Company Reports

Profitability at Air New Zealand has moderated significantly. Fiscal 2024 underlying profit before tax of NZD 222 million was within guidance and about 2% below our forecast, but down 61% from near-record profits in fiscal 2023. Conditions have normalized. Pent-up demand has exhausted, previously constrained industry capacity has eased, and price competition has returned. The second half deteriorated further from first-half pretax profit of NZD 185 million amid cost inflation, engine maintenance issues, a soft economic backdrop in New Zealand, and increased competition on North American routes.

Despite roaring back to profitability once the skies reopened following the covid-19 pandemic, competition is weighing on earnings at Air New Zealand. Pent-up demand is largely exhausted, capacity constraints have eased, and competition is back. As global carrier capacity continues to recover, pricing is under pressure. Switching costs among airlines are negligible and consumers aren't loyal. As carriers increase capacity globally, pricing declines, underpinning our view that airlines, including Air New Zealand, lack economic moats.

Both domestic and international flying is challenging for Air New Zealand. Leisure demand is declining amid cost-of-living pressures, corporate and government travel remain subdued, and international competition has intensified. Coronavirus-related travel credit redemptions have declined, but they are only a partial offset. The airline now assumes fiscal 2024 credit breakage—its expectation of unused credits to expire—of about NZD 95 million, from NZD 65 million previously. The net result is a NZD 10 million reduction in fiscal 2024 earnings guidance. Our unchanged pretax profit forecast of NZD 226 million sits near the top of the amended guidance range of NZD 190 million to NZD 230 million.

Profitability is normalizing for Air New Zealand after an exceptional fiscal 2023. Interim fiscal 2024 profit before tax fell 38% to NZD 185 million, in line with guidance. The second half is set to be much weaker. Pent-up demand has largely exhausted, and previously constrained capacity is easing. Price competition is intensifying as capacity bottlenecks ease. Burdened by high fixed costs, relatively low barriers to entry, and low switching costs, airlines globally lack economic moats and Air New Zealand is no exception. These conditions, which plagued the airline industry before the pandemic, appear to be returning. Air New Zealand reiterated full-year guidance of NZD 200 million to NZD 240 million, implying only modest second-half profit. We make no changes to our fiscal 2024 pretax profit forecast of NZD 226 million.

Despite roaring back to profitability once the skies reopened following the COVID-19 pandemic, competition is weighing on earnings at Air New Zealand. Pent-up demand is largely exhausted, capacity constraints have eased, and competition is back. As global carrier capacity continues to recover, pricing is under pressure. Switching costs among airlines are negligible and consumers aren't loyal. As carriers increase capacity globally, pricing declines—underpinning our view that airlines, including Air New Zealand, lack economic moats.

The good times didn’t last long for Air New Zealand. After a near-record pretax profit of NZD 585 million in fiscal 2023, conditions have deteriorated much more rapidly than we anticipated. Pent-up demand is largely exhausted, capacity constraints have eased, and competition is back. The cost base is up significantly and temporary engine maintenance requirements will weigh on profits. While the airline expects a first-half fiscal 2024 pretax profit of about NZD 180 million, it only guides to NZD 200 million to NZD 240 million for the full year, implying a near 80% fall in profit half on half. We lower our fiscal 2024 pretax profit forecast by 30% to NZD 226 million and cut our fair value estimate to NZD 0.80 (AUD 0.74), from NZD 0.90 previously.

Despite roaring back to profitability once the skies reopened following the COVID-19 pandemic, competition is weighing on Air New Zealand's earnings. Pent-up demand is largely exhausted, capacity constraints have eased, and competition is back. As global carrier capacity continues to recover, pricing is under pressure. Switching costs among airlines are negligible and consumers aren’t loyal. As carriers increase capacity globally, pricing declines—underpinning our view that airlines, including Air New Zealand, lack economic moats.

The COVID-19 pandemic has wreaked havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Air New Zealand's wings. Stringent New Zealand entry requirements for international arrivals have decimated passenger revenue, and despite aggressive cost cuts, operating deleverage lead to significant aftertax losses in fiscal 2022.

We lower our fair value estimate for Air New Zealand by 7% to NZD 0.90 (AUD 0.84) per share. Airline profitability is normalizing after an exceptional fiscal 2023. Pent-up demand has largely exhausted, and previously constrained capacity is beginning to ease. While we had expected elevated profitability to prove short-lived, we did not expect conditions to normalize so rapidly. The company now expects first-half profit before tax to be at the bottom of the prior guidance range of NZD 180 million to NZD 230 million. We lower our full-year fiscal 2024 forecast by 23% to NZD 325 million—a 43% decline on fiscal 2023.

We maintain our NZD 0.97 (AUD 0.88) fair value estimate for shares in Air New Zealand following a trading update, with shares screening as undervalued. Despite tremendous profitability in fiscal 2023, driven by pent-up demand and constrained capacity, the operating environment is beginning to normalize. Profit before tax guidance of NZD 180 million to NZD 230 million for the first half of fiscal 2024 broadly tracks our unchanged full-year fiscal 2024 forecast of NZD 423 million—a 28% decline on fiscal 2023.

After three long years and about NZD 1.3 billion in underlying pretax losses thanks to travel restrictions, Air New Zealand's fortunes turned in fiscal 2023. Air travel demand returned strongly, while capacity is constrained by the availability of aircraft, labour, and parts. With full planes and expensive tickets, Air New Zealand is enjoying tremendous profitability. Fiscal 2023 underlying profit before tax of NZD 585 million, its second-best on record, was broadly in line with our NZD 582 million forecast and guidance provided in June 2023. We make no changes to our NZD 0.97 (AUD 0.88) per share fair value estimate.

