Peanuts spell tasty savings for Air NZ: report

By DANIEL RIORDAN aviation writer

Air NZ shares were driven up 13 per cent yesterday by an imminent change to its index weighting and a reasonably bullish report from broking house UBS Warburg.

The report values the airline's shares - which jumped from 38c to 43c - at 50c, but thinks another 12c can be added if the airline makes its widely expected conversion to a partly low-cost carrier.

Air NZ is nearing the end of a strategic review expected to usher in reduced service on some short-haul flights (less than four hours).

Directors are expected to consider the review's findings at their regular board meeting on Thursday.

The index change stems from January, when 2.1 billion ordinary shares were issued to the Government as the airline's new 82 per cent owner.

The Stock Exchange decided the extra shares would be "admitted" into the NZSE Top 40 and Mid-Cap indices in three equal tranches.

The last of these joins the indices tomorrow, boosting Air NZ's market capitalisation 33 per cent, from $946 million at yesterday's share price to $1.26 billion.

JBWere aviation analyst Peter Sigley said active and passive fund managers had been buying shares ahead of tomorrow, alongside retail investors responding to the Warburg report.

UBS Warburg aviation analyst Timothy Ross says in his report that if Air NZ could capture only half of the difference in unit operating costs between itself and industry leader US-based Southwest Airlines, it could save $155 million a year - about 4 per cent of its estimated June-year costs.

This would entail moving to a no-frills, one-class model on domestic flights, and on flights to and from the South Pacific, which cater largely to holidaymakers prepared to forgo inflight meals for lower ticket prices.

Brisbane flights could also convert to that model, but flights to the large business markets of Melbourne and Sydney are unlikely to convert, says Ross.

Savings would also come through lower staffing levels, online booking incentives and reduced lounge availability.



Ross says the move would represent a "strategic master-stroke", not just lifting earnings and valuations, but also deterring Virgin Blue from entering the transtasman and New Zealand markets, and forcing Qantas to continue to charge uneconomic prices to retain its New Zealand market share.

The report also notes that Air NZ is benefiting from a stronger New Zealand dollar, lower costs for fuel and recovering demand for air travel.

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