Air New Zealand says its "normalised" earnings are down 24 percent on last year, but it can stay out of the red if jet fuel costs don't rise above $140 a barrel in the 2009 financial year.
For the year to June 30, it posted a drop of 1 percent in net profit to $218 million ($221m last year), despite record operating revenue, up 9.1 percent, and a 5.6 percent rise in passenger numbers.
Unprecedented rises in the price of both Crude oil and refining margins took the gloss off what would have otherwise been a record result, the airline said.
Air New Zealand chairman John Palmer said that volatile prices for jet fuel made it difficult to accurately forecast the financial result for the 2009 financial year.
"Air New Zealand expects to operate profitably ... if the average price of jet fuel is below $US140 per barrel for the 2009 financial year," Mr Palmer said.
Price increases, capacity rationalisation, a focus on fuel efficient fleet and cost saving initiatives would all mitigate the higher fuel costs.
Chief executive Rob Fyfe warned that market conditions on trans-Tasman routes looked set to become increasingly challenging over the coming year.
Current carriers were looking to increase capacity and some new entrants were taking up rights to fly beyond Australia, he said.
The Tasman market was profitable for Air NZ in the year just gone, but if all the extra capacity being projected was thrown into that market it would severely test the profitability of any carrier operating on the Tasman.
In general, Air NZ was prepared to reduce capacity if needed, Mr Fyfe said.
"We have a couple of additional aircraft coming into our fleet during the course of the year ... Whether we fully utilise that incremental capacity or not remains to be seen."
In results released to the NZX today, Air NZ said normalised earnings before unusual items and taxation slumped by nearly a quarter to $197m ($259m).
Operating revenue rose 9.1 percent to $4.667 billion ($4.279b) for the year, but $302m of the $388m increase was mainly attributed to capacity added both to the domestic and long haul routes, and higher load factors, up 2.8 percentage points to 79.3 percent.
The airline carried 13.2 million customers, up 5.6 percent on the previous year.
Mr Palmer said fuel costs soared by $300m during the year.
"Despite fare increases, Air New Zealand continues to only partially recover the increase in the total cost of fuel," he said.
"Challenges facing airlines were `immense' but the national airline was able to innovate and adapt more rapidly than many of its competitors, and had a strong financial position.
"Quickly and accurately matching supply to demand is crucial in an environment of rising costs and softening demand," he said. "To survive, Air New Zealand must be prepared to take action."
Air NZ's managers were looking at further new revenue opportunities in the tourism and travel sectors including designing the interiors of business jets, online sales and industry training. Mr Palmer said the second half of the 2008 financial year marked the start of a period of substantial adjustment in commercial aviation, as the industry adapted to live with higher jet fuel costs.
The company declared a fully imputed dividend of 3.5c/share, bringing the total for the year to 8.5c/share.
Air NZ's share price was down 2c to $1.20 in mid-afternoon trading.