Air NZ delivers record first-half profit on rise in passenger demand and lower fuel costs

See also: Competitive risk threatens Air NZ’s future earnings

UPDATED: Air New Zealand [NZX: AIR] posted a record pre-tax profit in the first half, up 132% on a year ago, due to lower fuel prices and a jump in passenger revenue as the country's national airline added new routes and more aircraft.

Pretax earnings rose to $457 million in the six months ended December 31, from $216 million a year earlier, the Auckland-based company said in a statement. The company forecast earnings of $400 million, excluding any equity accounting contribution from its 26 per cent stake in Virgin Australia, at its annual meeting last October.

Net profit in the first half climbed 154% to $338 million. Revenue increased 12% to $2.7 billion with passenger revenue accounting for $2.3 billion, up 16% on a year ago. While Air New Zealand added 16% extra capacity into the market in the first half, demand due to tourism growth increased 17%. Foreign exchange benefits contributed $83 million to the rise in passenger revenue.

The airline is spending around $2.3 billion on new aircraft in the next three and a half years and chief executive Christopher Luxon said it expects to reduce capacity growth to 7% in the second half while it’s likely to be between 8 and 10% in the 2017 financial year.

Mr Luxon said the company's strong first-half performance should come as no surprise given Air New Zealand was the “best airline in Australasia on a relative basis” though he acknowledged much of the revenue increase was due to the country’s tourism boom.

“Air New Zealand has participated in that growth and, more importantly, has been a big driver of that growth,” he said. ”There’s been a 10% rise in tourism numbers, 16% rise in tourism spend and Air New Zealand and its partners bring 40% of the tourists to this country and helps Tourism NZ build the proposition and case for tourists to come here.”

Falling fuel prices were another big contributor to the profitability increase, with fuel costs of $484 million for the half down 15%. Fuel price savings of $252 million were impacted by the negative impact of foreign exchange and increased volumes of 12%.

The board declared a 10c  fully imputed interim dividend, up 54%, with a March 11 record date, payable on March 19. Its shares rose 0.5% to $2.88.

Air New Zealand is under renewed threat from more competition including Qantas’ low-cost arm Jetstar on regional domestic routes and on transtasman and international routes from a range of carriers including American Airlines, AirAsia X, China Eastern and Emirates.

Luxon said it was in good shape to take on that competition.

“Air New Zealand is a great street fighter and knows how to compete and competition is good for New Zealand and New Zealand tourism,” he said. 

Of the transtasman route, Mr Luxon said demand was up 6% during the half while Air New Zealand’s traffic from Australia was up 6.7% as well. It was holding its 51% market share, when combined with its partner Virgin, on the route, he said

"I’ve said, previously, we don’t lose to Australians at home, and we haven’t, and won’t.”

He said it was still early days with respect to competition from Jetstar on regional routes but so far the impact had been less than expected. “But it’s a bit early to tell,” he said. Domestic capacity grew 11% during the half while yield declined 3.9%.

Asked about dropping airfares to meet the competition, Mr Luxon said competing effectively had to be balanced against an adequate return to shareholders, reducing debt with the current debt to equity in a sweet spot of around 53%, and managing the company for the long term by investing in new fleet, lounges, new technology, and marketing new routes.

Cargo revenues during the half increased 21% $187 million.

Head count dropped 295 during the half though labour costs were up by $37 million to $619 million due to increased capacity, general rate increases, and increased provision for incentive payments.

Air New Zealand’s stake in Virgin and its share of the Christchurch engine centre earnings contributed $15 million and $10 million respectively for the half.

Based on current market conditions and fuel prices, the company expects annual earnings before tax to exceed $800 million, excluding Virgin earnings, which is broadly in line with most analysts’ forecasts.

Earlier this week Australia’s biggest airline Qantas Airways, Air New Zealand’s main competitor on the transtasman route and domestically through its budget offshoot Jetstar, posted a record first-half profit of $688 million, up from $A203 million in the previous half due to revenue growth, lower fuel prices, and further benefits from its $A2 billion transformation programme.  

(BusinessDesk)