Air NZ shares soar following favourable report

12.00pm

Air New Zealand's share price soared 4c this morning, an increase of 10.5 per cent, after a reasonably bullish report by brokerage UBS Warburg.

The report reflected a more positive outlook for the airline's profitability based on reasonable fuel prices, fresh management, and the severing of the loss-making Ansett Australia operation.

But perhaps the most immediate factor is the review Air NZ is conducting of its short-haul and long-haul operations. There is strong speculation that Air NZ will cut perks such as meals on short-haul flights to offer a more competitive price.

Such a strategy could head off the threat of Virgin Blue crossing the Tasman and make Air NZ more competitive against Qantas.

At 11.30am Air NZ's share price has risen to 42c, the highest since the collapse of Ansett and September 11 when it plunged from over a dollar in early September to a low of 16c on September 24.

Timothy Ross, UBS Warburg's Asia-Pacific airline analyst, said it was "hard to get more negative than we were last year" about Air NZ.

"Assuming no one drives an airplane into another tall building this year, you've got to say that 2002 has got to be better globally for the airline industry. Regionally, you have a currency which is actually supporting (Air NZ) rather than penalising it, you have a fuel price which, okay, it's up recently but it's still down considerably on average on where it was a year ago.

"So just taking those things into consideration, and you've got to say the outlook for Air NZ is better."

Added to that, the airline had "cut loose the Ansett albatross", it had a fresh pair of hands on the joystick and it was actively evaluating a short-haul model which numbers suggested would add value.

Mr Ross said clearly Air NZ could not afford to continue charging the fares it was charging now.

It faced considerable competition for air fares in its domestic market from Qantas which "was probably operating below the cost of production", and a further budget threat from Qantas.

Cutting perks on its short-haul flights (those under four hours) would mean Virgin "would be unable to exploit that niche". Air NZ has said its review includes the position of its budget subsidiary, Freedom Air.

Mr Ross suggested Qantas might also eventually end up as an Air NZ stakeholder, which could see it back down in the New Zealand market.

"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."

Air NZ still had the edge over Qantas in that it had more flights domestically.

Mr Ross said it was clear from the experience of low-cost airlines in Europe that consumers were willing to forsake a few luxuries for cheaper travel.

"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?"

- NZPA