Bad things come in three to put airline in tough position

Air New Zealand CEO Rob Fyfe. Photo / Brett Phibbs

Natural disasters and soaring fuel prices have conspired to give Air New Zealand its biggest challenge since the collapse of Ansett.

A profit previously expected for the second half of the financial year is now predicted to be a loss, but chief executive Rob Fyfe is optimistic about 2012.

Air NZ had been building momentum in the first half of the year ending June, with passenger numbers building off the back of the global financial crisis, yields starting to return and fuel at reasonable levels, Fyfe said.

"Then in the space of a couple of months from the end of January things really started to get challenging for us."

On March 10, Air NZ said it was increasing its domestic and international fares because of the rising cost of jet fuel, which during the previous month had risen from US$114 ($149) to US$130 a barrel, adding nearly US$10 million a month to costs.

The airline has 30-40 per cent of its seats booked and paid for the next six months, Fyfe says.

"So the lag is realistically about 6 months before you recover that."

After the earthquake in February struck Christchurch, the cost of subsidised fares and cargo move-ments was about $10 million.

"You actually are driven by what is the right response in this situation in terms of our employees, passengers and the Christchurch community."

Then, last month, Japan was struck by an earthquake 8000 times stronger than that of Christchurch and was followed by a devastating tsunami.

"The combination of those three events - we haven't seen anything like it since we had the collapse of Ansett and 9/11 happen within the space of 24 hours," Fyfe said.

Last month the NZX-listed airline said expectations for profit in the second half-year would now be a loss and full-year normalised earnings was expected to be below $100 million.

The average estimate of analysts had been for normalised profit before tax of $160-$170 million, Fyfe said.

Shares in the 74.7 per cent government-owned airline dropped 13c to $1.06 each on the day of the announcement, wiping about $141.4 million off the airline's market capitalisation.

The share price has since recovered some lost ground closing at $1.10 yesterday.

Last week, Moody's Investors Service changed its outlook on the company to negative from stable, although it did affirm its Baa3 senior unsecured issuer rating.

Air NZ and Virgin Blue in December were given regulatory approval for a transtasman alliance and in January the company took a 14.9 per cent stake in the Australia-based airline at a cost of about A$145 million ($196 million) or A44c a share.

The week after Air NZ bought its stake, Virgin Blue warned its first-half earnings would more than halve as a result of the floods in Australia.

The Virgin profit downgrade was of no consequence, Fyfe says.

"Our biggest concern was if we didn't take a position in Virgin someone else may well have ... because we think that's a very attractive entry price," he says. "When I look at the things that created the challenges for Virgin, which are fuel price and floods [in Queensland], and I look at our situation ... I can see exactly how that unfolded."

Air NZ has a strong balance sheet and one of the youngest fleets in the region, he says.

"The world has thrown some pretty challenging operating conditions at us but as long as we can adapt faster than our competitors to that environment then I actually have a very strong degree of confidence that we'll emerge from this in very good shape."

Air NZ was the 43rd or 44th largest airline in world, he said.

"We have to make up for our lack of scale by being able to be more nimble and more agile, and at times like this actually a lot of these events favour the more agile players against the much larger player that struggles to adapt their business."

Fyfe cannot put numbers to the outlook because there are too many uncertainties at the moment.

"But if I look into our 2012 financial year I'm actually very optimistic," he says.

The Rugby World Cup was worth tens of millions of dollars in improved performance and China Southern Airlines starting direct flights to southern China this month was good for Air NZ, he says.

"By them flying they'll stimulate more interest in New Zealand and they'll do advertising ... it just all helps to enhance the reputation of the destination."