Opinion: Air NZ will fly above trans-Tasman bloodbath

By Rachel Pannett of NZPA

Friday 5th August 2005

Qantas offshoot Jetstar this week dealt the killer blow to the nostalgic ideal of "flying the friendly skies", announcing it will compete on the cut-throat trans-Tasman route.

Red ink spattered the tarmac at Christchurch Airport after Air New Zealand subsidiary Freedom Air and Virgin-owned Pacific Blue quickly matched Jetstar's $39 one-way fares to Sydney, Melbourne, Brisbane and the Gold Coast from December.

The war of words erupted, with Pacific Blue distributing flyers saying: "Small tip: anyone can match a low fare, but when it comes to service you're going to have to... UP YOURS".

As the sideshow events wind down and the airlines face up to reality - how well placed is Air New Zealand to cope with the increased competition from across the ditch?

Spiralling oil prices and a lower kiwi dollar have grounded the national carrier's share price in recent weeks. At today's price of $1.27 the Government is well out of pocket after spending $1 billion to save the airline from bankruptcy in 2001.

The shares underwent a five-for-one consolidation in August last year. On that basis, the Government paid an average of $1.30 per share for its 81% stake.

Compared with a high of $3.03 (in today's terms) in May 2002, when Air NZ announced a "no frills" revamp of its domestic services, it looks like the Government bought a glider not a Boeing 787.

But Don Keene, ratings agency Rapid Ratings' New Zealand director, says the low share price is unjustified.

"Our view is that it is undervalued. When we do the comparison with its peer group, Air NZ is currently performing in the top quarter of airline companies around the world," Keene said.

"When people say: `look at the bloodbath across the Tasman' - the trans-Tasman is not the vast bulk of Air NZ's business. Domestic is the bulk of Air NZ's business. They are the dominant player."

Rapid Ratings has an A4 rating on Air NZ, ranking it in the top 16% of aviation stocks worldwide, and a "strong buy" recommendation on the stock.

"We think the sharemarket has not recognised the improved performance of Air NZ following the capital investment by the Government," Keene said.

He says Air NZ has a vested interest in talking its share price down ahead of another attempted tie-up with Qantas.

"The management of the company are downplaying the company's prospects and reducing expectations because they have a strategy for getting into bed with Qantas that they haven't yet given away, " Keene said.

In June, Air NZ trimmed its forecast full-year operating profit by 8% to about $220 million before tax and unusual items, blaming high fuel prices, which account for about 20% of its costs.

"They are forever coming out in the media and saying the price of fuel is causing all these problems and: `we are bit worried about loadings overseas and the international business is weak'," Keene said.

"But the reality of life is that with the bailout from the Government they are now performing at an extremely satisfactory level, compared to other airlines.

"If the Government were to sell out any portion to Qantas at the moment, then the Australians would get the benefit, not New Zealand."

Air NZ is likely to remain state-owned regardless of who wins the election, although the major parties won't rule out selling a partial stake to another airline.

National's finance spokesman John Key says if his party wins, it will consider approaches from airlines interested in taking a stake.

He says Air NZ has gone "from strength to strength" over the past three years due to a combination of the security of government capital, "world-class" management, and the discipline demanded by external analysts.

Air NZ could be in for a bit of turbulence when outgoing chief executive Ralph Norris disembarks following the annual result release on August 31.

In under four years, Norris has piloted the airline from near collapse to its current stable position. He is confident his work is done, and analysts say there are several contenders for the top job within the current management team.

Norris' parting manoeuvre was a merger of Air NZ and its budget subsidiary Freedom into a single operating company, aimed at slashing costs by 10%.

The proposal involves placing the entire Airbus A320 fleet into one group to service Air NZ's and Freedom's trans-Tasman and Pacific Island operations.

Freedom this week tried to deflect some of the attention away from Jetstar's arrival by showing off the new business class seats in its A320 planes - a perk of the merged operation that gives Freedom one up on the competition.

Peter Sigley of Goldman Sachs JB Were says this week's fare price war will have a limited shelf life.

"These fares should be looked at as what they are, which is pretty much a publicity stunt, promotional activity by Jetstar.

"If you look at the long term economics, particularly with fuel prices where they are at the moment, you absolutely wouldn't be able to sustain those fare levels and make a profit."

He says there is room for three low-cost players on the trans-Tasman route.

"They're all owned by airlines that are well capitalised - they do have sustainable business models. Over time you'd expect competition to normalise.

"From time-to-time you'll see skirmishing around fares, but I think they can probably last in the market, all three of them."

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