Air NZ shares edge up as earnings outlook hangs over record 2016 result

Air New Zealand’s [NZX: AIR] shares have bounced around in sharemarket trading today despite reporting record full-year earnings as the country's largest airline warned of an earnings drop ahead due to growth in international carriers also wanting to cash in on New Zealand’s tourism boom while fuel prices remain low.

The shares were recently up 0.5 percent at $2.24, having traded between $2.155 and $2.27 since trading opened today.

Air New Zealand reported record financial results for the year ended June 30 with earnings before other significant items and tax up 70 percent to $806 million, while pre-tax profit rose 40 percent to $663 million, and operating revenue increased 6.2 percent to $5.2 billion.

Chief executive Christopher Luxon said there were three key drivers beyond New Zealand’s tourism boom, that drove the airline to its best full-year earnings in its 76-year history: lower aviation fuel costs; 25 percent fuel consumption savings from its investment in more fuel-efficient aircraft; and a better understanding of its customers, including which markets to hit and how to go to market in foreign ports.

However, analysts expressed concern at the wide range of the outlook for the 2017 financial year, with the airline forecasting increased competition was likely to see operating earnings drop in a range of $400 million to $600 million, with the mid-point materially below analysts’ consensus estimates.

“It won’t be another record year but it will still be a good result. We have to adjust to a big number of competitors coming in and help demand get caught up with supply,” Luxon said.

New competition includes American Airlines flying direct across the Pacific to the US and Emirates increasing long-haul capacity to New Zealand, Tianjin Airlines starting services to Auckland from December, Qatar Airways due to start services early next year, AirAsia X which has begun flights to the Gold Coast and Malaysia, and China Eastern flying to Shanghai. 

Short-term, Air New Zealand can easily adjust capacity on its short and long-haul routes according to demand, he said. “We have begun exiting our remaining Boeing 767 fleet and will continue to focus on achieving greater efficiencies from our simplified fleet structure and across our business, which will partially ease some of the pressure on earnings,” he said.

Luxon sounded a warning about the continued growth of the country’s tourism industry over the medium term, which he said is at risk unless New Zealand proactively works on resolving key capacity issues and ensures adequate investment in support infrastructure such as public facilities, car parks, public transport, and hotels.

Two key trends impacting the airline are digital disruption and increased personalisation and Luxon said the airline had created a new Digital function to ensure its data and analytics help it develop more customised products and services.

Air New Zealand lifted capacity by 12 percent during the year across its network and international passenger numbers rose 16 percent after it launched three new services to Houston, Texas, Buenos Aires in Argentina, and Ho Chi Minh City in Vietnam.

Growth came across all markets with passenger revenue up 8.9 percent to $4.5 billion. The airline wouldn't break down numbers for its new routes, although he said Australians from Melbourne travelling via Auckland accounted for 40 percent of passengers to Buenos Aires, while the Houston route had opened up the market to Americans in the north-west, east coast, and south who had previously thought it was too far to fly to New Zealand.

The airline also doesn’t provide a regional revenue breakdown but notes to the accounts show a revenue analysis by geographical region of original sale. In New Zealand that was $2.98 billion compared to $2.91 billion the prior year while passengers carried domestically rose to 9.7 million compared to 9.2 million in 2015.

Luxon said Air New Zealand wasn’t concerned about its domestic market share after Qantas’s low-cost offshoot Jetstar started competing on regional routes last year but he wouldn’t be drawn on numbers. Earlier this week Jetstar New Zealand reported a 21 percent rise in passenger numbers to 2.1 million.

Air New Zealand’s big gains were in the America/Europe markets, with America revenue by region of original sale at $831 million up from $702 million the prior year and UK and Europe at $330 million from $286 million the prior year. Passengers carried in both markets rose to 1.13 million, which is up 341,000 in the past five years.

Revenue from original sale in Asia was $470 million, compared to $381 million the prior year and passengers carried rose to 791,000 from 642,000 in 2015. 

Aircraft capital expenditure is expected to be $2.1 billion over the next five years.

Significant items of $143 million had an impact on the results, and included $83 million in writedowns on the carrying value of its 25.99 percent shareholding in Virgin Australia after selling down to a stake of just 2.5 percent during the financial year, and $57 million in legal costs and settlement of a class action compensation claim in the US relating to global airline anti-competitive conduct in the air cargo business.

Shareholders will be rewarded with a one-off special dividend of 25 cents per share on the top of a final dividend of 10 cents per share, which will see the government reap around $260 million in total dividends.  Around 8,500 employees will next week be paid a company performance bonus of up to $2,500 for those not covered by other incentive programmes.

(BusinessDesk)

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