Air New Zealand's share price and analysts' target price for the stock have risen after the airline forecast a boost in first-half earnings at last week's annual meeting driven by increased demand, higher tourist numbers, and lower fuel costs.
The company expects earnings before tax and excluding any equity accounting from its stake in Virgin Australia will rise 85 per cent to $400 million in the six months ending December 31.
The share price has gained 8 per cent since before the AGM last Wednesday. It gained 0.9 per cent to $2.695 on the NZX - still down from its peak of $3.02 in June. Analysts' 12-month target price on the stock range from $2.70 at Goldman Sachs, $3.10 at Macquarie Research and $3.40 at Craigs Investment Partners.
Craigs analyst Chris Byrne said in a research note that given the airline has consistently achieved well above guidance over the past three years when it has given guidance this early, he assumes the airline is anticipating earnings of at least 10 per cent above the minimum or at least $440 million for the first half, which would be up 90 per cent year on year.
Byrne also expects Virgin Australia to contribute positively to the national carrier's earnings this year so its profit could be even higher. His revised full-year forecast for earnings before tax is $839 million, up from $738 million.
"We've lifted our revenue assumptions on the basis that yields are not coming under the pressure we had forecast, while load factors are also holding up better than we had expected, particularly long haul," Byrne said.
The airline is increasing capacity by 11 per cent this year and spending $2.6 billion on new aircraft in the next four years.
Goldman Sachs's Will Charlston said he expects the airline's second-half earnings before tax will be broadly flat on the previous corresponding period as it manages significant capacity growth and stronger competition, which is expected to put pressure on unit revenues. His revised forecast for full year pretax earnings is $721.1 million compared to $641.5 million earlier.
Macquarie analysts Warren Doak and Nick Mar said the first-half guidance looks well above consensus expectations but the airline "continues to be in the upgrade cycle with strong first-half guidance and momentum expected to continue through FY16".
Competitors adding capacity or entering the market remains a key concern, including Jetstar domestic, American Airlines and Chinese carriers, they said in a research note.
"The key concern for the markets remains around FY16 possibly being peak earnings from the combination of low fuel prices, hedged currency and low competition, with these factors expected to unwind in subsequent years," Doak and Mar said.
"We think Air New Zealand continues to strengthen its business through the modernisation of fleet, unit cost focus and enhancement of the customer experience. This makes it increasingly difficult for competitors to gain traction on new routes."
Macquarie is forecasting profit before tax of $809 million for 2016 and $684 million in 2017 with headwinds from fuel, foreign exchange, and competition.