1. Air New Zealand's Tie With Virgin Challenges Qantas In Australia
Air New Zealand (Baa3 stable) announced it paid AUD145 million ($145 million) to acquire a 15% stake in Virgin Blue (unrated), the operator of Australia's second-largest airline. This credit positive investment will help Air New Zealand diversify its earnings from an overconcentration at home and provide exposure to Australia's larger market. For Qantas Airways Ltd. (Baa2 stable), operator of Australia's largest airline and parent of the country's third-biggest carrier, Jetstar (unrated), the investment serves as a further sign of Virgin's growing competitive challenge to Qantas in the airline's home turf.
The investment will weaken Air New Zealand's credit profile only slightly, as the carrier can use cash reserves to pay for it. However, Air New Zealand will probably not receive dividends in the near term as we expect Virgin to continue to invest in expanding its fleet as it steps up the competition with Qantas. Nevertheless, the purchase will give Air New Zealand a presence in Australia, one of the world's most profitable aviation markets, while sparing the carrier the cost of doing the actual flying.
Currently, Air New Zealand relies on its home market, where it has an 80% market share, for virtually all its earnings. As competition accelerates, we expect carriers to create more such "virtual networks" through multiple channels of cross-ownership, alliances, and code sharing. Air New Zealand, Virgin, and others will likely search for ways to acquire greater scale and network connectivity with leaner fleets.
In Australia, Virgin Blue has maintained a nearly 30% market share, positioning itself as a leisure line between Qantas's full-service offerings for business travelers and low-cost carriers (LCCs) such as Tiger Airways and Jetstar, the latter of which Qantas wholly owns. In 2010, Virgin Blue announced a shift to target the profitable business market, dominated by Qantas, while at the same time maintaining a leisure market offering. To do so, Virgin Blue is increasing the frequency of flights on key trunk routes and investing in additional, wide-bodied capacity to cater to transcontinental routes to Perth, a nexus for Australia's natural-resources industry.
Exhibit 1 (attached)shows market shares by carrier in 2010.
Virgin Blue previously announced new routes into Europe via Abu Dhabi's Etihad (unrated), into the US via Delta Air Lines (B2 stable), and across the Tasman Sea via Air New Zealand. These routes will not deliver direct incremental earnings to Virgin Blue, but the airline will benefit from channeling Etihad and Delta's customers into its domestic network. Previously, this type of international alliance and global reach was a competitive strength that differentiated Qantas.
Attached exhibit 2 shows the steep rise in the share of international arrivals carried by Virgin Blue and its partners, year to date.
This development increases competition for Qantas, as it brings Virgin Blue's range of offerings closer to that of Qantas for international travel and will require Qantas to reduce prices to keep load factors at acceptable levels. Virgin Blue has cheaper fares than Qantas, and is therefore well positioned to win market share. Qantas is already grappling with rising oil prices and subsidiary Jetstar's low yields, which bedevil the entire LCC segment. The additional threat from the Virgin Blue-Air New Zealand tie-up will add to pressure on Qantas's margins just as renewed passenger demand was helping it recover from the effects of the global recession. In 2000, Air New Zealand tried unsuccessfully to enter Australia by acquiring Ansett Airlines, which subsequently collapsed. By contrast, this latest move costs little but has a larger potential payoff. It may, however, be a tough fight. Qantas, with its dual-brand strategy and entrenched, leading position in Australia, has shown in the past that it knows how to counter competitive challenges.
2. Market boosted by aviation sector
Auckland International Airport led gainers on the NZX 50, reaching a 2-½-year high in the wake of its upbeat economic report last week.
Air New Zealand rose after posting a jump in traffic for December.
The NZX 50 rose 5.615, or 0.2 per cent, to 3358, heading for its third daily advance. Trading was quieter than usual, with Wellington market participants away for the anniversary day holiday.
Auckland Airport rose 1.8 per cent to $2.29. The shares reached the highest level since mid-2008, extending their gains since the company released a report showing it may account for almost 20 per cent of national gross domestic product and sustain more three quarters of a million jobs by 2031, based on the flow of freight and passengers through the airport.
