New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

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>Transport Sector<br>Omicron to Stall then Accelerate Aviation Recovery</h2>
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<p>The aviation sector remains challenged by heavy border restrictions and the threat of an Omicron outbreak, which could derail the domestic recovery. Plans for the staged reopening of New Zealand's border have been delayed given Omicron outbreaks overseas and the MIQ lottery system has this week been 'paused' given increasing border cases.&nbsp; Having moved on from elimination, the government's minimisation and protection strategy could mean that 'red' settings under the traffic light system may need to be adjusted to ensure the health system is not overwhelmed during an Omicron outbreak. While not our base case, this could mean domestic travel restrictions are re-imposed and border restrictions remain in place for the foreseeable future. In summary, we expect the backdrop for aviation exposed companies to worsen before a potentially more sustained recovery takes hold later in 2022.&nbsp;</p>
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<h3>Omicron elsewhere</h3>
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<p>International outbreaks to date tell us three key things about Omicron: (1) The variant appears significantly more contagious than the Delta variant. (2) But it is less severe. (3) Vaccines and prior infection appear to provide meaningful protection against hospitalisation and death but only modest protection against infection. Infection waves are short and sharp, and while lockdown restrictions may slow infection rate growth, Omicron will still spread.&nbsp;</p>
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<h3>What happens in NZ?&nbsp;</h3>
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<p>If (when?) Omicron spreads in New Zealand we expect a relatively brief but intense outbreak causing a few months of severe disruptions, driven by three factors; (1) initial collective "shock" as people adjust their behaviour to avoid getting infected; (2) select but intense labour shortages as positive cases and close contacts isolate and/or are sick; and (3) government restrictions, for instance red settings across the country.&nbsp;</p>
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<h3>Government approach&nbsp;to aviation</h3>
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<p>The red setting in the current traffic light framework allows the aviation sector to continue operating without restrictions beyond compulsory use of face masks for passengers and crew. Air New Zealand (AIR) also has a mandatory vaccine pass or pre-departure test requirement for passengers. Our base case scenario is that this approach continues through an Omicron outbreak, though we see scope for the government to move to a red+ approach if the health system becomes overwhelmed, which would likely mean a re-introduction of heavier restriction, including essential only travel.&nbsp;</p>
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<h3>Implications for companies</h3>
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<p>Air New Zealand&nbsp;(AIR):&nbsp;AIR's&nbsp;losses and cash burn will continue through&nbsp;2H22 at elevated rates. The outlook for FY23 is clouded by the threat of Omicron and the government's response. Consequently, the flagged equity raise (due by end of March 2022) is increasingly likely to be delayed again with the backstop, a redeemable share offer to the government, increasingly likely as a short term measure to buffer equity capital.</p>
<p>Auckland Airport&nbsp;(AIA):&nbsp;Our revised FY22 earnings estimates, which assume constrained international pax through 2H22, have&nbsp;AIA breaching its EBITDA interest cover covenant (&gt;2.0x). Though given a supportive banking group, the nature of the breach (government policy rather than company driven)&nbsp;and it likely significantly exceeding future year covenants, we suspect little recourse.</p>
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Transport Sector Omicron to Stall then Accelerate Aviation Recovery

The aviation sector remains challenged by heavy border restrictions and the threat of an Omicron outbreak, which could derail the domestic recovery. Plans for the staged reopening of New Zealand's border have been delayed given Omicron outbreaks overseas and the MIQ lottery system has this week been 'paused' given increasing border cases.&nbsp; Having moved on from elimination, the government's minimisation and protection strategy could mean that 'red' settings under the traffic light system may need to be adjusted to ensure the health system is not overwhelmed during an Omicron outbreak. While not our base case, this could mean domestic travel restrictions are re-imposed and border restrictions remain in place for the foreseeable future. In summary, we expect the backdrop for aviation exposed companies to worsen before a potentially more sustained recovery takes hold later in 2022.&nbsp;


Omicron elsewhere


International outbreaks to date tell us three key things about Omicron: (1) The variant appears significantly more contagious than the Delta variant. (2) But it is less severe. (3) Vaccines and prior infection appear to provide meaningful protection against hospitalisation and death but only modest protection against infection. Infection waves are short and sharp, and while lockdown restrictions may slow infection rate growth, Omicron will still spread.&nbsp;


What happens in NZ?&nbsp;


If (when?) Omicron spreads in New Zealand we expect a relatively brief but intense outbreak causing a few months of severe disruptions, driven by three factors; (1) initial collective "shock" as people adjust their behaviour to avoid getting infected; (2) select but intense labour shortages as positive cases and close contacts isolate and/or are sick; and (3) government restrictions, for instance red settings across the country.&nbsp;


Government approach&nbsp;to aviation


The red setting in the current traffic light framework allows the aviation sector to continue operating without restrictions beyond compulsory use of face masks for passengers and crew. Air New Zealand (AIR) also has a mandatory vaccine pass or pre-departure test requirement for passengers. Our base case scenario is that this approach continues through an Omicron outbreak, though we see scope for the government to move to a red+ approach if the health system becomes overwhelmed, which would likely mean a re-introduction of heavier restriction, including essential only travel.&nbsp;


Implications for companies


Air New Zealand&nbsp;(AIR):&nbsp;AIR's&nbsp;losses and cash burn will continue through&nbsp;2H22 at elevated rates. The outlook for FY23 is clouded by the threat of Omicron and the government's response. Consequently, the flagged equity raise (due by end of March 2022) is increasingly likely to be delayed again with the backstop, a redeemable share offer to the government, increasingly likely as a short term measure to buffer equity capital.
Auckland Airport&nbsp;(AIA):&nbsp;Our revised FY22 earnings estimates, which assume constrained international pax through 2H22, have&nbsp;AIA breaching its EBITDA interest cover covenant (&gt;2.0x). Though given a supportive banking group, the nature of the breach (government policy rather than company driven)&nbsp;and it likely significantly exceeding future year covenants, we suspect little recourse.


Transport Sector: Omicron to Stall Then Accelerate Aviation Recovery