Turbulence continues at Air NZ

By Phil Boeyen, ShareChat Business News Editor

Monday 20th November 2000

Credit ratings' agency Standard and Poor's has downgraded Air New Zealand's rating, claiming the airline is facing a high debt burden, increasing costs and more competition.

S&P has downgraded Air NZ's short-term rating from A-3 to B and long-term from BBB-minus to BB-plus, and has changed the company's outlook from creditwatch negative to stable.

The ratings agency says its downgrade reflects Air NZ's high debt burden associated with its acquisition of Ansett, greater vulnerability to cost pressures, heightened competition, slowing economy activity, and the risk of significant delays in the successful and timely integration of Ansett in the next few years.

"Although Air NZ recently has completed a NZ$284 million rights issue, its level of cash flow protection is expected to remain weak, with funds from operations-to-debt at less than 15% in fiscal 2001," the agency says.

The airline's ability to successfully integrate its operations with that of its Australian acquisition, Ansett, comes under particular scrutiny in the S&P report.

"Air NZ...will face a challenge to successfully integrate the two airlines and realize the integration benefits its has identified in a timely manner, given Ansett's relative size and recent market share losses."

Standard and Poor's says although Ansett has a satisfactory 40%-45% share of Australia's domestic passenger market, its position has weakened from nearer 50% in the past few years, reflecting strong competition from Qantas and the recent start-up of two new discount airlines, Impulse Airlines and Virgin Blue.

"As Ansett accounts for 50%-55% of Air NZ's revenue, a potential long-term threat to Air NZ's business risk profile is the success of a discount airline in Australia, as that would undermine the Australian industry's favorable yield structure."

Air NZ is also currently under pressure from the lower Kiwi dollar and increasing fuel costs, which are not expected to ease anytime soon. Just last week Asia Pacific airline representatives were told to expect jet fuel costs to continue rising into the New Year.

Another challenge for Air NZ will be to see what kind of mileage it can make out of a new 'open skies' policy with Australia, which will allow Australian and New Zealand international airlines to operate across the Tasman and beyond to third countries without restriction.

Previously, beyond services were limited to 12 Boeing 747s per week to a maximum of 11 countries.

In addition, the international airlines of both countries will be able to operate dedicated freight services from any international airport in Australia and New Zealand to third countries, providing greater opportunities for exporters.

The agreement will formalise the Single Aviation Market (SAM) arrangements, which were signed in 1996.

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