Air New Zealand was expected to manage its way confidently through the challenging environment of higher fuel prices, Forsyth Barr broker Ken Lister said yesterday.
The national carrier was expected to emerge in a stronger competitive position, even though the rapid increase in fuel prices was hurting short-term earnings.
"There is nowhere to hide from the current high fuel price and Air NZ, along with other airlines, will continue to raise air tickets in the immediate future.''
A virtually debt-free balance sheet, the recently-completed fleet upgrade and a top-quartile product on key routes left the company in a comparatively strong position, he said.
Because fuel was a larger proportion of the cost on long-haul routes, a high oil price tended to defer the threat of new entrants or surplus capacity being introduced, particularly from low-cost carriers.
The fleet upgrade gave Air NZ a better chance at recovering the higher fuel cost through yield management, particularly with business and premium economy fares.
If Air NZ had a poor product it would be more vulnerable to an increase in the fuel cost, Mr Lister said.
"While lifting yields may not fully recover the impact of the fuel cost in the short-term, as soon as the fuel price corrects, it can provide a substantial boost to earnings in the following year.''
The group-wide performance was impressive for the nine months to March 31. Passenger growth increased by 5.9%, revenue passenger kilometres (RPKs) increased by 11%, outpacing the growth in seat capacity of 5.7%, and load factors were up 3.9% to 80.2%.
Long-haul had been the main driver of passenger growth and yield. Short-haul, which included transtasman, Pacific Islands and New Zealand domestic services, was slightly under-performing because of increased competition on the New Zealand domestic market.
However, Forsyth Barr had lowered its full-year 2008 and beyond forecasts with part of the lower profit being due to softer domestic numbers as well as pushing fuel costs higher, he said.
Air NZ was forecast to report a full-year profit this year of $141.5 million, down from $221 million in 2007. Profit was forecast to fall to $105.8 million in 2009, but rebound strongly in 2010 to $180.2 million.
Forsyth Barr valued Air NZ at $2.33 a share. It last traded at $1.19.
- Ken Lister's disclosure statement is available by request from Forsyth Barr.
