Solid kiwi big boost for Air NZ

By DANIEL RIORDAN aviation writer

Air New Zealand's share price continues to show resilience, buoyed by a rising kiwi dollar, the market's satisfaction with the new mangement team's performance and expectations that an alliance with Qantas will improve the national carrier's competitiveness.

Shares started the week at 62c and ended it at 66c.

UBS Warburg analyst Timothy Ross, whose re-rating at the end of April when shares were below 40c coincided with the first sustained rise in the share price, released a research note on Monday changing his rating of the airline from hold to buy. The note lifted his 12-month target price from 50c to 85c, and forecast full-year pre-abnormal earnings of $90 million, up 15 per cent.

Ross said that while passenger numbers were growing faster than envisaged, the stronger kiwi dollar was having the biggest impact on the airline's fortunes.

He estimated that for every cent the kiwi rises against the US dollar, Air NZ saves $10 million to $11 million in operating costs.

The kiwi has risen from 41USc to 49USc in the past four months.

Of course Qantas, Air NZ's fiercest competitor -and suitor - is also benefiting from recent exchange rate movements.

Macquarie Equities estimates a 1Ac increase in the aussie against the greenback translates to a A$14 million ($16.2 million) lift to Qantas' profits.

Some of that good fortune will no doubt help offset the rock-bottom ticket prices Qantas continues to charge on NZ main trunk services.

Macquarie has a fair share value of between 52c and 68c for Air NZ, leaning towards the higher end as it sees Air NZ management continuing to implement its business plan.

Ross said Air NZ chief executive Ralph Norris' skills from his last job running ASB Bank had translated well to the challenges at Air NZ.

They include dealing with a mass- market customer base, the importance of back office operations, the hedging of financial instruments and doing business in an environment of highly competitive margins.

Qantas is keen to buy into Air NZ by buying some of the Government's 82 per cent stake.

While highlighting the benefits to both airlines of such a move, Ross doubted suggestions they could save hundreds of millions of dollars.

"You don't typically get operating cost savings from such alliances, but you do get benefits from revenue and equipment savings."

The bigger impact on Air New Zealand's costs was likely to come from its move to a single-class domestic service, Ross said.

Standard & Poor's this week raised its long-term corporate rating on the airline from B- to B, citing the stability of Government ownership, better fuel prices and exchange rates.

Key threats remain Qantas and the potential for Virgin Blue to enter the New Zealand and transtasman markets.