Air New Zealand's financial boost in the lead-up to the Rugby World Cup has failed to last and the airline is now talking down its full-year profit expectations, sending its shares into a steep descent, analysts say.

Air New Zealand's share price has dropped 22 per cent to 92 cents since the start of August. It is down nearly 40 per cent since the start of the year compared with the NZX 50 index which is off just 2.2 per cent.

Forsyth Barr aviation analyst Rob Mercer said that six months ago the airline was looking at the financial year to June 2012 with confidence given an increase in passengers during the Rugby World Cup and the start of its crucial trans-Tasman alliance with Virgin Australia. But the past three months had failed to deliver the expected growth in total traffic and yields had suffered.

While there was an improvement in Rugby World Cup-related travel, there were a lot fewer other travellers, he said.

Management moderated its earlier profit expectations for the next six months in a recent briefing to analysts, prompting a further share selloff.

"The language [has] shifted from a substantial improvement in earnings to, `We should be able to beat last year's earnings'," Mercer said.

The change in sentiment is in line with the International Air Transport Association, which has also downgraded its profit forecast for the global airline industry from US$4.9 billion (NZ$6.4b) to US$3.5b, earning a net margin of just 0.6 per cent.

If the European crisis evolved into a full-blown bank crisis and recession, the group estimated airlines could collectively lose more than US$8b in 2012.

Mercer said Air New Zealand's shares were being oversold as investors priced in the short-term uncertainty. The domestic and trans-Tasman parts of the business were travelling well, but long haul remained a big challenge.

The airline was holding a big review of its long-haul business, which was losing $1m a week. The aim was to gain $110m from long-haul by the 2015 financial year with a greater focus on Pacific Rim destinations and cost savings.

Air New Zealand told analysts that its market share and economics to Hong Kong and Los Angeles were good.

"But beyond there it gets a lot tougher," Mercer said.

Air New Zealand chief executive Rob Fyfe said pulling out of London was an option.

Air New Zealand does not provide profit figures by route, but Deutsche Bank aviation analyst Geoff Zame said fares to London suggest it was losing money on the service. A return fare from Auckland to Los Angeles costs about $2200, but a fare to London costs only about $400 more.

"That highlights the challenge," Zame said. But pulling out of London was unlikely to happen.

"The Heathrow [landing] slots have value and the UK is still a big inbound market for New Zealand."

If Europe did implode, it would reduce travel demand and impact on Asian economies, Zame said.

But Air New Zealand was less exposed than its larger competitors because it was not a hub carrier over major Asian centres.

Zame said the airline's low share price meant the Government's planned partial sell-down of its 74 per cent stake would wait for a "more favourable set of circumstances".

- © Fairfax NZ News