Air New Zealand warns of $60m profit hit as fuel costs bite

Air NZ Boeing 787-9 Dreamliner at Auckland Airport. Photo / Grant Bradley

Air New Zealand has slashed up to $60 million off forecast pre-tax profits in just two months as high fuel costs hit.

The airline has dropped guidance for earnings this financial year to $340 million, the bottom of its previously announced range.

"Based on the current market environment and reflecting an additional approximately $25 million headwind from increased jet fuel prices (assuming an average price for the second half of the year of US$78 per barrel), we are targeting 2019 earnings before taxation to exceed $340 million," Air New Zealand said.

That compares with a target range for operating earnings of between $340 million and $400 million given on March 28.

In January Air New Zealand warned that profits would be lower than forecast following softer bookings and concern about future revenue. Slowing domestic growth and levelling out in the number of international visitors had hit the airline.

Its first-half net profit dropped by 34 per cent to $152m.

Last year it was forecasting pre-tax profits of $425m to $525m for the current financial year.

The airline today announced it would buy eight new Dreamliner 787-10 to replace its 777-200s. Airlines typically get big discounts but the list price for the order is US$2.7 billion ($4.1b).

Air NZ's shares were trading at $2.71, down 0.4 per cent on Friday's close, after the announcement hit the exchange.

Earlier this month it said salaries for top executives have been frozen for the next year as the company battles costs.

The airline has under way a process to carve 5 per cent from overhead costs of support services in response to a dip in demand growth that emerged late last year. It has also been hit by rising operational costs, mainly fuel.

Chief executive Christopher Luxon has told staff that as part of the overhead cost review, the nine-member executive had chosen to freeze salaries for the next 12 months.

"These are quite eye-watering numbers and the executive has been looking at every area of our business for savings to offset these increases as well as hunting out opportunities to increase our revenue from ticket and cargo sales," Luxon said.

Staff have been told of the plans to reduce overhead costs and last week executives interviewed two international consultancies to partner with the airline to deliver savings.

It is also planning for network growth of 3 per cent to 5 per cent on average, over the next three years, revised from 5 per cent to 7 per cent to reflect a slower demand growth environment. It would target growth on successful recently launched routes between Auckland and Taipei and Auckland and Chicago, and start a new service to Seoul from late November.

The airline's share price has fallen from $3.39 just on a year ago to $2.71.