KEY POINTS:
The takeover of Qantas highlights the strong position Air New Zealand is now in, says Forsyth Barr aviation analyst Rob Mercer.
Mercer yesterday published a research report upgrading his recommendation on the stock to "buy" and lifting his valuation of Air New Zealand to $2.20 a share from $1.52.
The shares closed at $1.76 last night, having risen nearly 20 per cent in the past three weeks.
Although the Qantas bid has driven the share price to new heights, Air New Zealand is not a takeover target because it is 82 per cent owned by the New Zealand Government.
But the $12.6 billion price tag on Qantas has put the spotlight on airline stocks which are being revalued by analysts worldwide.
"Airlines are heading in to a sweet spot, due to improving yields which have been helped by a shortage of wide-bodied aircraft," Mercer says. "This has largely been due to the delays in the launch of the Airbus A380."
Air New Zealand is in the enviable position of having perfectly executed the timing of its fleet upgrade and is undervalued compared with Qantas - by about 30 per cent - and compared with other global airlines.
The heavily leveraged private equity buy-out of Qantas will require the airline to increase earnings aggressively and has prompted some speculation that Air New Zealand could face tougher competition from its biggest regional rival.
But Mercer believes there is a relatively low probability of a cash-hungry Qantas launching a hostile strategy on New Zealand domestic and Tasman routes.
"An aggressive plot against Air New Zealand could actually work against it," he said.
"Air New Zealand could actively partner with a wide range of long-haul carriers, including Virgin."
That could result in Air New Zealand customers being linked away from Qantas.
Qantas and Air New Zealand ditched plans to share operations on the Tasman last month after they were rejected by regulators.
The New Zealand domestic and the Tasman routes would also be relatively low on the list of routes the new owners were likely to target for growth, Mercer said.
Qantas was more likely to look at driving revenue and increasing market share on Australian outbound and inbound flights to destinations such as North America and Europe.
Airlines still face some risk from fuel price volatility, although prices have stabilised since the middle of the year.
In the two years before June, Air New Zealand's fuel bill more than doubled.
Market observers on both sides of the Tasman have voiced concerns that the Qantas deal is a symptom of over-confidence in the private equity industry - which has taken a "buy at all costs" attitude to Australasian assets in the past year.
