Air NZ on a roll with profits up

Another strong earnings statement from Air New Zealand has led to a substantial upgrade on the company from Craigs Investment Partners and a buy recommendation.

Broker Chris Timms said given Air NZ's momentum, it was likely investors would look to earnings to assess the company over the next 12 months.

Craigs lifted its target price to $3.40 a share from $3.10.

The shares last traded at $2.64.

After delivering growth of about 60% for 2015 financial year earnings before tax, Air NZ now expected first-half 2016 profit growth of at least 75%, he said.

''This run rate is well ahead of Craigs' and market expectations. This growth is being driven by buoyant tourism to New Zealand, allowing Air NZ to fill significant capacity expansion and maintain yields/load factors.''

A lower-fuel-price environment, low debt and an increasingly efficient fleet was adding to the story, Mr Timms said.

Air NZ had a price/earnings ratio of below 5% and was offering a yield of 9%.

Shares were currently trading at a discount to the target price.

In the financial analysis, Mr Timms outlined Air NZ now expected its first-half profit to exceed $400million, excluding any earnings from Virgin Australia.

Virgin Australia was expected to contribute positively to Air NZ's earnings this year, so its growth, including Virgin, could be even stronger.

Air NZ has a 26% stake in Virgin Australia.

''Given Air NZ has consistently achieved well above guidance over the past three years when it has given guidance this early, we would assume Air NZ is anticipating profit before tax of at least 10% above the minimum.''

It was likely Air NZ could be targeting a first-half profit of at least $440million, up at least 90% year-on-year, compared with the 2014 first-half profit of $332million and $525million last year, Mr Timms said.

In his address to the annual meeting, Air NZ chief executive Christopher Luxon said the airline's ambitions did not stop at three years of consecutive growth.

The company was investing $2.6billion in aircraft over the next four years, building one of the most modern fleets in the world.

''We continue to invest in, and focus on, providing a consistent and personalised customer experience. We are about a third of the way through a four-year $100million investment in our regional, domestic and international lounges.

"We continue to improve the ways our customers can interact with us, book their flights, check in and enjoy an end-to-end travel experience.''

Stronger commercial results would be achieved through growing and developing markets through the use of Air NZ's own fleet and network and in conjunction with alliance partners to expand a presence in the Pacific Rim, he said.

As well as being a win for customers, the simplified fleet was a win for Air NZ due to greater fuel efficiencies and operational efficiencies, enabling the airline to use pilots and crew across multiple planes and routes - along with the maintenance benefits of operating fewer types of aircraft.

Looking ahead, Mr Luxton said Air NZ planned to grow its domestic network capacity by 8% in 2016 through the fleet realignment and additional services between Auckland, Christchurch and Queenstown.

Demand was filling the additional capacity already, as seen by the August year-to-date performance when domestic capacity increased 7.4% and demand increased 7.2%.

There would be modest growth in 2016 across the Tasman and throughout the Pacific network.

The stake in Virgin gave Air NZ additional capacity share on the Tasman but also reached into the Australia domestic market through Virgin's extensive domestic network, he said.

''Our alliance with Virgin Australia is going from strength to strength and provides us with 51% market share on the Tasman.''

Next year would be an exciting year for Air NZ's international network when capacity would grow by 15%.

A lot had already been factored in with a full year of the Singapore route from January, Mr Luxon said.

Next year, Air NZ will fly to Houston five times a week and Buenos Aires three times a week.

The advance sales on both routes were going well and the airline was excited about the opportunities those two destinations brought to the network.

Those flights started in December this year.

Also, the airline would be in a revenue-sharing joint venture with Air China as they built the routes to Shanghai and Beijing.

''So, we are in for a very busy summer.''

 


At a glance

• Profit upgrade to more than $400million

• Target share price lifted to $3.40

• Capital spending on new fleet continues

• New routes promise exciting year ahead 


 

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