Air NZ to feel brunt of rising fuel prices on international routes, analysts say

Tuesday 22nd May 2018

Air New Zealand’s international routes will bear the brunt of oil prices near a 3 and a half year high as stiffer competition and the cost of flying vast distances set a higher bar for the national carrier than the domestic market, analysts say.

The Auckland-based airline last week raised its domestic airfares 5 percent in response to meet the rising cost of its operations, including labour, fuel, goods and services, but kept international fares static.

That comes at a time when Brent Crude oil prices, at US$79.41 a barrel, are near the highest level since November 2014, and a weaker New Zealand dollar pushes up the cost of imports. That’s already being felt at the petrol pump, with the price of 91 octane hitting a record $2.30 a litre in Wellington and the South Island.

Salt Funds Management director Matthew Goodson said the real sensitivity for Air New Zealand will be on international routes because fuel tends to be a higher percentage of the cost of goods sold when planes fly so much further.

“Competitors have the same pressures, but they may have different hedging programmes, because everyone hedges their fuel costs to varying degrees, that’s really where those cost pressures will play out,” Goodson said, referring to the practice of using a tool to fix fuel prices from wholesalers to protect from rising costs.

The national carrier hedged about 3.12 million barrels, or 70 percent of estimated fuel consumption, in the first six months of calendar 2018, which it projected would generate an unrealised gain of $30.7 million, according to its Feb. 14 hedging position. For the final six months of 2018, the airline hedged 1.69 million barrels, or 35 percent of estimated consumption, likely to generate an unrealised gain of $88,000.

Forysth Barr head of research Andy Bowley said international airlines can’t always fully recoup higher costs due to the competitive nature of the industry, with a greater number of carriers competing more aggressively and through a wider array of channels. That contrasts with the domestic market, where Air New Zealand faces just one competitor of scale in Qantas Airways subsidiary Jetstar.

Government data show consumer prices for domestic airfares rose 3.9 percent in the March quarter from a year earlier, whereas prices for international fares fell 6.6 percent. Over the same period, input prices paid by rail, water, air and other transport producers rose 2.4 percent.

Bowley said fuel pressures will affect the sector in the second half of 2018, but Air New Zealand’s hedging offers some protection.

“I think the cost pressures are going to be at a similar level in the second half, that doesn’t mean that the fuel price on average isn’t the same, it’s a reflection of what the cost pressures in the prior year were as well.”

The airline’s fuel bill jumped 21 percent to $470 million in the six months ended Dec. 31 and was a major contributor to Air NZ’s 7.5 percent increase in operating costs to $2.03 billion.

The shares recently traded at $3.39, having gained 6 percent so far this year and outpacing a 2.6 percent increase on the S&P/NZX 50 index over the same period. The stock is rated an average ‘hold’ based on six analyst recommendations compiled by Reuters, with a median target price of $3.14.

(BusinessDesk)

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