We make no changes to our NZD 0.97 (AUD 0.88) fair value estimate for shares in Air New Zealand following a trading update. The company now expects to report fiscal 2023 profit before tax of no less than NZD 580 million, an upgrade of 8% at the midpoint of prior guidance of NZD 510 million to NZD 560 million. We lift our fiscal 2023 pretax profit forecast by 7% to NZD 582 million as demand continues to outstrip supply. Full planes, high ticket prices, and an easing fuel bill sees Air New Zealand set to exceed pre-COVID-19 profitability.

We maintain our NZD 0.97 fair value estimate for shares in no-moat Air New Zealand following the release of interim fiscal 2023 results, largely in line with our prior forecasts. Our fair value estimate for Australian-listed securities is AUD 0.88 based on the current AUD/NZD exchange rate of about 1.10. Underlying pretax profit of NZD 299 million was a significant turnaround from the NZD 367 million loss in the prior corresponding period, or pcp, which was marred by lockdowns and border restrictions. While air travel capacity remains constrained, demand is strong, leading to expensive tickets, fuller planes, and exceptional profitability. Air New Zealand also provided guidance for fiscal 2023 profit before tax of between NZD 450 million to NZD 530 million. We make no changes to our fiscal 2023 forecast of NZD 516 million, near the top of the range.

We maintain our NZD 0.95 (AUD 0.88) fair value estimate for shares in Air New Zealand following a trading update. Bookings have improved following the reopening of the New Zealand border, with the airline now guiding to an underlying fiscal 2022 pretax loss of less than NZD 750 million (from less than NZD 800 million previously). We lower our fiscal 2022 underlying pretax loss to NZD 747 million, from NZD 788 million. Our longer-term forecasts remain intact. We think the worst is now behind Air New Zealand and the recent recapitalisation (see our note published March 31, "Corporate Action: Air New Zealand Rights Are Cheap as Chips") places the airline in a strong financial position to thrive as air travel returns.

We maintain our NZD 1.90 (AUD 1.80) fair value estimate for shares in no-moat Air New Zealand following the release of fiscal 2021 results. The underlying pre-tax loss of NZD 440 million was in line with our prior forecast and company guidance--a substantial deterioration from the NZD 87 million pre-tax loss incurred in fiscal 2020. This result was not surprising considering the high levels of operating leverage intrinsic to airlines and the substantial loss of revenue during fiscal 2021--the first full year impact of COVID-19. The domestic business recovered to near pre-COVID-19 levels toward the end of fiscal 2021 as domestic restrictions eased, driven by local leisure demand amid international border restrictions. In contrast, the international business remained subdued, with limited repatriation flights partially offset by the Trans-Tasman travel bubble, and countercyclical freight earnings amid surging e-commerce demand. As expected, Air New Zealand declared no dividend--we expect dividends will remain suspended until the firm returns to profitability in fiscal 2023.

We maintain our NZD 2.00 fair value estimate for shares in no-moat Air New Zealand following the release of interim fiscal 2021 results. The fair value estimate for the Australian listing reduces to AUD 1.86 from AUD 1.90 due to a stronger Australian dollar. Border restrictions and lockdowns continue to wreak havoc on Air New Zealand (and the global airline industry in general), leading to an underlying first-half net loss aftertax of NZD 133 million. Despite aggressive cost-cutting and a progressive recovery in domestic flying, we expect Air New Zealand will remain loss-making in the second half. We now forecast operating deleverage to lead to an aftertax loss of NZD 250 million in fiscal 2021, an increase from our prior forecast of NZD 228 million.

The COVID-19 pandemic continues to wreak havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Air New Zealand's wings. Stringent New Zealand entry requirements for international arrivals and a ban on noncitizen, nonpermanent resident arrivals have decimated passenger revenues, and despite aggressive cost cuts, we expect operating deleverage to lead to aftertax losses in 2021.

We maintain our NZD 2.00 fair value estimate for shares in Air New Zealand following the transition to a new analyst. Our fair value estimate for the Australian listing lifts to AUD 1.90 from AUD 1.88 due to the improving NZD. Our very high uncertainty and Standard stewardship ratings remain intact.

We maintain our NZD 2.00 fair value estimate for shares in no-moat Air New Zealand as the company flags a potential equity raise following the completion of a capital structure review in early calendar 2021. As expected, with monthly cash burn of around NZD 75 million, the firm has started to drawdown on its NZD 900 million loan facility provided by the New Zealand government--the airline's majority shareholder. This debt funding agreement can force Air New Zealand to raise capital to repay the loan or convert the loan to equity. We do not expect Air New Zealand will need to raise the entire balance of the loan facility, and currently forecast a raise of NZD 450 million before the end of fiscal 2021.

We lower our fair value estimate for the shares of no-moat Air New Zealand to NZD 2.00 from NZD 2.10 following fiscal 2020 results. The airline reported an underlying pretax loss of NZD 87 million, in line with our prior forecast of a NZD 90 million loss, as air travel ground to a halt at the height of the coronavirus pandemic. The underlying loss excludes NZD 541 million in one-offs--principally comprising NZD 140 million in reorganisation costs, NZD 105 million in de-designation of fuel hedging, and NZD 338 million in noncash aircraft impairments. As a noncash expense, the write-down does not affect our fair value estimate. However, the impairment illustrates the damage that the coronavirus has inflicted on Air New Zealand (and air travel in general) over the past few months and is an indication of the challenged roadmap ahead. Our forecasts now include the impact of the new accounting standard for leases, IFRS 16.