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Preparing Australian aviation for a new world

Aviation is a fascinating industry, but it is also a challenging one.

For almost 90 years QANTAS has developed a cultural strength that enables us to cope well with crises. We have shown great resilience through numerous major shocks over the past decade alone.

But right now the global aviation industry faces, not a shock or a blip - not even a crisis - but a permanent transformation. The drivers of this transformation will be globalisation, accelerated by permanently high fuel prices. And the result will be a new aviation world order.

... Oil, of course, is a finite natural resource and whether or not the world has reached "peak oil" is a matter of debate. But there is no question that the cost of finding and extracting oil will continue to climb. Today’s fuel prices also derive from a long period of sustained global economic growth, notably in China, India and the Middle East. And this, of course, is the result of globalisation.

Everyone in this room today is feeling the impact of high fuel prices. And while we welcome last week’s sudden drop in prices, there is no guarantee that this trend will last.

Right now airlines around the world are cutting routes and capacity, grounding and retiring aircraft, and shedding staff - it is likely that 100,000 jobs worldwide will be lost before this calendar year is out. In the past six months alone 24 airlines have closed down completely. The major US carriers are now planning to ground 465 aircraft - that is more than twice the size of the QANTAS fleet.

On Friday we announced the QANTAS response to this new era, based on suspending recruitment, cutting jobs and reducing capacity. It is very tough, especially when our people have been so steadfast and flexible through these years of constant change. I wish it were different, but once again we have no choice but to manage actively to preserve a sustainable base for the group.

This financial year QANTAS expects to pay around two billion dollars more for fuel than last year. This increase represents more than our projected profit before tax for 2007/08.

By further cutting other costs and by increasing our fuel efficiency we can reduce somewhat the need for a rise in fares to compensate, but we simply cannot offset the full amount.

... Jet fuel is currently around 167 us dollars a barrel, including a refining margin of 33 dollars a barrel, which is more than double the historic average over the past three years. And if we look over prices going back to 2000, the refining spread has averaged 8.38 US dollars a barrel so the margin has in fact quadrupled.

These realities are changing the underlying economics of aviation, permanently.

... Over time, consolidation will transform aviation. It will produce a few, very large and extremely efficient global airlines with a portfolio of interests and brands - like Air France and KLM. These players will have enormous power in marketing, in fuel buying and hedging, in aircraft purchasing, and in reach.

There will still be niche airlines with specialist offerings - whether for business or leisure travellers - but these will need to be run very skilfully, and any weakness will lead to a quick death.

And there will also remain those powerful, government-backed airlines, particularly from the oil rich states. These governments will continue to use aviation services as instruments of national economic development.

... The size of the aviation industry in the coming years will be significantly determined by the amount by which fuel prices rise. The industry structure will be on a global scale, and focused on maximum cost constraint and efficiency. Over the next twelve years many more airlines will vanish, unable to cope with high fuel prices, or they will be swallowed up in takeovers or mergers.

Editorial Notes: Full text of speech at original Contributor Stuart McCarthy writres: Geoff Dixon is the CEO of QANTAS. This is part of a speech to CEDA (the Committee for Economic Development of Australia). He deserves a great deal of credit for being the first CEO of a major Australian company to publicly discuss the taboo subject of peak oil. Hopefully other business people, and governments, will follow his lead.

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