FY pretax profit down 21 pct, in line with expectations Flags...

• FY pretax profit down 21 pct, in line with expectations
• Flags improved earnings this year, contingent on oil prices
• Plans to spend NZ$1.5 bln on aircraft over four years

(Recasts and updates throughout with 2018 forecast, analyst comment)

SYDNEY, Aug 23 (Reuters) - Air New Zealand Ltd (AIR) cautiously flagged an earnings improvement in the current year as it posted a 21 percent drop in core annual profit on Wednesday, citing fierce competition.

The carrier "faced an unprecedented increase in the level of competition from some of the world's largest airlines," Chief Executive Christopher Luxon said.

Even so, strong inbound tourism helped Air New Zealand post its second-highest ever profit of NZ$527 million ($383 million) in the year ended June 30, down from last year's record NZ$663 million but in line with market expectations.

"Looking forward to the year ahead, the airline is optimistic about the overall market dynamics," New Zealand's biggest airline said in a statement to the New Zealand Stock Exchange.

The airline said it planned to spend about NZ$1.5 billion on aircraft and associated assets over the next four years as it battles rivals like Qatar Airways and American Airlines Group . Lured by the surge in tourism, both carriers have increased capacity in the New Zealand market. .

Air New Zealand has six aircraft due for delivery this financial year and another 16 in the next financial year.

The anticipated improvement in earnings this year was contingent on an average jet fuel price of $60 a barrel - the average over the past two months - which would equate to a full-year fuel cost of NZ$880 million.

Competitors' recent announcements about a pullback in capacity supported its "view of a stronger revenue environment in the coming year", the company said.

The airline announced an NZ$0.11 fully imputed dividend, contrasting with the NZ$0.10 cent ordinary dividends paid in recent periods, a measure that Forsyth Barr Head of Research Andy Bowley said "clearly highlights the board's confidence on the medium-term earnings outlook".

"We see scope for small increases to market consensus forecasts, albeit these are already factored into the share price at current levels," Bowley added in a note.

Air New Zealand shares were down 0.3 percent in morning trade, in line with the broader market, after earlier falling as much as 3 percent.

The stock has recorded strong gains this year, reaching a nearly 16-year high last month underpinned by growth in passenger numbers. ($1 = 1.3740 New Zealand dollars)