Fuel price puts Government's Air NZ investment on edge

Sky-high oil prices mean it is not just consumers noticing their wallets are lighter.

Air New Zealand's share price is under pressure and the Government is now close to being in the red on the billion-dollar investment it made to save the airline from bankruptcy.

The Government paid $885 million in 2001 and a further $150 million last year, or an average of 26 cents a share, for its 81 per cent stake.

After a five-for-one share consolidation last August, that average is $1.30 in today's terms - just one cent below Air New Zealand's closing price of $1.31 (down 4c yesterday).

The difference between what the Government paid and what the shares are now worth?

A mere $8 million.

Taking holding costs and dividends into account, the Government is well out of pocket.

Compared with a high of $3.03 (in today's terms) reached in May 2002 - when Air New Zealand announced a "no frills" revamp of its domestic services designed to turn the business around - the Air New Zealand investment is looking decidedly dubious.

At that point the Government was $1.34 billion in the money.

Only briefly in 2001 when the airline was teetering on collapse have the shares traded lower than yesterday's closing price.

They hit an all-time low of 88c (in adjusted terms) on September 24, 2001, when the idea of placing Air NZ into statutory management was being considered.

Fuel represents about 20 per cent of Air New Zealand's operating costs, and with refined Singapore jet fuel now fetching about US$72 ($106) - double what it was worth a year ago - the airline is feeling the pinch.

Goldman Sachs JBWere aviation analyst Peter Sigley says Air NZ will face "a considerable earnings headwind over the coming period".

The airline has about 60 per cent of its fuel hedged at US$50 a barrel for 2006, but with Goldman Sachs JBWere predicting oil prices will remain this high until then, it will need to buy a good share of its fuel on the volatile spot market.

"The reality is that it is burning a hole in their pocket so something has to be done," Sigley said.

Air New Zealand bumped up international and domestic fares by between $5 and $22 in April to counter rising oil prices. But it is reluctant to do so again for fear of losing customers to rival carriers.

Sigley says the fuel surcharge has risen in the order of four or five times since it was introduced.

"They'll be starting to find the outer edge of the envelope and there'll be a reluctance to push it too much further."

It looks as if Air New Zealand, and the Government, could be in for tough times ahead.

"With oil prices at US$60, the shares are only going to go one way," Direct Broking's Ken Allen said: "Lower".

- NZPA