RESULTS PREVIEW: Air New Zealand

Air New Zealand opens its books tomorrow, revealing what is expected to be a drop in underlying full-year profits.

But it’s likely to point to brighter skies ahead with innovative aircraft on the way and the recent pick-up in passenger demand expected to continue toward the Rugby World Cup.

At the half-year result in February, chief executive Rob Fyfe said Air New Zealand was still struggling with a slump in travel demand and average fares remained lower than pre global financial crisis (GFC) levels,

While the airline was expected to remain profitable over the last six months, Mr Fyfe said there was no rapid recovery and it could be three years before it was back on the growth path it had been on before the GFC.

Domestic travel has since shown signs of recovery, with the increase in leisure and business travel providing confidence for Air New Zealand’s June announcement to add 180,000 seats or 4.2% to domestic jet capacity from September and a further 10-15% increase from January.

Since May it has also been adding back international capacity by just below 5%, mainly through increased frequency, as it starts to see recovery in international travel – albeit slow.

Further updates will be expected today on plans to boost domestic and long-haul capacity ahead of the expected demand during Rugby World Cup in October next year.

The challenge to improve passenger numbers and yields should be aided by Pacific Blue’s October withdrawal from all domestic routes.

Moodys Investor Services said this was good news for Air New Zealand, as it would ease what had been cut-rate competition and support profitability for the airline and its now sole domestic rival Jetstar.

Forsyth Barr head of research Rob Mercer has forecast a normalised full-year net profit for Air New Zealand of $95 million, on total earnings of $4.1 billion – down $524 million or 11% on the same time last year.

Mr Mercer expected the outlook to be “cautious but positive” with a number of key initiatives to be introduced in the year ahead.

These include arrival of the new fuel-efficient B777-300 fleet in November to replace the 747 and the new-look long-haul cabin with lie-flat seats.

“We believe the outlook for global tourism has improved and this, combined with Air New Zealand’s superior product offering and fleet flexibility should see its earnings improve out to FY12, particularly given the timing of New Zealand hosting of the 2011 Rugby World Cup.”

Air New Zealand carried one million passengers in June – lower than the 1.11 million passengers at the same time last year but up 7.8% when adjusted for the difference in the number of days in the June accounting period this year and last.

Although passenger numbers were up on domestic, transtasman and long-haul routes were up, group-wide yields for the financial year were down 7.1% on the same time last year.

The airline last week announced plans to more than triple its charter flights from Japan to New Zealand this summer in response to a surge in visitors from the high-spending tourism market.

This will see it operate 14 return charter flights to Auckland from nine cities across Japan using Boeing 767s, which could add up to 3000 visitors to the summer tally, the airline said.

The market will also look to see if any progress has been made with the proposed transtasman alliance with Australian airline Virgin Blue.

Applications have been filed with the Ministry of Transport and the Australian Competition and Consumer Commission for the proposed code-share agreement although the outcome won’t be known until the end of the year.

Clearing the regulatory hurdles will see the airlines share aircraft and passengers and revenue on the fiercely competitive transtasman route and domestic connecting flights.

Air New Zealand said this could result in up to 80 more flights across the Tasman each week and a $20-$30 million in annual benefits for the airline, with most of that from carrying more passengers.

Mr Fyfe said the most of that would be from carrying more passengers; more stable revenue and a more efficient network, rather than cost savings.

Shares in Air New Zealand were unchanged at $1.21 today, having fetched between $1.02 and $1.46 in the last year.