KEY POINTS:
Air New Zealand has downgraded its profit forecasts for the second time in just over a month, warning that high fuel costs will see earnings fall below $200 million for the year ending June 30 - a drop of more than 25 per cent.
The news came after the airline unveiled big plans for biofuel which it hopes will be used across its domestic fleet within five years and could cost less than half the price of regular fuel.
In February Air New Zealand said it was still hoping to beat last year's pre-tax profit of $268 million .
But on April 24 it reduced that to a target of between $220 and $200 million.
Yesterday the company said that figure was now expected to come in below the $200 million mark.
Jet fuel prices have gained 53 per cent in the past six months to a record US$173.55 a barrel in Singapore on Tuesday.
A few weeks ago it was at US$120 a barrel.
Yesterday Air New Zealand deputy chief executive Norm Thompson said at the annual Trenz tourism conference in Rotorua the airline was increasing its focus on biofuel, which could cost less than half the barrel price of regular fuel.
"We are absolutely committed to this. We have a goal within the organisation to get to a point where we can run all or part of our domestic fleet on it.
"It is happening quicker than we had planned. When you have got the price of jet fuel at US$172 it gives a lot of incentive."
Thompson said fuel cost increases meant that for a flight from Los Angeles to Auckland fuel had gone from being 30 per cent of the cost to the airline to 70 per cent.
In the past two months Air New Zealand has increased its customer fuel surcharge twice - a total increase of 6 per cent.
The airline has also said that from September it will reduce capacity and fuel costs on the Auckland-LA-London route by using Boeing 777s instead of the larger 747s.
Thompson said it was hard to predict how much money Air New Zealand would save by using biofuel but it could be "close to half" the current cost of jet fuel.
While it was too soon to put a date on when it would start using biofuel in the fleet, sometime in the next five years was the goal, he said.
There was still a lot of work to be done and the fuel would have to be available at a range of airports across the world before it would consider using it for long-haul.
"When you go down the biofuel track you have to be sure of supply."
Thompson said the company was also waiting to see whether long-haul flights could be run on a blend of jet fuel and biofuel.
Air New Zealand is planning to run a test using biofuel in a 747 by the end of this year.
The fuel will be used in one of the plane's jet engines which would take-off from Auckland and fly for about an hour before landing.
The engine will then be detached from the plane and examined by Air New Zealand and its biofuel partners Boeing and Rolls Royce to see if there is any damage.
Earlier this year, Britain's Richard Branson successfully tested a coconut-based biofuel in one engine of a Virgin Atlantic flight.
Thompson said the biofuel Air New Zealand tested would either be a second-generation biofuel based on a crop called jatropha or an algae-based biofuel it was working on with several New Zealand companies.
The jatropha was sourced from China and India where it was grown on scrub-land unsuitable for food crops.
But long-term, the airline hoped to source biofuel from New Zealand.
Analysts say Air New Zealand is better placed than many of its rivals to weather the fuel spike as it has a strong balance sheet.
But despite that, it has been the worst performing stock on the NZX-50 index this year - down 42 per cent in the past six months.
Its shares closed down 3c at $1.11 yesterday.
