Why Air New Zealand’s profit is set to dive

Air New Zealand's interim profit is forecast to be at the bottom of its range. Photo / Estelle Sarney

Air New Zealand’s flight back to super-profits is stalling, analysts forecasting a near 40 per cent drop compared to last year.

The airline will report its first-half result on Thursday, and Forsyth Barr analysts say profit before tax for the six months to February will be $183 million, down 39 per cent for the same period last year.

Analysts Andy Bowley and Paul Koraua say the result is compromised by the inclusion of around $45m in Covid-related credits.

The airline has warned the interim result would be at the bottom end of a $180m to $230m range and has repeated it faces an increasingly challenging outlook.

The analysts identify key issues that are pushing down profit. They include:

Passenger yields/revenue per available seat kilometre (Rask): Softening demand and increasing competition is pressuring yields and Rask. “We expect the environment to remain challenging through 2H24,” the analysts said.

Capacity: The Pratt & Whitney engine problem creates complexity for the airline’s capacity outlook, given four A320/21 aircraft will be out of action on average at any one time over next two years. Compensation for the airline is likely to cover the direct costs incurred for replacement leased aircraft. Pratt & Whitney last year disclosed a condition affecting the maintenance plan for the Geared Turbofan (GTF) jet engine fleet. Up to 700 engines globally will be impacted over the next three years, with the effect on global aviation felt most keenly in the coming year. Air New Zealand has 17 A320/321NEO aircraft in its fleet of 108 aircraft, serving Australia, the Pacific Islands and domestic New Zealand.

Fuel cost outlook: The analysts say a weaker New Zealand dollar and relatively stable jet fuel prices in recent months provides little earnings support in a weaker demand environment.

Operating expenditure: Continued inflationary pressures and capacity increases will add materially to the cost base. Bowley and Koraua estimate the airline’s operating costs will be around 25 per cent higher than pre-Covid.

Last year’s full-year profit was the second best in the airline’s history as it enjoyed high yields amid reduced competition and red-hot demand for travel.

For the year to June last year it reported a full-year underlying profit of $585m on operating revenue of $6.3 billion, up 9 per cent on pre-Covid levels. The result was a dramatic turnaround on pre-tax losses of $725m in 2022.

Given the current dynamic operating environment, the analysts say it wouldn’t be surprising if the airline didn’t provide full-year guidance.

“Though given current elevated consensus expectations [$289m vs Forsyth Barr’s $262m] it may need to.”

The pressure on airfares is reflected in Stats NZ figures released this week.

After high-demand pricing around the Christmas break, domestic travel prices fell 12.2 per cent in January but they were also down by 5.2 per cent across the year.

International air travel prices fell even more dramatically - off by 21.6 per cent monthly and by 31.5 per cent across the year.

This contrasted with a much different picture leading to last year’s interim result when domestic fares were up 53.7 per cent on 2022 and international fares were up 16.7 per cent.

Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.