Air NZ says profit back on track after fare increases

Air New Zealand says it is back on track to hit its original pre-tax profit forecast of $140 million for the 2006 year after fare increases and improved passenger numbers in premium class seats boosted yields in the final quarter of the financial year.

The company lowered market expectations just one month ago when it indicated analysts who had downgraded their profit forecasts were correct in their assumptions about rising fuel costs.

Analysts had been estimating that profits could fall as low as $105 million.

The $140 million profit forecast was originally made with the 2005 annual results last August. It is 40 per cent down on the $235 million pre-tax profit it made the year before.

The airline also warned in yesterday's announcement - part of Air NZ's regular monthly investor update - that high fuel prices are expected to continue on into 2007 and will have a heavy impact on that year's profit.

But the strong operational performance over the past month was extremely good news given the difficult time for the sector in general, said Goldman Sachs JBWere aviation analyst Peter Sigley.

"Particularly post the downgrade by Qantas last week."

The Air NZ share price has been mired by near historical lows for several weeks, but rose 5c yesterday to close at $1.18.

An increase in premium class passenger numbers was particularly encouraging, Sigley said.

That appeared to back up the company's decision to reinvest in the quality of its product through new seats and new aircraft.

"They've managed to fill more seats up front and raise fares," Sigley said.

Air NZ said it was moving to increase the number of premium economy seats on its 747s.

Warnings about the impact of fuel prices on the 2007 profit were not surprising, Sigley said. It was prudent of the company to remind investors of those risks.

Air NZ said its overall passenger load factor had dropped slightly in May, although that was caused by its replacement of Boeing 767s with larger, more fuel efficient 777s.

Passenger numbers had continued to decline on Japanese routes and the airline had reacted by suspending its flights to Nagoya. That would have some positive influence on profitability.

While the airline was focused on growing capacity in key markets like China and the UK, there were some routes that would start to become more marginal the longer fuel prices stayed high, the company said.

As well as the Auckland-Nagoya flights, Air NZ has also exited the Christchurch to Los Angeles route and the Auckland to Taipei route.

Compensating for the Japanese decline was a large increase in Chinese visitors to New Zealand.

Air NZ plans to tap into that market with its direct flights to Shanghai beginning in November.

About 82 per cent of Air NZ is owned by the Government.