Forum Archive Index - February 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

G Stolwyk wrote
> 
>I am not too keen on the word "experienced" investor but like Hugh
>like Hugh Webber, don't like airlines.
>

So your analysis might be uncharacteristically biased?

> 
>All over the world they tend to have very erratic earnings. 
>

...which is built into the share price

>
>And I don't like AIR ( Air New Zealand ) 
>because of Brierley involvement!
> 

Yes there is certainly a potential overhang in the market for 
AIRVA because of all those 'A' shares Brierley still holds.

>
> Unlike other airlines they did not hedge the oil price when it was
> so low @ $US 10-20 !
>

Possibly a high risk strategy so that cornerstone shareholder 
Brierley Investments can get a better price for the B shares they 
sold to Singapore Airlines, as per the 'top up' arrangement?

Looks like it might have backfired.

>
>They now have a new CEO, he may be able to do something but there
>are heavy costs.
> 
>I thought that they had paid too much for Ansett and it is becoming
>clearer, that they did so !
>

Yes, Selwyn Cushing, the AirNZ Chairman, is on record as saying so.

> 
>Another one - in my opinion - is 'the Aussie factor':They tend to be
>far more parochial and hate their companies to be owned by
>foreigners. (Some Aussies will disagree with this thought.) 
> 
>Therefore, I feel that the ticket price has to be lower than that of
>Qantas before they would use another airline.
>


I'm not sure about that.  I think Ansett is still identified as an 
Australian Brand, the new chief executive is Australian, and he 
proceeding to 'Australianise' the senior management too.


> 
>As you know there were problems with Ansett planes due to poor
>maintenance. That is not normally the case. It may indicate that
>there were management problems as well.
>

Agreed.  The Air NZ fleet is now surprisingly modern, and in relative 
terms the Ansett fleet is old and tired.   An older fleet needs more 
maintenance which must be properly planned for.

>
>In my opinion, they could be running close to - or even at a loss
>for some time. You need to check as to the ownership of planes.
>Normally, they would lease some as well.
> 
>If they own quite a few, then depreciation charges will be high.(
>Most likely they will tend to lease more when there is little cash
>flow ). 
>

I disagree completely.  Airliners are bought and sold on the 
international market in US dollars.  So with the decline in the New 
Zealand dollar you may find that the market value of the planes has 
*appreciated* in value over the past year.  There may be no 
depreciation at all, despite what nominal figures the accounting 
standards make AirNZ put in the books.


On the other hand with leased planes, the leases are paid for in US 
dollars.  It is the leased planes that will be the drag on the cash 
flow (kiwi Dollars coming in, US dollars going out).  Not the other 
way around.

> 
> I have indicated in Forum that their debt levels tend to be high.
> They " fix " this with a cash issue coupled with some more
> borrowing.
> 
> AIR will most likely need refinancing.
> Their covenant with their Bank(s) may prescribe refinancing should
> the share price fall below a certain level.
> 

There is a mooted convertible note issue, already approved by 
shareholders that should take care of that.

>
> Another cash issue is not likely as the price of new stock will need
> to be set  too low to be acceptable. In any case, the market will
> not accept another so soon after the last one!
> 
> I think that right now AIR will be approaching the Government and
> arrange for Singapore to take an increased stake in AIR. 
> 
> Singapore could dictate any terms !! 
> 

I don't think the situation is as cash desperate as you imply.   Air 
NZ are still paying an interim dividend of 4c per share.

>
> I don't think that I would hold AIR in these conditions.
> 
> I could be wrong but in your case I would sell as soon as the
> exchange opens!!  
> 

Considering you don't know with what objective the original poster 
bought the shares, I feel your advice is a bit extreme Gerry!   I 
think the original poster's question was more along the lines:
'Yes I know that Air New Zealand has problems, but there might be a 
point where all these problems are built into the share price and it 
becomes a countercyclical 'buy'.  The question is, has it reached 
that point?'

My impression from the Air NZ AGM, is that management expected the 
oil price to decline and the $NZ to $US exchange rate to rise over 
the last few months.  Aviation Fuel has come down in price a bit but 
the exchange rate has remained stubbornly low.  My hunch is that 
AirNZ has continued their largely unhedged policy and have got it 
wrong.  Given the volatility of both oil prices and the exchange rate 
this could change quickly.   But frankly with more upheavals in the 
Gulf, I don't expect much change in either the oil price or exchange 
rate.

Given flat, minimal profi, business conditions I can't see much 
upside in the share price in the short term.  But I don't see much 
downside either.   If the final dividend matches the interim this 
will be 8c per share or 5.3% yield based on AIRVA at $1.50.   That is 
OK compared to what you can get in the bank.  Myself, I am going to 
hold.   I think the upcoming covertible note issue (if it happens) 
might be a good way to indirectly get into AIRVA too, but I'm not 
shelling out more cash for more AIRVA shares directly, just yet. 
SNOOPY

disc: Hold AIRVA (for income) and AIRVB (for income and some growth)






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