Air New Zealand downgrade: What it means for planned capital raise

The closed transtasman bubble is hitting aviation companies in NZ and Australia. Photo / Juliette Sivertsen

Air New Zealand may delay raising further capital as it taps further into a government loan and has outlined how badly the suspension of quarantine-free travel with Australia will hit its bottom line.

While the airline has said deferring raising capital, put by analysts at more than $1 billion, would help it assess what it needs and give the market more certainty, one portfolio manager says the environment is now clearly getting tougher.

As the pandemic hit, other airlines quickly went to markets to raise debt and equity. Air New Zealand has delayed such a move, instead so far relying on a backstop $1.5b government loan which it will now tap into again as transtasman travel collapses.

The airline told the NZX today it expects losses before other significant items and taxation of up to $530 million for the 2022 financial year, up from guidance of up to $450m announced in mid-June.

Shane Solly, a director and portfolio manager for investment management company Harbour Asset Management, said the bottom-line downgrade announced was not unexpected given what was happening with the bubble.

"It does raise this question of the timing of when to raise equity. With the transtasman bubble closed it does make it tougher," he said.

"It is not illogical [to delay], given what is happening. It's one of those ones where you've got to watch the vapour trails and they're telling me that they're doing the best with the hand they've been dealt but that hand is not looking great still."

Solly said the airline had cut its cash burn and it was a good sign it had not tapped into the government loan since February. It announced today it would draw down further on the facility before the end of this month. It has used $350m of the loan, negotiated as the pandemic hit last March, although terms including the high interest rate have been re-set.

Slower recovery

Air NZ said today the suspension of quarantine-free travel for eight weeks had led to the update on its outlook.

"The airline continues to assess the impact of this temporary suspension on passenger demand, in conjunction with an expectation that demand on the Tasman may be slower to recover following the re-opening of a travel bubble and that there remains a risk of future suspensions," it said.

The Tasman and Pacific Islands accounts for about a third of revenue. Air New Zealand and Qantas piled capacity back on to the Tasman when the bubble opened in April but demand tapered off as the Covid outbreak worsened in Sydney in June and reverted to repatriation and skeleton services when the Government suspended quarantine-free travel last month.

Solly said getting short-haul international travel back on track is far more important than getting long-haul back on.

"But we've got another six months of uncertainty to deal with."

Air New Zealand used Boeing 787-9 Dreamliners on some Sydney flights. Photo / Supplied

Yesterday, Qantas announced it was standing down 2500 staff as domestic travel had plummeted from near-pre pandemic levels to about 40 per cent.

He said Qantas' share price, which was close to A$5 a month ago, was now at around A$4.50, reflecting the impact of Covid-19 in New South Wales and outbreaks in other places.

Qantas chief executive Alan Joyce said it would be at least two months before normal flying resumed out of Sydney.

Air New Zealand, which is negotiating changes to mid-haul or Boeing 787 cabin crew contracts, had rehired staff to fill roles on Airbus A320s for its transtasman operations earlier this year.

It told the Herald it had not stood any staff down to date as a result of the transtasman bubble closing.

"Our A320 crew who operate quarantine free travel on the Tasman also work across our domestic network, which is currently operating at above pre-Covid-19 levels."

Bubble pause hitting workers

In its market update it said its operating cashflow remains positive because of continued domestic performance and the revenue contribution from the Government's Maintaining International Air Connectivity freight scheme.

That is in place until October this year and an airline body today called for the $542m scheme to be extended.

"We believe it will be imperative that the air connectivity scheme for maintaining international air freight routes is further extended," Board of Airline Representatives NZ executive director Justin Tighe-Umbers said.

His organisation said it would ask the Government to give that urgent consideration so airlines could maintain vital import and export routes.

Tighe-Umbers said transtasman travel remained critical to aviation recovery.

"A number of providers have a huge dependency on the Tasman right now and they are saying the effect of the suspension of the bubble is not just in their balance sheets; it is impacting workers."

Many of those providers were faced with making the painful call of standing down staff they hired in April and were worried those workers would not come back again once the bubble resumed, he said.

Barnz had requested support for the workers from the Government and was waiting to hear back, but the sector was running out of time. It was important to keep as many airlines as possible flying here.

"New Zealand faces a danger that once routes are lost they will be hard to attract back, especially with the northern hemisphere opening up to air travel. Airlines will be forced to go where the cash flow is to help recover from their severe financial losses."