Should I buy Air New Zealand shares after its FY23 earnings update?

Nick Sundich Nick Sundich, June 13, 2023

Should I buy Air New Zealand shares?

Yesterday, Air New Zealand may have left some investors wondering that question. The stock is well below pre-COVID levels and arguably has certain structural advantages compared to its peers in Australia. But is it worth buying into?

 

 

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Air New Zealand gave a strong trading update

Last Thursday (June 8), the company provided earnings guidance for FY23. It is expecting earnings before other significant items and taxation to be no less than NZ$580m. This compared to the previous guidance which was NZ$510-$560m. This was assuming an average jet fuel price of US$89 per barrel and assuming current demand levels stayed strong. It noted demand right now was stronger than usual at this time of year – one that was typically considered off-peak being in between the Easter and Winter school holidays.

The Air New Zealand trading update provided no further details about its financial performance beyond those points except noting it would spent NZ$3.5bn over the next five years in capital expenditure – and that was just refitting aircraft. That pales in comparison to Qantas, which is looking at a US$15bn bill just for the aircraft it has already ordered. Air New Zealand’s fleet doesn’t need much more renewal with an average fleet age of just 8.8 years and the airline set to take delivery of 787-10s starting next year.

Consensus estimates for FY23 suggest NZ$6.3bn in revenue (up 130%) and $1.28bn in EBITDA (a substantial swing back into positive territory from FY22).

 

So should I buy Air New Zealand shares?

To put it bluntly, no. Consensus estimates for future years aren’t as rosy. Analysts call for $6.4bn in revenue (up less than 2%) and $1.19bn in EBITDA (down 7%). Revenue and earnings are stagnant for FY25-FY27. The multiples may appear compelling at just 3.2x EV/EBITDA and 8.1x P/E. But not when you remember that there is no growth.

It is easy to forget that aviation is not just highly cyclical, but highly competitive. Additionally, New Zealand’s economy is all but certain to have a recession in CY23 and this will hit consumer spending. Although Air New Zealand has a bigger exposure to the high-margin Trans-Pacific network than Qantas, it will face intense competition from United, which is significantly increasing capacity into Australasia.

And Air New Zealand’s frequent flyer is no match for Qantas’. Compared to the program run by the Red Roo, Air New Zealand’s Airpoints program is essentially still stuck in the 1970s where frequent flyer programs were essentially ‘buy however many flights and get _ free’. It is consequently not the cash cow that it otherwise might be.

 

What are the Best ASX Stocks to invest in right now?

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There are better stocks out there

We think there are better ways to gain exposure to the travel thematic that might even be safe if there is a downturn – Corporate Travel Management (ASX:CTD) is one of them. The only catalyst that could spark a surge in the share price is the FY23 results, but you could argue they are priced in already given how recently it updated its guidance. If the company consensus in the future years holds up, its share price will likely follow suit in stagnating.

 

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