Air NZ Still Faces Headwind
By Geoffrey Thomas, The Australian | Jan. 19, 2007
Air New Zealand has played down suggestions that the seemingly endless challenges facing it are over despite falling fuel prices prompting a share price rally.
In five months Air New Zealand's share price has risen from $NZ1.20 to just above $NZ2 and some analysts say it will triple its profit over the next four years.
But chief executive Rob Fyfe warns there is still much to do.
"The improving profit picture is deceiving. We have a long way to go to achieve the financial performance and deliver the returns our investors expect," he said.
The airline industry performed poorly compared with most other industrial stocks particularly when it came to EBIT (earnings before interest and tax) as a percentage of revenue, Mr Fyfe said.
"Air NZ had EBIT of 4 per cent last year compared with Auckland Airport's 60 per cent and Telecom's 39 per cent.
"If we wanted the same EBIT margin as Auckland Airport we would need to post a result of $NZ2.50 billion instead of $NZ150 million, and that would require a tripling of ticket prices. In such an intensely competitive sector that won't happen."
On a return on equity basis Air New Zealand was only making 6 per cent less than current New Zealand term deposit rates.
"Given the risks in the airline industry our investors expect that we will deliver a financial return far in excess of what they would get putting their money in the bank."
Poor returns aside, the management and staff of Air New Zealand have done a remarkable job in turning the airline around after it was a basket case in 2001, to the point that it is posting profits and offering industry-leading in-flight products. However, Mr Fyfe said, the restructure was only 30 per cent complete. "We have another three years to go, without any major upheavals, before we will have a good business," he said.
"We have the right product but the challenge is to grow the revenue."
Air New Zealand has recently finished upgrading its eight 400-seat 747-400s and have taken delivery of the last of eight 300-seat 777-200ERs. It is also mulling an order for the larger 385-seat 777-300ER.
The airline also holds options on 20 180-seat A320s.