KEY POINTS:
When Air New Zealand announced its half-year result at the end of February chief executive Rob Fyfe said the future profits were all about the oil price.
Oil had then just nudged $US102 a barrel. Since then, it's got much worse for big fuel users, especially for an airline that burns 50,000 litres every 20 minutes.
Air New Zealand announces its results tomorrow and has already issued two profit warnings since February, the second in May when it downgraded forecast earnings to fall below $200 million. That was a drop of 25 per cent on early guidance.
Goldman Sachs JBWere says it's forecasting $184 million profit before tax and unusuals for the full year - down 32 per cent on the $268 total last year.
Head of research Marcus Curley said the strong first half would be dragged down by extra spending on fuel and the inability to pass on high fares high enough to recover this.
"Inability to do so underlines the relatively weak underlying market conditions and a very competitive market place. It's fuel and the nature of the industry causing the problems."
The airline was well hedged against extreme fuel costs - oil touched $US147 a barrel in July, although it was US$114 at the weekend. Without hedging, Air New Zealand's result would have been $125 million worse for the second half of the year.
"They've had very good hedging but even with that, the profit is going to fall quite significantly," Curley said.
Looking ahead to the 2008/9 year Goldman Sachs JBWere was forecasting a further fall in profit to $116 million, with most of the damage being done in the current first half.
The airline has a strong balance sheet, with about $1 billion in cash, before debt is paid off. With 77 per cent ownership by the Government, it is strongly backed.
Curley said the airline's viability would never be in question; it was "just a matter of how bad does it get".
The impact of recession in New Zealand was being overlooked somewhat because oil price rises were so dramatic, he said.
Forsyth Barr is forecasting a pre-tax profit of $181 million and an after-tax profit of $124 million. Head of research Rob Mercer said there was confidence the airline would emerge in a stronger market position.
"However, earnings predictability is very low and in the absence of a structural reversal of the fuel price, a strong recovery in earnings has been pushed back a couple of years."
Mercer said every $US10 increase in fuel costs requires a 2.5 increase in group yields to keep up.
The airline was in a strong position on the quality of its product on key routes, strong balance sheet and low capital expenditure. High fuel prices were also delaying competition for new capacity.
Fyfe has said he believes the airline will come out of this slump far stronger than its competitors.
Besides a succession of fare increases, cutbacks on some long-haul services and replacing fuel-hungry Boeing 747s with more-efficient planes, Air New Zealand has frozen senior executive salaries and has all non-essential operations under review.
Globally, more than 20 mainly small airlines have stopped flying, mainly due to crippling fuel costs.
PROFIT TAILSPIN
Airlines around the world have been cutting capacity and scrapping growth plans to battle soaring fuel costs, with the International Air Transport Association forecasting a $7.5 billion loss for the industry worldwide. Results include:
VIRGIN BLUE
55 per cent decline in annual net profit to $118m
QANTAS
2.5 per cent fall in second-half profit in overall $1.2b profit for the year.
CATHAY PACIFIC
Loss of $119m for six months to June, versus $450m profit a year earlier.
MALAYSIAN AIR
Second-quarter income dropped 65 per cent to $16m versus $42m a year earlier.
THAI AIRWAYS
$386m loss in the second quarter - its worst quarterly showing in a decade.
