Air New Zealand Earnings: Profitability Boosted by Full Planes and Expensive Tickets

After three long years and about NZD 1.3 billion in underlying pretax losses thanks to travel restrictions, Air New Zealand’s AIZ fortunes turned in fiscal 2023. Air travel demand returned strongly, while capacity is constrained by the availability of aircraft, labour, and parts. With full planes and expensive tickets, Air New Zealand is enjoying tremendous profitability. Fiscal 2023 underlying profit before tax of NZD 585 million, its second-best on record, was broadly in line with our NZD 582 million forecast and guidance provided in June 2023. We make no changes to our NZD 0.97 (AUD 0.88) per share fair value estimate.

Earnings are expected to soften from current elevated levels, with pricing competition returning as capacity bottlenecks ease for Air New Zealand and its competitors. We forecast fiscal 2024 passenger capacity growth of about 28%, largely driven by continued recovery in the long-haul international business. But we expect yields to suffer as competition heats up, and forecast passenger revenue growth of just 6%. Airlines globally lack economic moats due to a long history of value destruction, a business model with high fixed costs not conducive to rational pricing, a lack of barriers to entry, and low switching costs. We expect these conditions, which plagued the airline industry before the pandemic, to return. We expect the return of industrywide capacity to lead to a normalisation in profitability and forecast underlying pretax profit to moderate by about 28% in fiscal 2024 to NZD 423 million.

Air New Zealand declared a special dividend of NZD 6 cents per share, fully imputed for eligible New Zealand investors. Air New Zealand is targeting an ordinary dividend payout ratio of 40% to 70% of underlying net profit after tax. We lift our forecast dividend payout ratio to about 50% of underlying NPAT from fiscal 2024, from 40% previously. Our fiscal 2024 dividend forecast is NZD 4.5 cents per share, representing a yield of about 6% at current prices.