Oil price floors Air NZ shares

Soaring jet fuel prices have hammered Air New Zealand's share price, as the airline prepares to announce a new chief executive and unveil its profits for the past year.

The national carrier yesterday became the first in the region to launch a new round of fuel surcharge increases, including boosting domestic fares 4.5 per cent from a week tomorrow.

It was quickly followed by Qantas, which last night also increased its fuel surcharges - its fifth such rise since May last year.

Following the news, Air New Zealand's shares hit a record low of $1.20c before recovering to trade a cent higher at $1.22.

Its shares have dipped below that level just once before, on September 24, 2001, as the airline teetered on the brink of bankruptcy.

At that time they were technically trading at 88c but yesterday's record low is measured in adjusted terms - following a five-for-one share consolidation this time last year.

The fuel surcharge means the cost of short-haul flights across the Tasman and on Pacific Island routes will increase $10 and long-haul sectors will go up by $20.

The surcharge for flights from New Zealand to Britain is going up by $20 to reach $152 each way.

Benchmark Singapore jet fuel prices have increased by 60 per cent since the start of this year, but have gone up only 1 per cent since the surcharge was last raised, in early April.

Chief financial officer Rob McDonald said the airline could no longer sustain the extra cost of fuel.

Just two months ago it was expected that fuel would account for around 20 per cent of the airline's annual costs, at around $623 million.

Unveiling the increased surcharge this week, McDonald said this year's fuel bill would now top 30 per cent of costs.

And despite the new surcharge, Air NZ would still not be fully recovering the higher cost of jet fuel.

The latest share price means the Government is $80-100 million out of pocket on its $1 billion investment in Air New Zealand, for which it paid an average of $1.30 a share.

The impact of high fuel prices on company profits will be top of the agenda next Monday, when Air New Zealand announces its profits for the June year.

In February, it paid its first dividend in four years - 2.5c a share.

It said it expected to pay another 2.5c a share, which should be announced next week.

Expectations of a $240 million pre-tax profit were shelved in June, when the airline said the impact of oil prices meant it was more likely to match earlier forecasts of $220 million.

One of the problems facing the airline is that it must renew expiring hedge contracts at much higher levels.

Many of the world's airlines have announced increases in their fuel surcharges over the past two weeks, including some of the big US carriers.

* Air NZ yesterday said it had reached a deal with Hong Kong tax authorities over disputed back taxes.

The Hong Kong Inland Revenue Department last year said an Air New Zealand subsidiary owed it $47 million in back tax from its formation in 1989 to 2002.

The airline said that extending the Hong Kong IRD's approach to include later years "could add a further $60 million, giving a potential exposure of $107 million".

Rob McDonald said the company was "highly satisfied with the outcome," and the settlement would have "no negative material impact on the company".

The airline will not say exactly how much of the back tax it has agreed to pay.

- additional reporting: NZPA