Air New Zealand short-haul yield weakens, long-haul improves; pax growth in Feb-2011


Air New Zealand, in its Feb-2011 traffic release, stated group-wide yields for the financial year to date (eight months to Feb-2011) have increased 1.9% year-on-year. Short-haul yields are down 2.3% partly due to the new 'seats to suit' product while long-haul yields have improved by 5.5%. Removing the effect of foreign exchange, group-wide yields were up 4.6%.

A year ago, in Feb-2010, yields were down across the board at the carrier: Group-wide yields for the eight-month period were down 9.6%, with short-haul yields down 8.1%, long-haul yields down 13.3% and group yields removing the effect of foreign exchange were down 9.1%. In the corresponding period in 2009, yields were up across the board: 8.5% for group wide, 3.5% for short-haul, 14.4% for long-haul and 4.2% for group yields ex forex.

Air New Zealand yield growth has, however, been weakening in recent months. According to CAPA estimates, group yields in the month of Feb-2011 decreased 0.9% year-on-year, building on an 8.2% reduction in Feb-2010. Yields were in positive territory in 2008, with growth of 11.3% year-on-year in the month. Yields excluding forex improved 1.1% in Feb-2011, following a 1.4% reduction in the previous corresponding month in 2010 and a 3.8% reduction in Feb-2009.

Air New Zealand Group yield growth: Jul-2008 to Feb-2011

Long-haul yields were up 2.7% year-on-year last month, after slumping 15.4% in Feb-2010, while short-haul yields were down 7.9% in Feb-2011, building on a 3.2% reduction in Feb-2010. This means both short and long-haul yields remaining below 2008 levels as a result. 

Air New Zealand short and long-haul yield growth: Jul-2008 to Feb-2011

Pax levels stronger in Feb-2011

During Feb-2011, Air New Zealand handled 1.1 million passengers, a 6.9% year-on-year increase, and a 10.2% increase from Feb-2009 levels. Passenger numbers were however slightly down from Feb-2008 levels (with 1.068 million passengers in Feb-2008 vs 1.066 million in Feb-2011).

Air New Zealand passenger numbers:  Jan-2009 to Feb-2011

In the domestic market, passenger numbers have improved on a year-on-year basis for the past eight months, in line with traffic (RPKs) and capacity (ASKs) trends.

Air New Zealand passenger numbers:  Jan-2009 to Feb-2011

Some 66.3% of the carrier’s capacity is allocated to the domestic market, according to Innovata. The carrier has an extensive domestic network and is the sole operator on numerous regional sectors.

Air New Zealand international vs domestic capacity share (21-Mar-2011 to 27-Mar-2011)

Overall Air New Zealand traffic (RPKs) gained 6.6% in Feb-2011, slightly outpacing capacity (ASKs) growth of 6.5%. Capacity levels so far in 2011 are up on 2010 levels but remain below 2009 levels.

Air New Zealand capacity (ASKs): Jan-2009 to Feb-2011

As demand outpaced capacity in the month, Air New Zealand reported slight load factor growth: +0.1 ppts to 83.3%. Load factors have improved year-on-year every month since May-2010. Looking closer at February load factor data, the Feb-2011 result of 83.3%, while only marginally higher than 2010 levels of 83.2%, mark the highest load factors for February back to until least 2006, when load factors stood at 76.7%. (Feb-2006: 76.7%; Feb-2007: 79.0%; Feb-2008: 80.2%; Feb-2009: 78.7%).

Air New Zealand load factors:  Jan-2009 to Feb-2011

North America/UK load factors slip

However, load factors on the carrier’s North America/UK routes have slipped from the previous years’ respective rates for the past five months.

Air New Zealand Passenger Load Factor (Long-haul, North America/UK) (2009 to 2011)

North America is Air New Zealand’s second largest market, with 21.6% of total weekly capacity – based on Innovata data – for the week ending 27-Mar-2011. Western Europe represents a smaller 7.8% of total capacity.

Air New Zealand international capacity by region (21-Mar-2011 to 27-Mar-2011)

Air New Zealand cautions of Christchurch quake effects

Also this month, Air New Zealand cautioned that it expects the financial konock-on of the Christchurch earthquake, which occurred on 22-Feb-2011, to be more severe than previously forecast. Air New Zealand stated its full year pre-tax profit could be NZD50 million-60 million (USD37-44 million) below forecasts. The carrier, which previously expected to be profitable in the second half, now expects to be unprofitable in the six month-period. Full-year normalised earnings are now expected to fall below NZD100 million (USD74 million).  "Our concerns are relatively near term, for the next three or four months, then we'll see some improvement in our position looking forward from there," CEO Rob Fyfe said.

However, Mr Fyfe has subsequently assured customers that the airline would be return to profitability “within months” without needing to suspend routes. Mr Fyfe said the airline has adjusted schedules in light of weak demand in recent weeks but added he would be “very surprised” if he was forced to cancel routes. Mr Fyfe expects to be back in the black for 1HY2012 “based on what we’re seeing today”.

Christchurch is one of New Zealand's three major points and consequently a vital part of the flag carrier's network. As post-earthquake tremors and the cleaning up exercise continue, many residents have left the city temporarily and business activity has slowed, making for a significant slowdown in activity - although relief worker traffic has helped swell the numbers. Air New Zealand has a 63% capacity share at the airport, with Jetstar Airways also heavily exposed to the Christchurch market

Christchurch International Airport capacity (seats per week, to/from) by carrier
(21-Mar-2011 to 27-Mar-2011)

Air New Zealand CFO Robert McDonald has stated that Christchurch Airport is to serve as a gateway rather than a destination for tourists as the tourism infrastructure is assessed after the recent earthquake damage. Mr McDonald stated the carrier has changed the schedule of its trans-Tasman services in and out of Christchurch so more tourists could arrive and leave during the day time.

The carrier also had its outlook downgraded this week by Moody's Investor's Service, from "stable" to "negative", as a result of the earthquakes in Christchurch and Japan, in addition to escalating jet fuel prices.

The ratings agency affirmed the airline's 'Baa3' senior unsecured issuer rating, which Moody's stated is supported by Air New Zealand's dominant position in its core domestic market, strong liquidity and currently solid financial metrics relative to its global peers. The rating also benefited from the implicit support and ownership by the government, Moody's said. The rating outlook could revert to stable if the current high level of uncertainty in the company's operating environment, including demand conditions in New Zealand and on other affected routes, stabilised, along with a moderation in outlook for jet fuel prices. However, it said more negative rating pressure could evolve if there was evidence of sustained weakness in the carrier's financial profile.

Fuel costs a concern; raising fares and well-hedged for 2H2011

Another factor negatively impacting Air New Zealand and airlines on a worldwide basis is fuel costs. Air New Zealand is increasing domestic and international fares as a result of the rising cost of jet fuel.Over the past month jet fuel has increased from USD114 per barrel to USD130 per barrel, adding almost USD10 million per month to the airline's operating costs.

Effective from 18-Mar-2011, domestic airfares will increase by an average of 7%, fares to Australia and the Pacific Islands will increase by an average of 8% and long-haul fares will increase by an average of 7%. The carrier has hedged 93% of its requirements for 2H2011, with this declining to 42% for 1HFY2012. The carrier has minimal hedging covering from this point onwards.

Air New Zealand fuel hedge positions: As at 16 February 2011

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