The past couple of weeks have been nothing short of a nightmare for Air New Zealand [X.AIZ]. Factors including the company's notably weak balance sheet, the recent grounding of some of its subsidiary's fleet, and negative market sentiment towards the transportation sector have all contributed towards its severely damaged brand name. Although the airline has gone into damage control - such as releasing a television commercial sentimentally explaining and apologising for Ansett's problems - market experts believe Air New Zealand will struggle to gain investor support in the near future.
The Civil Aviation Safety Authority's (CASA) decision to ground some of Ansett's 767's prior to Easter caused absolute turmoil for Ansett and its parent company. In a tough environment where it is difficult to elevate earnings, the airline group faces restructuring and plane maintenance costs. Added to these woes would be the emerging realisation that the market holds little confidence that the company will report strong financial results. Analysts have already downgraded, Salomon Smith Barney has re-rated Air New Zealand's NPAT (net profits after tax) estimation by $NZ91.8 million to $NZ184 million for 2002.
"The combined group has a very poor profit outlook. It has staggering commitments in terms of its existing finance arrangements.," said Ben Sandilands, an aviation writer. "People have been taken aback by the steep slope the company will have to climb in order to get itself back to some sort of situation where it would be attractive for investors."
The market is not only wary of supporting Air New Zealand but also the airline industry as a whole. Hans Kunnen, Head of Investment Markets Research at Colonial First State told StockHouse Australia: "You may take a counter-cyclical view and say things can't get any worse and earnings have got to grow from here, but I'm not sure that I'd be persuaded by that argument." Sandilands agreed with Kunnen's view. "I'd put my money into the airport sector and some of the airline services sectors but you would have to be really brave to invest in the actual core business of flying passengers," he added.
Intense competition and strict regulation have made the Australian airline industry intrinsically volatile. Further, the entrance of Virgin Blue and Impulse into our domestic skies has led to fare cutting and price wars, which is highly risky for the airlines as the lower the prices go, the more passengers will become accustomed to cheaper fares.
Interestingly, the sector is a good barometer of economic activity as airline yields (including fares and actual bookings) reflect in advance what will occur in the general economy.
"When you see airline bookings go down, it normally means the economy is in trouble. What has been different this time, is that bookings have been driven artificially higher by extremely low prices in the marketplace. So, we've had phenomenal growth on competitive routes but it hasn't really reflected the underlying state of the economy. The economy is going one way and airline operating costs are going the same way, which is south, but passengers are making hay while the sun shines and traveling more and more," said Sandilands.
While airfare prices continue to drop, Qantas [X.QAN] still boasts being the market leader. And if you were in Ansett's shoes, wouldn't you just loathe them? Time after time the flying kangaroo has stolen the limelight from its competitor - the worst incident being when Qantas implemented an ambush-marketing ploy during the Sydney Olympic Games and people thought it was the official airline sponsor when in fact Ansett was.
"In fact, it is difficult to think of a situation where Qantas won't be the dominant player in the Australian market in the medium-term, they'll hold at least a 50 percent market share," Sandilands added.
On the back of Ansett's misfortunes, investors have not rushed out to buy Qantas shares - perhaps because of the weakness of the sector. "Qantas was a good buy at $A2.45 but at these levels you might see it come off as Ansett gets its act together. Also, I don't think there is a lot of money in the sector anymore," said a Sydney-based stockbroker.
On Monday Air New Zealand shares were trading 2c down at $A1.27 while stock in Qantas was slightly up at $A2.85.
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