Fuel prices are creating significant headlines and will drive large profit growth for Air New Zealand in the second half of the 2015 financial year.
Craigs Investment Partner broker Chris Timms said it was also the airline's operational statistics which would continue to show good correlation with domestic and global economic (gross domestic product) growth.
Jet fuel started the current financial year at $139 a barrel and had fallen 14% by October 26 to $119 a barrel, with an average year-to-date price of $134 a barrel.
If fuel prices and currency remained at current levels, the average over the year would be $125 a barrel, down 15% on the 2014 financial year.
''Air New Zealand provided earnings guidance in late November that should jet fuel prices stay at [then] current levels, there would be `significant improvement' in second-half earnings.
Since guidance was provided, fuel prices have declined even further''Craigs estimated for every 5% fall in the annual fuel cost, $50 million should be added to the profit before tax, he said.
Since October 26, jet fuel prices had fallen another 20% to $98 a barrel and the year-to-date average was now $130.
If fuel prices and currency remained at current levels, the average for 2015 would be $110 a barrel, down 25% on last year.
''If fuel prices remain at current levels, there is clear upside to our 2015 profit before tax forecast of $474 million.''
Air NZ was 78% hedged for its first-half fuel requirements with a majority of Brent Collars (how airlines manage their fuel costs) of $US99 ($NZ127.20) a barrel versus spot prices of $US85. The second half was 56% hedged with a floor of $US99.
On currency, Air New Zealand said in August it was 91% hedged for the first half at US84c and 84% hedged for the full year at US84c.
''Air NZ will benefit from lower fuel costs in spite of a weakening New Zealand dollar,'' Mr Timms said.
However, there were things to watch in the future, he said.
Air NZ would begin flying a daily service to Singapore from January which would see another lift in capacity. In North America, capacity was up 3% in November after being down 5% in October.
With capacity roll-out, investors needed to watch load factors and yield to make sure the demand was there to match supply, Mr Timms said.
Both domestic and global conditions supported demand growth.
International Air Transport Association forecasters expected 2015 passenger traffic to grow by 7%, which was well above the 5.5% growth trend of the past two decades.
The IATA said the strongest financial performance by far was being delivered by airlines in North America and Air NZ had twice as much long-haul capacity in North America-United Kingdom than in Asia, Mr Timms said.
