Air NZ stymied on raising fares

By CHRIS DANIELS aviation writer

Competitive pressures from rivals may prevent Air NZ from raising ticket prices in response to the big rise in world jet-fuel prices.

Fuel prices are at levels not seen since late 2000, with Singapore Jet, the benchmark price of aviation fuel for Air NZ, going up more than 30 per cent in the past four weeks.

World airlines, including American Airlines, Continental and Air Canada, have this year all cited increased fuel costs as the reason for raising their fares. British Airways has suggested it will also put up its prices.

Air NZ says it faces intense competition, particularly on the Tasman, so any move to increase prices may have to wait for rivals to move first.

Coupled with recent falls in the value of the NZ dollar against the US dollar, profits at Air NZ could be dented if the situation on world oil and currency markets continues.


Fuel prices and exchange rates are intimately linked, since all fuel is paid for in US dollars.

A high New Zealand dollar last year meant a $38.3 million saving in fuel costs for Air NZ.

Long-range fuel and currency-hedging policies are in place to attempt to shield the airline from any short-term spikes in world prices.

Despite having forward hedge contracts designed to smooth out the impact of fluctuating oil prices on revenue, Air NZ must still buy jet fuel from the oil companies every day, at prices set according to the current world prices.

However, high world oil prices did not take the company completely by surprise.

Speaking to a transport conference in Sydney last month, Air NZ CEO Ralph Norris referred to fuel prices when reiterating the airline's forecast of a $220 million full-year profit.

"The guidance incorporates the increase in competitive activity on international sectors such as the Tasman, the slow recovery of the Japanese market and a period of high-sustained fuel prices," he said.

When these comments were made, the price of Singapore Jet was US$37.66 a barrel. Now it is US$47.90.

Fuel is the second biggest expense for Air NZ, after labour costs.

Normal seasonal volatility of Singapore Jet is around US$10 a barrel. The fuel is usually at seasonal low prices at this time of the year, since there is less demand for kerosene-type fuel from Northern Hemisphere power stations.

Air NZ will hope for prices to fall soon, and this can happen quickly, especially since there is no actual shortage of jet fuel being produced.