Jet fuel price set to slash Air NZ profit

Air New Zealand's profits could be crippled next year if jet fuel prices stay at present levels, the country's national carrier warned yesterday.

After-tax profit during the 2006 year could wither to $102 million - a 40 per cent decline - compared with $180 million during the just-reported 2005 year.

The market however anticipated a dismal forecast, as shares were down just 1 cent, closing the day at $1.24. Since January, the shares have fallen 26 per cent, leaving the Government to pay dearly for the almost $1 billion rescue package it gave the near-bankrupt airline in 2002. The Government, which owns an 82 per cent stake in the airline, paid on average $1.30 a share.

The airline's outgoing chief executive Ralph Norris said raising airfares in the extremely tight market or further increasing fuel surcharges was not an option.

Air New Zealand will this week raise fuel surcharges on passenger fares for the fourth time since introducing the levy in May 2004. Domestic surcharges will increase on average $6 a ticket, whereas international passengers will pay up to $20 more on a fare.

Benchmark Singapore jet fuel prices have spiked nearly 50 per cent in the past year to near record levels of nearly $77.50 a barrel in mid-August. The price tag for next year's fuel costs could increase by $300 million, even after recovering $200 million from surcharges and taking into account hedges.

In an interview, Norris said the airline was taking the view that fuel costs would eventually drop.

He said although profits would be affected, high fuel costs would not push the airline's balance sheet into the red. The company had $1.1 billion in cash on hand at the end of June.

Norris said the airline would concentrate on cutting costs to the tune of $100 million next year in addition to the $90 million it had trimmed since 2003.

Its underperforming engineering business, which has been hit by increased competition from European carriers who are opening similar wide-body aircraft facilities in Asia, is under review. Changes in that business could mean outsourcing the maintenance work or limiting third-party work it does for other airlines. Air New Zealand's engineering arm employs 3000.

The airline can handle airfare pressure from competitors like Qantas Airways, Norris said. But, competition from Dubai airline Emirates is taking its toll.

"Other market players are rational, but Emirates is providing a lot more capacity than is required in the market," said Norris. "That means the Tasman price levels do not deliver an adequate return on investment."

For the first time, the airline carried more than 11 million customers in one year.

* A final 2.5c dividend will be paid, taking the total to 5c for the year.