Air New Zealand, the national carrier, rose 0.7 per cent to $1.43 after traffic figures showed the airline carried 1,322,000 passengers December, 10 per cent more than the same month a year before.
Load factor rose by 1.3 per cent to 86.3 percent compared to the previous period, with revenue passenger kilometers up 7.7 per cent to 2,861 million.
Much of the increase was built on the back of a 10.9 per cent increase in short haul passenger numbers to 1,140,000, broken down to a 10.7 percent lift in the domestic market and a 13.9 per cent increase in Tasman/Pacific.
APN News & Media, which publishes the New Zealand Herald and operates the Radio Network, was unchanged at $2.40 on the NZX after it said the diversified nature of its operations is likely to offset the effects of Queensland floods, with minimal impact on the bottom line.
The company that said while it expects the Queensland economy to rebound strongly once mop-up operations are complete, advertising revenues from small businesses, retailers and real estate are expected to remain under pressure, having already shown some signs of weakness ahead of the floods.
Hallenstein Glasson Holdings, the clothing retailer, fell 1.2 per cent to $4.05.
New Zealand's retailing sector remains under pressure, with November's core retail sales declining 0.2 per cent to $4.24 billion, the second monthly decline. A gain of 0.5 per cent was expected, based on a Reuters survey.
The New Zealand dollar will probably stay within recent ranges this week as investors prepare for the Reserve Bank to keep interest rates on hold this week.
Five of six economists and strategists in a BusinessDesk survey expect the kiwi will respect recent price-action and stay in the middle of its medium-term range between US74 cents and US76 cents ahead of this week's central bank meetings in New Zealand and the US.
The lone dissenter expects the kiwi to head lower amid heightened expectations of rising interest rates in China.
Economists expect central bank Governor Alan Bollard will keep the official cash rate at 3 per cent after New Zealand dodged a double-dip recession last year, and last week's benign inflation and tepid retail sales data won't have given him reason to tighten rates early.
Analysts now expect Bollard will start lifting rates in September, with 68 basis points of hikes priced in over the next 12 months, according to the Overnight Index Swap curve.
The kiwi rose to US75.82 cents from US75.46 cents last week.
3. NZ shares rise; Kathmandu gains
New Zealand shares rose for the second time in three sessions, as positive offshore leads help stoke investors' appetite for local stocks.
Kathmandu Holdings paced gainers on the exchange while Restaurant Brands NZ fell.
The NZX 50 Index rose 6.41 points, or 0.2%, to 3359.06.
Within the index, 22 stocks rose, 13 fell, and 15 were unchanged. Turnover was $84 million.
Stocks on Wall Street rose for a second day, with the Standard & Poor's 500 Index closing 0.6% up at 1290.84, after chip-maker Intel announced a successful share buy-back plan, while packaging company Rock-Tenn agreed to buy rival Smurfit-Stone Container.
Kathmandu rose 2.9% to $2.16, the highest level in over six months.
Last week the outdoor clothing retailer upgraded its earnings forecast, with profit likely to rise by as much as 26% to between $18.5 million and $19.5 million for the six months ending Jan 31 on the back of stronger earnings.
The stock was further boosted by the December BNZ BusinessNZ performance of service index, which showed a significant recovery in confidence among retailers, with rose to 56.9 in the month, up from 46.3 in November.
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A reading above 50 indicating activity is expanding, while a reading below 50 indicates contraction.
Air New Zealand, the national carrier which bought a 15% stake in Virgin Blue Holdings for $189.5m, rose 2.1% to $1.45.
Virgin today said it expects first half net profit to be down more than 50%, due to the floods, a slowdown in consumer spending and disruptions to the airline's check in system last September.
It expects to post a net profit after tax of A$23 to A$26 million for the six months to December 31, down from A$62.5 million in the prior corresponding period of 2009.
"Air New Zealand's management recognise that the New Zealand aviation market is small and in order to expand and become a bigger player they have to look further afield," said Grant Williamson, a director at Hamilton Hindin Greene.
"Investors are hoping that this go into the Australian market is going to be more success than last time."
Pyne Gould was unchanged at 36 cents after executives were rewarded with 4.4 million new shares in the financial services company as a thank-you for the merger of the firm's Marac unit with Southern Cross and Canterbury building societies.
