Air New Zealand has bounced back strongly from the depths of the pandemic. Photo / Brett Phibbs
Reduced competition, high airfares and strong demand have set Air New Zealand revenue soaring and it shows no sign of levelling off, meaning the airline could resume dividends years sooner than expected.
Jarden analyst Andrew Steele says long-haul economy class yields are up 28 per cent for later this year and business yields are up 24 per cent compared to the same period in 2019 for bookings between one and six months out.
The airline is on track for one of the best half-year revenue results in its history when it reports this month, and he says that in August it could announce the resumption of dividends – three years earlier than current guidance.
The latest analysis won’t come as a shock to travellers who have been hit with high prices as demand surged coming out of the depths of the pandemic. Air New Zealand said last year that domestic fares were up by 15 to 20 per cent.
Stats NZ CPI data shows that in the final three months of last year, international air travel prices increased 19 per cent and domestic fares across the board were up 14 per cent.
Analysts at Forsyth Barr say that with reduced capacity and high demand, airlines are the big winners in the recovery from the pandemic.
Air New Zealand is 52 per cent owned by the Government on behalf of taxpayers who have provided more than $2 billion of direct and indirect support during the pandemic.
As with other airlines, many passengers have not only been paying high prices, but also receiving poor service compared to what they expected before the pandemic, as staff and aircraft shortages and infrastructure issues make for a bumpy recovery in aviation.
While most of Air New Zealand’s 12.3 million customers during the past year would have had a good experience, for thousands of others it has been “sub-optimal”, as flights were cancelled or delayed and baggage went missing.
Jarden’s Steele says the yield data shows all markets are up materially, but Singapore, Hong Kong and Shanghai stand out for the “material uplift” in prices compared to before the pandemic.
The competitive landscape favours Air New Zealand’s international operation, which traditionally earned about two-thirds of its revenue. The airline scheduling outlook suggested a “stable industry structure” - reduced competition - for at least the next six months.
Analysis of scheduling data highlights the likelihood that Air New Zealand and Qantas will continue to dominate the key transtasman market, where Virgin Australia has largely reinstated flights only to Queenstown.
Air New Zealand is making the most of its strong position on the Tasman.
In the first half of this financial year, Air NZ capacity across the Ditch was around 20 per cent below the same period in 2019, while competitor capacity was down 46 per cent, according to the Jarden research.
Looking ahead to the second half of this year, Air NZ’s capacity is expected to be down 8 per cent while other airlines’ capacity is reduced by 19 per cent.
Importantly, not only is the return of competitor capacity below that of Air New Zealand’s for the second half of the year, but fewer airlines will be flying in the market.
“Most notably, Virgin is not expected to return to the market in this period,” said Steele.
“We believe that the Tasman market is much more likely to continue to see rational deployment of capacity and pricing when dominated by two players. In addition, we do not expect Virgin to return to the market and pursue aggressive price cuts in the near term.”
A number of Pacific Island routes are yet to see a return of any competition for the second half of this financial year. Competitor capacity is not scheduled to return in this financial year for Bali, Samoa or Tonga, leaving Air New Zealand the only airline to provide a direct service to these markets.
In the Cook Islands, competitor capacity is 55 per cent below the pre-Covid level.
Other than Fiji, French Polynesia and New Caledonia, Air NZ was the dominant or only airline serving its other Pacific Island destinations, Steele said.
Across each key Asian market, Air New Zealand is bringing capacity back faster than competing airlines and there was broad-based strength across all Asian routes.
With the reopening of China, airfares into Shanghai are very strong: economy class airfares booked over the past month for three and six months forward were up 98 per cent and 385 per cent versus the comparable pre-Covid period and business class airfares are up by 45 per cent and 65 per cent.
From this month Air New Zealand is operating four passenger services a week, bringing total seat capacity to 1200 seats a week. This is roughly a third of pre-Covid capacity for the equivalent period.
This capacity then steps up to 75 per cent of the pre-Covid level late next month, then 100 per cent in May.
In contrast to the pricing strength across Asian routes, airfares into North America are more mixed, Steele said.
One-month and three-month forward prices into Los Angeles, San Francisco and Vancouver are solidly up versus pre-Covid.
However, it is notable that six-month forward airfares into Vancouver are up 7 per cent for economy class and 15 per cent for business class, Los Angeles down 3 per cent (economy) and up 13 per cent (business) and San Francisco down 5 per cent (economy) and up 13 per cent (business).
“While we will remain watchful of these longer-dated muted airfares, particularly given the cost environment versus financial year 2109, given the strength of near-term economy prices and all business class fares, we estimate the average yield across the booking curve remains strong versus pre-Covid.”
Air New Zealand doesn’t have any direct competitor flights to Chicago, Houston or New York - until June, when Qantas is due to start Auckland-New York flights.
“We believe this return of competition is reflected in the pricing data - with Los Angeles, San Francisco and Vancouver six-month forward economy pricing at a similar level or slightly down on a financial-year-2019 comparable,” Steele said.
Not only is the airline enjoying a revenue bonanza, it is now benefiting from the falling price of fuel – a huge cost it cited last year as contributing to fare increases.
Steele said that in NZ dollar terms, jet fuel has come down 28 per cent from a peak of $246 a barrel in July last year.
The difference between crude oil and refined jet fuel is reducing. Should this normalise to its average, it is estimated that it would cut the airline’s fuel costs by around $20m in the 2024 financial year.
“For a business with high operating leverage, this fuel cost swing could have a large impact on earnings.”
Balance sheet repair meant that besides the dividend resuming, there was potential for share buy-backs.
Steele said the airline could finish the current financial year with about $1.1b of net debt, and gearing (including leases) of 35 per cent, well below the company’s target range of 45-55 per cent.
Air NZ guidance is for an underlying interim profit of between $295m and $325m. Jarden forecasts $312m when the airline releases its six-month results on February 23.
Other interim results that day – Qantas and Auckland Airport – will provide a further gauge of how strongly airlines are recovering in this region.
From cataclysmic losses at the depths of the pandemic, the International Air Transport Association says the global industry will make a US$4.7 billion ($7.45b) profit this year, although this is well down from $26b in the 2019 pre-pandemic year.
The airline sold its last slots at Heathrow in 2020.