Air New Zealand warns of softer demand, higher fuel prices and increased competition

The airline won’t offer any earnings guidance as it faces multiple headwinds from softer demand, higher fuel prices and increased competition for airlines including Qantas.

Air New Zealand has warned of major headwinds including softer demand, higher fuel prices and increased competition, a month after returning to profit following three years of losses during the pandemic.

Chief executive Greg Foran told investors at its annual meeting in Wellington on Tuesday that it will look to navigate an uncertain macroeconomic environment over the current fiscal year as it walked away from providing any earnings guidance.

Headwinds include a weak New Zealand dollar, ongoing wage inflation, increased airport charges and intense competition on its lucrative North American routes from US carriers and Qantas, which also competes on Air New Zealand’s flagship route between Auckland and New York.

“While more capacity is a good thing for markets that are currently undersupplied, the increasing cost of living may start to impact discretionary spend and with it, people’s travel plans,” Mr Foran said.

Amid the recent surge in global oil prices, the airline said that the cost to purchase fuel in US dollars was even more expensive due to the weak dollar as Mr Foran also warned that inflation continued to bite, driving increased costs across the whole business.

Qantas flagged that fuel prices had increased by around 30 per cent since May 2023, including a 10 per cent spike since August, which would result in a $200m headwind.

“The group will continue to absorb these higher costs, but will monitor fuel prices in the weeks ahead and, if current levels are sustained, will look to adjust its settings,” Qantas said in a statement on Monday.

Air New Zealand boss Greg Foran said a weak dollar, higher fuel prices and more competition was hurting the carrier. Picture: Hannah Peters/Getty Images

Air New Zealand, which is majority owned by the New Zealand government, has $NZ200m of Covid-19 era travel credits on its balance sheet with customer having until the end of January to use them on flights departing by December 2024.

In recent weeks, Qantas axed the expiring date of its $570m worth of Covid-19 travel credits and Virgin Australia has been under mounting pressure to follow and axe its December 31 deadline.

Air New Zealand, like Qantas, is working to improve customer “pain points” by working to improve on time performance, the time it takes to process refunds and call centre wait times, which have been 75 per cent in the past year to six minutes.

While customer demand remained sold across most of the airline’s markets, Air New Zealand chair Dame Therese Walsh said in recent weeks there had been a softening in corporate and domestic demand.

“We are mindful of the uncertain economic environment however and acknowledge there are a number of factors that may impact future customer demand and profitability,” she said.

Air New Zealand is also facing disruptions to its operations after aerospace manufacturer Pratt & Whitney detected cracks in engines built between 2015 and 2021, resulting in a change in maintenance timing. The company supplies and maintains engines on 16 of Air New Zealand’s Airbus A320neo and A321neo aircraft that operate mostly on routes servicing Australia and the Pacific Islands.

Mr Foran said he is expecting more details from Pratt & Whitney in coming weeks, and the airline has been developing plans to reduce the potential disruption to customers.

“As we navigate our way through these challenges, I’m confident we are well positioned as an airline, have the right strategy and a core set of enduring competitive advantages that we have spent years cultivating and fortifying,” he said.

Air New Zealand last month swung to a profit of $NZ412m for the 2023 financial year from a loss of $NZ591m a year earlier.