The managers are getting shares equivalent to 0.5% of the company, at 36.74 cents each, worth $1.6 million, according to a statement from chairman Bruce Irvine.
The gratuity will slice $1.4 million off Pyne Gould's 2011 profit and cut $300,000 from the earnings of the new merged entity, Building Society Holdings this year and by $100,000 in 2012.
"I think this is a very strong incentive for directors and staff to perform, though some investors might view it as excessive," Williamson said.
Charlie's Group, the juice maker that extended its footprint in Australia's Cole supermarkets, was unchanged at 20 cents after beating sales forecasts by $900,000 in the second half of last year.
The company's sales hit $21.9 million in the six months ended December 31, beating the $21 million forecast, and 29% ahead of 2009's revenue.
Chief executive Stefan Lepionka said most of the growth came in Australia, where it broke into Coles last year, though New Zealand sales were also up 3.6% cent from the same period a year earlier.
It kept forecast profit at $1 million for the period.
Restaurant Brands NZ, the fast food franchise operator, fell 2.8% to $2.44, pacing decliners on the NZX 50 for a second day.
The stock was second best performer on the NZX 50 last year, gaining 64% over the past 12-months, but has battled to find traction this year, and is now trading at its lowest level since October.
OceanaGold, the gold miner, fell 2.2% to $3.60 after it announced that it was taking full control of mining at its Reefton Gold Mine from April 1, and with a significant increase in operations at the mine, situated on the outskirts of Greymouth.
Stracon Mining has been operating and maintaining OceanaGold's mining equipment fleet under an agreement at the operation since mining started in 2006.
Goodman Fielder, the Australian food ingredient manufacturer, fell 0.6% to $1.73.
The stock has regained some of the ground it shed after chief executive Peter Margin announced his resignation on Jan 18, but still trading lower than $2 highs seen in November.
4. Putting the romance back into flying
You may have noticed that over the holiday period Air New Zealand finally took delivery of the first of its five Boeing 777-300ER aircraft.
It's been a much-anticipated arrival because this is the plane which will introduce cuddle-class - a flat bed made from three seats - plus slightly more room and the ability to order snacks via the video screen in economy; improved seats and a menu that includes the likes of tapas, pizzas and gourmet burgers in premium economy; and freshly cooked meals prepared on demand in business premier; plus a swish new decore and an inflight entertainment service which includes access to YouTube and provides news updates.
Innovations like those have already seen Air NZ named as Air Transport World's Airline of the Year and Conde Nast Best Long Haul Leisure Airline and the aviation industry is watching closely to see what effect they have on passenger number and profits.
Having checked out the new ideas on the ground some months ago, at Air NZ's so-called test hangar in Fanshawe St, I was very keen to try the actual plane for myself. Unfortunately, the delivery flight kept being postponed until it got to the point where it would have wrecked our plans for a family Christmas, so I had to pull out.
However, those who were able to experience the various innovations in action seem to have been hugely impressed.
In handing over the plane, Boeing's vice-president for the 777 aircraft, Larry Loftis, said Air NZ's interior was "the best in the air".
And the company's vice-president for sales and marketing, Marlin Dailey, said the airline was demonstrating once again "that they are a forward-thinking airline with revolutionary ideas".
Perhaps more significantly, even the cynical scribblers on the trip appear to feel the same way.
Veteran Australasian aviation journalist Geoffrey Thomas commented in his electronic magazine Flightpaths that when passengers on the delivery flight boarded for the first time, "quiet awe was the reaction and a sense of privilege that one was witnessing aviation history".
After experiencing the new plane in action he concluded, "While New Zealand may be at the bottom of the world, its airline is at the top of its game."
Unfortunately, the average passenger won't be able to see for themselves whether this really is a new era in aviation for a while - the cuddle-class seats, for instance, have yet to be approved by the Civil Aviation Authority - but over the next few months the 777-300ERs will run on more routes until by next year most long-haul flights will be covered.
Could this truly be the plane that puts the romance back into flying? That's a big ask. But it'll certainly add a bit of excitement to an industry that has often seemed to be mainly intent on squeezing ever more passengers into an ever smaller space.
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