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Air New Zealand has been forced to cut its profit expectations by as much as 25 per cent because of the soaring cost of fuel.
With the price of oil poised to go through US$120 a barrel yesterday, Air New Zealand advised the market that its pre-tax earnings
will likely come in at between $200 and $220 million for the year to June 30 - down from $268 million last year. When it issued its last guidance, with the interim result on February 29, the carrier said it still hoped to beat last year's result.
But Air NZ said yesterday that crude oil's "unprecedented rise" had also seen a widening of the gap between crude oil and jet fuel. That gap (known in the industry as the "crack spread"), which for the past two years has been about US$15 a barrel, was now more than US$25 a barrel.
The airline had crude oil hedges in place but they did not protect against the growing differential with jet fuel.
Jet fuel prices have surged 48 per cent in the past six months to a record US$144.15 in Singapore this week.
Air New Zealand has already increased ticket prices in response to rising fuel costs.
While the airline stopped short of predicting more price rises, it said that if the oil prices were sustained, they would have "a significant impact, requiring continued review of our pricing, network and cost-base".
But one of the problems facing Air New Zealand was that increased domestic competition was making it difficult to pass on the full cost of the rising fuel price, said Goldman Sachs JBWere analyst Marcus Curley.
"They certainly haven't been able to pass it on in the short-haul network," he said.
Given the spike in jet fuel prices over the past few weeks, the announcement was not too surprising, Curley said.
Generally Air New Zealand was in a stronger position of than most of its rivals.
It was in a good financial position and had already completed the upgrade of its business class product, he said. If they hadn't completed that "they would probably be in dire straits", he said.
Air New Zealand shares fell after the announcement, closing down 10c at $1.19.
The soaring price of crude oil in the past few weeks has pump prices for high octane petrol topping $2 for the first time ever.
Oil prices steadied a little yesterday after climbing overnight to a record near US$120 a barrel on the weakening US dollar and concerns about unstable supply amid firm global demand.
The dollar's drop to a record low against the euro on Tuesday helped to draw more funds from investors who see commodities such as oil as a hedge against inflation and a falling dollar. Oil is now nearly double its closing price a year ago, and is already up 24 per cent in 2008.
Supply constraints also pushed up prices.
A Royal Dutch Shell joint venture declared what's known as "force majeure" on April and May oil delivery contracts from a Nigerian oil field due to a pipeline attack last week. The move protects the company from litigation if it fails to deliver on contractual obligations to buyers.
In Mexico, oil production slipped 7.8 per cent in the first quarter to 2.91 million barrels a day as output at the country's oil fields waned, state oil company Petroleos Mexicanos said.
In Scotland, workers at Ineos' 196,000 barrel-a-day Grangemouth refinery and petrochemical plant threatened to strike over changes to an employee pension plan.
Global oil demand is expected to rise about 1.3 million barrels a day this year to 87.2 million barrels a day, according to the International Energy Agency.
FLYING HIGH
* Crude oil prices have surged to almost US$120 a barrel
* The price has doubled in the past year
* It has risen 24 per cent already this year
* Jet fuel prices have surged 48 per cent in the past six months
