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Air NZ not ready to cut fares despite hefty fuel price drop

By NZPA

Friday 12th January 2007

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Air New Zealand, caught wrongfooted by the slump in oil prices, said today it was unwilling to drop airfares despite hefty recent falls in jet fuel.

"At this stage we have no intention of reducing them (fares)," a spokeswoman Pam Wong told NZPA.

She said the airline had forward purchased its fuel so that the recent falls had not reduced its fuel bill.

"We are still not recovering the full cost of fuel. Until we are a little bit close to that, we don't have any intention of reducing them."

The airline, 81% owned by the Government, has been caught on the wrong side of fuel hedging contracts designed to protect it from fuel price rises.

In August, at its annual result briefing it said it was 60% hedged at $US71 ($NZ104) a barrel -- meaning that would be the maximum price it would have to pay for 60% of its fuel.

It was currently 72% hedged at between $US62 and $US72 a barrel.

Air NZ said its fuel bill this year would be around $1.1 billion, up from around $900m last year and $480m three years ago.

Over the past six months the price of crude oil has fallen from a peak of about $US78 a barrel to under $US52. Aviation fuel out of Singapore has dropped 27% from a peak of $US93.50 in early September to $68.50, according to Reuters data.

Motorists have enjoyed an 18% cut in the price of retail petrol prices in the last six months as oil companies have responded to the drop in crude oil price.

British Airways said today it was lowering fuel surcharges on many routes as crude oil hit fresh 19-month lows.

Its fares incorporate a "fuel surcharge" Qantas and Air NZ were prohibited from describing fare increases as a surcharge after they were heavily fined when the Commerce Commission took them to court for breaching the Fair Trading Act.

The fuel surcharge on tickets sold in the UK for longhaul flights of less than nine hours has been reduced to STG30 ($NZ85) per flight from STG35.

Qantas told NZPA today it was "closely monitoring the situation but still needs to see a sustained reduction in oil and fuel prices before we can consider reducing our fuel surcharges".

The Australian airline used the same line five months when it copped flak from Australian Treasurer Peter Costello for not cutting its surcharges in response to the fuel price drop.

It said then it prices would not be dropped while prices remained "volatile" and had "the market stabilised significantly".

Air NZ's share price has risen 75% since September thanks in part to the drop in fuel prices. It has also risen in response to the $A11 billion ($NZ12.6 billion) private equity takeover bid for Qantas.

Forsyth Barr analyst Rob Mercer predicted this month that Air NZ's profit would triple over the next four years.

He forecasts the airline would make a profit before interest and tax of around $500 million by 2010.

Its 2005/6 net profit fell 47% to $96m, mainly as a result of fuel price increases. Jet fuel prices rose 44% on a year earlier.

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