Qantas forced to slash passenger capacity as Middle East war drives up jet fuel costs

Ongoing tensions in the Middle East and a still volatile oil market have forced Qantas to cut capacity on its domestic network, throwing the future travel plans of countless Australians into chaos.

The bombshell news came in a trading update released by the Flying Kangaroo on Tuesday, which acknowledged it had already hiked fares to recoups costs.

Qantas said jet fuel prices had more than doubled since the US and Israel launched their military campaign against Iran in late February and they “remain highly volatile”.

While 90 per cent of the airline’s jet fuel prices for the second half of the current financial year are hedged, it was exposed to movements in jet refining margins — the difference in price between crude oil and refined jet fuel.

That exposure has increased from $US20 a barrel in February to a peak of around $US120 as Iran’s stranglehold on the Strait of Hormuz has choked off oil to the rest of the world.

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Qantas said it was working closely with the Federal Government and jet fuel suppliers “who continue to provide confidence in fuel supply for the remainder of April and well into May”.

“We are closely monitoring the situation given the ongoing uncertainty in global fuel supply chains,” it said.

Even still, Qantas said it now expects fuel costs in the second half to soar to between $3.1 billion and $3.3b, up between $600 million and $800m from an estimate of $2.5b issued just days before the start of the war.

And it expects the pain to continue, factoring in a per barrel price of between $185 ($US131) and $200 ($US142), excluding hedging, for the remainder of the financial year.

The ongoing ructions between the US and Iran and an uneasy ceasefire that is yet to deliver a deal on a lasting peace has forced the national carrier to trim capacity on domestic flights in the June quarter by about 5 percentage points.

“Affected Qantas and Jetstar customers are being contacted directly and offered alternative flights or a refund,” it said.

Overall, capacity across its domestic Qantas and Jetstar operations are expected to be down one per cent in the fourth quarter, compared to a year ago, after the airline recorded a 5 per cent leap in capacity in the previous three months.

Qantas said despite the Middle East conflict, demand for travel to Europe remained strong as customers sought alternative routes.

In response, it has redeployed capacity from the US and its domestic network to increase flights to Paris and Rome, and now expects higher earnings from international bookings to partially offset the rising fuel costs.

“The group continues to closely monitor the dynamic environment and retains optionality to take further actions to mitigate fuel cost increases over time,” it said.

Qantas said full-year capital expenditure would now be at or below $4.1b, the bottom end of the previously guided range, as it looks to protect profits.

It said its $300 million interim dividend of 19.8¢ a share would be paid this week but it would not proceed with a previously announced $150m share buy back plan.

As The West Australian reported earlier this month, Qantas has had to reshape its flight schedule between Australia and Europe as travellers are forced to fly around the Middle East.

Amid the shake-up, between mid-April and late July, Qantas will take its Paris flights away from Perth to give them to Sydney, flying via Singapore. It adds an extra two services a week.

In compensation for WA, flights between Perth and Rome will fly daily and there are 10 flights a week between Perth and Singapore.

The Perth to London direct flight will continue to fly via Singapore, though the London to Perth flight will remain a non-stop service, due to more favourable flight paths and prevailing jet streams.

Perth to Singapore flights will be timed to connect with the Singapore to Paris flights.

Qantas is also taking some of its 787-9 Dreamliners from US flights and redeploying A330s from domestic routes.