High Fuel Costs makes Union Contracts too Costly on Qantas’ International Flights

Posted by PITHOCRATES - May 26th, 2012

Week in Review

There is an inverse relation between gas prices and driving distance on your summer vacation.  The higher the gas price the shorter your drive.  When gas is cheap you can travel across the country in a recreational vehicle.  When gas prices are high you may limit your drive to a single day.  Perhaps even a single fill up.  Because driving adds up.  If you fill up twice a day you may pay $150 at the gas pump.  If you drive two days out and two days back that’s $600 in driving costs.  Which you could put towards a nice hotel or some fun.  Or into your gas tank.  Which isn’t really a whole lot of fun.  Especially when you have some bored kids fighting each other in the back seat.

Fuel costs can make the difference between a nice vacation and a bad one.  And between a profitable operation and an unprofitable operation (see Australia’s Qantas to Split Business into Two by Reuters posted 5/22/2012 on CNBC).

Qantas Airways, said it plans to split its loss-making international and profitable domestic businesses, though Australia’s top airline was viewed by analysts as unlikely to spin off or sell the international operations…

The changes are part of a five-year turnaround plan aimed at shrinking costs and getting the international operations into profit…

The airline…is emerging from a bruising industrial dispute with unions…

Weak demand and high fuel prices are taking a toll on airline profits, pushing airlines across the world to cut costs and delay capital expenditure. 

The reason companies go through these bruising disputes with their unions is because of the good times when all other costs aren’t so bad.  When fuel was cheap the airlines were making some decent profits.  And it was affordable to be generous to their unions.  When they had little choice but to be generous.  For a strike during busy times is not good to the bottom line.  So they enter into these agreements that just cripple a company when fuel costs soar.

The international business is losing money because it takes a lot more fuel on those international routes.  And when demand is low it is very difficult to raise ticket prices.  Because even though Qantas is a quality airline there are other quality airlines out there trying to make it in an industry suffering from low demand.  And they are all trying to keep their ticket prices as low as possible to get the few passengers out there still flying.  It’s gotten so bad that some airlines are charging for things they’ve never charged for before. 

Such as carryon bags.  Which helps revenue in two ways.  It helps pay for fuel costs.  And it discourages passengers from carrying on luggage.  Which reduces weight and saves on fuel costs.  For an airline only puts into their fuel tanks the amount they need to fly.  They don’t top them off.  They count everything going onto that airplane and calculate the weight to add to the weight of the airplane and the weight of the fuel they carry.  The less the weight on that plane the less fuel they have to burn.

The short routes tend to be the more profitable ones.  There are more of them (one plane can make 2-3 round trips in a day).  And they burn less fuel.  That adds up to profitability.  Which is why Qantas is profitable on their domestic routes.  But not on their international routes.  And why the domestic business can pay the high union contracts.  While the international business can’t.

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