Fuel prices cloud hopeful outlook

By YOKE HAR LEE

Air New Zealand was caught napping by a higher-than-expected rise in jet fuel prices, but first-half results otherwise showed a strong underlying performance.

Domestic operations, boosted in part by strikes at rival Ansett New Zealand, helped the airline to expand its market share.

Net profit rose 0.7 per cent to $83.4 million for the six months to December 31. When one-off gains were included, net profit rose 53.6 per cent to $127.2 million.

The airline's healthy underlying performance was demonstrated by a 14 per cent rise in pre-tax profits to $316.9 million for the first half.

Chairman Sir Selwyn Cushing said the results were very satisfactory, given the impact of $73 million arising from higher jet fuel prices.

Managing director Jim McCrea said the outlook demanded caution, given the fuel price increase.

The half year's underlying operations improved strongly owing to a better New Zealand performance, a more focused international and regional network, and contributions from business units, particularly the engineering group, Mr McCrea said.

Transtasman traffic levels improved as a result of high frequencies between the two countries. North American traffic also showed significant growth, reflecting the greater number of code share arrangements to the US.

While there was strong inbound travel, the general operating environment during the first half was not particularly easy.

"What happened to the millennium? It didn't occur. In the Atlantic market, there was heavy discounting. It is a bit of a killing ground there at the moment," said Mr McCrea.

Earnings a share for Air New Zealand were 22.4c against 14.6c in the same period last year. The airline will pay a 6c interim dividend, the same as last year.

Revenue rose 10.8 per cent to $1.8 billion. The domestic airline's revenue rose 24.3 per cent, and the international airline's 8.6 per cent.

Costs per available seat kilometre flown were up 1 per cent (excluding jet fuel and foreign exchange), which the company deemed creditable considering the international airline's frequency rose 7.25 per cent.

Analysts said the results were largely in line with expectations, with the airline experiencing good revenue recovery amid rising international oil prices.

Air New Zealand's hedging policy on jet fuel came under considerable discussion at the media briefing.

The airline says it now has its jet fuel needs fully hedged for the whole of this financial year and 50 per cent hedged into the first quarter of the next year.

Despite being able to save about $50 million from its hedging position, jet fuel expense for the full year will rise about 40 per cent to around $450 million.

On suggestions that the airline might have in hindsight been too conservative in its hedging policies, Mr McCrea said: "These are extraordinary times, and we have varied our policy, hedging up to 100 per cent. In the past we have hedged up to 70 per cent; on other occasions, we have had less."

He added that companies such as Air New Zealand had had to make judgment calls in terms of positioning themselves for oil price uncertainty.

In the past, member states of the Organisation of Petroleum Exporting Countries often had problems enforcing compliance on proposals to cut production.

This time, the industry was caught by surprise by the rapidity of oil price rises.

Mr McCrea said Air New Zealand recently conducted a survey of how its fuel hedging policy fared against a family of other airlines.

"Our hedging performance in the industry has been excellent."

Air New Zealand, he said, was comfortable with the jet fuel hedging policy that it had in place.