August 22, 2019 / 1:21 AM / 3 months ago

UPDATE 2-Air New Zealand eyes further cost savings as profits dip 31%

* AirNZ annual profit drops 31%, revenue rises 5.4%

* Profit hit by big fuel bill, weaker tourism

* FY 2020 earnings forecast NZ$350 mln to NZ$450 mln (Adds share price, CEO comments, bullet points)

By Praveen Menon and Shriya Ramakrishnan

Aug 22 (Reuters) - Air New Zealand reported a 31% fall in full-year profit on Thursday on the back of a higher fuel bill and warned that the national carrier would need to make further cost cuts in a low growth environment.

Outgoing Chief Executive Christopher Luxon said earnings in the year to June 30 were also weighed down by weakness in inbound tourism and domestic leisure demand, and problems with Rolls-Royce engines that have plagued its fleet of Boeing aircraft.

Still, Air New Zealand’s profit before tax, the most closely watched measure of the company’s performance, rose to NZ$374 million ($239.4 million) compared to the NZ$340 million the airline forecast in a profit warning in May.

Revenue from continuing operations rose 5.4% to NZ$5.83 billion.

Air New Zealand shares were flat on Thursday after dropping slightly following the announcement.

The airline, which launched a two-year cost reduction plan in March that included savings of NZ$750 million by deferring aircraft deliveries, was aiming to cut costs by an additional NZ$60 million by the end of 2021, Luxon said.

“We know what we needed to do with regards to our cost structure and we are doing it,” he said in an investor call after the earnings announcement, adding that an external agency had been appointed to help run the process.

SLOWING DEMAND

For the coming year, the airline forecast fiscal 2020 earnings to be in the range of NZ$350 million ($224.1 million) to NZ$450 million, in line with the consensus among six analysts polled by Refinitiv of NZ$436 million.

Airlines globally have struggled to maintain margins in the face of slowing travel demand and higher fuel prices, but pressure could ease given that oil prices have fallen from a peak in October.

Australia’s Qantas Airways on Tuesday reported a 17% drop in annual profits hurt by higher fuel costs and a weaker Australian dollar.

Air New Zealand has also been hit by maintenance issues with Rolls-Royce Trent 1000 engines used in its Boeing planes that has affected 2,500 flights and led to 150 cancellations.

The company said it expects the engines to be back in service in the coming months.

“In a society with rapidly changing customer expectations, we know we need to continue to lift our game,” Luxon said.

Thursday’s report was the last annual result under Luxon who steps down next month after seven years in the top job, as he contemplates a career in politics. Chief Financial Officer Jeff McDowall was named acting CEO this week. ($1 = 1.5618 New Zealand dollars) (Editing by Anil D’Silva and Jane Wardell)

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