KEY POINTS:
Air New Zealand faces a tough haul to make a profit in the year ahead after beating expectations with a pre-tax surplus of $197 million for the past 12 months.
The airline says it will only make a profit in the 2009 year if the jet fuel price averages below US$140. So far this year it has averaged US$142 a barrel and analysts say it is unlikely to drop below the US$140 figure.
Over the second half of the year the airline's profit slumped by 76 per cent.
Earnings before tax and one-time items fell to $38 million in the six months ended June 30 from $161 million a year earlier, due mainly to a 64 per cent increase in jet fuel prices compared with a year earlier.
Weakening demand is a big concern on long-haul flights which when heavily loaded are the most lucrative for the airline but can be the most risky given the high fuel component of running the aircraft.
Chief executive Rob Fyfe said the current year would be a hard one.
"While people can focus on fuel, my prime concern is how demand holds up. We think demand in New Zealand is very resilient and strong. The big issue for us is long-haul inbound, in the UK and Europe we're seeing a lot of softness there."
While the price of crude oil had fluctuated dramatically throughout the past year, the refining margin had been even more volatile, ranging between US$15 and US$40.
Air New Zealand is the country's biggest fuel user and saw its fuel bill rise by $300 million with around 80 per cent hedging saving the airline $159 million over the past year
Fyfe said 57 per cent of the airline's fuel was hedged in the current year.
"It is tight for us - if you hedge too much and the price keeps dropping away, then you're going to pay more than your competitors so it's a difficult balancing game at the moment."
Goldman Sachs JBWere's head of research, Marcus Curley, said the airline beat expectations of around $184 million because of higher revenue from contract engineering, a 12 per cent gain for cargo, better containment of wage costs and less damage than predicted from fuel costs.
The current year would be different.
"Most analysts are forecasting a jet fuel price of over US$140, which would suggest Air New Zealand is not going to make a profit over the next 12 months."
Fyfe restated warnings of a "bloodbath" on the Tasman if demand did not rise to meet planned increases in capacity of up to 11 per cent from other airlines in the next six to nine months.
"The Tasman is a very difficult market - we now see a number of carriers looking to introduce additional capacity [on] the Tasman. In tough times that can turn from profit very rapidly."
Air New Zealand has long maintained there is one too many airlines flying domestic routes and Fyfe yesterday said there was too much capacity here.
Demand would need to rise to fill this capacity "or we will see one or other player decide to exit the market. I wouldn't want to predict either of those outcomes but we certainly expect there will be some rationalisation."
Overall revenue was boosted 9.1 per cent, up $388 million to $4.7 billion.
The revenue increase was primarily due to extra capacity added to both its domestic and long-haul airlines and higher load factors, up 2.8 percentage points to 79.3 per cent. The airline carried 13.2 million customers, up 5.6 per cent on the previous year.
Full-year net profit fell 1 per cent to $218 million from $221 million a year earlier. Net profit included a $107 million gain on the value of future fuel hedges, after the company adopted international financial reporting standards for the first time.
Long-haul capacity had been reduced by 4 per cent with the replacement of Boeing 747s with 777s on London services.
Chairman John Palmer said the airline's $1.3 billion cash reserve put it in a strong position.
"People have thought we've been running a too conservative balance sheet - we think we're running an appropriate balance sheet. Our cash reserves give us confidence as we go into these more difficult times."
Air New Zealand's shares closed down 2c at $1.20c.
Holding course - the year to June 30:
Air NZ:
Revenue - $4.67b (2008) / $4.28b (2007)
Normalised earnings - $197m (2008) / $259m (2007)
Net profit - $218m (2008) / $221m (2007)
Dividend - 8.5c (2008) / 8c (2007)
