Can Qantas’ Kiwi rival bounce back from COVID?

Like most airlines around the world, Air New Zealand has had a turbulent time over the past couple of years. From COVID-19 grounding the industry to recent capacity constraints, supply chain issues, sustained staffing complications and the volatile price of jet fuel, you’d be forgiven for thinking twice about investing in any airline at the moment.

Air New Zealand chief Greg Foran. The airline is aiming to reach 75 per cent of its pre-pandemic capacity this month.Credit:Aresna Villanueva

Although the ASX-listed airline’s share price plummeted by more than 60 per cent over the past five years, it has rebounded over the past six months, clawing back more than 40 per cent as the carrier continues to be buoyed by the demand for travel and its recent internal strategy shakeup.

Air New Zealand expects to fly about 3 million customers around the country over the next two months, as the Trans-Tasman region looks to enjoy its first silly season without COVID-19 restrictions in two years.

Demand for travel is showing no signs of slowing, and Air New Zealand’s cost base, profit forecast and capital investment look to be in good shape. Is now the time to back Qantas’s only ASX competitor?

How it started: Originally named Tasman Empire Airways Limited, Air New Zealand’s first flight took place in 1940 when it carried ten passengers from Auckland to Sydney on a flying boat, taking seven and a half hours.

The airline was used for several special charter and reconnaissance flights during the war. It was then purchased by the Australian and New Zealand governments in a 50 per cent split, but New Zealand bought out Australia in 1961 and renamed it Air New Zealand five years later.

How it’s going: Air New Zealand has come a long way from flying boats. The airline is Qantas’s only long-haul rival listed on the ASX, and while the two are as friendly as contenders can be, they’re in direct competition on the Auckland to New York route.

Air New Zealand suffered during the pandemic but has recently updated its profit guidance for the first half of next year by $100 million. The airline is now expected to post between $295 million and 325 million in profits off the back of strong ticket sales and the slowly stabilising price of jet fuel. The airline has reduced its wide-body fleet since COVID-19, so its long-haul aircraft will remain condensed compared to before the pandemic.

Industry: Aviation.

Main products: Air transportation.

Key figures: Chair Dame Therese Walsh, Chief executive Greg Foran.

The bull case: Passenger appetite for travel is seemingly insatiable and the Kiwi carrier is in a fortunate position with only one major local competitor, Qantas, and 80 per cent of New Zealand’s market share.

It’s aiming to reach 75 per cent of its pre-pandemic capacity this month and has recently hired 2200 employees and added two A321neo aircraft into the fleet. Jet fuel prices have moderated to about $US102 per barrel, 20 per cent up on pre-COVID levels, but significantly less than Air New Zealand’s six-month expectations.

Morningstar analyst Angus Hewitt increased his earnings forecast by 37 per cent to $NZ1.2 billion off the back of the group’s stock upgrade.

The bear case: Airline profitability is volatile at the best of times but particularly right now. From the jumpy price of jet fuel, global recessionary risks, inflationary pressures and geopolitical tensions, to increased costs and supply chain issues, the risks can often seem endless.

Although the airline upgraded its half-yearly forecast last week, no full-year earnings guidance was provided. UBS analysts recommend selling the stock on the basis that increased value is unlikely to emerge until the 2025 financial year. UBS is targeting a 12-month stock price of 70c.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions

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