What Air New Zealand’s flight cuts and changes tell us

A US-Iran ceasefire was announced on Wednesday and Brent crude prices were down 12.9% on a day earlier.

But jet fuel experts such as Forsyth Barr’s Andy Bowley have said prices would take time to come down even if peace broke out in the Middle East.

“We are seeing continued increases in prices of jet fuel, phenomenal increases,” Board of Airline Representatives (Barnz) executive director Cath O’Brien told the Herald yesterday.

“Month-on-month, jet fuel prices for some airlines have risen by 100%. We’ve never seen that before.”

Yesterday’s Government fuel update showed 51.7 days’ worth of diesel and 53.5 days of jet fuel within New Zealand or on the way.

That was an improvement on the 51.5 days of diesel and 50.1 days of jet fuel reported in Monday’s update.

“It looks like the supply side of things is holding its own in New Zealand,” O’Brien said.

But with price still an issue, how do airlines react?

“The tricky thing about airline tickets is they’re usually sold in advance,” O’Brien said.

That was often good for carriers, but now it meant they were struggling to cover costs.

She was asked if in some scenarios it might be cheaper for an airline to cancel a flight and refund all passengers than to operate using expensive jet fuel.

While that might be true in an extreme case, such a decision could have longer-term costs for airlines.

“Airlines also care about customer confidence. They don’t want to be cancelling services,” O’Brien said.

So a short-term calculation could cause long-lasting reputational damage.

Airlines still had staff rostered on, and had to pay them, and there was little point having them sit around doing nothing.

Forsyth Barr’s Bowley yesterday said a ceasefire should ease supply constraints on crude and refined products getting through the Strait of Hormuz.

Even if the ceasefire held, shortages of crude oil at refineries would take time to be resolved and Bowley said airlines would have to wait for relief.

“It’s still going to take time for jet fuel prices to moderate ... for the time being it’s still going to be quite hard for them.”

He said Air New Zealand would probably remain in a challenged position until at least mid-2027.

“The balance sheet is more stretched than it was.”

Would the Government or somebody else give the airline a cash injection to help it through the likely hard times?

“I don’t think you can rule out the potential for a capital raise but I don’t think it’s something they need to do imminently.”

Bowley said cutting routes made little sense in a competitive market.

The competitive dynamics of that situation would play a bigger role in the decision than for a service where the airline’s only rivals were cars, trains or buses.

“It’s hard, super-hard for airlines at the moment. It’s easy to say they should keep flying even if they’re losing money. But in most businesses, you tend to stop doing things that are loss-making,” he added.

“If you know it’s a temporary situation, you may be willing to take it on the chin.”

Broadly, fuel price rises led to capacity reductions.

Falling fuel prices might then encourage capacity expansion but a global aircraft shortage and small populations complicated that.

Bowley said cutting services already sold to travellers created operational challenges.

“If you’re then taking the next step and exiting a service, that’s a big decision.”

Dumping a route in tough times meant disenfranchising a cohort of customers, Bowley said.

Those customers might not take kindly to an airline returning when its economic outlook improved.

“There’s a huge brand component to how airlines behave.

“You need to adapt. And the challenge most of them have today is, how long does this go on for?”

John Weekes is a business journalist covering aviation. He previously covered consumer affairs, crime, politics, police and courts.