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Air NZ, Qantas shares fall as rising oil prices paint tougher outlook

Thursday 23rd August 2018

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Shares of trans-Tasman rivals Air New Zealand and Qantas Airways fell after the national carriers both warned the rising cost of fuel will weigh on upcoming earnings, despite their respective success in the latest period. 

Auckland-based Air NZ said pre-tax earnings were $540 million in the year to June 30 versus $527 million in the prior year. The company had expected to improve on 2017 earnings based on an average jet fuel price of US$60 per barrel. The price, however, increased 25 percent to US$75 per barrel. Fuel costs contributed around $160 million to costs, although operating efficiencies of $104 million helped offset the impact. Net profit rose 2.1 percent to $390 million while operating revenue rose 7.4 percent to $5.5 billion. 

"This is an impressive financial result, driven by strong revenue growth across the airline’s key markets, as well as continued focus on sustainable cost improvement, despite significantly higher fuel prices," said chair Tony Carter in a statement. 

Looking ahead, however, fuel will continue to bite. Air New Zealand said 2019 underlying earnings before tax are expected to be in the range of $425 million to $525 million, based on current market conditions and assuming a higher average jet fuel price of US$85 per barrel. 

This excludes an estimated $30 million to $40 million impact on profit from schedule changes prompted by the global Rolls-Royce engine issues, it said. The impact is largely due to lost revenue as it adjusts its schedules, including reducing flight frequency on some routes. 

Air New Zealand's shares shed 2.9 percent to $3.31 "on the 2019 guidance and warning of fuel costs," said Grant Williamson, director at Hamilton Hindin Greene in Christchurch. 

Across the Tasman, competitor Qantas shares fell 0.9 percent to A$6.66 on the ASX. The Sydney-based company reported record underlying earnings of A$1.6 billion in the year to June 30 but warned that fuel prices would be a challenge in the current financial year.  

"Our fuel bill was up by almost A$200 million in FY18 and we're expecting it to be up another A$690 million in FY19," said chief executive Alan Joyce in a statement.

Despite the more expensive input costs, both airlines' chief executives remain relatively upbeat about consumer demand. Meanwhile travel management firm Flight Centre today said it still sees the travel market growing and expects to top the record earnings of A$384.7 million. 

Qantas's Joyce said he expects to "substantially recover" the higher fuel cost given the strength of forward bookings.

Air NZ head Christopher Luxon said meeting earnings guidance will depend on demand, which remains strong. "The bottom line is that we are seeing really good underlying demand dynamics in the business."

Luxon also poured cold water on reports of softening New Zealand business confidence. "I appreciate there is a lot of commentary in the market around business confidence. We see it often early and fast - we are not seeing it," he said.

Air New Zealand is leasing three widebody aircraft and adjusting schedules to free up two other planes after a backlog of engine maintenance has slowed the return of some of its engines. 

Some of the airline's Boeing 787-9 Dreamliner fleet faced operating restrictions and disruption to schedules after engine maker Rolls Royce and regulator the European Aviation Safety Agency directed operators to checks Trent 1000 engines every 300 cycles rather than the typical 2,000 threshold due to concerns about the blades. 

"We recognise that we need to deliver greater schedule certainty for our customers going forward," Luxon said. 

Air New Zealand will pay a final dividend of 11 cents per share, taking the total dividend for the year to 22 cents, up 4.8 percent on the year. The dividend will be paid Sept. 19 to shareholders on record as at Sept. 7. Staff who do not participate in a short-term incentive programme will receive an $1,800 bonus. 

Qantas will pay a fully-franked final dividend of 10 Australian cents per share, taking the annual return to 17 cents. The airline is also buying back up to A$332 million of stock. 

(BusinessDesk)

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