Air NZ's bumpy result likely to smooth out

Air New Zealand is tipped to report a much reduced underlying profit for the year to June tomorrow, dragged down by lower revenue – but the outlook to 2012 is rosy, analysts say.

Forsyth Barr head of research Rob Mercer is picking a normalised profit after tax of $95 million, down 19 per cent on last year. The normalised profit removes the value of future hedges on fuel and foreign exchange, and is considered the fairest measure of the airline's performance by analysts.

The market consensus is for a trading profit of $158m, down from $208m on a normalised basis.

Mr Mercer expects the reported bottom line profit to quadruple to $84m because last year's figure absorbed a $100m after-tax impact from fuel hedge costs.

However, the operating figures will not make for good reading, he said.

Revenue is expected to be down 11 per cent to nearly $4.1 billion, reflecting an 8 per cent cut in seat capacity and lower yields during a difficult trading period.

But costs are forecast to be 22 per cent lower, compared to 2009, of which a 43 per cent drop in fuel costs to $955m is the biggest factor.

"If this level of profitability is achieved, it will be a great performance given the very difficult trading conditions," Mr Mercer said.

Goldman Sachs JBWere aviation analyst Marcus Curley said Air New Zealand had announced improving load factor and pricing trends in July. But those improvements were expected to be offset by higher costs, over the last six months as the price of fuel rose again, Mr Curley said.

"That would suggest the profitability in the second half will be relatively modest." However, the market will be more interested in the outlook with a number of key initiatives to be implemented this year that should lead to a step change in profits over the next two years.

The first of a fleet of five Boeing 777-300ER long haul jets is due to arrive in November to replace the Boeing 747-400 fleet.

The 338-seat aircraft features new premium economy seats as well as the world's first economy seats that convert into a double bed.

Three will be in service by June next year, and the remaining two will be delivered the following year.

Mr Mercer said the new cabins would help boost the recovery in demand over the next year.

He is forecasting a normalised profit of $152m next year climbing to more than $230m in 2012, helped along by the Rugby World Cup and the possible trans-Tasman alliance with Virgin Blue.

Mr Curley said Pacific Blue's decision to pull out of the domestic market will provide a short-term benefit to Air New Zealand.

"How long those benefits last really depends on how quickly Jetstar builds up capacity in response."

Frequent flyers still did not have a real alternative to Air New Zealand due to the lack of flight frequencies offered by either Jetstar or Pacific Blue.

"If Jetstar reaches a critical mass where it is seen as a proper alternative for regular travel, then the dynamics of the market may change," Mr Curley said.

Air New Zealand's share price climbed back up from a low of $1.02 last month to close at $1.21 yesterday, down 1 cent.

- © Fairfax NZ News