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Fuel price forces air fare increase

Media Release
21 April 2006

Fuel price forces air fare increase

Air New Zealand announced today that it would be increasing all domestic airfares and outbound international airfares by 10 percent effective 1 May in response to recent significant rises in jet fuel prices.

“Fuel is now our number one cost. We regret having to increase fares but the numbers are stark,” said Chief Financial Officer Rob McDonald. “The price of benchmark Singapore Jet Fuel has more than doubled from around US$40 in April 2004 to US$89 a barrel today.”

Mr McDonald said this meant Air New Zealand’s fuel bill had risen from $480 million in FY04 to nearly $1 billion in FY06.

“Until now customers have been shielded from much of the effect of these price rises by the Airline’s fuel hedging programme. The Airline has also borne additional fuel costs over and above its hedging, avoiding passing those costs on to customers,” he said.

But recent falls in the value of the New Zealand dollar against the US dollar and the fact that Air New Zealand’s more favourable fuel hedges have rolled off compound the situation and mean this shortfall must now be addressed.

Despite today’s fare increase the Airline will still not fully recover the increased cost of jet fuel.

“This is a business that is very sensitive to fuel price rises. Every US$1 increase in the price of jet fuel forces down our EBIT by US$8 million per annum before hedging. In the last month alone, fuel prices have increased by nearly US$10 per barrel,” Mr McDonald said.

Air New Zealand has recently made extensive efforts to reduce cost across its business, including a significant restructure of its wide body maintenance, a review of corporate head office staff levels and combining the flying of Freedom and Air New Zealand A320 aircraft on the Tasman into one operating company.

The Airline has also filed an application with the New Zealand Ministry of Transport and the Australian Competition and Consumer Commission to code share on the Tasman with Qantas to rationalise excess capacity and flying.

From 2003, the Company had made $293 million in cumulative cost savings.

“But the magnitude of recent fuel price rises mean even these cost reduction measures are now not enough,” said Mr McDonald.

Following the District Court’s judgement in November 2005, Air New Zealand incorporated fuel surcharges into its advertised prices. The increase in fuel costs announced today will therefore simply be reflected in increased fare prices.

Air New Zealand has acknowledged delays in revising pricing that appears once a customer enters into the online booking process.

The Company is completing an update of its IT systems and fuel will be included in pricing that appears in the online process effective 15 May.

Air New Zealand will continue to rigorously monitor its business and network, with underperforming routes or business units being candidates for immediate review.

ENDS

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