Transtasman rivalry costs Air NZ millions

The airline bloodbath across the Tasman has cost Air New Zealand tens of millions of dollars a year on the route.

Chief executive Rob Fyfe said given the importance of the Tasman to his airline, overcapacity and discounting was hurting badly.

Around 15 to 20 per cent of the airline's revenue comes from transtasman services as opposed to 5 per cent for Qantas and a far lower number for the other carriers on the route.

"It's such an important part of our business that other players dumping capacity in the market or pricing below cost has quite a material impact on us."

Fyfe said he believed other airlines would be losing money on the route and he wasn't expecting any more capacity in spite of a rise in the number of travellers, particularly from Australia.

He said there could be stimulation of the market through a variety of package deals, better tourism promotion and more seamless passenger processing, to be rolled out from the end of this year. Air New Zealand was also looking at how to cut costs on the route.

"We're not going to lose our competitive position on the Tasman but at some stage we'd like to make some money as well."

At the release of annual results he said the swine flu scare had dented revenue from Japan and China by $10 million to $15 million. "That impact has certainly now subsided."

Head of research at Forsyth Barr Rob Mercer said the result was a "pretty good effort".

Accounting for fuel hedges had pulled up earnings on balance date in the 2008 year but pulled them down this past year and this had affected bottom-line net profit.

The airline also had an "impressive" balance sheet with lower net debt than last year, Mercer said.

"But earnings are going to be tough, passenger numbers are probably going to be lower as capacity cuts from the second half [of last year] wash through."

The airline had a modern fleet with new fuel-efficient Boeing 777-300 aircraft due to start arriving next year to replace its 747s.

"They're as well positioned as they can be for recovery but they'll probably have to wait until 2011."

Jason Bloom from UBS said the result was helped particularly by currency hedging benefits.

"The outlook is still uncertain, yields as we've seen are heading south. Although loads may have stabilised there's still a lot of uncertainty."

Bloom said the Tasman market could swing sharply depending on capacity but for Air New Zealand it was a matter of toughing it out and it had to be "almost the last man standing".

The company reported operating revenue for the 12 months to the end of June down 1.2 per cent, or $58 million, on a year earlier to $4.6 billion.

Air New Zealand's passenger load factor was maintained through a capacity reduction of 7.2 per cent.

Overall freight, contract services and other revenue fell by $59 million on last year, the airline said.

Engineering services revenues rose as the business became more competitive with the weakening New Zealand dollar and as newly acquired engineering businesses were integrated.

Losses of $239 million were related to hedges on fuel used in the 2009 financial year.

The net impact of foreign exchange movements, including foreign exchange hedging gains, had a $272 million benefit compared with last year.

Air New Zealand's share price closed down 2c to $1.23.