I recently covered Aukland Airport and from there it is only a small step to also cover Air New Zealand. It should be kept in mind that this is a completely different business compared to airports which in my view have a lower risk profile. So, Air New Zealand will be the subject of this report in which I will discuss the most recent earnings, the risks and opportunities and provide a stock price target as well as a rating for the stock.
Air New Zealand: Challenges To Revenues And Costs
The chart with the profitability waterfall is something that I do love, because it quite clearly shows how any changes in profitability due to revenues stacked against costs compared to last year. Total revenues climbed 7% to $6.75 billion NZD on a 17% increase in cargo and passenger capacity. Passenger revenues increased 11% to $5.9 billion NZD on a 23% increase in passenger capacity, showing that much of the capacity growth was offset by weakening in unit revenues. Passenger unit revenues decreased 11%. Cargo revenues declined 27% to $459 million NZD while contract services and other revenues remained more or less stable. This led a $400 million NZD lift to EBIT. However, this was fully offset by higher fuel costs driven by higher consumption and higher pricing, and higher operating costs including maintenance and labor as well as higher sales costs resulting in EBIT to decline 61% to $222 million NZD. Due to aircraft delivery delays, there was a $100 million NZD impact on the earnings.
On unit revenue decline of 11% decline in unit revenues excluding breakage of customer credits, the unit costs declined by 1.6% and increased by 0.6% on adjusted basis which excludes fuel price movements, foreign exchange rates and third-party maintenance to show the operating cost efficiency with unit costs with solely the fuel costs excluded increased 6%. So, what the results of Air New Zealand showed is what we see with many airlines and that is significant capacity additions to remain competitive with other airlines thereby eroding unit revenues.
What Are The Risks And Opportunities For Air New Zealand?
The risks and opportunities are the same for Air New Zealand as they are for other airlines. The risk to the top line is the continued weakening in unit revenues without benefiting from better fixed cost absorption as costs in the industry base remain elevated. Furthermore, fluctuations in fuel prices pose a risk as well as continued delays in deliveries of new fuel-efficient airplanes. Any reversal of that risk would obviously provide an opportunity for improving results or at the very least for the margins to be less pressured.
Air New Zealand Stock Is A Sell
To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions, and the stock price targets accordingly. In a separate blog I have detailed our analysis methodology.
I don’t consider Air New Zealand stock attractive for investment as EBITDA is expected to decrease further in FY25 and free cash flow is expected to be negative in the coming two years, which I believe will require the company to borrow money while the demand environment remains challenging and operating costs are elevated. None of this makes for a compelling risk-reward profile and I mark the stock a sell.
Conclusion: Air New Zealand Holds Little Value
The results that Air New Zealand posted for FY24 clearly showed the pressures on unit revenues and an inability to meaningfully reduce unit costs while dramatically increasing capacity. In the years ahead, we don’t see EBITDA recover somewhat until FY26 and in the meantime the company will likely need to borrow more money to fund the CapEx. As a result, I don’t see a compelling investment case for Air New Zealand stock.
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