Air NZ reports fall in profit

Air New Zealand has reported a drop in profits in the six months to December 2019.

The airline made $198 million before tax over the period, down from $217m in the prior six months. Its net profit was $101m, compared to $152m in the six months to December 2018.

It said the result reflected slower demand growth, weakness in the global cargo market and unrest in Hong Kong.

Revenue growth of 3 per cent was driven by solid demand across the airline’s domestic and Pacific Islands networks, as well as new services in Asia and North America.

Operating costs increased 3.5 per cent in the period, influenced by significant price increases in domestic air navigation and landing charges, as well as a weaker New Zealand dollar. Fuel costs increased 1.1 per cent.

Chairwoman Dame Therese Walsh said she was proud management was executing the strategy the airline had communicated to the market in March 2019.

‘‘Our capacity discipline on existing routes, stimulation of leisure traffic with the domestic fare restructure and entrance into attractive new international markets has driven good revenue performance in the first half. Alongside our focus on profitable top-line growth, we are on track to deliver the long-term sustainable cost savings target from our business review initiatives,’’ she said.

‘‘While the Covid-19 situation is dynamic, we have taken immediate steps to mitigate the impact of softer demand and I am confident that we have the ability to manage the expected short-term impacts effectively.’’

Aviation consultant Irene King said it was no surprise Air New Zealand’s profit had dropped. The impact that difficult market conditions would have on the airline had been signalled for some time, she said.

‘‘They are still making a return on their investment so they are still profitable,’’ King said.

Customers would see very competitive pricing from Air New Zealand in 2020. That’s going to be the theme of this year. It started last year but now it’s just going to rocket away.’’

The business travel market could present some challenges for Air New Zealand with fewer companies sending their staff on business trips, especially while coronavirus risks existed, she said.

‘‘They’re going to lose that high end traveller for a period of time.’’

Air New Zealand had taken immediate steps to mitigate the impact of demand weakness on some parts of the airline’s network following the recent Covid-19 outbreak.

In addition to the temporary suspension of services into Shanghai and Seoul, the airline announced that it would make further capacity reductions on other markets that are showing signs of weakness following the outbreak. This includes services into Hong Kong and Japan, albeit to a lesser extent.

The reduction in services to Asia will result in approximately 17 per cent less capacity across the February to June period than the airline had initially planned.

Chief executive Greg Foran said that by proactively reducing these services, Air New Zealand was better able to manage the cost implications of making late changes to its network and could redirect its most efficient aircraft, the Boeing 787 Dreamliner, elsewhere.

The airline has also noted signs of weaker demand on the transTasman, as well parts of the domestic network, such as Queenstown and Christchurch, which are primarily leisure-based destinations that are popular with international visitors. As such, this week the airline announced targeted capacity reductions on certain trans-Tasman and domestic services.

The airline will be increasing its market development investment to help drive additional demand.

Foran said the challenges presented by the Covid-19 outbreak showed the resilience of the airline and its ability to respond quickly to changing market conditions.

‘‘Air New Zealanders from across the business have been working around the clock to manage the impact of the Covid-19 outbreak on our operations. Our business is resilient, and we have demonstrated the ability time and again to respond quickly to changing market conditions. We have a highly capable and experienced senior leadership team who have dealt with challenges such as this before and I am confident that we will effectively navigate our way through this,’’ Foran said.

Based on current assumptions of lower demand as well as the benefit of the announced capacity reductions and lower jet fuel prices, the airline currently expects a net negative impact to profits in the range of $35m to $75m as a result of Covid-19.