The numbers Air New Zealand handed the market this morning were ugly, but the most interesting thing about them is what they were not. They were not a story about empty cabins. They were not a story about tourists who never came back after the pandemic. They were not even, at heart, a story about an unloved national airline that has lost its way.
Tourists are back. International arrivals to New Zealand reached 3.58 million in the year to February, sitting at 92 percent of the 2019 peak. And the single biggest surprise sat right inside that figure. Visitors from China in February were up 214 percent on a year earlier, the highest single month since February 2018. Trans-Tasman demand is healthy. Premium cabins on the Auckland routes are running near capacity. The country’s national carrier should, by rights, be having one of its better years.
Instead, Air New Zealand told the market today it expects a full year pre-tax loss of between 340 and 390 million dollars, a swing of more than half a billion dollars from last year’s 189 million dollar profit. Newswire covered the bare facts of the announcement earlier today. The more interesting question is why an airline with full planes is bleeding money.
There are three answers, and only one of them is the war.
Fuel costs
The first and biggest answer is jet fuel. Air New Zealand’s fuel bill for the second half of the financial year has jumped from a budgeted 740 million dollars to 980 million dollars. That single 240 million dollar swing is, by itself, enough to wipe out the airline’s profit.
What is not widely understood, and what the company very politely did not lead with, is that the airline was already 85 percent hedged on its oil exposure when the Iran conflict broke out. Most people hear “hedged” and assume “insulated”. They are not the same thing.
Airlines hedge the price of crude oil, not the price of jet fuel. The gap between the two is called the crack spread, and it is set by refining margins. When refineries run hot, fuel is cheap relative to crude. When refineries cannot keep up, fuel becomes much more expensive than crude. Since the Iran conflict began, the crack spread on jet fuel has blown out from around 22 US dollars a barrel to as much as 115 US dollars a barrel. That is the part the hedges do not cover, and that is where most of the damage has been done.
Chief executive Nikhil Ravishankar, six months into the job, told Skift in April the airline could not recover the full cost of fuel and was only managing to claw back about 40 percent through higher fares and route cuts. That is an unusually candid admission from an NZX listed company, and it is the polite way of saying shareholders are eating the rest.
Grounded aircraft
The second answer is the one Air New Zealand cannot blame on Iran, because it predates the conflict by two years.
Rolls-Royce’s Trent 1000 engines, the ones bolted to the wings of the 787-9 Dreamliner, have suffered well documented durability problems. So have the Pratt and Whitney GTF engines that hang under the A320neo and A321neo narrowbodies. Together those two engine families power most of the airline’s modern fleet. At the peak of the disruption Air New Zealand has had up to 11 of its 60 operating jets parked, waiting for shop visits that the engine manufacturers cannot deliver fast enough.
The airline has been quietly wet leasing aircraft from Spanish operator Wamos Air, and continues to lean on dry leased 777s from Cathay Pacific to plug the gap. Those leases are not cheap. Engine maker compensation, around 55 million dollars in the first half, only partly covers the lost earnings, which Air New Zealand puts at closer to 90 million dollars in the same period. Rolls-Royce is targeting full conversion to its upgraded Trent 1000 XE by late 2027. Pratt’s powdered metal problem is not fully resolved until 2027 either. There is no quick fix here.
Qantas on the Tasman
The third answer is competition, and it is the one that stings because it is preventable.
Qantas has chosen exactly this moment, the moment its only serious trans-Tasman competitor is on the back foot, to dump 210,000 extra seats onto the New Zealand market. A220s are flying Wellington to Brisbane from February. Jetstar begins Brisbane to Queenstown in June. The Auckland to Christchurch domestic frequency has gone from eight flights a day to eleven. The Australian carrier is buying market share on Air New Zealand’s best yielding routes, while Air New Zealand has fewer aircraft to fight back with.
What it means for travellers
For travellers, the consequences are already visible. There have been three rounds of network “consolidation” since the conflict began. About 1,100 flight cancellations were announced in March. Winter schedules to Queenstown have been thinned. Fares are up, but not by the full cost of fuel, because the market will not bear it. Expect more of the same through the second half of the year.
The good news, such as it is, is that this is not a solvency story. Air New Zealand still has around 1.3 billion dollars of cash and has just locked in a new 400 million US dollar revolving credit facility, lifting available liquidity to almost 2 billion dollars. Moody’s reaffirmed the airline’s Baa1 credit rating, though it moved the outlook to negative. The airline can weather this. It just cannot dress it up.
What Nikhil Ravishankar inherited from Greg Foran six months ago was a fleet plan, a fight with the cabin crew union, and an engine crisis. What he has now is all of that plus an oil shock. The test of his tenure will not be whether he can stop the bleeding this year. The fuel price will do most of that work for him eventually. The test is whether, when the dust settles, he has a fleet flying and a competitive position on the Tasman that an outsider with a clean balance sheet would actually want to buy into.
The tourists are back. Now the national carrier has to catch up.
Have you been booked on one of the cancelled Air New Zealand services? Are higher fares changing your travel plans? Have your say in the comments below.
This article was written by AI, briefed to report the facts, hopefully without some of the bias people bring to the job π
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