Air NZ joins global slide in airline stocks, touches 2 ½-year low, as bookings fall

Monday 12th December 2011

Air New Zealand shares fell to their lowest level since mid 2009 as faltering global economic growth reduced demand for travel and eroded airline margins.

The stock fell as low as 91 cents today, bringing its decline this year to 39 percent, having traded at $1.53 in January. The stock price weakness is in step with regional rivals – Qantas Airways has fallen 37 percent and Singapore Airlines is down 34 percent.

“It’s a tough environment for all airlines - it is a very hard industry to turn off the cost tap,” said Craig Brown, senior investment analyst at One Path New Zealand. “Airlines themselves are a volatile business, people either love them or hate them.”

Air New Zealand’s forward bookings have been hurt by economic uncertainty in a number of markets, rising fuel costs and a slow recovery in the Japanese market following March’s earthquake and tsunami, according to an investor presentation last month.

The airline posted a loss of $37 million in its second half ended June 30, when flights were disrupted by earthquakes in Canterbury and Japan, leading to unprofitable ‘compassionate’ fares for Christchurch residents. The profit outlook has dimmed for airlines worldwide.

The International Air Transport Association (IATA) last month cut its forecast for airline profits in 2012 to $3.5 billion from $4.9 billion and said their net margin would shrink to 0.6 percent from the 1.2 percent it expects for 2011.

IATA said the Euro zone’s debt crisis “puts severe downside risk on the 2012 outlook.” Should the region’s woes result is recession and another blow-out for banks, the global aviation industry could suffer losses exceeding $8 billion in 2012, IATA said in a report posted on its website.

Carriers in the Asia-Pacific region may post combined 2012 profit of $2.1 billion, a decline from 2011 but limited by high load factors in markets such as China, the world’s fastest-growing major economy.

Auckland-based Air New Zealand told analysts and investors last month that it is aiming for a $110 million profit improvement by 2015 from long-haul flights, which are now an under-performing part of the company.

The airline’s strategy is to focus on in-flight products and services, deployment of the new Boeing Dreamliner and cost cutting, including through alliances such as the partnership with Virgin Blue. It is exploring opportunities in new markets in South America, Asia and North America, as well deepening its network into China.

One Path’s Brown said the airline remains an attractive model especially in New Zealand but competing on global routes is not easy.

Air New Zealand is among businesses the government has flagged for a sell-down in this term, with the potential sale of a quarter of the shares, reducing its holding to about 50 percent from 76 percent. The government would reap about $252 million from the sale at today’s price.

The stock is rated ‘outperform’ based on a Reuters survey of seven analysts.

BusinessDesk.co.nz

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