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Travel operators wait for normality

By Peter V O'Brien

Friday 3rd September 2004

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The possibility of more international terrorist attacks and similar events underlined the good results of tourism-related companies and their corresponding share price performances over the past year.

Performances ranged from reasonable (Sky City Entertainment Group) to excellent on a 12 months' basis, with the exception of Air New Zealand, which lost its first half gain in the second six months.

Consolidation of the airline's shares on a 5:1 basis was interpreted as an attempt to limit market price fluctuations that allowed traders to take high percentage gains on small monetary movements.

Auckland International Airport chairman Wayne Boyd qualified optimism about the current year when he said, "as always any projection must be qualified by the assumption of an absence of any material adverse events that could affect aviation markets."

Mr Boyd referred earlier to the previous year's comparatively low growth, which he related to terrorism in Bali, war in Iraq and the Sars outbreak in Asia, so his "material adverse events" comment was based on international situations.

CDL Hotels New Zealand chairman Hong Ren Wong had the same theme in the company's report for the six months ended June when commenting on the future outlook.

"Barring any major global events influencing world travel patterns, our hotel operations should continue to trade well in the second half of the year."

So they should. CDL is the country's largest hotel operator, having capitalised on the tourism industry's earlier lack of long-term planning of local hotels and then acquiring scarce resources.

News came in August that another room night shortage is looming. That was the case 10 years ago but little was done until people decided there was an opportunity and jumped aboard.

A glut resulted, deferring new projects, despite evidence that the period from initial investment to receiving first guests has always been no less than three years and usually more.

That point has been made in NBR discussions of listed tourism companies since 1993 at least (and further back in the 1970s and 80s), so it involved no hindsight wisdom.

Tourism Holdings' preliminary report for the year ended June also tempered optimism with caution about the future.

Chairman Keith Smith said THL started a comprehensive risk management programme, designed to identify and manage risks that could affect the company.

"Whilst some risks, such as incidents of world terrorism and wars, are outside of our control, there are both internal and external risks than can be identified and the negative impact minimised."

The comment showed THL had international events in its forward assessments, irrespective of ability to control them.

Sky City Entertainment Group's preliminary report for the year ended June was silent about possible international political and resulting economic earthquakes but the company would be aware of the issues, particularly in relation to its Australian operations.

Investors have been wary about Sky City, mainly for social reasons the company identified in the report.

Sky reckoned smoke-free restrictions from December 10, 2004 would cut earnings before interest tax, depreciation and amortisation negatively $10 million at the Auckland facility.

That equated to $27,500 a day, including Good Friday and Christmas Day.

A $20 note limitation acceptance for gaming machines was estimated "to have impacted pre-tax operating for the FY04 (June 2004 year) financial result by approximately $7 million."

That showed the staggering rate at which money can be moved through gaming machines. A reduction from a standard (non-casino) feed from $100 to $20 showed the play speed over many machines during the four subsequent feeds.

THL is the only "true" stock exchange-listed tourism company in terms of local and international depth, although the small New Zealand Experience is based on tourist attractions, while lacking THL's integration.

Inbound tourist numbers had healthy increases in the past year but the industry relied heavily on internal travel and holidaymaking, a point often overlooked in the financial media. Internal tourism is a massive business.

People considering investment in listed tourism-related companies must realise the industry is seasonal, including airlines and Auckland International Airport, although the airport and Air New Zealand have good off-peak season business. Seasonal operations emphasise the THL slogan "cash is king." Cashflow must carry companies through the downtime.

Tourist companies' share prices were static recently. They are likely to remain so, despite sound profitability, until an earlier lost normality returns to international travel.

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