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Lateline Business -

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(generated from captions) As the price of oil continues

to climb, governments are under

pressure to help find new

fields, and there's a push for

Australia to investigate

unexplored areas off the coast.

complaints are getting louder Phillip Lasker reports. The

and the White House is feeling

the pain. Our nation must

produce more oil, and we must

start now. President George W.

Bush wants to drill in the

Arctic wilderness and overturn

a 30-year offshore drilling ban

imposed by his father. The

White House estimates it will

provide another 2.5 years worth

of oil, but some Republicans

have sided with the Democrats

to oppose the move on

environmental grounds. Oil and

gas drilling is a dirty and

dangerous business. You have

the possibilities of a large

spill which could damage the

coast and our coastal waters. A

report commissioned by the and Exploration Association Australian Petroleum Production

wants the Government to fund

more study of vast areas off

the coast. If Australia is to

know whether it has a natural

endowment of crude oil it needs

to explore these frontier areas

which up-to-date have been very

limited exploration. This is

where Australia's offshore oil

comes from. Production has

fallen 40% from its peak eight

years ago. The report

highlights huge areas off the

coasts of all Australian States

and Territories worthy of

scrutiny. Environment groups

say there would be some no-go

areas. You'd have to do the

modelling and say what would

happen if there was a spill?

Where would the material go and

end up, what would it impact

on? It's worth noting it takes

about 10 years for new oil to

reach the bowser and who knows

if it'll make any difference to

the price.

Well, one business that lives

and dies on the price of oil is

the aviation industry. In

recent weeks both Qantas and

Virgin Blue have announced cost

cuts and capacity reductions as

they battle record fuel prices.

Unlike Qantas, Virgin Blue says

there's no need for job cuts at

this stage, but if the oil

price goes higher, that could

change. Virgin is cutting $50

million in costs, removing

aircraft and increasing fares

in what it says are the first outcomes from an ongoing review

of jet fuel prices. Virgin

Blue boss Brett Godfrey joined me from his Brisbane headquarters earlier this

evening. Brett Godfrey,

welcome to Lateline

Business. Thanks, Ali. As your

cutting capacity and costs, you

talk about a " new reality in

the aviation industry" , can

you paint a picture of what

that reality looks like in an

Australian context? Sure. I

think the industry is going to

see a step change, or it has

seen a step change in its

imports. Fuel has become quite

a financial impost on the

industry and as a result of

that, I think we need to look

at some structural changes,

quite frankly, just tinkering

at the edges isn't going to do

too much. So in Australia -

and if I could set it in the

right context, Australia is

relatively better insulated

than the rest of the world - I

can come back to that later.

In Australia, you have been

seeing some reduction in capacity. Airlines are taking

planes out of the markets,

trying to find other homes for

them or if not, parking them on

the ground if they're fuel

inefficient. That's been as a

result of fuel and fuel going

into the airlines which is a

double whammy, because it's

also fuel that's causing

people, in terms of their

discretionary spend to look at

other ways of saving their cash

or doing other things with it,

because the fuel at the bowser

is also hurting. But where does

that lead to? You talk about

some reduction in capacity, but

when we look at what you call a

dramatic shake-out in the

global aviation industry, in

this country does that mean all

players can survive? I think if

you go back to just last year,

Virgin Blue and Qantas had two

of the better profit margin in

the world. Virgin Blue was the

fifth best in the world. You

look at the entire industry

last year generated profits of

$5.2 billion, of which in

Australia between Qantas and

Virgin Blue we had 20%, we were

about $1.2 billion. This

industry has been relatively

resilient and it has been

historically quite a good

market. I think, of course, I

can't speak for everyone else,

I think the big players will

survive. They'll have to

rationalise to some degree.

Fairly dramatic steps to for

the first time look at capacity

reductions particularly for

2008. So I'm quite comfortable

that in this market, it's going

to be tough, it's definitely

tough already, in fact. But

with good management and good

cash management in particular,

I think that, you know, all

airlines in this country or at

least the major ones will get

through it. Let's look at fuel,

you're 53% hedged at US $108 a

barrel for next year. If fuel

stays at around US $160, US

$165 a barrel, will Virgin Blue

need a capital injection? No.

If it stays at 165 for the longer term, there's supply

side and demand side. On the

supply side, we will do a

couple of things. We will look

to bring out more capacity. We

put out a package last week

that said we'd reduce our

forecast capacity. We're

looking at whether or not we

can slow deliveries of our Em

bray fleet That's possible

under your contract? It is.

Again, they need to have homes.

This is one of the

misunderstandings, the

aeroplanes that Virgin Blue fly

in Australia today are seen as

penalised, because they're not

old and written off and,

therefore, can be parked in the

desert somewhere. The fact

they are environmentally

friendly flying in the world

today means they are highly

sought after. There are many

airlines in the world that

would love to get their hands

on what we have. We've been

approached by many. Quite

frankly at $165 barrel we have

more things we'll introduce.

