Rising fuel costs pressure Air NZ earnings

Wednesday 26th September 2018

Jet fuel prices have risen above the assumed average for the current financial year of US$85 a barrel in recent weeks, Air New Zealand's chairman, Tony Carter, warned shareholders today.

However, the national carrier made no change to the $425 million to $525 million in underlying earnings before tax it is forecasting for the current financial year. That estimate, made last month, excludes an estimated hit to earnings of between $30 million and $40 million from schedule changes forced on the airline by maintenance issues relating to the Rolls Royce engines used on Boeing 787-Dreamliner aircraft.

Carter, answering a shareholder's question at the firm's annual meeting in Christchurch, said higher aviation fuel prices were "our largest headwind, undoubtedly". Recent declines in the value of the New Zealand dollar were only "slightly negative" on balance for Air New Zealand because of its impact on the cost of fuel and other imports.

The lower kiwi dollar did make the country more competitive as a tourism destination, he said.

Chief executive Christopher Luxon, who was recently appointed chair of the Prime Minister's Business Advisory Group, gave an upbeat view of the outlook for both the airline and the New Zealand economy, "despite some of the commentary in the media", he said, referring to recent reports of business and consumer confidence indicators prepared by the BNZ, ANZ Bank and Westpac McDermott-Miller.

"Underlying demand is looking very robust," said Luxon. Total network passenger growth of between 4 percent and 6 percent is expected in the current financial year, with domestic network growth of 3-to-5 percent, Tasman and Pacific Islands network growth of 7-to-9 percent and 3-to-5 percent growth in long-haul markets.

BusinessDesk understands Air NZ is considering adding up to five new long haul routes in North and South America to launch during the next few years, with Luxon saying the US would be a major focus for growth.

Some 34 million Americans have New Zealand on their list of holiday destinations, said Luxon. But only 340,000 had visited last year, with many discouraged by what they wrongly believed to be a 40-hour flight.

Direct connections to Houston and, from November, to Chicago, should help break down that perception.

The company also released a dump of company officer shareholding changes, including disclosure that Luxon sold 103,697 ordinary shares at $3.19 a share on Sept. 17 to realise $330,793.43 and leaving him with 3,793,269 shares. Air NZ shares were trading at $3.03 a share this afternoon, having fallen 1.3 percent today. They traded as high as $3.335 earlier this month.

Luxon told shareholders that Air NZ would not operate international services from Hamilton to alleviate pressure on Auckland, although he told the audience to "watch this space" for international service extensions.

The airline intended to build a "much more muscular" approach to regional domestic services, citing a desire to support destinations such as Gisborne to support more tourism growth.

There had been no consideration of resuming services to Vanuatu.

(BusinessDesk)

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