Air New Zealand this week downgraded its profit forecasts for the second time in a month and warned that high fuel costs will see earnings fall below $200 million for the year ending June 30, a drop of more than 25%.
In February, Air NZ said it was still hoping to beat last year's before-tax profit of $268 million, but on April 24 reduced that to a target of between $220 million and $200 million.
Now, the figure is expected to be below $200 million.
Air NZ deputy chief executive Norm Thompson said fuel cost increases meant that for a flight from Los Angeles to Auckland, the fuel cost had gone from being 30% of the cost to the airline to 70%.
In the past two months, Air NZ had increased its customer fuel surcharge twice - a total increase of 6%.
Qantas Airways Ltd will axe services, shed jobs and retire old planes in a bid to cope with skyrocketing fuel prices.
The airline said it would have to look harder at its business, including cutting staff numbers, in order to deal with an expected $2 billion increase in its fuel bill next financial year.
Mirroring moves by other airlines around the world, Qantas said it would reduce capacity by 5% - the equivalent of grounding six aircraft.
Fuel costs for airlines, which now typically account for up to 40% of total operating expenses, have jumped more than 50% since the start of the year.
Goldman Sachs forecasts oil to go above $US140 ($NZ180) a barrel this year.
Worse, the investment bank is tipping it to go to $US200, something regarded as unthinkable a few months ago.
International jet fuel prices this week reached $US173 ($NZ223) a barrel.
The International Air Transport Association (IATA) warned yesterday that the international airline industry faced a "grim outlook" as soaring costs and economic turmoil had a negative impact on passenger numbers.
In April, the number of airline passengers grew by only 3% compared with 5.4% in the corresponding month last year.
In the first four months of the year, growth stood at 5.6% against 6.7% last year, the IATA said in a statement.
The slowdown hit Europe particularly hard, with passenger growth of just 3.8% so far this year against 6% last year.
Asia fared slightly better with 4.7%, but that was still down from 6.2% in the previous year.
Air travel in Asia was hit by the slowing Japanese economy and the effects of long-haul routes to North America and to Europe being under pressure.
BY contrast, Middle Eastern airlines saw 12.4% growth in traffic in the first quarter, with their economies boosted by soaring oil revenue and developing tourism.
Cathay Pacific Airways said this week it might cut some routes, particularly on long-haul North American services and accelerate aircraft retirement.
"The situation is having a very serious financial impact on airlines worldwide and we are no exception," Cathay Pacific chief executive Tony Tyler said.
Yesterday, Virgin Blue said it had not yet made a decision about cutting services but a strategic review meeting was planned for next week.
Korean Air said it would temporarily cut flights on 12 international routes and suspend five routes from June to mid-July.
Taiwan's China Airlines said it was considering a reduction in flight frequency or suspension of certain routes - mostly long haul routes.
China Airlines' smaller rival, Eva Airways, also said it might cut flight frequency on routes where demand was not strong, possibly in southeast Asia.
Qantas flights on Gold Coast to Sydney and Ayers Rock to Melbourne routes will be the first to go, followed by Jetstar's exit from the Sydney to Whitsunday Coast, Adelaide to Sunshine Coast and Brisbane to Hobart routes in July.
Capacity will be reduced on Qantas' Ayers Rock to Sydney services and Jetstar will scale back services on some Adelaide, Avalon and Cairns routes by August.
Qantas said further cuts and changes to its international routes would be announced within the next week.
Qantas chief executive Geoff Dixon said the magnitude of the changes called for a reduction in staff numbers, and the carrier had already launched an accelerated leave programme to mitigate the requirement for redundancies.
The company did not say how many jobs would be lost.
Qantas also plans to freeze pay for all of its senior executive group and defer the normal July pay review for the remaining 1000 executives.
Forsyth Barr broker Ken Lister told the Otago Daily Times he still believed Air NZ was well positioned to weather the "storm of fuel prices".
"Air NZ has a flexible fleet and, with no debt and limited capex over the next couple of years, we believe Air NZ's problems are less than [those of] other airlines."
A 10% rise in oil prices resulted in an additional $150 million of operating costs which required a 3% increase in yields to offset those costs, he said.
That was achievable for the national carrier.
The company's net tangible asset valuation was $1.33 and the shares were now trading well below that level.
"Our valuation is under review but [we] remain positive on Air NZ's long-term position," Mr Lister said.
Merrill Lynch research analyst Kevin O'Connor said, "The simple fact is that, because of rising fuel prices, they need to push up ticket prices. You cannot push up ticket prices in a softening economic environment unless you start tightening up capacity."
That was not a good signal for the low-cost travel industry.
"When oil prices go from $US20 to $US120 a barrel, that is going to feed through to ticket prices, and when you push up prices, some people won't travel or they won't travel as much."
