Air New Zealand is bracing for a "challenging year ahead," as the airline grapples with a significant 61% drop in profits, driven by a confluence of industry-wide issues. The airline, which is often regarded as a symbol of national pride, is facing the stark reality of operational disruptions, supply chain bottlenecks, and fierce competition from larger international carriers.

For the financial year 2024, Air New Zealand reported a net profit of NZ$146 million ($91.5 million) after taxation. While this figure might appear healthy at first glance, it represents a sharp decline from the previous year’s stellar performance when the airline posted a net profit of NZ$412 million. The 61% drop highlights the severe impact of the challenges that have unfolded over the past six months.

CEO Greg Foran, addressing these concerns, pointed to several factors that have contributed to the downturn. “The challenges we are facing are not unique to Air New Zealand,” Foran explained. “Supply chain and aircraft delivery delays, growing costs, and a shortage of labor in key areas like engineering are major issues facing many airlines across the global aviation industry.”

One of the most significant hurdles for Air New Zealand has been the grounding of several aircraft due to delayed engine maintenance work. Specifically, six Airbus A320neo aircraft equipped with PW1100 engines and up to three Boeing 787 Dreamliners powered by Trent 1000 engines have been sidelined, awaiting essential maintenance. These delays are primarily attributed to ongoing supply chain disruptions and part shortages faced by engine manufacturers Pratt & Whitney and Rolls-Royce.

In a bid to mitigate the impact of these groundings, Air New Zealand has taken the strategic decision to lease three Boeing 777-300ER aircraft. While this move has helped to alleviate some of the immediate pressure, it does little to offset the broader challenges posed by the grounded fleet.

The difficulties faced by Air New Zealand are part of a larger trend affecting the global aviation industry. Both Airbus and Boeing have publicly acknowledged the significant disruptions to their production schedules caused by supply chain issues. Airbus has cited supply chain constraints as a key reason for its aircraft delivery delays, while Boeing has been dealing with a series of high-profile production problems that have further exacerbated the situation.

The ripple effects of these industry-wide challenges are being felt across the aviation sector. For instance, Ethiopian Airlines recently announced that it too had turned to the leasing market to cover delays in aircraft deliveries from Boeing. This growing reliance on leased aircraft highlights the extent to which airlines are being forced to adapt to an increasingly unpredictable operating environment.

In addition to operational challenges, Air New Zealand is also contending with the broader economic environment. High inflation, coupled with intense competition from U.S. airlines, has placed additional strain on the airline’s financial performance. The airline’s non-fuel operating costs have risen faster than revenue, eroding profit margins even as operating revenue increased by 7% and passenger revenue saw an 11% boost, driven by a 23% increase in capacity, particularly within its international long-haul network.

The impact of these rising costs is evident in the sharp decline in profits despite the growth in revenue. Foran acknowledged the difficulties posed by inflation, noting that it has particularly affected the airline’s ability to manage its non-fuel operating costs.

Despite the challenges ahead, Foran sought to reassure stakeholders that Air New Zealand is taking proactive steps to navigate the turbulent waters. One of the key measures being implemented is an “ongoing discipline around our cost base,” which includes a planned 2% reduction in employee headcount. This move is expected to help the airline maintain financial stability in the face of ongoing challenges.

Foran also emphasized the importance of maintaining a flexible and adaptive approach to the evolving landscape. The decision to lease additional aircraft is part of this strategy, as it allows the airline to maintain service levels even in the face of fleet disruptions.

The current operational challenges have also forced Air New Zealand to reassess its environmental targets. In July, Foran announced that the airline would be dropping its ambitious 29% emissions reduction target for 2030. The decision to withdraw from the Science Based Targets Initiative was made after the airline recognized that it may need to retain its existing fleet for longer than initially anticipated due to the ongoing supply chain and manufacturing issues.

This move has sparked concerns among environmental advocates, who worry that the airline’s retreat from its emissions targets could signal a broader trend within the industry. However, Foran defended the decision, stating that it was a necessary response to the current operational realities.