Air New Zealand profit takes a dive

Air New Zealand’s underlying profit has dived, more than halving to $222 million.

Its after-tax net profit was $146m for the 12 months to June 30.

The result was in line with forecasts but the airline’s boss expected tough conditions to persist for a few months more.

And the airline said today the fall in pre-tax earnings from $574m was an expected reduction on the prior year, when the airline had one of its best-ever results after the reopening of New Zealand’s border.

“While Air New Zealand reported a solid first half result, the second half of the financial year proved increasingly challenging as the impact of operational and economic headwinds became more pronounced,” the airline said this morning.

The tougher economic backdrop in New Zealand drove a deterioration in domestic demand in the second half, especially for corporate and government segments.

“I have absolute empathy for what households are facing,” chief executive Greg Foran said this morning.

“It feels like we’re at the bottom of the cycle at this stage.”

Foran said he expected conditions to stay tough for a few months more.

Accelerated maintenance requirements for Pratt & Whitney engines worldwide meant up to six of the airline’s Airbus neo aircraft have been out of service at times.

The issues affected some engines built for the twin-engined Airbus A320neo.

And ongoing additional maintenance requirements on the Trent 1000 engines powering the Boeing 787 Dreamliner fleet and reduced levels of spares in the market meant up to three Dreamliners were on the ground at times.

“It’s frustrating when you’ve got some of your best aircraft that you just can’t fly,” Foran said.

More competition, dividend slashed

Those issues, along with increased competition from US carriers and the cumulative effect of high inflation, had a big impact on the operational and financial performance of the airline, 52% owned by the taxpayer.

Passenger revenue increased 11% to $5.9 billion, driven by a 23% increase in capacity, primarily across the international long-haul network.

But that was partially offset by the weaker demand environment and higher levels of competition.

Also included within passenger revenue was $90 million of credit breakage for unused customer credits considered highly unlikely to be redeemed.

The airline had been under fire for steep increases in fares, saying it was facing higher costs.

While average jet fuel prices were slightly lower for the year, total fuel costs increased by around $190m, driven by capacity growth across the network.

Non-fuel operating costs increased faster than revenue, also driven by the increase in capacity, as well as broad based inflation.

The non-fuel operating cost inflation of about $225m was a major drag on the airline’s financial performance.

With landing charges, air navigation fees and engineering materials leading the increases, the non-fuel operating cost uplift of 6% brought the cumulative impact of inflation across the past five years to 20% to 25%.

“While growth in the network has provided some scale benefits, productivity remains below the levels achieved pre-Covid as the airline carries extra costs to help manage ongoing disruptions in the supply chain,” the airline said.

The airline has also slashed its dividend.

Shareholders will get a final unimputed ordinary dividend of 1.5c per share, taking the total ordinary dividends declared for the year to 3.5c per share, down from 6c last year.

Chief executive Greg Foran said he was grateful for the patience passengers had shown. Photo / Brett Phibbs

Foran said he was grateful for the patience passengers had shown as they faced disruption due to aircraft shortages.

“The challenges we are facing are not unique to Air New Zealand.

“Supply chain and aircraft delivery delays, growing costs and a shortage of labour in key areas like engineering are major issues facing many airlines across the global aviation industry.”

He said the airline was expecting a challenging year ahead.

The airline was spending $3.2b over the next five years on aircraft.

That included a significant, multi-year interior retrofit programme on 14 existing Dreamliners.

‘’We anticipate delivery of the first new GE-powered Boeing 787-9 aircraft towards the end of the 2025 calendar year, which will provide options for continued growth, cost efficiencies and network expansion opportunities.

The company said a tougher economic backdrop in New Zealand was driving softness in demand and it cited the cumulative impact of inflationary cost pressures, the impacts of aircraft availability issues and significant competition on its US network.

The airline expected these trading conditions to remain similar through the first half of the 2025 financial year.

Given the ongoing uncertainty, the airline is not providing guidance at this time.

Air NZ already downgraded its outlook multiple times this year.

Analysts at Forsyth Barr previously said the airline was on track to report an underlying pre-tax profit of $209m , less than half of the $585m near-record result last year.

Consensus forecasts had been $213m for the year.

In April, Air NZ said its full-year underlying profit before tax (PBT) to June 30 was forecast to be between $190-$230m.

That included $95m of Covid-era credits unlikely to be redeemed before expiry dates.

The airline had benefited from the non-cash boost of unredeemed Covid credits, but Forsyth Barr said it was likely to have operated at close to break-even for the last six months of the year.

Passenger yields or revenue per available seat kilometre (Rask) have also been under pressure from weakening demand.

Analysts previously said domestic demand was still challenged, partly because corporate and government demand had been under pressure.

International inbound demand had recovered, but at an even slower rate than for Kiwis taking trips overseas.