Air NZ's earning recovery prospects looking good

Air New Zealand's first Boeing 787-9 was tested in the skies above Seattle, Washington, this week...
Air New Zealand's first Boeing 787-9 was tested in the skies above Seattle, Washington, this week. Photo by AirNZ.
Air New Zealand, whose first Boeing 787-9 took to the air for the first time on Thursday, is expected to continue its earning recovery through 2014 and 2015.

Morningstar broker Scott Carroll said the New Zealand national carrier was expected to benefit from strategic alliances, fleet efficiency improvements and route rationalisation in long-haul.

Alliance benefits could take up to two years to fully materialise as scheduling and marketing arrangements were fine-tuned, he said.

The proposed alliance with Singapore Airlines on the Singapore-New Zealand route could deliver upside in the immediate future, if regulatory approval was secured.

''The alliance will significantly improve the airlines' Asian network and frequency to the region and offer new revenue opportunities from passengers flying to onward destinations with the partner.''

The Boeing 787-9 completed its first production test flight above Seattle, Washington on Thursday.

The aircraft, which was in Air New Zealand's signature black livery, is currently in the final phases of the delivery process before being formally handed over to the airline as the new owner. Air New Zealand is the launch customer for the Boeing 787-9 and has 10 of the stretch versions of the 787 on order.

This first test flight is known as a B1 flight where the two pilots put the aircraft through its paces thoroughly exercising its systems to verify performance while at the same time the functionality of every aspect of the cabin is tested in-flight.

Morningstar had raised its fair value estimate for Air NZ shares to $2 from $1.80. The change reflected a lower assumed cost of capital for the business, Mr Carroll said.

Morningstar had previously applied a weighted average cost of capital (waac) on Air NZ above its Australian peers.

''We now believe this is unjustified given the strong operational performance of the business and its dominant competitive position in the New Zealand market.''

However, a possible risk remained a reinvigorated Jetstar could aggressively add capacity to the New Zealand market. Airline duopolies could still be highly competitive, he said.

Morningstar retained its ''no moat'', or competitive advantage, rating for Air NZ, reflecting the competitive nature of the airline industry, minimal barriers to entry and low switching costs.

Airlines were capital-intensive businesses requiring ongoing fleet investment that could hinder returns. Historically, long-term returns in the airline industry had been poor.

For Air NZ, capital expenditure was expected to remain high through to the 2016 financial year with spending on new aircraft, including the wide-body Boeing 787s.

''Although we are supportive of the strategy outlined by management, we continue to expect long-term returns to be below Air NZ's cost of capital,'' Mr Carroll said.


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