putting Air New Zealand very much on the wrong side of the equation. Passengers are now paying the cost.
The hedging miscalculation is not, however, the whole story. The airline has derived considerable financial benefit from the slice of its fuel still bought at the spot price. This, and the potential for taking out forward contracts at the present price level, have been major factors in its share price rising above $2 for the first time since August 2004. Three months ago, it was trading around $1.40. It is also a reason for brokers to be increasingly confident about the airline's prospects. Significantly, also, Air New Zealand chairman John Palmer has predicted an improved profit performance in the June 2007 year if lower fuel prices and current operating conditions persist.
Across the Tasman, similarly optimistic statements are being made about Qantas on the basis of tumbling fuel prices. Analysts at Macquarie Bank have lifted their 2006-7 pre-tax profit forecast for the airline by A$140 million to A$1.08 billion. The comparable profit last year was A$671 million. Factored into the Macquarie prediction is a 25 per cent reduction in the fuel surcharge, of which Qantas this week delivered a smidgeon.
This is not an industry in such desperate straits that it cannot pay due regard to the reason for its existence, the fare-paying public. Air New Zealand was quite happy to respond to spiralling fuel costs by increasing its fares by 10 per cent. As much as the airline has made mistakes since then and must continue to grapple with volatile fuel prices, it remains an encouraging recovery story. There seems little reason why its passengers, like the country's motorists, should not enjoy the benefit of plummeting oil prices.
