KEY POINTS:
Air New Zealand has shrugged off a $165 million increase in fuel costs to more than double its profits, but disappointed investors yesterday who hoped it would dip into its $1 billion pot of cash to pay more special dividends.
Chief executive Rob Fyfe concedes the result for
the year to June 30 is still well short of what investors should expect.
The net profit of $214 million - the best in a decade - was up from $96 million last year. It was boosted by cost-cutting and growth in passenger numbers and yields.
Fyfe said he expected to grow profits again in the current year but was not prepared to make a forecast - citing volatility of fuel prices, exchange rates and the uncertain global economic outlook.
"If I just look at fuel prices in the last month, that runs to tens of millions of dollars on the bottom line so it's just unrealistic to put a target out there yet," he said.
Air New Zealand would not be directly affected by the global credit squeeze, he said. It had cash reserves of about $1 billion and it debts were secured against its aircraft.
But he acknowledged there was uncertainty about the economic outlook in some key markets such as the US.
For that reason he was also not prepared to commit to any more special dividends, he said.
In February, Air New Zealand announced a special dividend of 10c per share. Yesterday it declared a final dividend of 5c per share taking ordinary dividends for the year to 8 c per share.
That represents a total return for shareholders of $190 million for the year. The Government - which holds an 80 per cent stake - will receive $150 million of that.
"We're not foreshadowing any further dividends but what we are saying is that at each annual and half-yearly result we will review our capital position," Fyfe said. Market expectations around a further capital return have been high.
Air New Zealand shares fell 2c yesterday to close at $2.08.
But Forsyth Barr aviation analyst Rob Mercer said it was reasonable for the airline to take a cautious approach to any capital return.
In an increasingly competitive market increasing it was prudent for Air New Zealand to get "runs on the board".
Yesterday's announcement of a 123 per cent profit increase was a good result but people needed to remember that it was off a relatively low base, Mercer said. The airline still wasn't making an adequate return on a cost of capital basis.
Cost of capital is the level of return investors should expect on an investment based on the level of risk that is involved.
Air New Zealand should be aiming for earnings before interest and tax of more like $400 million to $450 million and net profits of more like $300 million to $330 million, Mercer said.
His forecast was for Air New Zealand to add another $100 million in the 2008 year at an ebit level - taking it up to about $380 million.
Fyfe agreed the airline was not yet where it needed to be on a cost of capital basis but was not prepared to put a figure on where profit should be.
"In terms of where we started last year - at just under a hundred million profit - we're probably a little more than half way to where we need to get to."
But he was confident profits would continue to improve.
"Compared to many airlines around the globe we are now going through almost a two-year capital expenditure holiday with our next major fleet acquisition not happening until 2010," he said. "So as we go into an uncertain financial market we're in an almost perfect position."
Mercer said the most pleasing aspect of yesterday's result was the strong earnings growth in the second half of the year - where $170 million of the $214 million profit generated in that period.
When you looked at the strong operating statistics for the month of July it appeared the good performance was already flowing through into the first half of the current year, he said.
Air New Zealand's passenger revenue increased by $338 million to $3.5 billion. Of that increase, rising passenger volumes accounted for $180 million.
The number of passengers carried rose to 12.5 million. That was well ahead of the capacity increases (related to new planes) and tourism growth in and out of New Zealand.
Restructuring had delivered a further $128 million of revenue, productivity and cost benefits during the year.
The airline's major restructuring programme had now been completed and the focus for the coming year was on revenue growth, Fyfe said.
AIR NZ
Year to June 30
Operating revenue
2007 - $4.38b
2006 - $3.8b
*Operating profit
2007 - $268m
2006 - $150m
Net profit
2007 - $214m
2006 - $96m
Annual dividend
2007 - 8cps
2006 - 5cps
Special dividend
2007 - 10cps
*before tax and unusual items
