Air New Zealand's profit is forecast to tumble when it announces its result for the last six months.
Forsyth Barr says the airline is in a downturn and it expects a "downwards consensus reset is necessary" given higher oil prices and sustained yield pressure over recent months.
The airline wil announce its profit for the six months to December 31 tomorrow morning.
Underlying net profit is forecast to fall 44 per cent to $187 million compared to the prior corresponding period as revenue per available seat kilometres (RASK) slips and higher fuel prices hit.
Forsyth Barr head of research Andy Bowley said the airline's own outlook for the coming full year was under pressure because of rising fuel prices which are 54 per cent higher than what they were a year ago.
"Management's full year guidance range of $400m -$600m is based on a jet fuel price US$10 lower than current spot levels."
Air New Zealand faced direct competition across the Pacific from American Airlines during the past half year, new carriers from China have entered the market and Emirates increased its capacity on its long haul routes. Air fares have been at historic lows, hitting all airlines' profitability.
Bowley said it was assumed that management had been concentrating on cost containment during the past six month and increases in capacity were predicted to fall.
"With significant RASK pressure challenging various routes for Air New Zealand, we expect the airline to outline a more subdued capacity outlook than in recent periods."
Overall capacity grew more than 7 per cent in the first half of 2017 but this was expected to fall to "low single digits" in the second half of this year.
The material decline in profitability through the full year and sustained higher levels of capital expenditure meant Air New Zealand would be flirting with the top end of its gearing band by the fiscal year end.
"The board may consequently prefer to take a more prudent approach with its dividend and therefore we see scope for a cut."
Bowley said while Air New Zealand had a better record than most of international peers, the airline industry generated volatile returns.
"Strong management and the structural advantage of being based in New Zealand with a
dominant local business (where it has 80 per cent of the domestic market) offer some earnings support through the cycle. However, Air NZ is not immune from cyclical swings and is currently in the midst of a downturn," Bowley said.
Harbour Asset Management director Shane Solly said 2016 was a very strong year for the airline but the market was expecting a pullback in the current year.
"The markets focus is likely to be concentrated on how Air New Zealand is dealing with increased services to New Zealand by other airlines,'' said Solly.
Air New Zealand's share price has fallen by more than 20 per cent from what it was 12 months ago and today was trading at $2.17.
Rival Qantas will also unveil its half-year profit tomorrow and after the first quarter said it was likely to fall for the full six months.
In the three months ended September 30, Qantas' revenue declined 3.2 per cent to A$3.98 billion ($4.27b) from a year earlier, even as passenger numbers grew 2.5 per cent.
The airline forecast in October that first-half earnings may fall as much as 13 per cent as competition drove down international air fares.
Virgin Australia's first half underlying profit before tax was down 48 per cent to $42.3m