Air New Zealand profits cut in half

Higher fuel costs slashed Air New Zealand’s net profit by nearly half to 96 million NZ dollars (61 million US) last financial year and are likely to continue eroding earnings, the company said.

Fuel costs now account for 30 percent of all expenses after rising 312 million dollars last year, the airline said.

Full statement:

Air New Zealand announced a profit of $150 million before unusuals and tax for the year ended 30 June 2006, 36 percent down on the previous year.

We clearly acknowledge this is not the result we would have liked to have achieved at the end of the financial year, said John Palmer, Chairman of the Board.

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But given the extraordinarily challenging business environment the airline is operating in, this is a respectable result.

The Board declared a fully imputed final dividend of 2.5 cents per share.

The current expectation of the Board is to maintain the present dividend flows.

Net profit after tax was $96 million, 47 percent down on the previous period due to fuel price increases.

Air New Zealand has outlined its plan for growing and transforming its business into a nimble, innovative and thriving world class airline, said Rob Fyfe, Chief Executive Officer.

Over the last year weve demonstrated beyond doubt that we are beginning to execute that plan, and we have done exactly what we said we would.

The year closed with Air New Zealand:

Refurbishment of its 747 fleet on time and on budget; refurbishing lounges in Los Angeles and Melbourne; taking delivery of 5 of its 8 new 777-200ER fleet, 4 new A320s and 8 of subsidiary Air Nelsons 17 new Q300 fleet; launching a new long haul service to Shanghai and a second daily service to London; successfully outsourcing wide-body aero engine maintenance; reducing corporate overhead costs; developing new in-house on-line booking software; unveiling a new network strategy; suspending flying on unprofitable routes such as Singapore, and actively investigating new and promising potential markets. It has been quite a year, said Mr Fyfe.

We now have a world class in flight product, world class customer service and we are growing a world class culture within this airline.

The challenge for us is to maintain those levels of performance.

Mr Fyfe said that in any other business environment Air New Zealand should have seen an increase in its profit as a result of these measures.

But an unprecedented 44 percent rise in the price of jet fuel has forced the companys profitability down.

However we cannot solely hide behind fuel price increases as the excuse for our decrease in profitability, said Mr Fyfe.

There are still more tough strategic, workforce and workplace decisions to be taken to ensure Air New Zealand meets its potential.

We are absolutely determined to ensure Air New Zealand grows and expands to be highly successful.

Operational review

Operating revenue for the year was $3.8 billion, an increase of $189 million or 5% over last year.

As a result of a 6% yield improvement, passenger revenue increased $179 million or 6% to $3.1 billion. Included in the passenger revenue increase is a $24 million negative foreign exchange impact.

Other external revenue increased $10 million or 1% to $746 million. A $62 million increase in freight revenue was partially offset by reductions in external engineering revenue, due to higher internal engineering (747 refit) and maintenance requirements.

Higher fuel prices led to total expenses, excluding borrowing costs, increasing by $253 million or 7% to $3.7 billion.

Cash position

Cash generated from operating activities was $473 million, an increase of $36 million over last year.

The company acquired assets, mainly aircraft related, to the value of $764 million during the year.

Debt drawdowns against aircraft purchases totalled $589 million. Offsetting this were debt repayments of $163 million.

Financial position

The closing net cash balance was $1,150 million, an $80 million increase over the previous year.

Cash is invested in bank deposits held by New Zealand financial institutions. The overall interest income earned yielded an effective average interest rate of 7.3%.

Total assets increased $693 million to $4.8 billion following the acquisition of new aircraft and the refurbishment of the 747 fleet.

Total liabilities increased $640 million to $3.2 billion, mainly as a result of debt financing of new aircraft. However, the substantial cash position means that net debt remains low at $203 million.

The companys gearing (including net capitalised aircraft operating leases) is 54.7%.

The companys strong financial position has meant that $245 million of debt, scheduled for repayment over the next three years, will now be repaid early in the 2007 financial year.

Shareholder funds as at 30 June 2006 were $1.6 billion, an increase of $53 million.

Outlook

Looking ahead, an unstable international situation, volatile oil prices and the softening New Zealand economy mean challenging times remain.

Air New Zealand is mitigating the ongoing impact of fuel on the business, with 60% of oil usage hedged at US$71 per barrel and ongoing changes to the network.

A weakening NZD is positive for long-haul revenue, but this will be offset by higher USD costs for leases, fuel and maintenance.

The company currently has 91% of its net USD foreign exchange position hedged at 68 cents (US$835 million).

But the Airline wont escape the impact of high fuel prices, and these will heavily influence the level of Air New Zealands profitability in the 2007 financial year.

Air New Zealand has also been nominated this year for a

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World Travel Award as Australasia’s Leading Airline.
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