A surging Air New Zealand stands to benefit from lower fuel prices next year by up to $249 million but must now fend off growing competition from other airlines also enjoying lower oil prices.
The airline yesterday announced a 20 per cent increase in interim normalised earnings before taxation to a record $216 million, although its statutory net profit slipped 6 per cent to $133 million after a 26 per cent lift in tax paid.
Shares in the company jumped by 18.5c per cent to close at $2.76 yesterday after it said its full-year result would be stronger than indicated last November. The airline will pay a dividend of 6.5c a share, up 44 per cent on the previous corresponding period.
While the fuel benefit added up to savings of just $22 million during the past six months due to hedging, it stands to benefit by almost four times that over the second half of the financial year. It does not get the full benefit of fuel savings until the 2016 financial year, when it could save $249 million, assuming a jet fuel price of US$76 a barrel.
Chief executive Christopher Luxon said competitors were benefiting from fuel savings as well, depending on their hedge position.
"We're still a relatively small airline - there are lots of larger, better-resourced competitors that want to hurt us," Luxon said. "The reality is there are a lot of airlines around the world that aren't quite as efficient or as fit as Air New Zealand. With those, the fuel benefits flowing through can lead to a lot more competitive activity."
Qantas is likely to announce a dramatic turnaround in its fortunes after last August announcing a full-year pre-tax loss of A$646 million. One analyst says the underlying pre-tax profit could be as high as A$1 billion.
Air New Zealand is adding 12 per cent more capacity in the current half-year as it enters a phase of what Luxon said was unprecedented growth. Its return to Singapore was a big contributor to that and it would start three-times-a-week services to Argentina late this year.
"There's no doubt that it's going to get much more competitive," Luxon said.
Mainland Chinese carriers are piling on capacity to New Zealand and Flight Centre product general manager Simon McKearney said a more mature Qantas-Emirates alliance on the Tasman was providing sharp price competition.
Air New Zealand is stepping up capacity to existing US west coast mainland ports, where it remains the only airline flying nonstop, and is investigating another destination further east.
Other airlines would be eyeing flying across the Pacific, McKearney said.
"You can be your own worst enemy - if you start making profits down here some of those big North American carriers look at Hawaiian Airlines doing okay and might have a look at that."
Forsyth Barr analyst Andrew Bowley said the strong half-year underlying pre-tax profit was driven by yield improvement, higher passenger numbers, some early fuel price benefit, and stable non-fuel costs.
"While the first-half result was short of our expectations, the potential fuel price benefit in [the second half of this year and 2016] has been quantified by management and could lead to some further material upgrades in market expectations for near-term earnings," Bowley said.
Air New Zealand has a stake of just under 26 per cent in loss-making Virgin Australia, which resulted in accounting losses of $14 million.
Luxon said strong, sustainable profits were necessary for the airline to invest in its 10,500 staff, new technology and new planes.
Air New Zealand plans to spend $3 billion on new aircraft during the next three years.
• Half-year to December 31
• Normalised earnings before tax of $216m, up 20% on prior period.
• Statutory profit after tax of $133m, down 6%.
• Operating revenue of $2.4 billion, up 3.4%.
• Operating cash flow of $378m, up 26%.
• Cash position of $1.27 billion.
• Fully imputed interim dividend of 6.5c a share, up 44%.