Air NZ warns 2006 profit could fall 40 per cent

National carrier Air New Zealand today warned its 2006 earnings could plunge by as much as 40 per cent if sky high oil prices continue.

"If fuel prices persist at current levels, then the potential exists for the current year performance to be around 40 per cent below the 2005 result," Air NZ chairman John Palmer said.

The warning came after the company today posted a slightly higher June year net profit of $180 million.

Today's result was up 8 per cent on the $166 million profit recorded for the same period a year earlier, and bettered analysts' expectations of $161 million. Before unusual items and tax, the profit fell 3 per cent to $235 million, just above an earnings guidance of $220 million issued by the airline in June.

Outgoing chief executive Ralph Norris put a positive spin on the result, saying that excluding record fuel prices -- which account for around 30 per cent of operating costs -- and the difficult trading environment on the Tasman, the result was among the best in the company's history.

"I am encouraged that even in these tough conditions we achieved a solid profit, which was underpinned by another year of strong domestic performance and improvements in some key international routes," he said.

Air NZ shares, 82 per cent owned by the Government after a $885 million rescue package in 2002, last traded down a cent at $1.24.

Over the past year, shares have fallen 26 per cent against a 20 per cent rise for the benchmark NZSX-50 index. At these levels, the Government is well out of pocket, having paid an average of $1.30 per share for its stake.

The company declared a final dividend of 2.5 cents a share -- its second in four years -- having signalled last year that it expected to be in a position to pay shareholders between 25 per cent and 35 per cent of net profit after tax from 2005.

Mr Norris, who leaves the airline today to head Commonwealth Bank in Australia, is credited with nurturing the airline from near bankruptcy following the collapse of its Australian subsidiary Ansett in 2001, to its current solid state.

Despite the tough trading conditions, revenue rose 3 per cent to $3.6 billion during the year, while gearing improved to 51 per cent.

Air NZ carried more than 11 million passengers during the year, up by 781,000.

Mr Norris said the financial and operating targets set for 2006 were challenging in today's environment.

Roughly 60 per cent of the airline's fuel requirements for 2006 are hedged at US$53 per barrel, against current spot market prices of around US$67. For the first half the hedge position is 70 per cent.

"As hedges roll off and are replaced by higher priced hedges, the operating cost base will increase, impacting margins," Mr Norris said.

"There is no doubt that the times ahead will be tough, but we have proven in the past few years that Air NZ has the ability to cope with adversity."

Air NZ chairman Mr Palmer said the international search for a new chief executive was progressing well.

Chief financial officer Rob McDonald will step in as acting chief executive in the interim.

Mr McDonald said that he would not be seeking the role full-time.

- NZPA