Fuel prices punish Air NZ

By Duncan Bridgeman

Friday 21st May 2004

Air New Zealand's case for an alliance with Qantas is getting stronger by the day as fuel prices hit record highs and the Kiwi dollar settles lower against the greenback.

Analysts say the airline is flying into some serious headwinds with additional concerns of a drop off in demand following its introduction of a surcharge last week.

"It doesn't look good for a number of airlines," Macquarie New Zealand's Arthur Lim said.

Most airlines worldwide have announced price hikes to counter the soaring fuel costs, which have increased 50% from a year ago. Several US companies, already battered by the downturn in the airline sector, have said any prospect of returning to profitability this year has now gone.

While Air New Zealand has successfully implemented a low-cost structure on its domestic, transtasman and Pacific routes, the price hikes are still likely to have an impact.

And if the Kiwi dollar falls further as sentiment toward the US economy improves, the situation could worsen.

Air New Zealand pays for its fuel in US dollars, enabling it to book currency gains from a strong kiwi. Until recently those gains helped offset the rising fuel costs.

"It's now a double-edged sword," Air New Zealand spokesman Glen Sowry said yesterday, referring to the recent fall in the dollar against the greenback to about 60c.

The company had budgeted for $US29 a barrel of oil, which was at the high end of the range at the time, Sowry said. With oil over $US40 a barrel, the company has been incurring costs above its budget during the entire financial year.

Asked if the price hikes were enough, Sowry said it was "getting close. We are in a very competitive environment and are very conscious of increasing prices further ... hopefully the dollar has now stabilised."

The Kiwi dollar has fallen 10c against a resurgent US dollar in less than three months but economists don't expect it to fall much further in the short term.

"It is literally anyone's guess whether in six months we are at 55c or 65c," BNZ chief economist Tony Alexander said.

Air New Zealand and Qantas this month appeared in the Australian Competition Tribunal in Sydney to appeal against the Australian competition watchdog's decision to reject their proposal for an alliance.

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