Air NZ airfares set to fall as fuel bill drops

Air New Zealand's fares should drop next year as its fuel bill falls and competition pushes it to pass on savings. Photo / Paul Estcourt

Travellers will get the benefit of Air New Zealand's shrinking fuel costs next year as competition in the Australasian market forces the national carrier to pass on any savings.

The airline's fuel hedge position will slash costs in 2010 by US$335 million, or NZ$560 million, based on an average price for West Texas intermediate oil of US$72 per barrel at an exchange rate of 60 US cents, according to a Morningstar Research report.

Still, the savings aren't expected to spill into the company's bottom line, with "competitive pressures on the short haul route" likely to be passed on as the carrier tries to stoke demand for airfares.

The local carrier pounced on poor service by Jetstar, the low-fare unit of Qantas, which suffered a series of problems with its check-in system expanded its local flight schedule in a bid to ramp up domestic competition last month. The local market is rounded out by Pacific Blue, the cut-price subsidiary of Virgin Blue.

Jetstar has already "created further competition" in New Zealand air-travel, and it expects lower airfares will become embedded as the fuel costs come off their highs.

"We are very serious about our investment in New Zealand - we've already spent hundreds of millions of dollars on aircraft and marketing," said Simon Westaway, head of corporate relations for Jetstar. "We see more people travelling domestically by air, and that's got to be good for tourism and the wider New Zealand economy."

The number of passengers flying with Air NZ domestically and across the Tasman shrank 4 per cent in June, its tenth straight decline, compared to the same month last year, even as visitors from Australian rose 9 per cent over the same period. The total number of tourists fell 5 per cent in June, while the number of international aircraft landing Auckland Airport rose 4 per cent to 3,327.

Air NZ reported a 79 per cent slump in half-year profit as fuel costs rocketed 69 per cent and passenger numbers dwindled. Its full-year profit, due for announcement on August 27, is expected to tumble 49 per cent to NZ$112.9 million according to Forsyth Barr researchers.

Forsyth Barr said while the airline's short-term earnings are hard to predict, its bottom line should be boosted by foreign exchange hedges, although the risk for earnings is still to the downside. Air New Zealand declined to comment and Pacific Blue had not returned calls by the time of public.

-BUSINESSWIRE