$1 airfares may be a sign of things to come after Air NZ's forecast profit drops $100m

Wednesday, 30 January 2019

Problems with Air New Zealand's Dreamliner 787 Rolls-Royce engines continue to dog the airline's profit outlook.

Cut price airfares may help Air New Zealand get out of a hole after the airline dropped its forecast profit by $100 million.

On Wednesday the airline released 700 $1 domestic flights, with the first 500 selling out in half an hour, and aviation consultant Irene King predicts there could be much more 'aggressive pricing' to attract passengers as the airline grapples with softer travel markets.

Air New Zealand chief executive Christopher Luxon said tough decisions were ahead and a review of the airline network, fleet and cost base was already underway with a further announcement to be made when the company's interim result was announced on February 28.

He blamed slower forward domestic and international bookings and ongoing problems with its Boeing 787 Dreamliner Rolls Royce engines for the profit revision which saw the company share price dive 11 per cent, dropping 36 cents to $2.91.

Passengers may benefit from cheaper airfares as Air New Zealand grapples with softer domestic and international travel markets.

* Air NZ domestic fares to increase by 5 per cent due to 'operational cost pressures'

* Air NZ's long haul stops forced by Dreamliner safety concerns

* Air NZ calls in leased planes amid engine troubles**

In a statement to the New Zealand stock exchange on Wednesday the company said it now expected earnings before tax of $340m to $400m for the year ended June 30, which included the impact of the global Rolls-Royce engine issues affecting Dreamliners.

That is down from the previous forecast of $425m to $525m, which excluded an estimated $30m to $40m impact resulting from engine-related schedule changes.

The profit announcement is a reality check after Air New Zealand posted its second-highest pre-tax annual profit last August.

Luxon said Rolls-Royce engine issues continued to be challenging, both commercially and operationally, but were expected to improve as the year progressed and the board anticipated declaring an interim dividend of 11 cents a share.

In a message to staff he said that while the news was disappointing, new destinations were on the horizon as was increased frequency into some existing markets.

Air New Zealand's concerns about a slow down in international bookings are also shared by the wider tourism industry.

'Rest assured we will continue to grow, just not at the same rate we have over the past few years.'

King said the recent $1 air fare offer could be a sign of things to come.

'You can't just drop your fleet, you have to plan for that.

'You're going to see all sorts of price responses and that's going to mean lower airfares.'

King said the airline would be looking three to six months ahead and, as well as reducing fares, it could look to rationalise routes that were not performing to expectations.

'They're got some real problems … they have expanded capacity up to new points in the US; that's a hell of a competitive market to be getting into, and I just don't think New Zealand is a hot destination anymore.'

Forsyth Barr head of research Andy Bowler said the slow down in international arrivals was less of a surprise than the drop in local leisure travel.

'What's new here is more around the position in terms of domestic demand, that's the biggest change.'

He said the airline would not hesitate to reduce services if necessary.

'It could mean reduced trunk line capacity, it could mean reduced regional services, it could mean some routes disappear.'

Tourism Industry Aotearoa chief executive Chris Roberts agreed the industry was not experiencing the previous record international growth it had enjoyed over the previous five years.

'For Australia there's more airline capacity on that route and it's not leading to any significant increase in passenger volumes.'

Slower economic growth in China could see visitor numbers over Chinese New Year down 10 per cent on the almost 69,000 who came in 2018.

'We won't know until much later whether it's a New Zealand-specific issue or just a general slow down in Chinese travel.'

Although travel from North America was really strong, but the UK market was being affected by Brexit, Roberts said.

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