Engine woes reduce Air NZ earnings

An Air New Zealand Airbus A320 passes the Remarkables, headed to Queenstown Airport. PHOTO:...
An Air New Zealand Airbus A320 passes the Remarkables, headed to Queenstown Airport. PHOTO: STEPHEN JAQUIERY
Rolls-Royce may build reliable cars but trouble with its jet engines has clipped the wings of New Zealand's national airline.

Air New Zealand blamed the operational costs of dealing with the global Rolls Royce engine issues as well as a "lower growth environment" as the root causes for a 31% decline in pre-tax earnings to $374million, while results were also offset by a $191million increase in the price of fuel.

Chairman Tony Carter admitted the board had been disappointed with the results but noted that the airline was operating in a different demand environment than it was 12 months ago.

"When we first saw signs that demand was slowing, we took immediate steps to review our network, fleet and cost base, to position the airline for success in a lower-growth environment. While we have made progress, this work is still ongoing," he said.

Part of that is likely to involve absorbing domestic route companies Air Nelson and Mount Cook, which operate the ATR and Q300 fleets, under the Air New Zealand brand.

"In line with this work, these two turboprop fleets will be integrated into the Air New Zealand operating certificate (AOC) and the AOCs for these two subsidiaries will not be renewed," an Air New Zealand spokeswoman said.

The airline will also take delivery of six ATR aircraft and three Airbus A320/321 neo aircraft in the 2020 financial year, which will provide continued growth, fuel efficiency and cost benefits on the Tasman and Pacific Islands network.

An additional Boeing 787-9 Dreamliner will also join the fleet this year.

The airline's CEO, Christopher Luxon, noted that as the airline navigated a more challenging demand environment, delivering competitive fares and a superior customer experience remained a top priority.

"While the New Zealand market has seen foreign competitors reduce capacity or withdraw completely this year, we have continued to grow both domestically and internationally and to adjust our domestic fare structure to keep New Zealanders connected to each other and the world."

Mr Luxon went on to say that the company was in a fundamentally strong position and would target further growth that taps into new pools of demand.

"We were very excited earlier in the year to announce that we would begin flying to Seoul in November 2019.

"A new seasonal service from Christchurch to Singapore will begin in December 2019, which will provide greater choice for visitors and locals alike."

It would also increase flights into both Chicago and Taipei, as these routes continued to outperform expectations.

He said an important milestone would be the return of Air New Zealand's remaining Rolls-Royce engines to service in the coming months.

"This will enable us to bring further reliability back to our flying schedule and to utilise our most efficient aircraft in the optimum way."

Mr Luxon acknowledged that while the outcomes of the business review announced in March will provide some clear benefits to the airline in the coming year, there were still further cost efficiencies that needed to be realised following the conclusion of operational and overhead cost reviews.

"We know that sustainability is a critical global issue and we risk losing our social licence to operate if we do not genuinely address climate change. That is why you will see us continue to invest, whether that be further reducing single-use plastic items on board our aircraft or making it easier for our customers to voluntarily offset their emissions with our FlyNeutral tool."

Based upon current market conditions and assuming an average jet fuel price of $US75 ($NZ117) per barrel, the airline is targeting earnings before taxation to be in the range of $350million to $450million.

This outlook excludes the impact of the new accounting standard for leases.

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