Air NZ expects to nearly break even, share price surges

Air New Zealand has announced it expects to nearly break even when it announces its full year result to June 30.

The airline, which has seen its share price moved up rapidly since Friday, advised today it was expecting to comfortably exceed the previous forecast of a loss of $63.4 million before unusuals and tax.

Changes to the airline's troubled situation included "significant" improvements in tourist traffic, a recovery in passenger numbers generally and cost reduction initiatives which had resulted in a much better trading performance in the last two months.

It said the final result was "still clearly subject to the volatility of the industry, and the seasonal weakness traditionally experienced over the final three months of the financial year".

Air NZ's share price this morning touched a high of 45c, an increase of 18 per cent or 7c since Friday. The price is the highest since the events of September 11, which closely followed the collapse of Air NZ's subsidiary Ansett Australia and prompted a Government rescue package.

Andrew Kelleher of ASB Securities said today's statement added to the positive tone the stock was developing.

"It's a stock the retail market has an affinity for.

"I think you still need to be cautious on the stock. It's still got to prove itself even though we have had these positive announcements. It's still in a sector that is recovering from an ugly year."

Yesterday many brokers were stumped for the explanation for the rocketing shares but two possible reasons emerged.

One was increased buying by index-related funds in reaction to a change in Air NZ's market capitalisation tomorrow. That is when the third and final tranche of extra Air NZ shares, issued to the Government as part of the rescue package, are "admitted" into the NZSE-40 and Mid-Cap indices.

The additional shares will boost Air NZ's market capitalisation by 33 per cent, from $946 million to $126 billion, prompting an index re-weighting of the stock.

Another possible cause was the release on Friday of a bullish brokerage report by UBS Warburg.

It put the value of Air NZ's stocks at 50c and suggested it could move up to 62c if the airline transforms into a budget carrier.

Air NZ is conducting a review of its short-haul flights and UBS Warburg analyst Timothy Ross suggested that it could make major savings if it was to trim perks such as meals on all flights under four hours long.

His current positive outlook was based on the New Zealand dollar rebound, lower fuel costs, a bounce in air traffic figures, and a restructured cost base.

The airline was slowly outriding its disastrous $1.4 billion loss last year and was likely to post a 2002 profit around $78 million, before carry-over write-offs from Ansett reduced it to a loss of about $252 million, Mr Ross said.

He forecast the airline returning to profitability in 2003 with a net profit of $194.85 million, and a 2004 profit of $239.44 million.

Mr Ross said moving to a budget model was a smart move. Budget airlines in Europe and Australia had left their full-service counterparts for dust.

"You see the load factors of Ryanair and Easyjet heading for the stratosphere as British Airways, Air France, Lufthansa competing on the same hubs struggle to get off the ground.

"How much do you want to pay for an orange juice and a sandwich on a one-hour flight?"

If New Zealand could capture only half the difference in unit operating costs between itself and another industry leader, Southwest Airlines, it could add $65 million annually to its earnings before interest and tax (ebit).

Southwest was likely to be the only profitable carrier in the United States this year, and even half its success could shave $155 million off Air NZ's cost base, Mr Ross said.

The move could also have the advantage of heading off some of Air NZ's strong competition, he said.

It could dissuade budget airline Virgin Blue from crossing the Tasman and force Qantas, which is suspected to be running unprofitably in New Zealand, further into the red.

Mr Ross suggested Qantas could even withdraw from New Zealand if it was allowed to take a stake in Air NZ, an option which the Government rejected last year.

"Who knows what might happen with ownership but I'm suspecting Qantas will reappear on Air NZ's register and I suspect you could see them scale back or make their New Zealand business far more of a commercial affair, once they've got a stake in Air NZ."

Mr Ross estimated the no-frills fares would lower Air NZ revenues by $90 million a year, but stabilising jet fuel prices and a strengthening currency, in addition to the no-frills savings plan, would help offset the loss.

A change of just 1 per cent in the New Zealand dollar against the greenback could also save Air NZ significant amounts of money on its US-related costs -- about $11 million. The kiwi dollar has so far firmed more than 8 per cent this year.

- NZPA