Air New Zealand: Profits Are Sky High, but Good Times Won’t Last Forever

We make no changes to our NZD 0.97 (AUD 0.88) fair value estimate for shares in Air New Zealand AIZ following a trading update. The company now expects to report fiscal 2023 profit before tax of no less than NZD 580 million, an upgrade of 8% at the midpoint of prior guidance of NZD 510 million to NZD 560 million. We lift our fiscal 2023 pretax profit forecast by 7% to NZD 582 million as demand continues to outstrip supply. Full planes, high ticket prices, and an easing fuel bill sees Air New Zealand set to exceed pre-COVID-19 profitability.

But these exceptional conditions are unlikely to persist, and we make only minor changes to our longer-term forecasts. We expect pricing competition to return as capacity bottlenecks, particularly labour shortages, ease for Air New Zealand and its competitors. Major competitors all seek to materially increase their own international capacity over the coming months, with new routes such as Qantas’ direct Auckland to New York service in direct competition with Air New Zealand.

With nuance around individual hedge books and aircraft composition, the moderating fuel bill is a benefit directionally shared by all airlines over time, placing downward pressure on fares as capacity improves. We expect the jet fuel price to fall further over the next few years, driven by Brent crude falling to our midcycle forecast of USD 60 per barrel, from around USD 75 per barrel currently. Lower fuel costs are typically competed away, and savings are passed through to customers, reflecting a high level of competition, reflected in our no-moat rating.