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Air New Zealand more upbeat about future, says competition may have peaked

Thursday 23rd February 2017

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 Air New Zealand expects revenues to improve over the second half and into the following financial year as competition shows signs of stabilising.

"We do believe we are at the high water tide mark in terms of new competitors coming into the market place," chief executive Christopher Luxon said on a conference call for investors and analysts after the company reported a 24 percent slide in first-half pre-tax profit to $349 million, largely due to new competition. 

The airline is targeting 2017 earnings before taxation to be in the range of $475 million-to-$525 million, including a $22 million gain from the divestment of its remaining interest in Virgin Australia. Earnings before taxation were $806 million in the prior period, a rise of 70 percent as it benefited from a massive tourism boom and low oil prices. 

While tourism numbers continue to hit record highs, eight new carriers began flying to the New Zealand market in the first half, putting significant pressure on the national carrier, said Luxon.  Some of them, however, such as China Southern and China Eastern, are now decreasing the number of services which is creating "pockets of optimism," he said. 

"Despite the tough environment in Asia there are encouraging signals," Luxon said. "Some Chinese carriers appear to be taking steps to reduce frequency to New Zealand in our low season and this has the potential to help our international long haul passenger rask (revenue per available seat kilometre)". United Airlines has also made downward capacity adjustments, he said. 

"We feel better where we stand today looking out than we did six months ago," said Luxon.  While he expects it to remain tough "the revenue environment will improve in the next and following six months," he said. 

Regarding domestic competition, Luxon downplayed any concerns about increased capacity from airlines like Qantas's Jetstar. "We are very, very confident about our position in domestic New Zealand," he said. He noted that Air New Zealand increased its capacity into Queenstown by 25 percent and strong inbound tourism and hefty domestic demand has meant the seats have been filled. He expects domestic rask to fare well in the second half, in particular due to a series of events such as the Masters Games and Lions Rugby Tour. 

Earlier today, Qantas reported a slide in first-half profit but said its Jetstar Group, which includes New Zealand domestic and regional as well as Australia outbound flights among others, did better. The Jetstar Group reported underlying earnings before interest and tax of A$275 million, up A$13 million on the year. The performance was driven by a record result for Jetstar's international operations, while the Jetstar Group in Asia continued to improve its profitability, the Sydney-based company said in a statement.  It did not provide a specific breakdown for New Zealand but said New Zealand regionals were performing ahead of expectations. 

While Air New Zealand's Luxon is more upbeat about waning competition he said that fuel prices will be a headwind in the second half.  Chief financial officer Rob McDonald said Air New Zealand expects to spend about $430 million on fuel in the second half versus $362 million in the same period a year ago, assuming an average jet fuel price of US$65 per barrel for the second half of the 2017 financial year and that the New Zealand dollar will average around 72 US cents. 

Total fuel costs for the year, however, are forecast to be $820 million versus $846 million in the prior year.

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