UPDATE:Air New Zealand Profit Jumps,International Business Improves

By Rebecca Howard

WELLINGTON--Air New Zealand Ltd. (AIR.NZ) chalked up its best interim profit in five years and is on track to more than double annual profit, following a turnaround in its international long-haul service and increased demand on domestic routes.

The 76% state-owned airline is expecting business to improve even as global carriers struggle with volatile fuel prices, fragile consumer confidence and stiff competition.

"This result is because every aspect of our business is actually firing on all cylinders," Chief Executive Christopher Luxon told the Wall Street Journal. The airline has made some "smart fleet decisions" and has optimized its networks and international alliances, he said.

"We are beginning to feel the benefits of a more modern, fuel-efficient fleet."

Mr Luxon, who took over as CEO in January, said "getting the network right" was key to making Air New Zealand's international business profitable for the first time since the start of the global financial crisis. The airline will suspend the Hong Kong-London route, reducing its exposure to Europe, but its customers can fly to London via Los Angeles. Air New Zealand also set up an alliance with Cathay Pacific Airways Ltd. (0293.HK) of Hong Kong, a tie-up that could increase the airline's links to Southeast Asia.

Air New Zealand's net profit rose to 100 million New Zealand dollars (US$83 million) in the six months to Dec. 31, from NZ$38 million in the year-earlier period. Its normalized earnings before taxation totaled NZ$139 million, up from NZ$33 million a year earlier.

Mr. Luxon said normalized earnings before taxation in the second half would "comfortably exceed" last year's, and the airline is well on track to more than double the prior year's normalized earnings of NZ$91 million. The normalized earnings figure excludes net gains and losses on derivatives that hedge exposures in other financial periods.

Air New Zealand's stock closed up 4.1% Thursday at NZ$1.40, a 24-month high after the results beat expectations, said Hamilton Hindin Greene Broker Grant Williamson. "They are probably one of the most profitable airlines in the world," he said.

Air New Zealand is renowned for its safety videos, including the latest where Man Vs Wild star Bear Grylls gives passengers safety advice while racing across New Zealand's alpine peaks and stowing a fish under his seat. Others have featured a wide variety of wizards, hobbits, elves and dwarves from Peter Jackson's film interpretation of J.R.R. Tolkien's "The Hobbit."

In its home market, the airline's on-time performance and competitive pricing has helped boost demand, Mr. Luxon said. It has increased and modernized capacity in the domestic fleet with more fuel-efficient aircraft.

Mr. Luxon also noted the company's alliance with Virgin Australia (VAH.AU) is proving very successful, giving the two companies a market-leading position on Trans-Tasman routes. Air New Zealand's 19.99% stake in Virgin Australia reinforces this relationship, he said.

Asia is becoming increasingly important for the airline. Mr Luxon noted travelers from China have supplanted visitors from the U.K. as New Zealand's second-largest tourist group.

There are "massively rising middle classes, higher discretionary income. There is a world of opportunity," he said.

Air New Zealand will lease two additional Boeing 777-300ER aircraft to join its fleet in 2014.

Mr. Luxon also said he is fully confident that Boeing Co.'s (BA) 787-9 will be delivered on schedule in mid-2014. Boeing has come under significant pressure after global aviation regulators temporarily grounded the 787 Dreamliner due to potential safety risks over the jetliner's lithium-ion batteries.

"If I was taking delivery of those aircraft in the next three to six months, we might have some concerns, but that is not our reality," said Mr. Luxon.

The 787-9 is the larger version of the 787 Dreamliner, able to carry about 40 more passengers and fly slightly farther than the current model, which carries around 250. Air New Zealand is the global launch customer for the aircraft.

Mr. Luxon said he is confident Boeing will resolve the issue. "We are taking delivery of our aircraft, we are very confident."

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