New Zealand Professional Investment Services Firm

Forsyth Barr

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Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand<br>July Lifted by Domestic Recovery&nbsp;</h2>
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<div>Air New Zealand’s (AIR) July 2020 operating stats highlight the initial robust recovery in domestic air travel but an international business that remains largely focussed on air freight. RASK growth for the month appears impressive but reflects the very favourable mix impact of the domestic recovery.</div>
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<ul>
<li><strong>Revenue</strong>: We calculate that&nbsp;July&nbsp;2020 passenger revenue growth was&nbsp;down&nbsp;-74%&nbsp;compared to&nbsp;July&nbsp;2019.&nbsp;This compares to a 4Q20 average monthly decline of -89%.&nbsp;</li>
<li><strong>RASK</strong>&nbsp;(revenue per available seat km):&nbsp;July&nbsp;2020 group RASK&nbsp;grew a whopping +36%. However, we believe this is driven almost exclusively by mix. Short haul RASK increased +47%, but on a like-for-like basis, if we assume that international short haul was down in-line with long haul&nbsp;(-38%)&nbsp;we determine that&nbsp;domestic RASK was broadly flat year on year.&nbsp;</li>
<li><strong>Capacity</strong>:&nbsp;July&nbsp;2020 capacity&nbsp;declined -81%. While short haul fell -74% in the month, long haul&nbsp;was down -87%.</li>
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<div><strong>Our view</strong></div>
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<div>The July 2020 data sets a relatively low bar for passenger revenues for the remainder of FY21, yet August will likely be worse given the additional restrictions on domestic services under the recent Alert Level increases. That said, we expect the backdrop to gradually improve through the next 12 months given our assumption that international borders begin to re-open in 2H21. We remain comfortable with our current FY21 passenger revenue estimate, which implies a decline of -63% on FY20.</div>
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<div>AIR is currently trading at a material premium to its NAV as at 30 June 2020 (NZ$1.17 per share) and our NAV forecast (~NZ$1.00) at the end of FY21.&nbsp;We have an UNDERPERFORM rating&nbsp;on AIR.<br><br><strong>Chart: Revenue&nbsp;declined -74%&nbsp;in&nbsp;July&nbsp;2020</strong></div>
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<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1677216064923926527&amp;th=1746ab1ff15e7fff&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ_L1sYCwF6ENybCVAApPCUCY5pyu9-7_hfzv8o0fNc2lWJEFfNGweBSRyKUINltLOqcp2gg4OrQjyJ9iOI1M_TLlYlGfy8gizYPektFYiFusjmlbvaLwycvBbU&amp;disp=emb" class="editor-image img-responsive" data-image-whitelisted=""></figure>
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Source: AIR, Forsyth Barr analysis</div>
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<div><strong>Andy Bowley&nbsp;</strong><br>Head of Research<br>
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1677216064923926527&amp;th=1746ab1ff15e7fff&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ_OwNq_fwpm6HVMMUnfro9IqNk86P87iyXx9t8L5EAq6X0DFZJDAQD94erUhCAjLPNsK1D3uIuXD2PXMs8NUIPKGiHcjEITr0361ufNdMCk91QmwWQj_BOrUhA&amp;disp=emb" class="editor-image img-responsive"></figure>
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M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227 &nbsp;<br>Level 22, NTT Tower, 157 Lambton Quay, Wellington</div>

Air New Zealand July Lifted by Domestic Recovery&nbsp;

Air New Zealand’s (AIR) July 2020 operating stats highlight the initial robust recovery in domestic air travel but an international business that remains largely focussed on air freight. RASK growth for the month appears impressive but reflects the very favourable mix impact of the domestic recovery.


Revenue: We calculate that&nbsp;July&nbsp;2020 passenger revenue growth was&nbsp;down&nbsp;-74%&nbsp;compared to&nbsp;July&nbsp;2019.&nbsp;This compares to a 4Q20 average monthly decline of -89%.&nbsp;
RASK&nbsp;(revenue per available seat km):&nbsp;July&nbsp;2020 group RASK&nbsp;grew a whopping +36%. However, we believe this is driven almost exclusively by mix. Short haul RASK increased +47%, but on a like-for-like basis, if we assume that international short haul was down in-line with long haul&nbsp;(-38%)&nbsp;we determine that&nbsp;domestic RASK was broadly flat year on year.&nbsp;
Capacity:&nbsp;July&nbsp;2020 capacity&nbsp;declined -81%. While short haul fell -74% in the month, long haul&nbsp;was down -87%.

Our view

The July 2020 data sets a relatively low bar for passenger revenues for the remainder of FY21, yet August will likely be worse given the additional restrictions on domestic services under the recent Alert Level increases. That said, we expect the backdrop to gradually improve through the next 12 months given our assumption that international borders begin to re-open in 2H21. We remain comfortable with our current FY21 passenger revenue estimate, which implies a decline of -63% on FY20.

AIR is currently trading at a material premium to its NAV as at 30 June 2020 (NZ$1.17 per share) and our NAV forecast (~NZ$1.00) at the end of FY21.&nbsp;We have an UNDERPERFORM rating&nbsp;on AIR.  Chart: Revenue&nbsp;declined -74%&nbsp;in&nbsp;July&nbsp;2020
 


Source: AIR, Forsyth Barr analysis

Andy Bowley&nbsp; Head of Research 


M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227 &nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Air New Zealand: July Lifted by Domestic Recovery