News
Air New Zealand exceptionalism ends
March 1st 2019
The Kiwis had higher-than-global growth. New forecast 4% expansion is not shabby, but the carrier’s domestic outlook is concerning. Read More »
Air NZ and its home market have out-performed global averages, but CEO Christopher Luxon said this week he expected slower expansion as a result of subsiding inbound visitor growth and the tapering of domestic leisure travel.
The good news is this is still growth and not a contraction. The forecast period coincides with Air NZ’s capital expenditure holiday before 777-200 replacements are required from 2022. Long-term there are profound questions about how many more tourists New Zealand can accommodate.
Full-year capacity growth is forecast at 4%, the lower end of the previous 4%-6% target – but still good for Luxon. Domestic growth is forecast to be 3%, also at the lower end of the previous 3%-5% target. Long-haul growth is forecast to be 4%, in the middle of the previous 3%-5% target while Tasman and Pacific Islands will grow 6%, below the 7%-9% target.
Repeating a common theme across results, a 28% net increase in fuel was the main item weighing on earnings. Interim 2019 revenue grew 7.1%, but pre-tax profit was down 35% to NZ$211 million ($144m). The first half increase in fuel was more than the total increase in both halves of FY2018. Ex-fuel CASK grew 1.6%.
Domestic flying is Air NZ’s core profit earner and is intrinsically tied to international with 20%-25% of domestic passengers arriving from offshore. Air NZ estimates each long-haul visitor to New Zealand takes approximately two domestic flights.
Inbound visitor growth is slowing, with NZ’s largest source markets being Australia and China, where there are domestic consumption concerns. China-New Zealand political tensions are growing, but tourism concerns may be over-blown. The U.S. is the third largest source of visitors to the country.
Air NZ reported 8% domestic revenue growth on average in calendar 2018, but a drop-off started in December with 5% growth and then 3% for January. The airline sees this so far mostly impacting leisure demand and said corporate and government bookings are stable. The slowdown is not due to competitor Jetstar taking more passengers. Air NZ has seen its domestic market share increase.
In response, Air NZ has restructured domestic pricing. Firstly, it has introduced lower entry fares to stimulate travel, especially on off-peak flights. Domestic already has an 82.7% load factor. Luxon said they are not increasing the upper range of fares to compensate for lower entry fares.
Secondly, CFO Jeff McDowall says Air NZ is improving merchandising to increase buy-ups in fare families. The yield outlook as a result of the two initiatives is uncertain, but RASK should increase with some CASK reduction.
The broader outlook in FY2019 is balancing opposing halves. Air NZ sees interim 2019 reporting stronger revenue, but with cost inefficiencies while 2H2019 will see softening revenue as cost inefficiencies alleviate.
The trans-Tasman market is transitioning, but Air NZ should emerge stronger. The changes largely centre around Emirates ending fifth freedom trans-Tasman widebody (and usually A380) flights. Emirates was Qantas’ partner and the large reduction of Emirates capacity put Qantas on the market for a new partner. Air NZ ditched its JV with Virgin Australia to partner with Qantas.
Besides strategic opportunity, Air NZ has had sour relations with Virgin Australia (VA) because of the Australian airline’s under-performance. When the VA chairman declined Air NZ’s request to remove John Borghetti as CEO, Air NZ put its stake on the market. VA infuriated Air NZ by issuing new shares to HNA.
Air NZ is growing across the Tasman with the introduction of A321neos that bring more capacity per flight. While ASKs are growing, it is cost-effective growth. VA has added capacity, but Luxon prefers this new balance.
“We still look at that dynamic and say that's a lot better than when Emirates was in the market. Certainly we've seen Virgin struggling big time,” Luxon said. VA’s growth has been fast, with the airline lowering fares and seeing reduced load factors. Further is the gain from Emirates’ reduction, with Luxon saying: “I think none of you have probably had a hamburger served to you while you've been doing that.”
Pressure also is being eased in the form of lightening capital expenditure as Air NZ concludes one re-fleeting period. Air NZ Capex reached approximately NZ$3 billion in the four years from 2015 to 2018. Over the next four years through 2022, Capex is forecast to be NZ$1.1 billion. From late 2022, Air NZ expects to receive its first wide body to replace existing 777-200s. The airline expects to announce an order between April and June. It is considering more 787s or introducing the A350 or 777X.
Public response has been favourable, with local media reporting Air NZ is “slashing” domestic fares, which have routinely been criticised for being high. Air NZ has had to find business balance, as reflected in its ownership: publicly listed but with a majority government stake.
There has been easy criticism of Air NZ during good economic periods. But now as the mood dampens, Air NZ emphasised it is there for the long-term, saying: “At a time when the New Zealand market has seen foreign competitors reduce capacity or exit services completely, Air New Zealand continues to support strong market development.”
