Air New Zealand’s profitability on international routes could take a buffeting as oil prices hit near three-and-a-half year highs, analysts say. The Auckland-based airline last week raised its domestic airfares 5 percent in response rising costs, including labour, fuel, goods and services, But stiffer competition on international routes meant it kept international fares static.
This is despite the fact fuel tends to be a higher percentage of the cost of goods sold when planes fly long distances. Brent Crude oil prices, at US$79.41 a barrel, are near the highest level since November 2014, and a weaker New Zealand dollar is pushing up the cost of imports. That’s already being felt at the petrol pump, with the price of 91 octane hitting a record $2.30 a litre in Wellington and the South Island.
Salt Funds Management director Matthew Goodson says the potential strain for Air New Zealand will be on international routes. “That’s where those cost pressures will play out, Goodson says. "Competitors have the same pressures, but they may have different hedging programmes, because everyone hedges their fuel costs to varying degrees.”
In the first six months of calendar 2018, Air NZ hedged about 3.12 million barrels, or 70 percent of estimated fuel consumption, which it projected would generate an unrealised gain of $30.7 million, according to its February 14 hedging position. For the final six months of 2018, the airline hedged 1.69 million barrels, or 35 percent of estimated consumption, likely to generate an unrealised gain of $88,000.
The airline’s fuel bill jumped 21 percent to $470 million in the six months ended December 31 and was a major contributor to Air NZ’s 7.5 percent increase in operating costs to $2.03 billion.
Forysth Barr head of research Andy Bowley says international airlines can’t always fully recoup higher costs due to the competitive nature of the industry, with a greater number of carriers competing more aggressively and through a wider array of channels. That contrasts with the domestic market, where Air New Zealand faces just one competitor of scale - Qantas Airways subsidiary Jetstar.
Government data show consumer prices for domestic airfares rose 3.9 percent in the March quarter from a year earlier, whereas prices for international fares fell 6.6 percent. Over the same period, input prices paid by rail, water, air and other transport producers rose 2.4 percent.
Bowley says fuel pressures will affect the sector in the second half of 2018, although Air New Zealand’s hedging offers some protection.
“I think the cost pressures are going to be at a similar level in the second half, that doesn’t mean that the fuel price on average isn’t the same, it’s a reflection of what the cost pressures in the prior year were as well.”
The airline’s fuel bill jumped 21 percent to $470 million in the six months ended December 31 and was a major contributor to Air NZ’s 7.5 percent increase in operating costs to $2.03 billion.
The shares recently traded at $3.39, having gained 6 percent so far this year and outpacing a 2.6 percent increase on the S&P/NZX 50 index over the same period. The stock is rated an average ‘hold’ based on six analyst recommendations compiled by Reuters, with a median target price of $3.14.