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AirNZ annual result "too close to call"


Monday 26th August 2002

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For some analysts, Air New Zealand's annual results on Wednesday are just too close to call.

After such a turbulent year, the airline's results will be both interesting reading and full of variables. Like other airlines, Air NZ has had to contend with a temporary fall-off in international passengers post-September 11.

Unlike other airlines, the New Zealand carrier is still carrying losses from the collapse of its Australian Ansett subsidiary, has been rescued by a government bailout, and faces the prospect of ever stiffening competition from its Australian nemisis Qantas.

All this while Qantas angles for a stake of up to 25 percent in Air NZ.

Analysts' forecasts range widely, but they can be no worse than last year's disastrous $1.4 billion loss -- the largest corporate loss in New Zealand's history.

In April, the airline reported a half year loss of $376 million, including a $350 million Ansett write-down, but predicted it would break even for the full year.

Since then better trading conditions, cheaper fuel, a stronger Kiwi dollar and and improved load factors are expected to have delivered a better second half.

This year JB Were analyst Peter Sigley is expecting a bottom line loss of around $290 million, but like most experts, he will be looking closely at the operating profit which he estimates could be anywhere between $10 million and $20 million.

Multex Global Estimates forecasts an average $10.8 million profit before abnormals but one analyst goes so high as $75 million. And Forsyth Barr Frater Williams' head of research Rob Mercer won't even make his prediction.

He believes the result will be "zero, plus or minus $30 million" but is much more interested in what the figures signal for next year's result.

Given the obstacles Air NZ has contended with this year, one could perhaps forgive the airline for a poor showing. But Mr Mercer says it should be remembered that an airline with a market capitalisation of $2.8 billion should earn $200 million to $300 million a year.

And he notes that the airline's difficulties go back several years.

"I think the company has turned around the disappointments and it's going to be positive from that perspective, but there's still a lot of challenges ahead for them to deliver earnings that are going to support the current share price."

Going ahead, Mr Mercer believes the challenge for Air NZ will be bedding in its restructuring plan. The change in November to a no-frills domestic service for cheaper prices are to him a marketing exercise, as comparative prices were already on the market.

What he does see as real changes are staff changes, a pending fleet upgrade, and the airline's currently testy relations with travel agents. Also, how easily the customer can access a cheap flight.

"I think that's the real challenge for 2003, that they can move through the changes in November and go through the summer substantially ahead of what was outlined in the restructuring plan."

It will also have to fend of Qantas which plans to match Air NZ's cheap fares without cutting its inflight perks.

Whatever the result, the only thing which is likely to fire the sharemarket is an announcement about Air NZ's talks with Qantas over a cornerstone shareholding.

The 82 percent government-owned airline frustrates many brokers because so few shares are available to the public and one institutional owner in particular driving the share price.

"It's a good example of market inefficiency with a lack of liquidity being the catalyst," said Sam Macdonald of DF Mainland.

Meanwhile, it's anyone's guess at to whether Wednesday will see an announcement on Qantas. Over the weekend, Peter Gregg, Qantas' chief financial officer, said talks between the two carriers were "still intense."

"The intent is to complete this as soon as we can, but it has to be a deal that both parties are very happy with," he told a television business show.

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