Aug. 27 (Bloomberg) -- Air New Zealand Ltd., the nation’s biggest airline, plans to cut capacity and other costs to arrest a slide in earnings amid falling passenger numbers.

The airline will cut capacity on its long-haul routes about 9 percent in 2010 following a 9.4 percent reduction in the year ended June 30, Chief Executive Officer Rob Fyfe said from Auckland today. Capacity on routes to Australia will fall about 10 percent.

Air New Zealand is canceling services and using smaller aircraft on routes to Asia and North America as falling demand from tourists and business travelers pushes down yields. Larger carriers including Cathay Pacific Airways Ltd. and Singapore Airlines Ltd. have also cut capacity after posting losses.

“While demand is stabilizing, yields remain under significant pressure and fuel prices have resumed an upward trend,” Fyfe said on a conference call. The company declined to make an earnings forecast.

Full-year earnings before tax and unusual items fell 26 percent and the airline today said it may not be able to repeat the gains from currency and fuel hedging.

Air New Zealand shares fell 3 cents to NZ$1.22 at 1:20 p.m. in Wellington trading, narrowing the stock’s gains the past three months to 15 percent.

Asian Carriers

Air New Zealand has avoided the worst of the collapse in demand in the aviation industry. Japan Airlines Corp., Asia’s largest airline by sales, Singapore Air and All Nippon Airways Co. all posted losses last quarter as business demand slumped.

Japan Air had the biggest quarterly loss in at least six years while Singapore Airlines Ltd. said it may have its first annual loss as a publicly traded company. All Nippon Airways Co. tumbled to a loss last quarter compared with a year earlier, while maintaining its forecast of a profit this fiscal year on lower costs.

Air New Zealand’s Fyfe said decisions to cut services including two Hong Kong-to-London flights each week have led to labor savings, while the airline has reduced its fuel bill by using Boeing Co. 777 aircraft on routes, replacing older 747 aircraft. Future capacity cuts will also reduce labor costs, he said.

Air New Zealand expects demand will stabilize as the global economy starts to recover, which may spark more tourism and business travel.

“I’m not pessimistic when looking at forward booking profiles in any of the cabins,” Fyfe said, referring to economy and business class travel.

The airline’s greater reliance on tourism may have cushioned it from a slump in business travel that hit the earnings of rivals, he said.

Full-year earnings before unusual items and tax, the airline’s preferred measure, fell to NZ$145 million ($98 million). Net income slumped 90 percent to NZ$21 million after including fuel hedging losses associated with future years.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

Last Updated: August 26, 2009 21:58 EDT