Qantas chief executive Vanessa Hudson, who has been with the airline for more than 30 years, calls it “the seven-year shock” – the frequency of those left-field extreme events that can throw global aviation into turmoil.
The oil price shock that is bludgeoning the world thanks to Donald Trump’s decision to flex his warrior muscle on Iran doesn’t fit with her shock schedule. It’s the third major disturbance in that seven-year period, following the COVID-19 pandemic and Russia’s invasion of Ukraine.
Events like these have one thing in common, beyond their ability to promote chaos: unpredictability. They highlight why airline investors need to have an enhanced appetite for risk.
In response to aviation fuel costs soaring by 150 per cent, Qantas moved this week to blunt the financial fallout by lifting airfares by around 5 per cent. But this won’t be enough to insulate the airline from meaningful damage. Analysts at Citi estimate that the Iran war has already chewed through $70 million to $90 million of Qantas’ pretax profits.
Back at Qantas HQ in Mascot, a team is gaming out scenarios in the escalating conflict and potential responses, including diverting planes to Europe from less frequented routes – all while operating in an information vacuum.
(Qantas doesn’t run its own aircraft into the Middle East, but sells tickets to Europe transiting through the region on flights operated by its code-share partner Emirates.)
Qantas itself flies to Europe via Perth and Asia, and demand for these flights has spiked since the start of the war. Even flights from Perth to Paris during what is usually a softer travel period are now full.
It was one of several airlines that responded to the soaring oil price with fare hikes or fuel surcharges, including Air New Zealand, Hong Kong Airlines, Air India and SAS. Earlier this week, Air New Zealand suspended its profit guidance for the year, citing “unprecedented volatility in global jet fuel markets”.
Meanwhile, the largely domestic Virgin Australia is in the more fortuitous position of having fuel price hedging in place that covers the refiner margin, which should help it absorb the oil price gyrations.
The extreme volatility in the oil price over the past 11 days reflects the mixed messages sent by the US war machine. The price spiked to almost $US120 a barrel after Trump’s pugilistic bluster promising to bomb Iran into complete capitulation, only to dive again when he said the war job is “very complete, pretty much”.
Simultaneously, Qantas’ share price, which is down more than 12 per cent since the United States and Israel started bombing Iran, began to turn up this week after Trump’s announcement that the war is coming to an end “very soon”.
For airlines like Qantas, fuel accounts for about one-third of costs, which makes their profit performance extremely sensitive to oil prices. And while more than three-quarters of Qantas’ fuel costs are hedged, the same can’t be said for the airline’s refinery margin, the additional costs to turn oil into aviation fuel.
Citi’s analysts looked at Russia’s war against Ukraine to predict how much the Middle East conflict might push up oil prices. But the trajectory of this war and the oil price are a moveable feast.
US Energy Secretary Chris Wright sparked confusion with a social media post overnight that said a vessel had been accompanied though the Strait of Hormuz “to ensure oil remains flowing to global markets” – only to have the statement later contradicted by the White House.
By midday on Wednesday AEDT, the US was saying it had attacked 16 Iranian mine-laying vessels near the strait and Trump was vowing to bomb Iran “at a level never seen before”.
Against this constantly changing war backdrop, airlines like Qantas are trying to manage huge shifts in demand and calculate the odds on when the oil price stabilises – and when this latest “seven-year shock” is over.
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