Air NZ to hike fares by 10 per cent

Air New Zealand announced today all domestic and international airfares will rise by 10 per cent from May 1 as fuel costs continue to spiral.

Chief financial officer Rob McDonald said fuel was now the airline's number one cost.

"We regret having to increase fares but the numbers are stark," Mr McDonald said.

The price of benchmark Singapore jet fuel has risen from around US$40 ($63.95) a barrel to US$89 a barrel in the past two years.

That has seen Air NZ's fuel bill more than double from $480 million in the 2004 year to almost $1 billion in 2006.

"Until now customers have been shielded from much of the effect of these price rises by the airline's fuel hedging programme," Mr McDonald said.

"The airline has also borne additional fuel costs over and above its hedging, avoiding passing those costs on to customers."

But recent falls in the value of the New Zealand dollar against the US dollar and the fact that Air NZ's more favourable fuel hedges have rolled off meant the shortfall needed to be addressed.

Despite today's fare increase the airline would still not fully recover the increased cost of jet fuel.

"This is a business that is very sensitive to fuel price rises. Every US$1 increase in the price of jet fuel forces down our EBIT (earnings before interest and tax) by US$8 million per annum before hedging. In the last month alone, fuel prices have increased by nearly US$10 per barrel," Mr McDonald said.

Air NZ had made efforts to reduce costs, restructuring its wide body maintenance, reviewing head office staff levels, combining Freedom and Air NZ flights across the Tasman, and, most recently, announcing a proposed transTasman alliance with rival Qantas.

Since 2003, Air NZ has made $293 million in cumulative cost savings.

"But the magnitude of recent fuel price rises mean even these cost reduction measures are now not enough," Mr McDonald said.

Shares in Air NZ last traded steady at $1.24 against a year high of $1.53 and a low of $1.03.

- NZPA