Air New Zealand’s profit is picked to plunge – the reasons why

Air New Zealand is facing more competition on international routes and pressure on profitability. Photo / Michael Craig

Air New Zealand’s pre-tax profit is forecast to plummet by more than 60%.

The company has already downgraded its outlook four times during 2024 and analysts at Forsyth Barr say it is on track to report an underlying pre-tax profit of $209 million, less than half of the $585m near-record result last year.

It releases its full-year result on Thursday.

Consensus forecasts are for $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, including $95m of Covid-period credits that are unlikely to be redeemed before the expiry date.

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

Earlier this month, Craigs Investment Partners also said Air New Zealand had faced a grim second half of the financial year.

Forsyth Barr analysts Andy Bowley and Hugh Lockwood say the airline had faced a challenging year, given weakening demand, intense competition on key sectors (particularly North America where big US carriers poured in capacity during summer), and the emergence of further engine issues (this time with Pratt & Whitney on domestic and short-haul Airbus aircraft).

It has also been dealing with longer-term issues with Rolls-Royce engines on its Dreamliner fleet.

The firm has an underperform rating for the airline and a 12-month share target price of 48c, down from 57c it is trading at today.

Passenger revenue is forecast to be up 11% on last year, totalling $5.94b.

Key issues likely to feature in the FY24 result

Passenger yields/revenue per available seat kilometre (Rask): Yields have been under pressure from weakening demand. Group Rask was down -11% on the prior year.

Demand/forward bookings: The domestic demand remains “challenged”, say the analysts. Corporate and government demand has been under pressure. International inbound demand (visitors to this country) has recovered, but at an even slower rate than New Zealand outbound (Kiwis taking trips overseas).

Capacity: In light of the Pratt & Whitney engine maintenance issues, capacity guidance was expected to be flat for the 2025 financial year. With two new Boeing 787 Dreamliners delivered towards the end of the year “robust growth” was expected in 2026.

Fuel cost outlook: The recent softening of fuel prices has helped the airline. Bowley and Lockwood say that all else being equal, a US$10 ($16) a barrel decline in jet fuel prices lowers Air NZ’s fuel cost burden by ~$160m.

Operating costs: Air NZ remained exposed to inflationary cost pressure.

Operating spending would remain “sticky”, given ongoing above trend labour costs and airport charges increases.

Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.