Qantas poised to dominate region

By Phil Boeyen, ShareChat Business News Editor

Friday 22nd March 2002

Ratings agency Standard & Poor's describes Air New Zealand (NZSE: AIR) as small and weak and says Qantas is set to become a much stronger regional player.

In a review of the Australasian airline market the agency says that although clearer skies have emerged after the final demise of Ansett, the storm clouds have not completely blown over.

With the Australian market now returning to a duopoly between Qantas and Virgin Blue the agency believes there are prospects for more sustainable pricing strategies.

However ratings director Jeanette Ward says the industry is still under pressure from weak international markets, severely weakened airlines and airline collapses, and sizable or increasing debt burdens.

Ms Ward says Qantas is poised to become a much stronger player regionally and to further cement its position as one of the world's strongest and most profitable airlines, once its international business recovers.

"To exploit and maximise its opportunities, however, Qantas relies on lowering its cost structure and competing more effectively not only against Virgin Blue, but also against its numerous international competitors where industry overcapacity remains an issue."

Ms Ward says that as well as a recovery in international markets, other important competitive issues for the region's airlines are how far and fast Virgin Blue can expand and how much of the market Virgin Blue will win from Qantas.

Another factor will be the fate of Air New Zealand which she describes as "small, weak, and facing strong competition in its domestic market."

There's considerable speculation about whether Air NZ will form some tie up with Virgin Blue and what form the partnership will take. Speaking on National Radio on Friday morning the company's CEO, Ralph Norris, said that turning the entire airline into a discount carrier was one option under review.

However S&P has better news for the country's airports, which include the publicly listed Auckland International Airport (NZSE: AIA).

The agency says that the demise of Ansett and the events of September 11 demonstrate that the airports are vulnerable to market and operating risks, and high gearing levels despite their monopoly position.

"The importance of maintaining adequate financial flexibility, and a balance between shareholder returns and internal liquidity to withstand such extraneous events cannot be overemphasised.

"Operating and market risks are largely factored into the airport's ratings, and the changes in the operating environment led to a lowering of ratings on only two airports in the past 12 months," said associate director Parvathy Iyer.

Ms Iyer says with prospects for a slow recovery in international and domestic demand, slow growth in revenues, and higher operating costs associated with insurance and heightened security measures, the margin of safety on the current ratings of the financially stretched privatised Australian airports has diminished.

But she says the New Zealand airports have a stronger financial profile and "are better placed to weather the current business cycle."

AIA recently surprised the market with a strong half-year result and reports of increasing international passenger numbers. Latest visitor statistics released on Thursday show February numbers were up 6% compared with the same month last year.

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