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Air NZ looking good for Friday year profit

By Catherine Harris of NZPA

Wednesday 23rd August 2006

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Air New Zealand's annual result on Friday is expected to be a positive one after raising its fares in May to cope with higher fuel prices.

Analysts are expecting the airline to post a profit of $140 million before interest and tax, as Air NZ itself indicated in June.

The airline's optimism was based on a 10% hike in air fares and more demand for premium long-haul seats .

The forecast was a drop of 34% in ebit from last year but in the current environment of high oil prices, it would be an "outstanding result", Forsyth Barr analyst Rob Mercer said.

He added the company had implemented some smart moves including cancelling low-earning routes and improving its fleet, which put it in a very strong cash flow position.

Analysts will also be looking for early benefits of a lower exchange rate in the fourth quarter.

But "the bottom line is, when you look at '07, all the cost benefits and the fleet uplift may not be enough to really dampen the impact of the oil price where it is today", Mercer said.

Oil prices are now $US15-$US20 a barrel higher than when Air NZ made its forecast at the start of the year.

Air NZ is also contending with prospective increases in landing fees, although analysts like Mercer believe these fees are not material to the airline's position.

A proposed codeshare with Qantas is also courting controversy, with both airlines telling competition or Government authorities that they cannot afford to fly the Tasman without fuller aircraft.

Analysts will also be looking for some confirmation that a heavy number of layoffs and plans for outsourcing will result in lower costs.

It has outsourced aircraft engine maintenance and cleaning, signalled head office cuts and, it is rumoured, planning to outsource most of its finance and ground work to save $250 million.

Looking ahead, persistently high oil prices and the less profitable trans-Tasman and Asian routes are likely to drag on next year's profitability.

The airline has scrapped or is reviewing certain routes, and switched from Singapore to Hong Kong as its Asia hub.

Hong Kong is more strategic because of the increasing number of tourists from China, while tourism from Japan is in decline.

The airline plans to start flying out of Shanghai in November.

But it's the decision to upgrade aircraft that will make a big difference, Mercer said.

That decision gives the airline a "seven year holiday" on maintenance and operating costs. New or refurbished Boeing 747s were going into the States, and B777s were going to San Francisco and to replace the B767s in Asia.

The risks were not "an easy story to like" but Air NZ was well placed to become a strong competitor, Mercer said.

"It's not great but you'll lose players along the way and Air NZ will come out okay, and if oil prices fall, they'll get reasonable windfall profitability."

Air NZ has become a no-frills domestic airline and cut costs on its trans-Tasman routes as it recovers from a near-collapse in 2001.

Its shares closed up a cent yesterday to $1.10, 10c off the spike they rose to at the end of June when the airline said its profit forecast was on track.

Forsyth Barr's fair value price is $1.52 with a buy rating.

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