Air New Zealand enjoys second highest profit ever in FY2018, but disruption will leave its mark in FY2019

Air New Zealand’s earnings before taxation totalled NZD540 million (USD360 million) in FY2018 – a 2.5% increase year-on-year and the second highest profit in the airline’s 53-year history.  Net profit after taxation grew 2.1%, to NZD390 million (USD260 million).


Summary:

  • Air New Zealand achieved the second highest profit in its 78-year history in FY2018.
  • The Pacific Rim growth strategy continues to deliver profitability across the route network.
  • 787 engine issues will impact FY2019 results, but the carrier still expects strong earnings.

The result was driven by strong revenue growth across the airline’s key markets, as well as continued focus on sustainable cost improvement, according to Chairman Tony Carter. He noted that the company had still met its earnings guidance, despite “significantly higher fuel prices”, which amounted to a headwind of NZD135 million (USD90 million). Air New Zealand has now maintained profitability for 16 straight years, last reporting a loss in 2002.

Mr Carter added: “The ability of the airline to achieve its second highest profit in such a challenging environment really speaks to the focused strategy and unique competitive advantages that Chief Executive Officer Christopher Luxon and his leadership team have spent years building”.

The strong earnings were buoyed by a record operating revenue of NZD5.5 billion (USD3.7 billion), up 7.4% on FY2017.

Air New Zealand’s Pacific Rim growth strategy continues to yield benefits

Air New Zealand’s Pacific Rim growth strategy has allowed for consistently profitable network expansion over the past five years, with 17 million passengers a year travelling on the airline, compared with 13 million back in 2013.

The strategy focuses on profitable growth across key markets where the carrier’s “unique competitive advantages can deliver long-term returns to our shareholders”, according to Mr Carter. The carrier increased capacity by 5% across its network in FY2018.

The year 2019 also promises to be an exciting year for the airline and its customers; Air New Zealand will offer more cheap fares “than ever” over the next year as domestic jet capacity grows by 3-5% percent and regional turboprop capacity grows by 5-7% percent.

“One of the benefits of a growing Air New Zealand is more opportunities than ever for Kiwis to snap up a bargain. In 2019, we will offer more than 2.9 million seats for travel in New Zealand for under NZD100 (USD66.7)”, Mr Luxon said.

Disruptions will leave their mark on FY2019 performance

Based upon current market conditions and assuming an average jet fuel price of USD85 per barrel, 2019 underlying earnings before taxation are expected to be in the range of NZD425-525 million (USD284-350 million). This is a decrease over the current levels, however it could have been worse if Air New Zealand’s hedging strategy was not as involved. Air New Zealand is hedged to cover 66% of projected fuel consumption in FY2019.

GRAPH – Air NZ FY2019 fuel cost sensitivity

Source: Air New Zealand

However, the Rolls-Royce engine issue affecting Air New Zealand’s Boeing 787 aircraft will cause an impact of NZD30-40 million (USD20-26 million), due to schedule changes. The carrier has also been forced to dry-lease three 777s due to the groundings of some of its 787s.

Mr Luxon acknowledged that the engine issues in FY2018 had “resulted in a level of service for some that did not meet the high standards we set for ourselves”. He continued: “We are also investing in people, adding staff to our contact centre and other key customer touchpoints. While the engine issues are not in our control, the relationship with our customers is what matters most, so we must continue to stay on our game and go the extra mile to ensure their travel journey with Air New Zealand is an enjoyable one”.

Still, the future looks quite rosy for Air New Zealand, according to Mr Luxon.

“Looking out over the next two years, the airline is expecting to grow by one million customers a year, reaching 19 million customers by the end of 2020”, he said. The airline believes that there are positive demand signals in the short term, with strong forward bookings heading into the peak summer season and passenger growth expected to continue its upward trajectory.