Air New Zealand's Domestic Business Is Well Positioned for a Quick Recovery; Shares Undervalued

We lower our fair value estimate for the shares of no-moat Air New Zealand to NZD 2.00 from NZD 2.10 following fiscal 2020 results. The airline reported an underlying pretax loss of NZD 87 million, in line with our prior forecast of a NZD 90 million loss, as air travel ground to a halt at the height of the coronavirus pandemic. The underlying loss excludes NZD 541 million in one-offs--principally comprising NZD 140 million in reorganisation costs, NZD 105 million in de-designation of fuel hedging, and NZD 338 million in noncash aircraft impairments. As a noncash expense, the write-down does not affect our fair value estimate. However, the impairment illustrates the damage that the coronavirus has inflicted on Air New Zealand (and air travel in general) over the past few months and is an indication of the challenged roadmap ahead. Our forecasts now include the impact of the new accounting standard for leases, IFRS 16.