Sharechat Logo

Air NZ's market dominance underpins credit ratings, Moody's says

Tuesday 4th October 2011

Text too small?

Air New Zealand, the carrier three-quarters owned by the government, can rely on its dominance in the domestic market to support its credit rating, according to Moody’s Investors Service.

The 80% of the New Zealand passenger market controlled by Air NZ “is the most supportive single factor” of the airline’s Ba1 underlying credit rating, the international rating agency said in a Sept. 29 credit opinion.

The government ownership of the airline bolsters the rating to an investment grade Baa3, as there’s implied support if the company fell over.

“The strength of Air NZ’s market position was shown in its sustained profitability over the past several years (albeit with somewhat weakened profits in the most recent financial year),” the report said.

Still, that reliance on the local market is also a hindrance for the airline, exposing it to weakness in New Zealand’s economy, Moody’s said.

Moody’s put Air NZ’s rating on a negative outlook in March, saying the Christchurch and Japanese earthquakes, and rising fuel costs created uncertainty for the airline’s earnings.

Though that volatility remains, the rating agency is now more optimistic that these risks are diminishing and conditions are more stable.

The airline posted a loss of $37 million in the six months ended June 30, with natural disasters wiping about $70 million from its full-year earnings.

Air NZ’s ability to cut costs impressed Moody’s, which said the airline’s lower fuel burn and cheaper labour costs showed an improving trend. Still, fuel costs remain the biggest variable, and account for about a third of the airline’s operational expenses.

Moody’s said it expects Air NZ to show a better debt-to-earnings ratio in the coming year as it cuts capital expenditure, though that wouldn’t go far enough to push the airline’s underlying rating to investment grade, which would require a “significant debt reduction.”

The airline raised $150 million through an unsecured unsubordinated bond issue last month, paying annual interest of 6.9%. The bonds traded today at 99.50 cents in the dollar.

Moody’s also cited the airline’s liquidity as a strength and expects Air NZ to generate between $550 million and $600 million in operating cash flow over the coming 12 months.

The shares haven’t traded today, and were last at $1.09, having shed 27% this year.

  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