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>Travel and Tourism Sectors<br>Importing a Pump for Deflated Bubble Will Take At Least Eight Weeks</h2>
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<p>The New Zealand Government’s decision to close the trans-Tasman bubble for at least eight weeks together with the recent partial bubble closures represents a major set-back for travel and tourism companies Air New Zealand (AIR), Auckland Airport (AIA) and Tourism Holdings (THL). As a result, these companies will each experience a challenging 1Q22. AIR will be most impacted; it will suffer a likely resumption of cash burn after a hiatus during 2H21. Having brought back opex to facilitate international pax, AIA will be in limbo given the likely but unknown timing of the return of the bubble in 2Q22. THL will be the least impacted given the seasonality of its global operations. We retain UNDERPERFORM ratings on AIR and AIA, and a NEUTRAL rating on THL.&nbsp;</p>
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<h3>Bubble&nbsp; on 'pause' = closed for the time being​​​​​​​</h3>
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<p>​​​​​​​The trans-Tasman bubble has been closed for at least eight weeks by the New Zealand Government in response to the rising number of highly infectious delta variant COVID-19 cases in Australia. In additional, while lockdown restrictions are now in place across three Australian states (New South Wales [reported a daily average of ~135 new cases over the past&nbsp; five days], Victoria [~17] and South Australia [~2]), total cases numbers remain on an upward trajectory. The bubble could reopen ahead of the October school holidays, should the current Australian outbreaks be brought under control, however, the highly contagious nature of the Delta variant means the bubble 'pause' could also be extended. The longer these outbreaks persist the greater likelihood that the international travel recovery will be solely reliant on domestic vaccination progress, providing the government sufficient confidence in the management of future outbreaks and the eventual shift from elimination to suppression.</p>
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<h3>Bubble operating at fraction of 2019 pax levels​​​​​​​</h3>
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<p>Over the past three months, since opening on 19 April 2021, the bubble has achieved just 26% of the passenger (pax)&nbsp; journeys during the same period in 2019. While partial bubble closures and the lack of international connectivity (~20% of pre COVID-19 Tasman pax) have impacted demand, we believe the subdued level of pax reflects (1) longer booking windows for international travel, (2) a strong "flyer beware" message from the NZ Government, and (3) the likelihood of higher-risk groups less willing to travel. Once the bubble reopens, we expect pax demand to again gradually increase over time as confidence in quarantine free travel rebuilds.&nbsp;</p>
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<h3>Uncertainty persists&nbsp;​​​​​​​across travel and tourism stocks</h3>
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<p>We make no changes to earnings estimates in this report, though recognise that the longer the bubble remains closed the bigger the potential negative impact on the pax recovery through FY22. Our current estimates assume international pax at 24% of FY19 levels in FY22. This is still achievable if (1) the Tasman bubble opens in eight weeks and remains open, and (2) international borders open in early 2022, at least on a restricted quarantine free basis. ​​​​​​​</p>
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<li>AIR (UNDERPERFORM) is most challenged by the bubble closure given the resumption of cash burn in 1Q22 as a result of the bubble closure, which will accelerate from 2Q22 given the need to repay outstanding, and resume paying, PAYE. An NZ$1bn plus capital raise is still due before the end of September 2021.&nbsp;</li>
<li>AIA (UNDERPERFORM) will likely fall back into post-tax loss-making mode as Tasman pax dry-up. The company's recent decision to repay USPP debt&nbsp;was very sensible in light of the bubble closure. Covenant breach risk will increase for the next test as at 30 June 2022, however, given relative balance sheet strength&nbsp;its banking syndicate is&nbsp;unlikely to be too demanding, in our opinion.&nbsp;</li>
<li>THL (NEUTRAL) will be least impacted given bubble closure timing coinciding with the low season in New Zealand and peak season in its US domestic rentals business, albeit a lack of inter-state travel in Australia will impact the Queensland peak.&nbsp;&nbsp;</li>
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<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
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<div><strong>Matt Noland</strong></div>
<div><a href="mailto:matt.noland@forsythbarr.co.nz" target="_blank" rel="noopener">matt.noland@forsythbarr.co.nz</a></div>
<div>+64 9 368 0134</div>
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Travel and Tourism Sectors Importing a Pump for Deflated Bubble Will Take At Least Eight Weeks

