Hong Kong aviation

Rising oil prices stall Virgin Australia’s bid to win passengers from Cathay Pacific and Qantas on Hong Kong routes

Upstart carrier that launched discounted fares to muscle in on Cathay Pacific and Qantas could see foray short-lived, as its CEO hints at higher costs

PUBLISHED : Wednesday, 04 July, 2018, 1:00pm
UPDATED : Wednesday, 04 July, 2018, 2:18pm

Virgin Australia’s bid to win passengers from Cathay Pacific Airways and Qantas with cut-price fares could prove short-lived after oil prices rose to a four-year high on Tuesday.

London-traded Brent crude came within a whisker of US$79 a barrel and oil in New York traded at US$75, threatening global airline profits as jet fuel costs make up a large portion of a carrier’s operating expense.

Virgin Australia CEO John Borghetti said rising oil prices were “not good” and conceded the carrier needed to consider increasing prices.

“I think all airlines are watching fuel very carefully and, in some cases, if not most, starting to contemplate what this means for pricing,” he added.

After posting losses for years, Virgin Australia in April began selling tickets at lower prices when oil was US$10 a barrel cheaper on both benchmarks ahead of its newest flight linking Sydney to Hong Kong. The route featuring discounted fares launched on Monday in a direct challenge to Cathay Pacific and Qantas.

Oil was at US$50 a barrel when the airline began its flights between Melbourne and Hong Kong at the same time last year.

All airlines are watching fuel very carefully
John Borghetti, Virgin Australia CEO

Virgin’s foray into Hong Kong-Australia routes caused fares to fall as much as 40 per cent. Cathay Pacific and Qantas have responded by undercutting their smaller rival.

Amid the price war, the International Air Transport Association last month trimmed 2018 global airline profit forecasts 12 per cent to US$33.8 billion, citing higher fuel bills.

While Virgin said it was profiting on domestic routes, it noted its international flights were facing “competitive” pressure.

Hong Kong Airlines, which now partners with Virgin on services to Australia, last month said it was pulling out of that market, with flights to Cairns and the Gold Coast ending next October. Its parent company, the struggling Chinese conglomerate HNA Group, is a major Virgin shareholder.

Wang Liya, Hong Kong Airlines’ vice-chairman and president, declined to comment on the pull-out.

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But Borghetti described the two airlines as working well together despite the dropped offerings.

“We’re very [much] aligned and they code-share on our planes to Australia,” he said of the partnership with the Hong Kong-based carrier.

“We’ll just carry more of their passengers and that’s terrific for us and them, just like they’ll carry more of our passengers to all the points in China. It’s a good relationship.”