If it goes hiring we'll look to

see what we could to push more

capacity out of the

market. What would it have to

be for you to need a capital

injection? The problem is it's

quite a Rubic's cube. We've

looked at increasing fares and

we might have to continue to

increase fares. We're trying

to ensure we don't impact

demand. That's

counterintuitive. I couldn't

answer that and I wouldn't. I

don't want to sound like

someone who's trying to be very

defensive here. Last year our

cash position was stronger in

terms of the amount of cash we

had per day's operation than

any other airline in this

country. $700 million was our

cash position. That hasn't

deteriorated. It no doubt will

if fuel goes from $165 to a

higher level. Although we're

not planning on it, if fuel

continues to march to $200 a

barrel, at some stage the

world's industry will tip into recession and at that point -

whether that's a good or a bad

thing - it's a bad thing if

you're OPEC. The reality is

fuel will have to come down

because the demand will drop

off. I'm not in a position.

We've got many other levers.

We've got discretionary cap

ex-and airlines we can defer.

We've just had quite a big session with our board two

weeks ago, none of those 3-year

scenarios have us looking at

any further capital being

required whatsoever. I

understand it's a Rubic's cube,

but even at US $180 you'd still

have options? Of course we do,

but they become, as I said,

quite structural and we made decisions last week that

involved no loss of any

positions in our company. I've

been on a road show this past

two weeks and I'm telling

people that where we are today

we're in a very tough position.

If fuel goes to $180 or $200 a

barrel I can't make those

guarantees and our competitors

in this market have already

made statements to the effect

they're going to have to place

planes and people out of work.

We've been able to prevent that

to date, but no-one is going to

be unaffected. Not one single

aeroplane or company in

Australia that uses fuel as an

import is unaffected if fuel

hits $200 a barrel ch Are you

ruling out redundancies until

the price gets to US

$200? There's various levers

along the way. Where fuel is

today at $165 , we've made a

commitment. That is based on all other things remaining

equal. If for instance it

stays at $16 #5, even goes to

$165 and demand falls down the

floor, GDP comes off to 3.1, if

that gets downgraded further,

that's where I say there's a

few sort of elements to the

model. But where we are

sitting today, we're not happy with it, of course, but we're

doing what we can to mitigate

the concerns and also we've

told our people that at these

levels, you know, they will be

protected. But I couldn't say,

you know, at $200 anyone in

this country would be

protected. Are you going to

start charging for baggage as

others do? I'll be frank, we're

looking at everything. We've

spent weeks on this now. We've

got a matrix based on where

fuel and the economy goes from

here on end. I don't think I

want to disclose those today.

I can honestly tell you yeah,

that is something we've

considered. Would you consider,

for example, the model where

JetStar uses where they offer a

concession for carry-on baggage

only, or are you more

interested in charging per bag? It's a combination. We

could look at a scenario where

we lowered fares and went to a

user pays process and at the

discount you paid for a bag on

board. If you were at the

other end of the market where

you're paying more, you're free

and you don't have to pay for

it. There are a couple of

issues in that. I can't tell

you today. We haven't

finalised it. Brett Godfrey, on

a scale of 1 to 10, how tough

is it? This surpasses SARS and

September 11 by some magnitude.

It's quite clear that SARS and

September 11, Australia was

relatively insulated except for

airlines flying to the US

obviously. This has, as I

said, I am convinced that

you'll see at least one of the

major US airlines which form

five of the top ten airlines in

the world not being with us by

Christmas time if fuel stays

where it is. In Europe you're

seeing a number of airlines

fail and I just can't see - the

airlines was never built for

$165 fuel it certainly wasn't

built for relatively inefficient carriers and the

capacity coming into those

markets. Unless something

dramatic happens you'll

probably have only four majors

in the US by Christmas

time. For Virgin Blue, can you

see any light at the end of the

tunnel? I can only see the

light in the sense the

strategies we have in play we

have flexibility. Coming back

to that point, if we get really

desperate, we still have the

ability to off-load the most

efficient planes in the world.

I don't want to go down that

path, because I think we will

see an opportunity to come out

the other side as a stronger

player, but you know, we're not

going to take that chance

either. So the reality is, I'd

rather have very fuel efficient

airlines and be sitting here

with clamped out airlines that

I have no choice but to park

and shut down. We at least

have options. Over at Qantas

Geoff Dixon leaves next year,

how much longer do you want to

man the controls at Virgin? Mm,

well I want to get through

this, if that's what you're

asking. It's a hard gig at the

moment. What's the definition

of " through this" ? When does

it end? I've been here nine

years and I've been... this

airline model I was playing

with in the mid '9 #0s. I've

certainly had some would say,

past my used by date. I'm

still enjoying it. This is as

you've alluded to biggest

challenge this industry has

ever faced. From a challenge

perspective it's certainly

different and we'll get through

this and then we'll have a look

after that. Finally, what do

you make of reports there's a

new German-backed airline

looking to set up in Melbourne

and fly capital city

services? Well, I've read it

and heard it as well, and I've

never discounted any

competitor, but I think it

would be kind of moronic to be

trying to come into this market

right now and I wish them the

best of luck. Brett Godfrey

thanks for talking to Lateline

Business. Thanks very much

Ali. The corporate watchdog has

launched court action against

ABC learning accusing it of

breaching competition rules.

