Air New Zealand optimistic on year ahead after reporting drop in first half profit

Earnings before taxation fell 24 per cent to NZ$349 million (A$327 million), compared with NZ$457 million (A$459 million) a year ago. The result included a $22 million gain on the sale of Air New Zealand’s stake in trans-Tasman alliance partner Virgin Australia.

Revenue was 4.3 per cent lower at NZ$2.6 billion (A$2.4 billion), Air New Zealand said in a regulatory filing to the Australian and New Zealand stock exchange on Thursday. (The company is listed in both countries.)

“Competitive capacity from new carriers certainly impacted revenue with eight new carriers entering the New Zealand market,” Luxon said during the airline’s results presentation to the financial community.

“It is obvious that we have had to adjust to a new revenue environment.”

Over the past two years, Air New Zealand has been in expansion mode, with long-haul services to Buenos Aires, Houston and Singapore launched as the airline sought to take advantage of the strong growth in visitor numbers to New Zealand.

Other carriers were also keen to tap into the the local tourism market – Emirates and Qatar commenced non-stop flights from Auckland to their Gulf hubs, while the airport fire trucks were kept busy welcoming Chinese carriers adding new flights to New Zealand from both major and secondary Chinese cities.

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Meanwhile, American and United (in partnership with Air NZ) started new nonstop service from Auckland to their respective US west coast hubs in Los Angeles and San Francisco, respectively.

United has since said it would end year-round Auckland-San Francisco flights from April, switching to a seasonal service scheduled to operate over the end-of-year holiday period. The route is operated as part of a joint-venture with Air New Zealand.

Luxon said overall industry capacity across all of Air New Zealand’s long-haul markets was up by a staggering 30 per cent in the first half. This led to a revenue per available seat kilometre (RASK), falling 13.2 per cent on its long-haul international services.

However, the Air New Zealand chief executive said that capacity growth was tipped to slow in the second half based on forward schedules.

“Some Chinese carriers appear to be taking steps to reduce frequency to New Zealand during our low season and this has the potential to help our international long-haul RASK when looking beyond 2017,” Luxon said.

“We probably think we are at the high water tide mark of new competitors coming into the marketplace.”

A bit closer to home, there has been a slew of new fifth-freedom operators on the Tasman, with AirAsia X, China Airlines, Philippine Airlines, Emirates and Singapore Airlines offering an alternative to the Air NZ/Virgin Australia and Qantas/Emirates/Jetstar offerings.

Air New Zealand said its Tasman and Pacific Islands network was forecast to grow capacity six per cent, due in part to the larger capacity Boeing 787-9s replacing the 767-300ER that were being retired.

Luxon said it was a “challenging pricing environment” in the trans-Tasman market, with RASK down 7.7 per cent in the first half due to new capacity and new long-haul routes out of New Zealand that has opened up more seats for sale for point-to-point rather than connecting traffic.

On a more positive note, the airline’s recent marketing push to get more Australians traveling to North and South America to go via Auckland has been “much more successful than we anticipated”.

“We continue want to build that out,” Luxon said.

In its home domestic market, Luxon said Air New Zealand had weathered a push from from Qantas-owned Jetstar on regional routes with a fleet of five 50-seat Dash 8 Q300s.

Air New Zealand said capacity on domestic routes was expected to rise about 11 per cent in the second half of 2016/17, which reflected the upgauging of regional services following the elimination of the 19-seat Beech 1900D and additional flying out of cities such as Queenstown, Christchurch and Wellington.

“In summary there are some moving parts but we feel better where we stand looking out than we did six months ago,” Luxon said.

“That doesn’t mean that our teams get complacent and we still are facing a significant amount of competition and it will still be very challenging, but you can expect that our teams will be very focused on execution regardless of the environment.”

“We are fundamentally feeling good about some of the capacity decisions we have seen from other carriers, especially as we go into our low season.”

The Star Alliance member took delivery of three 787-9 Dreamliners, one Airbus A320 and two ATR 72-600 turboprops during the first half. It also acquired two A320s that were already in the fleet that were previously on operating leases.

The airline expected to retire its final two 767-300ERs by the end of March.

Separately, Air New Zealand said it had recently decided to add an additional 787-9 on operating lease from Air Lease Corporation. This would bring the total 787-9 fleet to 13, with the aircraft due to be delivered in 2019.

In terms of the outlook, Air New Zealand said it expected earnings before taxation for the full 2017/18 year to come in a range between NZ$475 million to NZ$525 million.

The updated guidance was a narrower range than the company presented in September for earnings before taxation of NZ$400-600 million.

The company declared a fully imputed interim dividend of 10 cents per share.