Thursday 26th January 2017
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Analysts at Craigs Investment Partners have downgraded the share price target for Air New Zealand and warned its earnings before tax is likely to come in at the lower end of expectations.
On Wednesday, the airline published details of passenger revenue between July 1 and Dec. 31, 2016. Short haul passenger revenue through its preferred metric had fallen 6.3 percent, while long-haul passenger revenue had slumped 14.3 percent. Air New Zealand's preferred metric is passenger revenue divided by the total capacity for the period, what it terms RASK.
Even when the fluctuations in the value of foreign currency was eliminated, group-wide RASK fell 9.3 percent. In December the airline flew more people than a year earlier, but the percentage of seats sold on its flights fell 1.5 percent on a year ago.
In a note to clients, analyst Matt Peek downgraded the target share price to $2.09 from $2.17, although it retained its 'hold' recommendation. Shares of Air New Zealand are currently trading at $2.16, and have fallen 1.8 percent today, underperforming the broader S&P/NZX 50 Index.
Peek notes that a number of new rival services have launched, competing with Air New Zealand on price, as well as fuel prices increasing.
"Air New Zealand continues to be impacted by heightened competition, pressuring RASK, while fuel prices have also increased, reducing margins. The recent US$10/bbl increase in jet fuel price is not factored into the company's full year 2017 profit before tax guidance."
The airline told investors that it was expecting profit before tax of between $400 million-to-$600 million for the 2017 full year when it reported record profits for 2016 in August.
Peek now expects profit before tax to be in the lower half of this range, because competition limits Air New Zealand's ability to recover the rising cost of fuel, causing a further deterioration in profit margins. He argues that while the near-term is challenging, in the medium-term its prospects remain solid and it is well positioned for the longer-term due to its "quality product, market position and demand growth."
Shares in Air New Zealand have risen 0.2 percent since the start of the year, but are down 18 percent on 52 weeks ago.
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