Disasters and fuel costs clip airline's wings

Natural disasters gave national carrier Air New Zealand its most challenging financial year in a decade - it has posted a full-year after-tax profit of $81 million, 1% down on last year.

In reporting its year-to-June result yesterday, Air New Zealand said its normalised earnings before taxation were down 45%, from $137 million last year to $75 million, largely because of fuel costs, foreign exchange and hedging.

The global impact of disasters was reflected in Air New Zealand losing more than $1 million a week in its long-haul network during the first six months of this calendar year.

Unspecified changes to Air New Zealand's business model will be implemented before the end of the year, but the only guidance given was for "a better financial performance" in 2012. That relies on no further decline in global economies and fuel prices not rising.

Brokers from Craigs Investment Partners and Forsyth Barr had predicted a decline in after-tax profit of 17% to 36%, largely due to earthquakes and rising fuel prices.

Air New Zealand posted a profit of $112 million in the first half of the financial year, and a $37 million loss in the second half.

Chief executive Rob Fyfe said a combination of fares lost after the earthquakes in Japan and Christchurch, making extra capacity available for Christchurch and offering compassionate fares had a $70 million "negative impact" on Air New Zealand's full-year result.

He described operating conditions during the past six months as cumulatively the most difficult Air New Zealand had faced in the past decade.

"These natural disasters and sustained high fuel prices dramatically altered what was shaping up to be a very positive full-year result," he said in a statement yesterday.

He said the company was rigorously reviewing its business model, routes where capacity should be deployed, sales and marketing strategy and alliance partner opportunities, with changes expected before December.

On the 2012 outlook, Mr Fyfe said that "in the absence of further deterioration in global economic conditions and an escalation in fuel prices, we expect a better financial performance in the 2012 financial year".

Operating revenue for the past year was up 7% from $4.04 billion to $4.34 billion, cash flows were down 5% from $471 million to $446 million and after-tax profit was down 1% from $82 million to $81 million.

Following the announcement, shares in Air New Zealand were up 1c at $1.12. Air New Zealand announced a 2.5c dividend yesterday, totalling 5.5c for the year.

Forsyth Barr broker Peter Young said Air New Zealand's revenue was in line with expectations at $4.34 billion, up 7.3%, while fuel costs were lower than expected at $1.08 billion, but that gain was offset by higher operating costs in other areas, such as maintenance, aircraft and traffic services.

"Air New Zealand's full-year result looks OK, with operating profit better because there was lower-than-expected depreciation and lease costs," he said.

While Forsyth Barr's current target price, at $1.10, might yet be pulled back slightly, Mr Young was holding to a "buy" recommendation, because revenue and profit was improving and there should be a "substantial lift" for Air New Zealand during the full-year 2012.

Also, he noted the Virgin Blue Alliance should improve Air New Zealand's profitability on its transtasman business and there would be feeder gains on to Air New Zealand's domestic network.

"Of course, the Rugby World Cup provides a boost and will be a good start for the 2012 financial year," he said.

Mr Fyfe said Air New Zealand's international long-haul network continued to struggle against the backdrop of high jet fuel prices and a rising New Zealand dollar, which was stifling inbound tourism demand from key markets such as the United States and United Kingdom, further compounding the continuing tough economic conditions following the global financial crisis.

Short-haul passenger numbers were up 7.3% at 11.4 million, while long-haul numbers were up just 0.2% at 1.65 million.

"International markets remain volatile and this has an impact on the demand for New Zealand as a destination.

"This has seen long-haul routes in our network lose more than $1 million a week in the first six months of this calendar year," Mr Fyfe said.

- simon.hartley@odt.co.nz