Air NZ picks up power as fuel falls

Air New Zealand shares hit a 15-month high yesterday as the price of oil continued to fall but the airline says that does not mean it will be dropping ticket prices any time soon.

Crude oil prices have fallen to a seven-month low (below US$59 a barrel) since August, driving a 20 per cent fall in the price of jet fuel since the high of US$93.

Chief financial officer Rob McDonald said yesterday the drop was "a welcome respite" but the price had not come back far enough and was still highly volatile.

Prices had fallen back to levels last seen in February - which were still extremely high from a historic perspective.

During the 1990s, jet fuel averaged about US$30 a barrel.

Despite that, most aviation industry analysts have upgraded their profit forecasts for Air NZ in the past 10 days.

At UBS, Wade Gardiner has revised his 2007 net profit forecast from $124.4 million to $142.2 million while at Macquarie Research Equities the forecast has been increased by 50 per cent to $128.3 million.

Air NZ shares closed flat at $1.39 but traded at $1.41 during the day - the highest level since July 2005.

The airline forward hedges about 60 per cent of its fuel requirements and is locked in at about US$71 a barrel for the rest of the year.

However, it is getting an immediate benefit from the lower price on the 40 per cent of fuel which it buys at the spot price.

Because of the volatility of the fuel prices the company no longer provides its own earnings guidance but McDonald said he was comfortable with the kind of revisions released by analysts.

But with the new fuel price inserted into forecasts, profits levels were still nowhere near 2004 and 2005 levels.

In 2005, Air NZ returned a net profit of $180 million - compared with $96 million for 2006.

McDonald said even that 2005 level was not adequate on the amount the airline had invested in capital.

The airline really needed to be earning closer to $400 million "so that is the sort gap we have to make up".

Ultimately, the price of seats would be determined by the market. Air NZ had already taken some of the fuel rises "on the nose" because it needed to keep growing traffic.

McDonald said: "There has been a lag in what we have been spending on the fuel and any price increases."

The airline was getting some benefits now and was also able to pick up hedges during the recent falls. "Hopefully that will translate through the bottom line."

The hedging programme had delivered about $200 million of value in the past three years and that benefit had been passed on to consumers.

But New Zealand had a competitive market.

"Someone out there with no hedges could dictate the price in the marketplace and we would have to respond," McDonald said.

The present hedge price was still US$5 to US$6 a barrel higher than the spot price - a strong indication that market was picking more price rises to come in the short to medium term.