KEY POINTS:
Air New Zealand is optimistic it can bounce back from one of its sharpest profit drops.
The airline yesterday announced its half-year earnings were slashed 84 per cent to $26 million for the six-month period to the end of 2008.
Net profit after tax was $24 million, down 79 per cent, exceeding analysts' expectations.
Reducing fuel costs in the second half of the year and a strong currency hedging position were positives, despite a weak tourism outlook.
However, chairman John Palmer said there was room for improvement.
"If current conditions and jet fuel prices continue, Air New Zealand expects to see financial performance significantly improve in the second half of the financial year."
The airline, which is 76 per cent owned by the Government and is lightly traded, saw its share price trade up 4c to 85c after the announcement, closing up 1c at 82c yesterday.
Passenger numbers on long-haul routes had fallen 5.5 per cent, capacity had been reduced by 5.7 per cent during the period, and yields were up 12.3 per cent.
On short-haul routes, passenger numbers were down 4.1 per cent, capacity reduced by 0.6 per cent and yields up 4.1 per cent.
The airline had been hit by $211 million of extra fuel costs, and losses due to exposure to added maintenance and offshore business costs because of the falling dollar.
"If you take those together and add in falling demand, to actually achieve a profit at all is a creditable result, although we've made it quite clear that it is unsatisfactory."
Chief executive Rob Fyfe said the airline could not look forward with certainty, but "we do look forward with confidence and a lot of genuine optimism".
Weak demand was looming as a greater threat than oil prices but could be nullified by reducing capacity, as the airline is doing by up to 14 per cent on long-haul routes.
"We are seeing demand at the moment stabilise. The first couple of months of this current six months have been good. The remaining four months are OK," Fyfe said.
It was not clear how competition in the domestic market would be affected by Qantas leaving and Jetstar arriving, although Air New Zealand was confident of picking up more business travellers, Fyfe said.
"All those things are a little unclear and that's what makes us cautious about putting a number into the market.
"You can almost guarantee that no matter what number you put out won't be right within a few weeks or a month," he said.
Air New Zealand has launched a hard-hitting ad and marketing campaign to counter the arrival of Jetstar and Fyfe said the airline would continue to vigorously defend its position in the Tasman and domestic markets.
The airline had $1.4 billion cash in the bank and modest gearing - which rose from 45.5 per cent to 52.7 per cent but was still among the lowest of similar size airlines.
The result represents the sharpest reversal in fortune since that in the wake of the Ansett debacle and terror attacks in 2001 when the airline plunged $1.4 billion into the red.
Air NZ continued to seek out opportunities for small-to-medium-sized investments in the aviation and tourism sectors, and the current economic crisis might yield some bargains, Fyfe said.
Head of research at Forsyth Barr Rob Mercer said with revenue of more than $2 billion and profit of $24 million "there were a lot of moving pieces".
With extensive currency hedges in place, fuel costs down, no spending on new planes and strong yields, the airline was well placed.
"They've got the possibility to surprise in terms of the earnings that will come through in what are pretty difficult times. Putting the first half to one side, over the next 12 months they're going to be in a strong position even if demand's going to be pretty unpredictable."
