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Air New Zealand's 1H earnings tumble as rising fuel and waning tourism crimp returns

Thursday 28th February 2019

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Air New Zealand reported a 35 percent fall in pre-tax earnings in the first half as a spike in fuel prices, softer tourism and disruptions due to issues with the Rolls-Royce engines took their toll.

The national carrier reported earnings before taxation of $211 million in the six months through December versus $323 million in the prior year and a net profit of $152 million versus $232 million in the prior year. Operating revenue was $2.9 billion, up 7.1 percent. 

Passenger revenue increased by 6.5 percent to $2.5 billion, reflecting higher capacity across the network as well as unit revenue growth. Excluding the impact of foreign exchange, passenger revenue was up 5.1 percent, it said,

However, fuel prices increased 28 percent in the period. While this was partly offset by increased hedging gains of $15 million it resulted in a "net fuel price headwind of $131 million for the six month period." By way of comparison, the fuel price headwind was $135 million for the entire 2018 financial year. 

In April last year, Air NZ said it was working closely with engine manufacturer Rolls-Royce on a global issue involving some of the Trent 1000 engines that power its Boeing 787-9 Dreamliner fleet.

Certain engines required earlier than usual maintenance checks on a specific part of the engine compressor.  Planes had to be temporarily removed from service, which disrupted schedules and had a financial impact on the airline. The situation was compounded by high demand for the necessary facilities.  

In January, the airline said the Rolls-Royce engine issues continue to be challenging for the business, both commercially and operationally, but are expected to improve as the year progresses.

The company today said it will pay a final dividend of 11 cents per share, consistent with the prior year.

Looking ahead to the remainder of the year, chief executive Christopher Luxon acknowledged the rate of growth in the New Zealand market is slowing from previous years to be more in-line with other developed markets.

Accordingly, the airline will be reviewing its network, fleet and cost base to reflect the new environment. An update is expected by the end of next month. 

In January, Air New Zealand lowered its full-year guidance prompted by slower revenue growth expectations in the second half of the year.

Air New Zealand has benefited from a strong tourism sector, but softer tourism and slowing domestic travel is now weighing on revenue growth. 

It reiterated today that, based upon current market conditions, and assuming an average jet fuel price of US$75 per barrel for the second half of the financial year, 2019 earnings before taxation are expected to be in the range of $340 million to $400 million. 

Earlier this week, in a bid to jump-start its domestic tourism growth, the airline said it is cutting its lowest domestic fares by up to 50 percent. 

Luxon said the move is the "biggest overhaul" of the airline's domestic pricing structure in more than a decade and will see more than 750,000 seats a year available for less than $50. It doesn't anticipate a material impact on earnings.

The stock last traded at $2.56 and is down 17.4 percent so far this year. 


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