Trying Times Ahead for Air New Zealand?

A report by the Centre for Asia Pacific Aviation (CAPA) says that despite its relatively small size in global terms, Air New Zealand has consistently performed well in recent years in a highly competitive marketplace. For 2008, the company announced a 1% reduction in net profit and a 24% fall in operating profit for the 12 months ended 30 Jun 2008. Its margins have been consistently positive over the past five financial years, which, the report says, is a credit to the current management team.

Air NZ ended the financial year in a strong cash position of NZ$1.3 billion, armed with a productive work force, a young fleet and a cost and revenue effective international and domestic network, according to CAPA.

Operating revenue was up 9.0%, while passenger numbers grew 5.6%—a yield improvement mainly due to currency fluctuations.

In the words of CAPA’s report, “Air New Zealand has achieved some mighty feats, battling much bigger competitors and suffering the geographic realities of a home base which is 3,000 km from its nearest neighbour.”

However, the report also notes that the airline’s shares have fallen 36% in 2008, which is more than double the 17% drop of the benchmark NZSX-50 index. It suggests that this probably reflects investors’ justifiable sense of foreboding about the outlook.

As with most other airlines around the world, much of Air New Zealand’s future will now be determined by factors over which it has no control: changing traveller preferences, the level of competition in the market, the ability of the airline’s Treasury division to meet the challenges of future fluctuations in oil, gyrations in currency markets and an economy that appears headed for recession. The strength of the New Zealand dollar against the US dollar has helped recently, but this certainly cannot be taken for granted in future.

The report says that several markets crucial to Air NZ are under threat. Pacific Blue is launching an aggressive trans-Tasman expansion next month (in addition to its domestic service roll-out), V Australia will commence trans-Pacific services with connections over New Zealand by the end of the year, and Thai Airways is likely to re-route Bangkok–Auckland services via Sydney or Melbourne. Such a move by Thai would be a significant blow to the local tourism industry and would stifle one of the better (and cheaper) access routes for European tourists to New Zealand. Emirates will also begin operating A380s to New Zealand from early 2009.

The CAPA report says that Australia remains Air NZ’s biggest strategic opportunity but also its greatest threat. An opportunity, it says, because of Australia’s size and importance as an inbound market—which still has considerable growth potential—but a threat because of the “scale advantage” of Australian airlines, which have much more capacity entering their fleets in future.

While Air New Zealand’s passenger numbers and load factors both continued to increase during the past four years, according to Air New Zealand’s CEO, Rob Fyfe, its load factors began to weaken at the end of the financial year, “as a result of increases in ticket prices introduced to cover higher fuel costs.” He added, “we are acutely aware of the need to stimulate demand and will continue to sharpen our domestic and short-haul prices.”

The CAPA report considers that in recent years, Air New Zealand’s strategy of making small, tactical changes appears to have succeeded in rebuilding the balance sheet after the Ansett collapse at the start of the decade, and with implicit government support, has laid a solid foundation for steady expansion. The report goes on to say that, “under the airline’s current management and New Zealand Government, no abrupt changes to the carrier’s current strategy are likely.”

Provided that the average price of fuel remains below US$140 a barrel, and with careful hedging and network plans, Air New Zealand expects to continue to operate profitably in 2008/09. However, according to CAPA, “large-scale competitive shifts in the aviation sector could overtake and further marginalise Air New Zealand over the medium to long term” and the report adds that, “an unfavourable combination of just a few of the external variables could see Air NZ turn quickly into negative territory.”