Air New Zealand said it had cut its pre-tax earnings guidance to a range of $340 million to $400 million for the June year.
Air New Zealand is on course to deliver a sharply reduced interim profit on Thursday but attention will be focused on where its full year result is heading after its surprise profit warning.
In a bid to recalibrate expectations, the airline said on January 30 that its revenue growth was slowing and there were signs of slower growth include leisure travel within domestic New Zealand and softening inbound tourism traffic.
The airline then revised down its full-year underlying earnings guidance by as much as $185 million to $340m, sending shares into a fall from which they haven't recovered.
Guidance near the top, or exceeding of its new forecast will be welcomed by investors.
Like Qantas -which reported a 19 per cent fall in pre-tax profit last week - Air New Zealand was hit by a spike in fuel prices in the six months to December 31.
But unlike Qantas, Air New Zealand has been more pessimistic about demand in the coming months.
The Australian airline says it has strong forward bookings and expects in this second half of this financial year to overcome the hit it took from high fuel prices.
This week Air New Zealand said it was slashing some regional airfares as part of a strategy to try and stimulate its domestic market, especially the regional routes.
The Kiwi airline has another problem. It is also into its 15th month of dealing with fallout from Rolls-Royce engine problems which have grounded up to four aircraft at a time.
Although the impact of the issue is receding as more affected engines are checked and repaired, schedule changes have already cost an estimated $30m to $40m and led to what chief executive Christopher Luxon has described as a ''sub-optimal'' experience for passengers on leased planes used to plug gaps.
The airline has underway a sweeping review of costs which initially targeted $30 million in savings late last year and has since being widened and cost cutting move are likely to be updated on Thursday.
There is also a detailed review of its network in which no route is off the table. The airline will pull back on full throttle growth of the past two years where it has grown capacity at around 6 per cent - and achieved its two best ever full-year results.
Forsyth Barr head of research Andy Bowley has forecast half year underlying earnings for the last six months to dive by 30 per cent to $226m (and net profit of $164m) despite a lift in revenue of 7.2 per cent to $2.92billion.
''While we expect robust revenue growth, substantially higher fuel costs will result in material decline in profitability.He said he expected soft capacity growth guidance for the next 18 months reflecting weaker demand and the network review.
Luxon said on January 30 that the airline remained committed to its distribution policy that looks through short-term earnings volatility to provide a consistent and sustainable ordinary dividend and the airline expected to pay an interim dividend of 11 cents per share.
Bowley said an annual dividend was achievable ahead of a reduction in capital spending during the 2021-2022 financial years, providing there was no further fall in profitability.
Shane Solly, portfolio manager at Harbour Asset Management said the abrupt slowing in domestic New Zealand leisure travel has concerned investors.
''One of the key factors investors will be looking for more clarity on is the airlines rate of capacity growth.''
He too said the ongoing impact of the Rolls-Royce engine issue - which is also affecting other airlines with a certain model of them - will also influence near-term profitability.
Luxon said partially offsetting the impact from slower revenue growth since the previous guidance in October was an assumed average jet fuel price for the remainder of the financial year of approximately US$75 (NZ109) a barrel, well down on the US$100 a barrel last October.
It did, however, break through the $80 mark in mid-February, reflective of the volatility facing airlines and closer to Air New Zealand's assumed average price for the full year of $81 a barrel.
Air New Zealand chief executive Christopher Luxon has overseen record growth. Photo / Greg Bowker
Fuel would make up the largest component of operational costs of about $1.3 billion for the full year, up from $987 million last year and $827 million the year before.
The airline did get some good news late last week. In response to airline, political and public pressure, Auckland Airport agreed to back down on $33 million of aeronautical charges in the current five year pricing period. Air New Zealand is the airport's biggest airline customer.
