Air NZ slashes outlook, cuts Asian routes as airlines face biggest financial threat in a decade

The airline industry faces massive losses. Photo / Grant Bradley

Air New Zealand has slashed its profit outlook and cut back routes to Asia and closer to home in response to the coronavirus outbreak which is seen as the biggest threat to airlines in more than a decade.

Airline share prices sank in this region yesterday and the spreading virus will cost airlines in the Asia-Pacific region airlines an estimated US$27.8 billion ($43b) in revenue and demand will shrink by 8.2 per cent, the first contraction since the 2008-2009 global financial crisis.

Ahead of Thursday's interim result announcement, new Air New Zealand chief executive Greg Foran's says full-year earnings may be hit by as much as $75 million.

While the airline said the situation was uncertain but based on current assumptions of lower demand as well as the benefit of the announced capacity reductions and lower jet fuel prices, earnings could be hit in the range of $35 million to $75 million as a result of coronavirus.

At the midpoint of the estimated range, which is approximately $55 million, the airline is targeting earnings before other significant items and taxation to be in a range of approximately $300 million to $350 million for the year.

Travellers wearing face masks queue to check-in at Shanghai Pudong International Airport. Photo / AP

Its shares, which started the year at $3.05 when initial reports of the virus surfaced, tumbled by a further 5.5 per cent yesterday, closing at $2.58.

Qantas, which last week said its profit could be hit by up to $156m, saw its share price drop by more than 7 per cent yesterday.

Matthew Goodson, Salt Funds managing director and portfolio manager, said there remained ''considerable uncertainty'' about the outlook for Air New Zealand.

''The market seems to be reacting to that. The surprise was perhaps that the share price had held up so well,'' he said.'

'History points to such sell-offs being a good longer term buying opportunity but this is a larger event than Sars (in 2003) and China is a far larger and more connected economy than at that time.''

Harbour Asset Management's Shane Solly said even with the 15 per cent downgrade, the uncertainty would last for some time.

''We are going to have to watch this for a while. This Covid-19 is definitely a broader long-term event than what we've seen previously,'' he said.

While there were a number of factors in this downgrade, the core is around the virus.

Air New Zealand was in good financial and operational shape to weather the fallout.
''They have shown time and time again that they are nimble but this is going to be a tough one for the industry.''

Greg Foran took over as chief executive less than a month ago. He returned home from a job as boss of Walmart US and has no previous airline experience, which Solly said was not a bad thing.

''It is a tough time to be coming in (but) he has inherited a business that is in good financial and operational order. It gives Foran the opportunity to come in with a new lens and look at the business differently.''

Longer term, airlines from Mainland China which have poured in capacity here could be less aggressive and that would help Air New Zealand.

Another potential benefit was being able to free up aircraft to cover for those Dreamliners still affected by Rolls-Royce engine problems, said Solly.

Fuel prices have dropped in response to the sharply reduced economic activity in China and the airline has said this will help offset the impact on full-year earnings, Goodson said short-term hedging means that would not be the case.

''Ex the impact of coronavirus, there also looks to be a modest underlying downgrade from the remainder of the business.''

The new guidance assumes jet fuel prices of US$65 ($102) a barrel for the rest of the financial year, compared to the US$75 average used in the earlier forecast.

As part of network cuts, the airline yesterday announced it would cut its newly relaunched Auckland-Seoul service from March 7 through to the end of June in addition to cuts to Shanghai and Hong Kong services. Total Asia capacity will be cut by 17 per cent to the end of June.

Air New Zealand announces its interim result on Thursday. Photo / Dean Purcell

Tasman capacity will by cut from March through to the end of May by 3 per cent focused on Auckland-Sydney services with some changes to Auckland-Melbourne and Auckland-Brisbane.

Domestic capacity reductions of 2 per cent are focused on services between Auckland and Christchurch and Auckland and Queenstown.

All of these are high-frequency routes, said a spokeswoman. Asked what this would mean for staff, she said the airline had ''nothing further to add at this stage''.

It announced it would increase market development investment to drive additional demand, specifically across its domestic and Tasman markets.

The airline industry recovered quickly from the Sars epidemic and Tourism Industry Aotearoa chief executive Chris Roberts said once there was an upswing in demand more flights and more seats would be put back into the market.

''However, Air NZ's reduction in capacity from Asia of 17 per cent out to June, shows us that the impact of Covid-19 is already stretching out in the medium-term horizon.''

Figures on the forecast global airline impact from the International Air Transport Association say the bulk of losses would be borne by airlines in China, with $12.8 billion expected to be lost in the China domestic market alone.

In December, IATA forecast global revenue passenger kilometre growth of 4.1 per cent, so this loss would more than eliminate expected growth this year, resulting in a 0.6 per cent global contraction in passenger demand for 2020.