Sharechat Logo

Air NZ deal gets big tick from business analysts


Tuesday 26th November 2002

Text too small?
Analysts say the Qantas-Air New Zealand alliance may well be a good business deal for the New Zealand carrier but its chances of regulatory success are dicey.

Qantas wants to take a 22.5 percent stake in the New Zealand airline, but the deal must gain approval from the governments, shareholders and competition watchdogs on both sides of the Tasman.

The move gives cash-strapped Air NZ $550 million and vital feeder access into Australia, access that it lost after the crash of its Australian subsidiary Ansett last year.

But critics are fearful the New Zealand carrier will lose its autonomy and that passenger and freight prices will rise due to a lack of competition.

Salomon Smith Barney analyst Jason Smith believed there was little chance of the proposal getting through unchanged. But he believed the deal had been devised in such a way that if a large part got through, it would remain viable.

"If its gets through and it's not meaningfully altered ... then you have to think, there is a substantial amount of upside for both Qantas and Air New Zealand," he told the Australian newspaper.

But Forsyth Barr analyst Rob Mercer was predicting a tough fight to get the deal approved.

"At the moment, what we see in front of us is certainly good for shareholders. The question's going to be, is it good for New Zealand and is it good for the public?"

Mr Mercer said the deal was positive in terms of protecting Air NZ's market position, stabilising its earnings and enhancing its ability to react faster to major cost fluctuations such as fuel and currency.

It would also help Air NZ reduce its debt, although it still had debt obligations through aircraft leases.

"Air NZ's debt levels are too high to confidently cope with any degree of shift in their costs ... They need to raise capital to mitigate the financial risk further. They've also stabilised their earnings environment for themselves ... in terms of scheduling and pricing and marketing."

Air NZ would also have the scope to be more aggressive in terms of attracting increased tourism numbers into New Zealand."

"You can't blame them for trying. I just think the situation's going to be a lot tougher and perhaps six to nine months (for an outcome) is optimistic."

Mr Mercer said the companies had their work cut out to prove the deal would not be a deterrent to existing or would-be competitors like Origin Pacific and Virgin Blue.

But he said the state's Kiwishare agreement with Air NZ gave the Government wide powers to ensure brand and market positioning and even to compel the airline to fly certain routes.

A benefit statement giving more details about the deal's effects on Air NZ was due out in a couple of weeks, he said.

Australian analysts estimate that the returns on Qantas' investment would be nearly double the cost of the capital.

Merrill Lynch analyst Simon Gresham said it was a logical step for both companies and the deal's success through the regulators was "more likely than not, but definitely not a certainty".

Credit Suisse First Boston said approval was "doubtful in its current form".

The firm has kept its market rating on Air NZ at "underperform" but believes it has potential for a higher valuation.

It said the 44.5c which Qantas proposes to pay for its shares was more in line with the firm's own valuation than the airline's current 53c share price.

Credit Suisse has a 12-month price target on the stock of 49c, but said competition approval would add 5c to 7c to that valuation.

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

Air NZ plans to raise stake in Virgin Australia to 25.9 percent after gaining approvals
Air NZ keeps balance sheet plump, holds back on dividends as fleet renewal looms
Air New Zealand plans to close Auckland maintenance facility, cut 180 jobs, union says
Air NZ's Safe Air unit cuts 84 jobs in Blenheim as contracts end
Air NZ agrees to settle cartel case, expects earnings at upper end of guidance
Air NZ lifts stake in Virgin Australia to 23 percent , may creep up to 26 percent
Air NZ backs down on challenge to cargo suit against regulator
Air New Zealand reviews Japan flights as decline in yen makes travel more expensive
Ex-Foodstuffs boss Carter to head up Air NZ board
Air NZ shares jump 5.6 percent as airline flags annual earnings to more than double