Air New Zealand Pilots Into Profitability

We maintain our NZD 0.97 fair value estimate for shares in no-moat Air New Zealand AIZ 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.

While no interim dividend was declared, we now forecast dividends to restart with full-year earnings. When raising capital in May 2022, the board had no intention to declare a dividend earlier than fiscal 2026. But given the rapid resumption of profitability, the board now expects to consider distributions to shareholders in August 2023.

Our long-term forecasts are intact. We still expect healthy domestic capacity recovery leading to a strong fiscal 2023 at roughly fiscal 2019 levels of flying (about 94% of pre-COVID-19 levels during the first half). But we think the recovery in international travel will be more gradual. International short-haul was about 82% of pre-COVID-19 capacity and long-haul at about 50% during the period. While we forecast international short-haul to recover to pre-COVID-19 levels by fiscal 2024, Air New Zealand has permanently condensed its wide-body fleet so we don’t expect a full recovery to pre-COVID-19 levels of flying in the long-haul business over the next five years without additional capital expenditure on new aircraft.