Fuel costs derail earnings

By DANIEL RIORDAN

Higher fuel costs and lower freight volumes have slashed Tranz Rail's first-quarter net profit.

The company reported a net loss of $16.4 million for the three months to September 30, which included an abnormal restructuring cost of $16.5 million.

This compared with a net profit of $5.5 million for the same period last year.

Excluding the restructuring charge, operating profit was just $100,000.

The company said fuel costs had risen to extraordinary levels - nearly twice as high as a year ago.

Higher freight rates and passenger fares had not been enough of a counter.

The average price for a litre of diesel fuel and light fuel had risen 81 per cent and 63 per cent from a year ago.

Meanwhile, the slow economy, and in particular lower forestry volumes, contributed to a 4.4 per cent drop in freight volumes.

Freight revenue was down 2 per cent, although revenue from passenger businesses, which the company is looking to sell or contract out, rose 5 per cent, largely through increased patronage on commuter services.

Revenue from agricultural freight fell 8 per cent but manufactured-freight earnings held steady.

Forestry revenue from paper and pulp was lower due to the closure of customers' processing facilities. Competition from coastal shipping and reduced log traffic in the central North Island due to a weaker export market were also factors.

These negative forces were partly offset by more log volumes in Northland and a general improvement in average rates, the company said.

Coal revenue fell 12 per cent, mainly because the renegotiated contract with Solid Energy allowed for reduced rates as volumes increased.

The impact on the books of the abnormal restructuring charge of $16.5 million has been absorbed this quarter but will be spread over the whole year to cover the cost of executive redundancies, shifting some marketing and corporate functions to Auckland, and outsourcing and re-engineering of functions.

Those moves were signalled two weeks ago when the company revealed the first outcomes of its strategic review.

Credit Suisse First Boston analyst Andrew Mortimer said the result had been flagged to the market and contained few surprises.

One slight disappointment was labour costs staying high despite lower staffing, although that could be due to the renegotiation of the collective agreement.

Freight volumes in some categories were disappointing but some of that could be explained by the economic downturn, he said.

Tranz Rail shares closed 10c down yesterday at 360c on very light volume. The price fell before the result was released to the market.