By David Knibb in Brisbane

In a struggle to hold costs despite high fuel prices, Qantas is headed for more conflict with its workforce.

So far Qantas has been able to skirt around impasses on such controversial issues as outsourcing and wetleasing with its lower-cost subsidiaries. But if high fuel prices persist, these disputes will be back on the table, and next time they may be harder to resolve.

Less than two weeks before the end of its financial year in June, Qantas was forced to issue a warning that its pre-tax earnings for the year would be only about A$670 million ($490 million), at the bottom of the range of analyst forecasts. This is down 25% from last year's A$914 million.

qantas tail 
© Qantas

Restructuring costs account for some of this fall in profit, but the main culprit is a A$1 billion increase in fuel costs, most of which has not been covered by surcharges. Geoff Dixon, Qantas chief executive, warns that fuel prices could go higher next year. Even if they do not, Qantas is more vulnerable.

S&P analyst Jeanette Ward calls it "one of the best-hedged airlines globally for fuel", but she warns that Qantas is "particularly sensitive to the current high fuel prices because of the roll-off of its very favourable fuel hedges in fiscal 2005".

Qantas is running just to stay still. Despite cost cuts of $A1.5 billion over the past two years from its so-called "sustainable future" programme, those savings have been wiped out by higher fuel prices. Chief financial officer Peter Gregg describes the airline as "treading water". So far Qantas has not talked of higher fares, but is looking instead at what Gregg calls "a more aggressive programme" to cut costs. Dixon warns: "Further restructuring will be required."

Inevitably, this means revisiting some of the contentious issues that sparked earlier disputes. Qantas employees are already upset about a number of initiatives - Jetstar recruiting pilots overseas, call centre plans in Asia, and wetleasing from lower-cost unit Australian Airlines.

But as times grow tough, positions may be hardening. After a heated battle last year over outsourcing widebody maintenance, Qantas engineers have elected hardliners in a union vote that signals a tougher stance.

Qantas has a history of seeking indirect ways to cut costs. Instead of a frontal assault on its unions, it could base more flight crews overseas, further rationalise maintenance and transfer more routes to its low-cost arm Jetstar. Yet, all of these are still likely to cause a fight. ■

Source: Airline Business