Researchers say fuel will erode Air NZ profit

Air New Zealand is well placed to weather the fuel crisis affecting airlines around the world but it may come at high cost with slashed profits and a period of no dividends, a research report by brokers ABN Amro Craigs says.

Last year's after tax profit was $221 million but this year increased fuel costs are expected to be the main contributor to a 48% decline in profit to $112.8 million, followed by a further decline the following year to $95.5 million, the research forecast.

Airlines world-wide are facing a "perfect storm" of macro-economic problems from the recent record oil prices, global credit crunch, inflation and slowing in tourism growth - all compounded by increasing competition in the airways, ABN broker Chris Timms said when contacted yesterday.

"Air New Zealand is well placed in a difficult market, where others have fallen, to weather the storm. But it will be eroding cash and we are forecasting no dividend," in 2009-10, Mr Timms cautioned.

He highlighted that Air New Zealand was a trading stock "for the less cautious investor" which had "aggressive movements" and plenty of reasons for volatility.

However, trading around $1.23, the stock had "found a floor' and ABN has initiated a "buy" recommendation, with a 12-month target price of $1.77.

In August 2006, the stock was $1.12 and by June last year trading around $3.10, to a low of $1.07 in May this year.

Mr Timms said despite the forecast decline in profit to almost $113 million, which was well below other analysts' consensus of $134 million profit, by the end of this year Air New Zealand would be debt-free.

A strong balance sheet with about $1 billion in cash, before debt is paid off, meant by the end of the year Air New Zealand would be able to use some of the cash maintain its business and capital expenditure programmes.

Delivery delays of the new 787-9 aircraft meant Air New Zealand had little new capacity coming into service during the next two years.

Its mixture of plane deliveries, plane purchase options and leasing maturity dates meant it could react to either increasing or decreasing capacity demand.

The arrival of Pacific Blue was still a concern for Air New Zealand, but Mr Timms said Pacific was relying on highly discretionary leisure travellers which would be a harder market as the economy slowed.

With fuel from oil at prices of more than $US100 per barrel airlines had to deliver lean and cost-efficient operations, offer excellent customer service and strong branding, which was "arguably" the Air New Zealand business model, Mr Timms said.

Air New Zealand is due to release its full-year to June report at the end of August.

Mr Timms' financial disclosure document is available on request.