Qantas warns rising fuel costs may hit fares

Australia's biggest airline Qantas Airways said on Monday it will spend more than previously planned to improve "customer pain points" but warned spiralling fuel costs may force it to raise fares from already-elevated levels. The update sent its shares down as much as 2.5 per cent to a one-year low as investors questioned the airline's ability to grow profit given persistently high costs.

The company, under a new CEO, is trying to navigate a path between reassuring customers it is taking seriously complaints of widespread service problems while telling investors it can contain a surge in costs linked to tight oil supply.

The airline that sells three in five Australian domestic fares has seen its reputation tumble in its home market as its handling of the post-COVID travel revival brought a wave of flight cancellations and reports of lost luggage.

Adding to its woes, last month the antitrust regulator sued Qantas accusing it of selling fares on thousands of already-cancelled flights in 2022. Qantas also lost a union lawsuit when the High Court found its 2020 sacking of thousands of groundstaff was illegal.

The so-called "flying kangaroo" said it would now spend A$80 million ($52 million) on "customer improvements" on top of the A$150 million previously flagged.

"This additional investment is aimed at addressing a number of customer 'pain points' through improvements such as better contact centre resourcing and training ... more generous recovery support when operational issues arise, a review of longstanding policies for fairness and improvements to the quality of inflight catering," it said in the trading update.

At the same time, it said its forecast half-year fuel bill would jump by A$200 million ($129 million) to A$2.8 billion if the 30 per cent jump in fuel prices it had faced since May persisted. "The group will continue to absorb these higher costs, but will monitor fuel prices in the weeks ahead and, if current levels are sustained, will look to adjust its settings," Qantas said. "Any changes would look to balance the recovery of higher costs with the importance of affordable travel in an environment where fares are already elevated."

RBC Capital Markets analyst Owen Birrell said the company would likely absorb the higher fuel costs "until its target margins come under pressure and then would seek to claw back those costs through capacity cuts and higher fares. "We don't believe a material earnings shift is feasible from here given rising competition, growing consumer/business cost pressures and incoming re-investment in the product/platform," he said in a client note.