Qantas cutting domestic capacity by 5%

[eastwest101]

The refining hedge is a significant investment, it’s a huge commitment for an airline with already significant financial commitments on the horizon with Airbus and Boeing. From what I can see QF hasn’t participated in refining hedging for a long time and it was only marginal when they did (10-20%).

VA is an interesting case here and they only started hedging against the refining margin a few years ago. I don’t know the ins and outs on where they secured funding for this, I assume from Bain, someone along the Private Equity chain would be making something from that no doubt. But it’s worked for VA and is going to save the balance sheet for this half. The next half they are somewhat screwed though.

Thanks for the reply. Yeah, looking into the details of why an airline would hedge the crude upstream product price but not hedge against the middleman (refining) margin is an interesting one.

I guess the problem is that refineries in Asia are short of crude feedstock, but refineries in North America and Europe aren't so short of crude because crude is available elsewhere, albeit at a slightly higher price. And even small supply shocks would lead to disproportionately large price spikes in Asia. Whatever the case its a complex logistical snafu with the Straits of Hormuz currently closed.

Interesting that Bain went a slightly different path for VA compared to Qantas's own decision making, as you say - there could be a Private Equity model reason for doing so. I think your comments about VA's next half make a good point and not just for VA but for all airlines, in that even if this conflict ended tomorrow (which is very unlikely), there would be quite a long timeline for restoration of Middle East crude oil and gas infrastructure and normal shipping of crude and refinery supplies to get back to BAU. i.e. the entire energy sector is disrupted for an unknown amount of time

The other thing I have always wondered is what happens to hedging contracts when, say a refiner declares physical force majeure? Is it a case of the financial position persists independently of the physical disruption? I assume the reality is that the airline holds a worthless financial instrument (paper) and still has to go out and find the actual physical product for delivery?

 

[AustraliaPoochie]

There goes my last chances of a QFd 330 MEL> PER, and back and PER > SYD flights.
Bugg(a).

 

[moa999]

Also a question of the size and depth of most markets, which impacts cost to hedge.

Plus presumably a lot of data that suggested refining margin was historically fairly constant.

 

[LionKing]

I have heard service cuts are not only affecting Qantas, but also Jetstar, where Darwin-Gold Coast and Sydney-Brusselton is getting suspended.
I actually wonder whether it is more economical to use Jets to replace multiple turbopop services to selected regional areas to save fuel?

 

[eastwest101]

My understanding is that QF used to hedge the refined margin until they got quite badly burned during COVID. As there was very limited flying, particularly in this part of the world, those contracts ended up costing them dearly as there wasn't much use for Jet fuel. Damned if you do, damned if you don't, but a fortunate position for VA to be in.

Many airlines will tell you that they don't hedge to beat the market but for planning certainty. This is one of those examples.

That Covid example is pretty interesting but different to the current situation Qantas (and other airlines) find themselves in. In that case the Covid travel disruptions almost destroyed all the end-user demand for jet fuel quite quickly and dented worldwide demand for transport fuel such as petrol and diesel. The crude continued to flow, so the price of crude went negative, which was the market's way of saying that the refineries didn't want any more crude so a case of demand destruction caused by governments.

Agree with your thesis about damned if you do and damned if you don't with hedging, in my experience, hedging is sort of like insurance, and when a claimable event happens, the counterparty often attempts to find a way out of their obligation if they are on the wrong/losing end of a contract.


Anyway - back to the actual routes cut, and it seems to be an evolving story of possibly lower demand and maybe lower yield JQ and QF flights being cut first? Along with some consolidation or reduction of "Golden Triangle" frequency, but surely the "Golden Triangle" and flights in and out of Canberra are the highest yield and most price-inelastic customer part of the Qantas business domestically.

Whatever the logic, these surely must be business/bottom line decisions with cash preservation being important, but maybe a realisation from Qantas that they might want to start preserving current jet fuel stocks from a more national security or government edict-related type reason?

 

[eastwest101]

Also a question of the size and depth of most markets, which impacts cost to hedge.

Plus presumably a lot of data that suggested refining margin was historically fairly constant.

"Plus, presumably a lot of data that suggested refining margin was historically fairly constant."

Not having a go at you personally, but that is the danger of relying too heavily on historical data, a fine assumption for looking at the past in a business-as-usual situation, but when the "black swan"/anomalous type of event happens, all the historical data is now worthless and irrelevant.

I take your first point, though that maybe the size and depth of the crude oil market was/is big enough to hedge, but there wasn't a big and deep enough market to hedge against refinery margins? So everyone was "self-insured" against refinery margin spikes? Sort of like the places where insurance becomes too expensive, people revert to "risking it" by self-insuring. Self-insuring can be anything from ensuring there is always enough capital to overcome unlikely events, all the way through to simply crossing your fingers and praying that it never happens.

 

[Saab34]

Anyway - back to the actual routes cut, and it seems to be an evolving story of possibly lower demand and maybe lower yield JQ and QF flights being cut first? Along with some consolidation or reduction of "Golden Triangle" frequency, but surely the "Golden Triangle" and flights in and out of Canberra are the highest yield and most price-inelastic customer part of the Qantas business domestically.

Definitely looks like JQ cut the Bonza like routes first (well one was an ex AB route). Really highlights how vulnerable that model would have been if they stuck around.

Is a whole lot of capacity cuts around Cairns/Gold Coast if you go digging.

Have not seen any DPS cuts yet, plenty from the foreign competitors but nothing locally just yet. MCY/NTL-DPS seem vulnerable, seat maps on MCY/DPS are a little light on in the coming weeks .

 

[Warragul]

We had a HBA-MEL cancelled next week which I assume is related, a bit annoying as was in the early afternoon and the only options to reaccommodate now on QF are 9am and 6pm, big gap in the middle of the day

Maybe issues with A220 maintanance. My CBR- MEL flight this Thursday just cancelled due to maintanance requiring 'a longer time' to rectify.

Engines anyone?

 

[Harrison_133]

Maybe issues with A220 maintanance. My CBR- MEL flight this Thursday just cancelled due to maintanance requiring 'a longer time' to rectify.

Engines anyone?

X4A had an engine failure out of Sydney a few days ago, so they're down an A220 at the moment.

 

[tassie6]

X4A had an engine failure out of Sydney a few days ago, so they're down an A220 at the moment.

I would agree, but cancellation was on the 10th, looks like engine failure on the 12th.

Given it was a few days ago, it could be related to neither the capacity cut or engine in the end