Air New Zealand's profit drops as domestic competition mounts

Air New Zealand posted a 24% fall in first-half pre-tax profit in the face of increasing competition both at home and abroad but fared better than analysts expected.

Pretax earnings fell to $349 million in the six months ended December from $457 million in the same period a year earlier.

Net profit in the first half fell 24% to $256 million. Operating revenue was $2.6 billion compared to $2.7 billion the year before.

Basic earnings per share were 22.8c versus 30.1c in the prior period.

New Zealand's national carrier was forecast to post a 45% decline in first-half earnings to $186.5 million on a 2.6% decline in revenue to $2.63 billion, according to Forsyth Barr analyst Andy Bowley.

Last month Craigs Investment Partners downgraded their price target for Air NZ shares to $2.09 on the prospect of weaker than expected earnings, given increased competition among carriers and rising fuel prices.

Hobson Wealth Partners investment adviser Brad Gordon says the stock may get a lift on the better than expected result. "Cost management is key," he says.

Air NZ chief executive Christopher Luxon says "the past six months saw unprecedented levels of international carriers adding new services to New Zealand. As expected, the change in the competitive landscape in a relatively short period of time has impacted our airline's profitability when compared to the prior year.”

In recent years, for example, Qantas Airways and American Airlines gained approval for a tie-up operating between Auckland and Los Angeles, competing with Star Alliance members Air New Zealand and United Airlines in routes between New Zealand and North America.

Earlier this month Qatar Airways celebrated the arrival of its inaugural flight to Auckland, while Jetstar's entry on domestic regional routes has pressured Air New Zealand's domestic load factors and yields.

Mr Luxon says, however, the airline responded swiftly by adjusting its capacity plans and accelerating the exit of older aircraft and while net profit is sharply lower it is the second highest result for an interim period in the airline's history.

According to Mr Luxon, lower fuel prices benefited operating costs but were partially offset by the adverse impact of foreign exchange.

The board declared a fully-imputed interim dividend of 10c a share, which is consistent with the prior period.

Looking ahead, chairman Tony Carter says he expects the revenue environment will improve from the first half on continued strong growth in inbound and outbound tourism, although higher jet fuel prices will be a headwind.

Based on the market environment and expectations for the average jet fuel price in the second half of the year of $US65 per barrel, Air New Zealand says it is targeting 2017 earnings before taxation in a range of $475-525 million.

The shares last traded at $2.15 and have fallen 6.7% over the past 12 months.

(BusinessDesk)