AIZ – Air New Zealand

It closed at $1.815 with a high at $1.84 today.

Air NZ rated a ‘buy’

Air New Zealand is expected to triple its pre-tax profits over the next four years as it benefits from new planes and passenger cabins, as well as route changes.

Forsyth Barr analyst Rob Mercer has upgraded his profit forecast for the national airline to $205.5 million before interest and tax for the year to June 30, up $50.3 million.

That rises to $497 million in 2010, and compares with $148 million last year.

Even those forecasts are conservative, Mr Mercer says in a research note.

He also expects Air New Zealand to pay an 8 cent a share dividend in 2008, up from 5c.

The key profit driver is the perfectly timed fleet upgrade, which will give Air New Zealand a capital expenditure holiday for the next five years, allowing the airline to generate about $1.7 billion in free cashflow over the next five years.

As forecast net debt of $182.7 million for 2007 turns to $120.2 million cash in 2008, and exceeds $1 billion cash by 2011, shareholders can also expect special dividends in the next few years, Mr Mercer says.

Air New Zealand is about 80 per cent state-owned following a taxpayer-funded rescue in 2001.

Mr Mercer has increased his valuation for Air New Zealand shares from $1.52 to $2.20 and recommends investors buy the stock. The shares closed at $1.94 on Friday, up 2c.

“While the airline industry has a history of inadequate returns, we believe Air New Zealand is heading into a sweet spot at the right time,” Mr Mercer says.

In the last year, the airline has bought new domestic and long-haul aircraft which are more fuel efficient and will need little capital expenditure and reduced maintenance costs for the next five years.

“The timing of Air New Zealand’s fleet upgrade could not have been more perfect” at a time of high fuel costs, Mr Mercer says.

New, market leading lie-flat business class seats, and improved facilities in economy, as well as the introduction of premium economy, has allowed Air New Zealand to regain market share to the point where it now dominates all the routes from New Zealand to Asia, the United States and London. That has boosted revenue and yields, Mr Mercer says.

Loss-making international routes, including Singapore and Nagoya in Japan have been abandoned. The airline has also announced an 11 per cent overall capacity reduction on the Tasman next winter.

Air New Zealand and Qantas abandoned attempts for a trans-Tasman code-share agreement after its was rejected by the Australian competition regulator.

While the international capacity cuts will lower revenue, that will be more than offset by resulting cost savings, especially fuel use, Mr Mercer says.

Fuel costs have also fallen since August when the airline estimated its fuel bill could grow to $1.2 billion for the next year, up $251 million, Mr Mercer says.

Cost savings will come mainly from lower commission paid to travel agents as more passengers book direct through Air New Zealand’s website.

Air New Zealand chief executive Rob Fyfe expects online bookings to exceed $1 billion this year, about a quarter of forecast revenue.

Mr Mercer says airlines globally are heading into a period of buoyant earnings growth as the ongoing delays of the 555-seat Airbus A380 creates a shortage of international seats in an expanding travel market.

The first double-decker A380 super jumbos are now not expected to fly to Australia and New Zealand till 2009, nearly two years’ late.

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