Moody's upgrades Air NZ credit rating on new approach to leases, low jet fuel prices

Moody's Investors Service has upgraded Air New Zealand's [NZX: AIR] credit rating by one notch after changing its debt treatment of operating leases and on the prospect that cheaper jet fuel will assist the national carrier's earnings for the next two years.

The Auckland-based airline's rating was raised to Baa2 from Baa3 on Friday, with the rating agency maintaining a stable outlook. Moody's changed its approach capitalising operating leases, which led to a reduction in Air NZ's adjusted debt, and anticipates lower jet fuel prices and strong demand will underpin the airline's earnings over the next 12 to 24 months, it said.

"The upgrade also reflects Air New Zealand's strong operating performance of the last 12 to 24 months, and our expectations that the company's capacity growth and strong cost control measures will lead to improving margins for the carrier over the next 12 to 18 months," Moody's senior credit officer Matthew Moore said. "Moody's expects operating and cost improvements to result in ebitda (earnings before interest, tax, depreciation and amortisation) margins improving to around 25% versus the around 22% achieved for the last 12 months to December 2014."

Last month Air NZ said it expects to report normalised pre-tax earnings of between $520 million and $530 million in the 12 months ended June 30, up from $332 million a year earlier. The airline's first-half result was bolstered by cheap fuel and increased passenger numbers, a trend that carried on into the second half of the financial year.

Moody's said Air NZ's business model was unique among global carriers in that its domestic market share of about 80% was more than any other major carrier.

The rating agency said the rating could face downward pressure if there were a substantial increase in competition or if the airline's earnings deteriorate due to more expensive fuel or dwindling demand.

Qantas Airways' subsidiary Jetstar plans to expand its New Zealand offering with at least four new regional routes later this year, and Air NZ has responded by saying it won't be undercut on pricing.

Air NZ shares last traded at $2.57, and have advanced 4.1% this year.

(BusinessDesk)