Forget the A380 Qantas is all about oil.

A report by Elizabeth Knight in today’s Sydney Morning Herald helps clarify a great deal about Qantas’ current financial position and the limited impact the delayed delivery of the A380 may actually have on the highly profitable carrier.

The report says that the issue of the day is that Airbus is now offering a delivery schedule on its A380 aircraft which is two years behind and accordingly there are two major considerations for Qantas shareholders to absorb, with the first being whether this will hit the airline’s earnings over the next couple of years and the second how much Airbus will compensate Qantas for the delay and the two being clearly related.

The compensation issue is not that simple and undoubtedly Qantas will reveal over the next month what it will manage to extract from Airbus, but as reported in TravelMole today, that could be limited contractually.

The European aircraft maker has already told the market that its profit will suffer in the order of $4 billion over the next few years as a result of the production delays. Qantas is hit but others are hit harder with Virgin Atlantic a case in point.

The report says that Qantas only had 12 A380’s on order and one thing is for sure, the delays will not require an adjustment to this year’s or next year’s earnings from Qantas.

So, despite this issue, the major focus for the investment community as far as Qantas is concerned has to be the price of fuel and the industrial relations climate, with industrial relations being incremental, with small gains but none which in isolation would set the world or the market on fire and all this and sending jobs offshore being emotive but on a case-by-case basis will not make a big difference to profit outlook.

The report goes on to say that fuel is by far a more significant factor with most of Qantas’ fuel requirements hedged at $US70 per barrel and the international spot price for fuel now about $US60 per barrel and, in a general sense, falling.  Qantas’ hedging, described as being like an insurance policy comes at a cost of $US5 per barrel and any upside beyond that is money in the bank or in the shareholder returns.

So, right now Qantas is experiencing a gain of about $US5 per barrel at the spot price of $US60 per barrel, with the rule of thumb being that for every $US1 fall in the oil price the Qantas profit goes up by $10 million pre-tax, a huge amount of leverage whether it goes up or down and analysts adjusting their profit expectations accordingly.

When Qantas posted its outlook for the current year of steady profits it was looking a  $US70 a barrel future and while that seems less likely now, don’t expect that this respite in the price of fuel is going to deter Qantas CEO Dixon from his cost-cutting zeal and neither will it change his views on the need to diversify earnings, particularly into the more reliable earnings that it receives from the freight business, which Qantas management has made it very clear is its near-term focus, with an extra estimated $1 billion in the Qantas kitty set aside to pursue further freight interests. These plans are sufficient to silence any Qantas executive but other forms of either rail or road freight forwarding have to be on the agenda.

The report closes with – the bottom line is forget the industrial relations gains, any structural changes or even the furthering of a diversified suite of businesses, right now Qantas is an oil price play.

A Report by The Mole with acknowledgments to the Sydney Morning Herald