Air New Zealand has signed a major aircraft order with
Airbus which will replace its Tasman and Pacific Island
fleet. Business editor Dene Mackenzie talks to Forsyth Barr
broker Andrew Rooney about the implications of the order for
the national carrier.
The new A320 planes will add capacity to Air New Zealand's
fleet. Photo from Wikipedia.
Investing in Air New Zealand is more about timing than
taking a long-term view, Forsyth Barr broker Andrew Rooney
The airline industry generated consistently low and often
volatile returns. While Air NZ was no exception, it had a
better track record than most of its international peers.
Strong management and the structural advantage of being based
in New Zealand, with a dominant local business, offered some
earnings support, he said.
The national carrier recently signed a major aircraft order
with Airbus to replace its Tasman and Pacific Island fleet.
Mr Rooney said Air NZ would buy 14 A320 family aircraft at an
estimated price of $1.4 billion.
The ongoing fleet renewal programme, which included the
introduction of the first B787-9 later this year, was
extended to the 2020 financial year.
''The replacement of the current Tasman and Pacific Island
capacity with new A320 aircraft offers Air NZ a financially
superior outcome than retaining the existing fleet, in our
''In light of management's fleet renewal track record we are
trusting, despite not knowing, the full financial impact of
the deal and that of the capacity it replaces.''
The fleet changes had no impact on Forsyth Barr's
''explicit'' earnings for Air NZ, given their long-term
nature, Mr Rooney said. The broker had an outperform rating
for the airline.
The airline did not disclose aircraft purchase details,
rather acknowledging the purchase price included a standard
airline discount on the list price of $NZ1.6 billion.
Forsyth Barr estimated the standard airline discount
typically amounted to between 20% and 30% but in the latest
purchase, the discount was likely to be at the bottom end of
the range given the success of the A320 aircraft family, Mr
Forsyth Barr analysis suggested the list price of the
aircraft was $1.7 billion, rather than the $1.6 billion, at
an exchange rate of US85c. Applying a 20% discount, the
estimated price came in at $1.4 billion.
Notwithstanding some uncertainty on the price and payment
method, the new Airbus order had three key implications for
• Increased capacity. In combination with the existing fleet
renewal programme, including the delivery of 10 B787-9s, the
new Airbus order would help expand capacity by 23% for
international and 20% for the domestic jet fleet by 2020.
• Lower fuel burn. The new A320 would deliver a 15% fuel
saving compared to the older A320, equating to an annual
saving of $25 million to $40 million.
• Reduced average age of the fleet. The average age of the
Air NZ's jet fleet would fall from about 9.4 years to 7.2
years in 2020. The oldest aircraft in the jet fleet in 2020
would be the B777-200ER.
Air NZ had committed itself to operating an exclusive Airbus
fleet for short haul and domestic trunk routes.
In contrast with the favourable solution to jet fleet
renewal, management would need to resolve a key strategic
issue concerning its ageing regional fleet, Mr Rooney said.
The current international narrow body fleet was not old at an
average age of less than eight years. However, most leases -
typical duration of 10 years - were coming up for renewal.
Air NZ was taking advantage of a favourable funding backdrop,
strong demand outlook and attractive aircraft pricing in its
replacement programme, he said.
Commercial twin-prop aircraft smaller than the ATR72 (69
passengers) or Q400 were no longer being manufactured. As the
ageing Beech 1900D (19 passengers) fleet was retired, Air
NZ's ability to service many regional centres might be