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Current as of 09/12/16 07:39PM NZST
Aviation, tourism and energy writer for the Business Herald

Air New Zealand delivers - with a warning

Air New Zealand is warning of a sharp drop in underlying earnings in the current year as competition intensifies, after reporting a record profit for the past 12 months.

The airline has ridden the travel boom, held costs and benefited from low oil prices to deliver the best full-year earnings in its 76-year history.

Earnings before other significant items and taxation for the year to June 30 were $806 million, compared to $474m the previous year. Earnings before taxation were $663m, with net profit after taxation of $463m, up 40 per cent and 42 per cent, respectively.

Shareholders are being rewarded with a one-off special dividend of 25c per share on top of a final dividend of 10c per share, taking total ordinary dividends to 20c for the year.

Chief executive Christopher Luxon said the airline was paying the government - a 52 per cent owner of the company - close to half a billion dollars in tax and dividends.

And in keeping with previous years, staff are in for a bonus. About 8500 of 11,3000 staff not on incentive plans will next week be paid a performance bonus of up to $2500.

"This is something we're incredibly proud of that's been coming for a long time but [took] a lot of hard work in the last three or four years to make it a reality," said Luxon.

He described the financial result as "phenomenal" but also offered a warning.

"There is increased competition as other international airlines also add capacity in recognition of strong tourism demand for New Zealand," Luxon said. "There's no doubt customers have more choice but we are confident that we have the right pricing, products and services to stay a step ahead of the competition."

Air New Zealand now has direct competition on the lucrative route across the Pacific from Auckland to Los Angeles, from Qantas partner American Airlines. Emirates has been freed up to offer more seats across the Tasman by running new direct services to Dubai and the number of services to China is booming, with the latest carrier, Tianjin Airlines, starting Auckland services from December.

Although Air New Zealand's dominant domestic operation will fly a significant share of the fast-growing number of overseas visitors around this country, it is forecasting pre-tax earnings for the full year to 2017 to be in the range of $400m to $600m, down from $806m.

Luxon identified three main reasons for the past year's record result:

Growth

Growing capacity and filling seats at the right price. The long-haul international network grew by 16 per cent in the year to June 30.

Although its winter seasonal service to Vietnam didn't quite live up to expectations, new routes including Buenos Aires and Houston have performed strongly. New Zealanders are travelling in record numbers and inbound tourism is up 11 per cent in the past year. Strategic revenue and codeshare alliances with other airlines have expanded and have worked.

Cost control

Operating expenditure fell by $75m, a 2 per cent improvement on the previous year. Excluding foreign exchange and divestments, operating expenditure reduced 4.6 per cent on a 12 per cent increase in capacity. The airline is working with staff unions to head off labour relations issues and expensive problems before they start affecting the business. Its fleet is now more fuel efficient, locking in long-term benefits.

Lower fuel costs

All airlines have benefited from lower fuel costs (and those with less efficient fleets are getting an even bigger windfall) but excluding the impact of foreign exchange, Air New Zealand's fuel costs improved by $379m. The average United States dollar price of jet fuel fell 40 per cent compared to the previous year, resulting in a $456m benefit, offset by $77m due to increased volume used as the airline did 12 per cent more flying.

Most airlines around the world are reporting strong results. On Wednesday Qantas reported a A$1.05b profit but despite that, Luxon claimed that his airline's result was the standout performer in the region. "Qantas is four times larger and just twice as profitable therefore we're twice as good."

Air NZ shares, which have traded as high as $3.22 in the past year, closed down 1c yesterday at $2.22.

Record result

• Earnings before other significant items and taxation of $806m -- up 70 per cent

• Net profit before taxation of $663m, up 40 per cent

• Net profit after taxation of $463m, up 42 per cent

• Operating revenue of $5.2b, up 6.2 per cent

- NZ Herald

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