(Bloomberg) -- Air New Zealand said it may raise ticket prices to cover rising costs after reporting a 38% slump in interim earnings and forecasting an even worse second half.

Inflationary pressures have driven up non-fuel operating costs over the last four years, which is “having a significant impact on the cost of providing air services, including on the domestic network,” the Auckland-based carrier said on Thursday. “The airline is currently reviewing fares and capacity to better reflect ongoing cost pressure,” it said.

Air New Zealand is facing intense competition on its international routes, particularly from North America where US airlines have not yet returned to China at scale and have directed some of that additional capacity to the New Zealand market. It is also grappling with Pratt & Whitney engine maintenance issues on its Airbus A321neo fleet, which will see as many as five of its newest and most efficient aircraft out of service at any one time across the next 18 months at least.

“On top of these operational challenges, we are now leaning into the reality of a worsening revenue and cost environment, which is expected to have a significant adverse impact on performance in the second half,” Chair Therese Walsh said in a statement. “Despite these short-term challenges, the airline is in a fundamentally strong position. Our balance sheet is robust.”

First-half pre-tax earnings dropped to NZ$185 million ($114 million) even as operating revenue rose 13% to NZ$3.5 billion, Air New Zealand said. It reiterated that full-year pretax earnings could drop to as little as NZ$200 million from NZ$585 million a year earlier.

A dividend of 2 NZ cents per share was declared for the first half.

The immediate focus for the airline is to respond to increased costs in its domestic business, which accounts for a third of revenue, Chief Executive Officer Greg Foran said in a Bloomberg Television interview.

“We’ll sensibly work our way through that and start to pass some of those costs on to customers without damaging revenue,” he said. “Now’s the time to just eke a little bit more profit out of that.”

Foran said Boeing has confirmed that the first of the new 787 Dreamliners is unlikely to arrive until at least mid-2025, which will delay delivery of the airline’s Skynest offering — bunk beds in economy class. 

To mitigate maintenance requirements for both Pratt & Whitney and Rolls Royce engines, Air New Zealand leased a Boeing 777-300ER in November. A second leased 777-300ER will enter the fleet mid-year and negotiations for a third are advanced, he said.

 

--With assistance from Haslinda Amin.

(Updates with CEO comments in Bloomberg interview in seventh paragraph)

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