The ACCC says the company did

not sell off two centres as

required when it bought the

Peppercorn child care group

four years ago. Where parties

give undertakings to the ACCC

as part of merger issues, those

undertakings have to be

complied with. I won't comment

on the ABC matter, but this is

a case we're alleging that

undertakings have not been

complied with. Also today Mr

Samuel said the national

grocery inquiry has revealed

structural barriers in the

industry from the farmgate to

the checkout counter and has

accused petrol retailers of

swapping price information, a

practice he describes as close

to illegally collusive as the

ACCC has seen. As consumers

continue to jump on the environmental bandwagon so,

too, is big business. With

that comes an increase in

questionable green marketing

claims - a practice the

competition watchdog is

currently investigating.

Experts say more work needs to

be done and there are growing

calls for a uniform set of

green marketing standards.

Neal Woolrich reports. Beer

advertising in Australia has

come a long way. A hard earned

thirst needs a big cold

beer. Big blokes with big

moustaches are out and now a

100% carbon offset beer is in.

Cascade Green owned by Foster's

unveiled a green brand in March

hoping to tap into the growing

consumer movement for

environmentally friendly

products. We know 81% of

Australians are interested in

purchasing products or services

that are greener options. For

us that was one side of the

story. It was a natural

evolution having sustainability

practice at cast kadz for a

number of years. The next

step. Foster's say early sales

of Cascade Green have exceeded

expectations and is using the

knowledge gain from the project

to improve other production

lines. Many millions of dollars

invested at the brewery to

ensure we make year on year

improvements for environmental

performance. In the order of

$150,000 to get the advice we

needed to go through the

verification steps and to

purchase an initial number of

offsets to ensure the product

was carbon neutral at launch. The department of

climate change has awarded

Cascade a greenhouse-friendly

certificate and says the brewer

has cut its carbon emissions by

16% in six years. Cascade

invests in a Tasmanian landfill

project to offset the green's

brand's remaining carbon

output. The process is

evaluated from the moment the

hops are planted through to the

disposal of the product. That

creates a certain amount of CO2

equivalent or greenhouse gas

emmissions. We undertake to

reduce that where possible and

at the end of the period we

evaluate the full extent of

emissions and we need to

purchase offsets to make the

net emissions zero. The growth

in green marketing has led to a

trap for consumers - green

washing. The Australian Competition and Consumer

Commission is close to

releasing findings into

questionable carbon offset

claims. It's already

threatening fines of more than

$1 million for companies that

make false or misleading

statements. But that hasn't

stopped advertisers testing the

limits of fair

representation. So it's already

important that claims are

accurate and that they're

clear. For instance, saying

that a product is

repsycholeable when the product

is made of paper... there's

nothing new or special about

it. So try to market that

product as green is really

trying to pull the wool over

the consumers' eyes. We've

been involved in helping a lot

of clients who want advice on

marketing campaigns, because

they know that this is an

important area. And the

consequences of getting it

wrong are quite significant.

There's not only the potential

for criminal liability and

fines, but the damage to

reputation is quite immense. The consumer group'Choice' wants mandatory

standards for green product

labelling and there are calls

for the ACCC to be given power

to compel companies to

substantiate any environmental

claims they make. The

complexity is associated with

the fact that we're dealing on

the one hand with a law that

says don't mislead and deceive.

That's pretty general, and

we're starting to move into

some quite specific areas that

also involve an intermeshing or interaction with Government

policy on carbon emissions,

carbon trading. Mallesons's

Mandy Bodger says existing laws

should be adequate to deal with

green marketing, but says

concepts like carbon neutrality

are hard to measure and there

needs to be a clear set of

guidelines. They need to make

sure that all the claims they

make are accurate, they're

scientifically sound and can be

substantiated. But there's

further obligations than that.

Advertisers need to step back

and ask whether the overall

impression of what they're

saying is accurate, as well.

There can be products, for

example, that are exactly the

same as the product always was

but the company has simply

planted some trees. There's

nothing wrong with planting

trees, that's great, but it

actually doesn't make the

product fundamentally different

from how it was before. Tear

clear companies are clear in

what they're telling

customers. Even the competition

regulator is finding it

difficult to come to grips with

green marketing. Earlier the

ACCC investigated Woolworths'

Select brand. Woolworths'

label said the products were

from an environmentally-managed

companies, but an Indonesian

group argued the pulp mill was

clearing natural forests in

Sumatra for much of its timber.

The ACCC eventually dropped the

8-month inquiry, deciding that

fault was too difficult to

determine. And while green

marketing might be problematic

for advertisers and the

regulator, manufacturers look

set to continue cashing in on

the growing consumer movement,

if the price is right. I think

it's important that green

products are commercially

viable for big business, buzz

at the end of the day that's

going to encourage more

products and service to

actually get on board and

provide greener options and

help create the critical mass

that's important. The growth of

green products on the market

may leave consumers with the

challenge of deciding who is

the greenest of them all.

A look at what's making news

in the business sections of

tomorrow's papers.

The Dow has opened up 24

points and the FTSE is trading

up 11 points. We'll be back on

Monday night. I'll Ali Moore, goodnight.

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