Air New Zealand set for drop in growth

Newstalk ZB, NZ Herald,
Publish Date
Thu, 22 Aug 2019, 6:27PM
Air NZ is hoping that growth will come from a new service it will launch into Korean capital Seoul in November. (Photo / NZ Herald)

Air New Zealand set for drop in growth

Newstalk ZB, NZ Herald,
Publish Date
Thu, 22 Aug 2019, 6:27PM

Air New Zealand will rely on new long-routes to boost its growth this year as it sees flat demand in existing long-haul services and a contraction in domestic capacity as it trims frequency on main trunk routes.

The airline this morning announced pre tax earnings of $374 million, down 31 per cent from $540m for the year to June 30 as fuel cost pressures and weaker demand in the domestic leisure segment continue to impact the airline's profitability.

Net profit after tax also fell 31 per cent from $390m to $270m.

Speaking at an analyst briefing after the results announcement departing chief executive Christopher Luxon said he believed there was still a number of profitable growth opportunities for the airline to pursue.

"This year demand growth will mainly come from stimulation of new long-haul markets."

The airline said in March that it had revised its new capacity growth to around 3 to 5 per cent over the next few years and Luxon said it expected capacity growth to be 4 to 5 per cent in its 2020 financial year.

It is hoping that growth will come from a new service it will launch into Korean capital Seoul in November and the ramping up in frequency of flights to Chicago and Taipei to five times a week.

Luxon said it was also expecting growth from its Singapore route and a new Christchurch service which would commence in December.

"This growth is tapping into pockets of new demand. But the rest of the long-haul market is essentially flat," he said.

In the domestic market Luxon said the airline expected to contract its capacity slightly this year as it made targeted frequency adjustments mainly on the trunk routes.

"We are very comfortable on that decision as have had significant growth in those markets over the last five years and we can now fine tune the schedule to reflect the current demand and manage our revenue effectively."

On the Tasman and its Pacific Island routes Luxon said growth was mainly coming from its Wellington and Queenstown to Brisbane services.

But he remained confident about the year ahead.

"I'm confident we have the right mix of growth in our various markets to help drive improved profitability in the year ahead. But we are always able to adjust if necessary."

The airline is forecasting before tax profit of between $350m and $450m.

Mohandeep Singh, an analyst with Craigs Investment Partners said the forecast range was wide enough for a bus to drive through but was typical for an airline when so many factors were out of its control.

The airline's profit was hit by a $191m fuel cost expense after the price rose.

Singh said the result was in line with expectations and better than Air New Zealand's May forecast of a before tax profit exceeding $340m but that had been down-graded from a range of $340m to $400m.

The share price initially dipped 1c on the profit announcement but bounced back by lunchtime. By 4pm it was up 2.5c to $2.755.

Singh said if you took away the volatile aspects of the result Air New Zealand was doing a good job in controlling its costs on a per unit basis and they were continuing to come down.

In March the airline said it would cut $60m in costs of the business over the next two years.

"Unfortunately a lot of what distorts the performance is out of their control," Singh said pointing to currency fluctuations, oil price and consumer sentiment."

Shane Solly, a portfolio manager at Harbour Asset Management, said Air New Zealand was clearly positioning itself for a lower rate of growth than it had seen in the past.

"They are going from being a quite rapid growth business to lower growth."

"It's bit of a drop in altitude."

But he said the airline was well-capitalised and had been investing in its fleet which put it in a good position compared to competitors.

Air New Zealand said it would pay out a full year dividend of 22 cents per share in line with last year.

But Singh said Air New Zealand was really a growth stock and if investors began to see its growth slow investors could begin to pull out.

"Airline profits are cyclical and they will hurt like everyone else will."

Singh also pointed to the uncertainty of having a new chief executive. Luxon finishes in the top job next months and has appointed chief financial office Jeff McDowall as its interim chief executive.

"That will be making people a bit nervous there as well." He said Luxon had been a highly successful chief executive and would have hard boots to fill.