The end of Air NZ’s golden run

Air New Zealand’s golden run of strong earnings growth came to an end yesterday when the national flag carrier reported a 34 per cent drop in net profit to $152 million, driven mostly by higher fuel costs.

While the result was slightly lower than market expectations, Air NZ said it was sticking with its annual pre-tax earnings forecast of $340m to $400m for the year to June.

The company said operating revenue growth of 7.1 per cent in the half was more than offset by a 28 per cent increase in fuel prices and increased operational costs.

Last year the company announced pre-tax earnings of $540m — the second highest profit in its history.

The national flag carrier announced an unchanged dividend of 11c a share and said it was confident of maintaining the full-year dividend.

“We’ve been growing the business in the order of the high single digits for a number of years now, and all we are talking about is moving our (revenue) growth down to 4 per cent from 6 per cent,” chief executive Christopher Luxon told the Herald.

“Four per cent growth in an economy that is growing by 2 per cent is pretty impressive.”

He said the 30-year outlook for tourism in New Zealand was still positive. “What we are seeing now is a moderation of growth,” he said.

Andy Bowley, head of research at Forsyth Barr, said Air NZ was committed to delivering a sustainable dividend “and in light of pressure on earnings that’s quite an important message”.

Looking ahead, Bowley said the earnings guidance for the year was achievable provided the “world does not fall apart, competition does not intensify, and oil prices do not rise materially”.

“But this is an airline, and it’s therefore subject to a fair degree of volatility in some of the key inputs.”

The company had enjoyed strong earnings growth, driven by the tourism boom, in recent years.

“They have had a number of tailwinds and there is a number of headwinds in place at the moment, so it therefore requires a different tactical response,” he said.

Air NZ this week announced a new, sharply lower pricing schedule, to stimulate demand in the domestic market.

Luxon said the lower rate of growth was bringing New Zealand more in line with other developed markets.

The airline’s review of its network, fleet and cost base is progressing well and an update is expected by the end of next month.

Air NZ’s shares closed 9c, or 3.5 per cent, down at $2.47.