The New Zealand Government’s decision to close the trans-Tasman bubble for at least eight weeks together with the recent partial bubble closures represents a major set-back for travel and tourism companies Air New Zealand (AIR), Auckland Airport (AIA) and Tourism Holdings (THL). As a result, these companies will each experience a challenging 1Q22. AIR will be most impacted; it will suffer a likely resumption of cash burn after a hiatus during 2H21. Having brought back opex to facilitate international pax, AIA will be in limbo given the likely but unknown timing of the return of the bubble in 2Q22. THL will be the least impacted given the seasonality of its global operations. We retain UNDERPERFORM ratings on AIR and AIA, and a NEUTRAL rating on THL.&nbsp;


Bubble&nbsp; on 'pause' = closed for the time being​​​​​​​


​​​​​​​The trans-Tasman bubble has been closed for at least eight weeks by the New Zealand Government in response to the rising number of highly infectious delta variant COVID-19 cases in Australia. In additional, while lockdown restrictions are now in place across three Australian states (New South Wales [reported a daily average of ~135 new cases over the past&nbsp; five days], Victoria [~17] and South Australia [~2]), total cases numbers remain on an upward trajectory. The bubble could reopen ahead of the October school holidays, should the current Australian outbreaks be brought under control, however, the highly contagious nature of the Delta variant means the bubble 'pause' could also be extended. The longer these outbreaks persist the greater likelihood that the international travel recovery will be solely reliant on domestic vaccination progress, providing the government sufficient confidence in the management of future outbreaks and the eventual shift from elimination to suppression.


Bubble operating at fraction of 2019 pax levels​​​​​​​


Over the past three months, since opening on 19 April 2021, the bubble has achieved just 26% of the passenger (pax)&nbsp; journeys during the same period in 2019. While partial bubble closures and the lack of international connectivity (~20% of pre COVID-19 Tasman pax) have impacted demand, we believe the subdued level of pax reflects (1) longer booking windows for international travel, (2) a strong "flyer beware" message from the NZ Government, and (3) the likelihood of higher-risk groups less willing to travel. Once the bubble reopens, we expect pax demand to again gradually increase over time as confidence in quarantine free travel rebuilds.&nbsp;


Uncertainty persists&nbsp;​​​​​​​across travel and tourism stocks


We make no changes to earnings estimates in this report, though recognise that the longer the bubble remains closed the bigger the potential negative impact on the pax recovery through FY22. Our current estimates assume international pax at 24% of FY19 levels in FY22. This is still achievable if (1) the Tasman bubble opens in eight weeks and remains open, and (2) international borders open in early 2022, at least on a restricted quarantine free basis. ​​​​​​​

AIR (UNDERPERFORM) is most challenged by the bubble closure given the resumption of cash burn in 1Q22 as a result of the bubble closure, which will accelerate from 2Q22 given the need to repay outstanding, and resume paying, PAYE. An NZ$1bn plus capital raise is still due before the end of September 2021.&nbsp;
AIA (UNDERPERFORM) will likely fall back into post-tax loss-making mode as Tasman pax dry-up. The company's recent decision to repay USPP debt&nbsp;was very sensible in light of the bubble closure. Covenant breach risk will increase for the next test as at 30 June 2022, however, given relative balance sheet strength&nbsp;its banking syndicate is&nbsp;unlikely to be too demanding, in our opinion.&nbsp;
THL (NEUTRAL) will be least impacted given bubble closure timing coinciding with the low season in New Zealand and peak season in its US domestic rentals business, albeit a lack of inter-state travel in Australia will impact the Queensland peak.&nbsp;&nbsp;




Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246





Matt Noland
matt.noland@forsythbarr.co.nz
+64 9 368 0134



Travel and Tourism Sectors: Importing a Pump for Deflated Bubble Will Take At Least Eight Weeks