Air NZ's Houston service paves the way for partnership with United Airlines, analysts say

Air New Zealand's [NZX: AIR] new direct service to Houston, Texas, could pave the way for a potential partnership with American-based United Airlines that would help fend off competitors on routes between New Zealand and North America, market analysts say.

The airline confirmed yesterday it would begin flying between Auckland and Houston up to five times a week from December. It hopes the hub destination will attract more American tourists to New Zealand and make it easier for Kiwis wanting to connect to other destinations in the southern and eastern states.

Air New Zealand will code share with Star Alliance partner United Airlines from Houston to other key destinations in the US and beyond, including the Carribean. Houston is a key hub for United Airlines which has the majority of outbound seats.

Forsyth Barr head of research Andy Bowley said Air New Zealand was highly likely to do some form of United joint venture at some stage in the next few years.

"It would be a barrier to entry from United doing it on its own or another North American carrier coming across the Pacific," he said.

In a research note out today entitled 'Houston, we have lift off', Macquarie Research analysts Nick Mar and Warren Doak said a potential partnership with United Airlines would be a good outcome in making routes to New Zealand less attractive for Oneworld airlines, such as the Qantas Airways/American Airlines partnership, while maintaining profitable yields.

"At present, Air New Zealand has a monopoly over North American routes and we think this remains a key risk to its profitability," they said in the research note. "With low fuel prices, the direct costs of establishing service on from North America to New Zealand is reduced, however, there still remains a relatively large lead time to generate forward bookings as well as stimulating ongoing demand for such a service."

The key issue would be Air New Zealand having confidence that the quality of the service provided by United was similar to its own. That's already worked out well in terms of the similar partnerships the New Zealand carrier already has with Singapore Airlines and Cathay Pacific.

Air New Zealand and Singapore Airlines launched their alliance in January with the Star Alliance carriers operating one return service each per day on the Auckland-Singapore route and Singapore Airlines operating a daily return service between Christchurch and Singapore.

The alliance's goal is to grow their existing capacity between New Zealand and Singapore by up to 30 percent, year round, over time.

The New Zealand airline also has a strategic alliance with Cathay Pacific on flights between Auckland and Hong Kong and with Virgin Australia on trans-Tasman flights.

Air China is due by the end of the year to launch a daily direct service to Auckland from Beijing and the two national flag carriers aim to double capacity between China and New Zealand under an alliance which is subject to regulatory approval. Air New Zealand axed its direct twice-weekly Auckland to Beijing services in mid 2012 after heavy losses.

Macquarie said the announcement on Houston, coupled with an earlier decision to begin flying direct to Buenos Aires, Argentina, in December, joins the dots on how Air New Zealand intends to deploy the additional capacity created by the 12 Dreamliner aircraft it has taken delivery of or has on order. Five of the additional aircraft will replace its 767s while one will be deployed for growth in Singapore, one to Buenos Aires, and 1.5 to Houston.

The remaining capacity could be soaked up on general expansion to other routes and Buenos Aires and Houston eventually going daily if demand warrants it, they said.

Macquarie rates the stock an outperform and has bumped up its target share price for Air New Zealand from $3 to $3.20. The stock is currently trading at $2.79.

Forsyth Barr also has a positive rating on the stock.

"There is more to go on the current earnings up-cycle, not least from fuel price depreciation which looks like it will be staying a bit longer." Bowley said.

(BusinessDesk)