Analysts' forecasts: When will Air NZ return to profitability?

When will Air New Zealand's profits take off again? Photo / NZME

Air New Zealand is likely to make a much smaller loss in its 2023 financial year before returning to profitability in 2024, analysts are predicting.

But there are no signs of a dividend on the horizon for shareholders of the national carrier.

The airline revealed an underlying loss of $725 million on Thursday last week for the year to June 30 as fewer flights, driven by Covid lockdowns and border closures, continued to weight on its revenue.

The airline gave no forward guidance on its FY2023 profit.

Chief executive Greg Foran said it was encouraged by its forward booking numbers and expected capacity to return to 75 to 80 per cent of pre-Covid levels in its next financial year.

But that bounceback in demand for travel isn't expected to result in big profits yet.

Forsyth Barr analyst Andy Bowley said in a note he now expected a small loss in FY23 before a ramp up in profitability in FY24.

"Passenger demand is strong, albeit on lower industry capacity. Domestic forward sales are exceeding pre-Covid levels. International forward sales are 30 to 35 per cent lower, but are being held back by capacity constraints partly reflecting border restrictions in China/Hong Kong and lower Asian demand."

Bowley said Air NZ was exposed to a number of operational and financial headwinds as it scaled up its recovery, in particular, in its two largest cost lines - fuel and labour.

He forecast fuel costs to increase by around $1 billion in FY23 due to more volume, higher oil prices and hedging rolling off.

"The level of fuel hedging currently in place for FY23 is towards the bottom end of management's hedging range. In addition, a tight labour market and high levels of staff illness adds to labour cost inflationary pressures."

Bowley dropped his target price from 70 cents to 66 cents after the result and is forecasting an underlying loss before tax of $18.5 million for FY23 before the airline takes off again in FY24 with an underlying profit of $360.6m.

On the more pessimistic side, Craigs Investment Partners analyst Wade Gardiner is forecasting an underlying loss of $126m turning to a $313m profit in FY24.

"The outlook is mixed, with fuel prices remaining high, demand and yields in Q1 to date have been strong, but building capacity remains challenging due to labour constraints," Gardiner said.

"A key concern in the short term is volatility of Jet-Brent crack spreads which have blown out in recent weeks and against which Air NZ is not hedged."

Gardiner noted his forecast was below the market consensus from analysts but said the possible range of outcomes was wide given the number of uncertainties.

He increased his target price from 64c to 69c.

Weighing in on the optimistic side are Jarden analysts Andrew Steele and Nick Yeo.

They are forecasting a slim underlying profit before tax of $14m in FY23 rising to $200m in FY24.

Steele and Yeo upgraded passenger revenue forecasts by 12.8 per cent, 9.6 per cent and 10.3 per cent for FY23, FY24 and FY23.

"Despite higher revenue our Ebitda forecasts fall by 6.2 per cent, 6.4 per and 5.4 per cent respectively on higher labour costs and jet fuel," Steele and Yeo said in their report.

The analysts cut their target price from 72c to 70c.

They said the changes reflected greater confidence in passenger recovery following the full reopening of New Zealand's borders and current strong demand for travel.

"However these positives are tempered by ongoing risk of Covid disruption, high cost inflation and a softening macroeconomic backdrop."

Risks included Covid-19 related operational disruption, change to competition, fuel costs, FX and underlying consumer demand.

None of the analysts were picking a dividend to be paid in either FY23, FY24 or FY25.