Analyst warns Air New Zealand may be in for more pain

Thursday 31st January 2019

First NZ Capital analyst Andrew Steele warns Air New Zealand's earnings may come under more strain if the airline's weaker-than-expected bookings are a sign of consumer malaise.

The national carrier yesterday downgraded its annual earnings outlook, citing ongoing global woes with certain Rolls Royce engines that have disrupted schedules. Air New Zealand also noted revenue growth will be lower than expected due to smaller increases in the domestic market - where the airline dominates - and softer inbound tourism.

FNZC's Steele said he was surprised by the size of the downgrade, given the turnaround in the fuel market. He said the airline's December operating statistics showed negative yields on both long- and short-haul routes in a peak period for the carrier.

"Company commentary highlighting domestic leisure weakness is particularly notable, suggesting increased risk of broad-based consumer weakness," Steele said in a note to clients.

"While we note that the company has commenced a review of its network, fleet and cost base, we believe the combination of Air New Zealand's high operating leverage and a potentially softening NZ consumer environment increase the risk of further earnings downgrades."

Analysts will get an update tomorrow when the ANZ-Roy Morgan consumer confidence survey comes out. The previous survey showed a pick-up among consumers in the lead-up to Christmas, although retail spending during the typically busy Christmas/New Year period has been disappointing.

Ministry of Business, Innovation and Employment tourism spending figures out today show $4.178 billion was spent on passenger transport in the year to November 2018, down from $4.187 billion a year earlier.

FNZC's Steele lowered his forecast for Air New Zealand's pretax earnings to $333 million for the year ending June 30 from a previous prediction of $386 million. Air New Zealand cut its forecast for pre-tax earnings to $340-400 million, and pared back capacity growth.

The airline has also put spending under the microscope. This comes at a time when the company recently came under pressure from its engineers to increase pay and maintain existing work conditions.

Strike notices were issued by E tū and Aviation and Marine Engineers Association members in the run-up to Christmas, which threatened to disrupt 120,000 travellers during one of the airline’s busiest periods. An agreement meant industrial action was averted.

Air New Zealand is seen as a company with good management-union relationships. The company uses a high-performance engagement framework to work with unions to find operating efficiencies, saying the goal is to lift wages and improve working conditions.

E tū's head of aviation, who goes by the single name Savage, said many of the areas Air NZ is reviewing in terms of cost savings don't directly impact the union's 5,000 members.

"However, we will keep in touch with senior management so we understand any implications for airline operations and union members."

FNZC's Steele said the airline's guidance for an unchanged interim dividend of 11 cents per share was sustainable for the rest of the year.

Air New Zealand shares were unchanged at $2.83 as at midday today, having slumped 13 percent yesterday. Steele lowered his price target to $2.75 from $2.85 and upgraded the rating to 'neutral' from 'underperform' given market pricing reflected a more balanced risk-reward-profile, he said.

(BusinessDesk)

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