Soaring fuel costs to spur airline mergers, Qantas CEO says
SINGAPORE (Reuters) Record high oil prices are likely to trigger a rash of airline mergers and tie-ups, accelerating a wave of consolidation in the aviation sector, the head of Australian carrier Qantas said on Wednesday.
Qantas Airways Ltd. Chief Executive Geoff Dixon also said Temasek Holdings Pte. Ltd., a Singapore government investment agency, picked up a 3% stake in Qantas earlier this month when British Airways Plc. sold its 18.25% holding in the Australian flag carrier.
He said Temasek may be found to have raised its stake further when the latest share registry was released in coming weeks.
"We've always said we believe the industry is going to consolidate. If oil prices stay where they are I think the consolidation could come more quickly than even we expected," Dixon told Reuters in an interview.
Crude oil prices, hugging $50 a barrel, are squeezing profits and margins at airlines at a time when air travel is still recovering from global security concerns, the Iraq war and outbreaks of SARS in Asia.
Dixon said Qantas had no plans to raise its fuel surcharge in response to rising oil prices and noted demand for air travel had yet to diminish, but he warned profits could be hit.
"If costs go up across the board, obviously there's going to be an impact on a range of industries, and I would've thought the airline industry would be one of them," he said after launching a new budget airline in Singapore.
On Tuesday, investment house UBS cut its rating on several Asian airlines, including Cathay Pacific Airways Ltd. Thai Airways International Ltd. and South Korea's Asiana Airlines, but left Qantas unchanged.
UBS warned investors that July bookings fell at many Asian airlines, and probably also dropped in August.
Dixon said Qantas was largely protected from rising oil costs having hedged about 70% of its fuel needs at an average $32 a barrel in contracts that run at least until March, and some until next June.
Currently for September 2005, U.S. crude prices are around $43.56 a barrel, while forward Brent Crude is trading around $40.77 a barrel — but prices are very volatile.
Jet fuel prices tend to move in line with crude oil prices and have jumped 46% so far this year.
"We believe we'll be OK this year, but after that it will be a difficult situation," Dixon said.
Dixon said the decision by BA, Qantas' major shareholder, to sell its stake would have no major impact on the airline.
"There's no change in our strategy as a result of British Airways leaving our share registry."
"We've always had a strategy of trying to increase our presence over the next two or three years in Asia," he said, noting Qantas was about to start a new service to Shanghai and had just opened a new route to Mumbai.
The Asian strategy also included Jetstar Asia — a joint venture in which Qantas has invested $30 million for a 49% stake. The other shareholders are Temasek, with 19%, and Singaporean businessmen Tony Chew and F.F. Wong, who own 22% and 10%, respectively.
Temasek's airline interests include 57% of Singapore Airlines Ltd. and its regional affiliate Silk Air. It also holds 11% of Tiger Airways, a Singapore-based carrier set up with the founder of Irish discount airline Ryanair.
Dixon said Jetstar Asia, modelled on Qantas' successful domestic operation Jetstar Australia, could take to the skies in December with four leased Airbus A320 aircraft.
Jetstar will be the fourth budget carrier to start flights this year from Singapore, which is battling to preserve its status as Asia's fourth-largest air hub in the face of fast-growing competition from Bangkok and Kuala Lumpur.
Other budget carriers flying to and from Singapore are Valuair Ltd. — set up by former staff of Singapore Airlines — and Thai AirAsia Co., a joint venture between Malaysia's AirAsia Sdn Bhd. and Thailand's Shin Corp.
Dixon, who is chairman of Jetstar Asia, said the carrier would target cities within a five hour flying time of Singapore and expected to have a fleet of eight A320s by the end of next year and up to 20 planes in three years.