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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand<br>Lifting the Nose Despite Heavy Fuel Load</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Air New Zealand (AIR) has modestly upgraded its loss guidance for FY22, reflecting the strong recovery in demand through FY22 partly offset by higher fuel costs. It will still generate a significant loss but with the previously anticipated deterioration in 2H22 no longer&nbsp;likely. We expect near term&nbsp;newsflow&nbsp;and operating stats to continue to suggest sequentially improving revenue and a return to profitability in FY23.&nbsp;AIR's&nbsp;revised FY22 underlying profit before tax guidance is for a loss of less than -NZ$750m compared to previous guidance of less than -NZ$800m. Notwithstanding recent share price weakness, we retain a NEUTRAL rating and expect&nbsp;AIR's&nbsp;net asset value (NAV) to buffer any further selling pressure.&nbsp;&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Reduced loss estimate for FY22 consistent with management's updated guidance. FY23 and FY24 forecasts unchanged&nbsp;</li>
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<h3>Robust demand recovery</h3>
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<p>Passenger demand through 2H22 is ahead of prior expectations, while strong forward bookings bode well for the recovery into FY23.&nbsp;AIR's&nbsp;recent April 2022 operating stats suggested pax revenue had returned to ~49% of FY19 levels in April, up from ~28% in March. Our revised FY22 revenue forecasts imply&nbsp;a further recovery to ~69% over May and June 2022.&nbsp;Importantly, AIR refers to a robust recovery in corporate travel bookings&nbsp;with a return to ~90% of pre-COVID levels on domestic services,&nbsp;following the trend experienced by airlines internationally.&nbsp;</p>
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<h3>Steady capacity build</h3>
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<p>AIR's domestic capacity in June 2022 will be ~96% of CY19 levels according to OAG schedule data. In contrast Tasman/Pacific Islands and long haul are only back to ~43% and ~28% respectively. Consequently, total capacity is ~43% of CY19 levels but averaged just ~25% in FY22. Schedule data suggests AIR's capacity will build steadily over the coming months, climbing to 85%–90% for the summer peak.&nbsp;</p>
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<h3>Fuel price headache</h3>
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<p>Fuel prices remain AIR's largest headwind to a recovery to pre-COVID levels of profitability. Its hedging approach defers the full impact of higher crude oil prices (it typically hedges ~70% of anticipated fuel volumes​​​​​​​), but leaves AIR exposed to movements in the crack spread (the difference between crude and jet fuel prices). The recent widening of the crack spread, together with AIR's non-hedged exposure, partially offsets the near term earnings benefit of the strong demand recovery.&nbsp;</p>
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Air New Zealand Lifting the Nose Despite Heavy Fuel Load

NEUTRAL
Air New Zealand (AIR) has modestly upgraded its loss guidance for FY22, reflecting the strong recovery in demand through FY22 partly offset by higher fuel costs. It will still generate a significant loss but with the previously anticipated deterioration in 2H22 no longer&nbsp;likely. We expect near term&nbsp;newsflow&nbsp;and operating stats to continue to suggest sequentially improving revenue and a return to profitability in FY23.&nbsp;AIR's&nbsp;revised FY22 underlying profit before tax guidance is for a loss of less than -NZ$750m compared to previous guidance of less than -NZ$800m. Notwithstanding recent share price weakness, we retain a NEUTRAL rating and expect&nbsp;AIR's&nbsp;net asset value (NAV) to buffer any further selling pressure.&nbsp;&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Reduced loss estimate for FY22 consistent with management's updated guidance. FY23 and FY24 forecasts unchanged&nbsp;



Robust demand recovery


Passenger demand through 2H22 is ahead of prior expectations, while strong forward bookings bode well for the recovery into FY23.&nbsp;AIR's&nbsp;recent April 2022 operating stats suggested pax revenue had returned to ~49% of FY19 levels in April, up from ~28% in March. Our revised FY22 revenue forecasts imply&nbsp;a further recovery to ~69% over May and June 2022.&nbsp;Importantly, AIR refers to a robust recovery in corporate travel bookings&nbsp;with a return to ~90% of pre-COVID levels on domestic services,&nbsp;following the trend experienced by airlines internationally.&nbsp;


Steady capacity build


AIR's domestic capacity in June 2022 will be ~96% of CY19 levels according to OAG schedule data. In contrast Tasman/Pacific Islands and long haul are only back to ~43% and ~28% respectively. Consequently, total capacity is ~43% of CY19 levels but averaged just ~25% in FY22. Schedule data suggests AIR's capacity will build steadily over the coming months, climbing to 85%–90% for the summer peak.&nbsp;


Fuel price headache


Fuel prices remain AIR's largest headwind to a recovery to pre-COVID levels of profitability. Its hedging approach defers the full impact of higher crude oil prices (it typically hedges ~70% of anticipated fuel volumes​​​​​​​), but leaves AIR exposed to movements in the crack spread (the difference between crude and jet fuel prices). The recent widening of the crack spread, together with AIR's non-hedged exposure, partially offsets the near term earnings benefit of the strong demand recovery.&nbsp;


Air New Zealand: Lifting the Nose Despite Heavy Fuel Load