Dollar stokes airline returns

An Article in The Herald Sun says that Qantas and Virgin Blue are on track for record profits due to a rising exchange rate offsetting much of the profit drag caused by higher than expected fuel costs.

Airline executives and market analysts have confirmed that jet kerosene prices, up by almost $US31 a barrel since June, have yet to impact the bottom lines of either carrier.

Qantas and Virgin Blue are enjoying record ticket sales and both are well hedged against sudden and unexpected surges in world oil prices.

But the biggest factor protecting their bottom lines is the cushioning effect of the high exchange rate of the Australian dollar.

Global broking firm Merrill Lynch has upgraded its full year profit forecasts for both airlines.

Clients of the firm were told last week that with each 1 per cent rise in the Australian dollar would, the Qantas profit could rise 2 per cent.

“All other things being equal, if we assume the AUD/USD average parity for the 2008 financial year, this would raise our forecast by 30 per cent, ” Merrill’s noted as the Aussie continued to trade strongly against the Greenback.

Merrill’s gave Virgin Blue a similarly bullish report card, saying that like Qantas, it too would report a better than expected outcome with a 25 per cent improvement in after tax profit.

“Like Qantas, if we were to assume the AUD/USD moves to parity we would be looking at a further 32 per increase in our 2008 financial year forecast,” the broker noted.

While some of the gains could be lost because of increased competition, Merrill’s maintained that each 1 rise in the Aussie could add another 2.3 per cent to Virgin Blue’s bottomline.

Because jet fuel is bought in US dollars, the much improved Aussie also has put on hold for the moment any chance of a fuel induced price hike in airline ticket prices.

Peter Gregg, chief financial officer at Qantas, said as much when questioned on the same day last week when the price of jet kerosene reached $US109.10 on the benchmark Singapore market.

“Fuel prices always hurt,” he told reporters, before dismissing questions about a possible hike in Christmas holiday fares.

“No, we are not doing anything (about ticket prices) at the moment,” he added.

The price of jet kerosene has soared since July 2, rising from $US84.86 to $US115.85 on November 11, a $US30.99 increase.

At the same time the Aussie has climbed from US85.86 to US88.63 on Friday. The rate peaked at US93.41 on October 31.

A year ago the dollar traded at US76.63 and the price of jet kerosene cost $US73.99 on the Singapore market, the benchmark both carrier’s use to adjust their hedging.

Qantas chief executive Geoff Dixon and chief financial officer Peter Gregg are not overly fazed by the surge in fuel prices.

Both are confident they will extract a 30 per cent increase in full year profit, generate pre-tax earnings of $1.34 billion this financial year.

“Trading is very strong in all parts of the Qantas business,” Mr Dixon told reporters after last Wednesday’s annual shareholders meeting.

And Mr Gregg was to add: ‘We are on target to be 30 per cent ahead of where we were last year.”

A Report by The Mole from the Herald Sun