Forum Archive Index - April 2001

["Ben Dutton" <bendutton@sharechat.co.nz>]

This is an excellent analysis Snoopy, I'm sure many sharechatters will find
it very valuable.

Thanks for posting it,

Best Regards

Ben Dutton


----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Sunday, April 08, 2001 9:57 AM
Subject: [sharechat] AIR - SNOOPY?


> Interesting header.   When I read it I thought someone had blown the
> whistle on my plans to fire up the Sopwith Camel and offer World War
> One Replica single passenger flights across the Cook Strait!  But
> back to reality....
>
> It would seem that overseas, consumer and business confidence is
> down, except for the USA where confidence seems to be on the rise
> again for consumers at least.  Within NZ, the domestic market is
> going well, but competition is still hot within Australia.  Fuel
> prices remain high, probably higher than budgeted for.  You have to
> judge whether the good points outweigh the bad points and if not, has
> the overhang of bad news been fully reflected in the share price of
> AIRVA.   Let's do a bit of speculative sensitivity analysis to see
> what we come up with, using information from the 2000 Annual Report.
>
>
> 1/ International Markets (pA8 of Annual Report)
>
> We will assume revenue is tied into available seat kilometres (ASKs)
>
> ASK Figures quoted (in millions of kms) are:
> Tasman 6099, Pacific 10969, Asia Japan 6934, Atlantic 3257,
>
> Lets say all business is static (world less buoyant but negative
> effects of y2k and Olympics are gone) but Pacific business
> (principally from the USA) is up 10%.  This equates to an overall RPK
> growth of 1,097 (this can be accommodated within the existing flights
> so no extra fuel is burned).
>
> This gives rpk growth of 1097/(27,259)=4%
>
> FORECAST
> Based on revenue of $NZ3,724million = this gives revenue
> growth of $NZ149million.
>
> 2/ NZ Domestic Market
>
> Ansett was in disarray last year due to strikes and the transition to
> becoming a Qantas franchise.  So even if the market gets better in
> New Zealand I can't see Air NZ having a relatively easier ride of it
> domestically in 2001-despite an improving domestic economy.  And the
> wild card of Qantas coming in to bail out their own franchise won't
> make things any easier.
>
> FORECAST
> Little different to last years figures
>
> 3/ Australian Domestic
>
> Here Ansett and Qantas are up against two rabid minnows:
> /a/the privately owned Impulse Airlines and
> /b/Virgin Blue which is an offshoot of Richard Branson's conglomerate
> of Virgin companies.
>
> Impulse Airlines was founded in 1982 by Gerry McGowan, is
> headquartered in Newcastle and until recently was a freight only
> airline.  The joke is that people are being herded on and being fed
> no better than cattle cargo while aboard.  This appears to be
> naive,as it is now apparent that not only the general public (who are
> also the most price sensitive) flocking to this new outfit, but so
> are the business travellers!  Impulse is a private company so there
> is little in the way of public domain financial data to go on as a
> reference.
>
> Virgin Blue, the other cut price competitor, can keep prices low by
> focussing on repositioning international planes between Sydney and
> Melbourne.  Sister company Virgin Express Holdings plc, which
> operates aircraft around Europe has just released a startlingly bad
> y2k result.  The loss of 65.2million Euro (or $NZ135 million dollars)
> is on revenue of $NZ600m.  Because of the relative size of Virgin
> Express (only 1/6th the size of Air NZ) this figure is far worse than
> anything Air NZ has reported.   I should stress that 'Virgin Express'
> is not the same company as 'Virgin Blue' (for which specific figures
> are unavailable, that I can find), but since Branson backs both,
> there must be some question mark as to how long Branson will tolerate
> these kinds of losses in his 'airline family'.  He could certainly
> afford to do so, but with these kinds of 'returns' why should he?
>
> Capacity has increased on Australia's main trunk routes by 9% (from
> 46k million to 50k million), and revenue per km per passenger flown
> (for Ansett) has gone from 18c to 15.8c.  Because the Airlines
> operate on such fine margins this has had a serious effect on
> profitability.
>
> Assuming that:
> /a/ Ansett has exactly held their own in passenger numbers
> during the price war (and given that the price war has grown the
> market this isn't entirely unrealistic) and
> /b/ the price war has affected fully half of Ansett's routes, then
> revenues would have been reduced from A$3.5billion (p5, Air NZ
> special meeting of shareholders notice) to A$3.28billion.
>
> FORECAST
> This A$220m revenue reduction when stacked up against last years
> profit of A$72.3m, will give an expected loss for year 2000 of
> -A$147.7million, or -$NZ180m in round figures.
>
> 4/ Jet Fuel (pA10 of Annual Report)
> "Air New Zealand's jet fuel expense increased from $322million to
> $463.7million, despite savings of about $40.7million from the groups
> fuel price hedging program."
>
> Since that time the NZ dollar has not risen 20% (from US40c to
> US50c as forecast) and the oil price has not dropped from around $23
> to $21 at the end of the northern winter.   So if AirNZ management
> expected the market gurus to be right, their fuel bill this year will
> be up to $504.4m x1.2 x1.09= $662.9m.
>
> FORECAST
> This is $200m more additional cost than last year.
>
> 5/ Effect of Hedging on Lease Payments
>
> pB30 of Annual Report
>
> Lease payments due this year $NZ305.4million based on last years
> currency hedging policy.  Lets say they got the currency hedging
> wrong by 20% as per the jet fuel example.
>
> FORECAST
> Extra costs this year = $305.4 x 0.2 = $61.0m.
>
> SUMMARY OF FORECASTS
>
> If we add the additional extra profit adjustments based on points
> 1-5 above we get:
>
> $149m + 0 -$180m -$200m -$61m
> = -$NZ292m
>
> And adding this to last years operating profit that we will use as a
> baseline  ($NZ177.9million), we come up with a projected loss of
> $NZ114.1million.
>
> Given that Air NZ has $NZ800m in cash and $NZ400m in undrawn credit
> it is clear that Air NZ can 'tough out' the price war in Australia
> for several years, notwithstanding higher fuel costs.  I am sure Air
> NZ will want to do better than just toughing it out though.  Ansett
> have leased four Boeing 767 aircraft which will enter service on the
> Sydney Melbourne route in July 2001, which should help woo back the
> business sector customers.
>
> SNOOPY'S OVERALL VIEW
>
> The situation in Australia with four domestic airlines doing the main
> trunk routes appears unsustainable.  I think AirNZ will be one of the
> survivors but just how much cash burn will occur until the situation
> settles down is unclear.  I don't like companies that burn cash so I
> wouldn't recommend investing in AirNZ now at any price (yes even at
> 75c!).   I'd be waiting for a signal either:
>
> 1/ one of the Airlines in Australia shuts down or
> 2/ AirNZ announces its long postponed capital notes issue.
>
> At one of those points, the worst of the financial risks of what is
> happening will be played out.  You will probably miss the bottom if
> you follow this strategy but you will also miss catching a falling
> dagger.   For an investor that is probably more important than trying
> to eek out that last bit of potential profit. SNOOPY
>
> disc: hold AIR, and will be topping up when the turnaround signal
> happens.
>
>
> ---------------------------------
> Message sent by Snoopy
> e-mail  tennyson@caverock.net.nz
> on Pegasus Mail version 2.55
> ----------------------------------
> "Sometimes to see the wood from the trees,
> you have to cut down all the trees."
>
>
>
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