Air New Zealand: Profitability Softens as Competition Returns

We maintain our NZD 0.97 (AUD 0.88) fair value estimate for shares in Air New Zealand AIZ following a trading update, with shares screening as undervalued. Despite tremendous profitability in fiscal 2023, driven by pent-up demand and constrained capacity, the operating environment is beginning to normalize. Profit before tax guidance of NZD 180 million to NZD 230 million for the first half of fiscal 2024 broadly tracks our unchanged full-year fiscal 2024 forecast of NZD 423 million—a 28% decline on fiscal 2023.

As expected, elevated profitability is proving short-lived. Customer demand is moderating from elevated levels, with Air New Zealand noting softening domestic corporate and government travel as economic uncertainty lends a sharper eye to expenses. We also expect pricing competition to continue to ramp up as capacity bottlenecks ease for Air New Zealand and its competitors, leading to a marked slowdown in passenger revenue, which we expect will grow at a modest 6% in fiscal 2024.

While movements in oil prices can lead to short-term swings in profitability, carriers’ long-term profitability has little to do with fuel given the cost affects all players almost equally. Reductions in fuel costs are typically competed away over time, reflecting extreme competition among airlines, which underpins our no moat rating. Although the price of jet fuel has fallen almost 10% over the past week, it rose around 35% over the first quarter of fiscal 2024, and elevated fuel prices, along with a weaker New Zealand dollar, continue to put pressure on costs.

We maintain our forecast of a full-year average jet fuel price of about USD 120 per barrel in fiscal 2024, a step-up from Air New Zealand’s USD 110-per-barrel assumption for the remainder of the first half. But we expect the jet fuel price to moderate in line with Brent crude over the coming years to our midcycle forecast of USD 60 per barrel, from about USD 85 per barrel currently.