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Daily ShareChat: Air New Zealand

By Jenny Ruth

Thursday 20th January 2011

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 Jenny Ruth

The trans-Tasman strategic alliance between Air New Zealand and Virgin Blue is a major positive for both airlines, says Rob Mercer at Forsyth Barr.

"We believe the alliance to be one of the most significant initiatives for Air New Zealand because it strengthens its competitive position in Australasia and finally gives it access, via Virgin Blue, to the Australian domestic market," Mercer says.

His early assessment is that the alliance will boost Air New Zealand's base annual earnings before interest and tax (EBIT) by between $15 million and $35 million. "The importance of the alliance is to increase Air New Zealand's return on capital across the cycle and potentially reduce its earnings volatility," he says.

As a result, Mercer has raised his forecast EBIT for the year ending June 2012 by $10 million to $400 million and his forecast for the following year by $26.5 million to $413 million. He has also raised his valuation to $1.98 a share from $1.82.

Other factors contributing to the airline's positive earnings outlook are further growth from long-haul visitor arrivals over the next few years, the introduction of new aircraft - B777-300 on long-haul flights and the A320s on New Zealand domestic routes - and the Rugby World Cup, he says.


Recommendation: Buy.

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