Restrictions Weigh on Air New Zealand’s Near-Term, but We Expect Blue Skies Ahead

We maintain our NZD 1.90 (AUD 1.80) fair value estimate for shares in no-moat Air New Zealand following the release of fiscal 2021 results. The underlying pre-tax loss of NZD 440 million was in line with our prior forecast and company guidance--a substantial deterioration from the NZD 87 million pre-tax loss incurred in fiscal 2020. This result was not surprising considering the high levels of operating leverage intrinsic to airlines and the substantial loss of revenue during fiscal 2021--the first full year impact of COVID-19. The domestic business recovered to near pre-COVID-19 levels toward the end of fiscal 2021 as domestic restrictions eased, driven by local leisure demand amid international border restrictions. In contrast, the international business remained subdued, with limited repatriation flights partially offset by the Trans-Tasman travel bubble, and countercyclical freight earnings amid surging e-commerce demand. As expected, Air New Zealand declared no dividend--we expect dividends will remain suspended until the firm returns to profitability in fiscal 2023.