Warning signs for transport
New Zealand’s transport companies are facing several barriers to growth, including rising labour and fuel costs. Forsyth Barr broker Damian Foster tells business editor Dene Mackenzie businesses will have to start reviewing their cost and pricing policie
RISING labour costs, rising oil prices and slowing container growth are all warning signs for the transport industry in New Zealand, Forsyth Barr broker Damian Foster says.
Forsyth Barr has no outperform ratings on any of the transport companies listed on the NZX.
It has neutral ratings on Mainfreight and Air New Zealand. Auckland Airport, Port of Tauranga and Freightways have an underperform rating.
Mainfreight was undergoing a period of stronger earnings growth, driven by Australia, New Zealand and Europe, Mr Foster said.
The growth was well factored into the company’s share price. The company would host an investor day in Europe on June 20.
Air New Zealand’s current strong revenue trends would help to at least partly offset rising costs pressures, particularly from higher oil prices, he said.
‘‘Assuming oil prices remain at or around current levels, we believe Air NZ is at the beginning of a downwards earnings cycle.’’
Recently announced price increases were positive industry leadership, although it would be brave to assume there would not be a competitive or demand response, Mr Foster said.
Transport infrastructure companies, Auckland Airport and Port of Tauranga, continued to trade at elevated earnings multiples.
Auckland Airport’s earnings growth trajectory through the next five years was on pause given its regulatory price reset, higher interest and depreciation costs, and slower passenger growth.
There was some regulatory risk as a result of the Commerce Commission’s aeronautical pricing review and increased airline lobbying of late. However, the risk of an equity raise to support the balance sheet had eased in light of an improved risk profile, according to rating agency Standard & Poor’s, he said.
The earnings outlook for Port of Tauranga was positive and there was scope for sustained earnings growth in the medium term.
Freightways was cheaper than Mainfreight on oneyear forward earnings multiples, although the valuation gap between the two had narrowed.
The company’s growth profile was more subdued due to the limited operating leverage available in its Express Package operations, particularly in light of rising cost pressures.
Rising oil prices represented a headwind for most transport operators as fuel represented a material cost for their businesses, Mr Foster said.
The increasing spot oil price — now about $US76 a barrel ($NZ108 a barrel), up from $US50 a barrel in June 2017 — had lifted petrol pump prices in New Zealand from $2.02 a litre to $2.26 in the same timeframe.
In the domestic freight segment, recent fuel price increases would soon be exacerbated by the Auckland regional fuel tax due on July 1, subject to the Government passing legislation and other regions having suggested they wished to follow suit.
Transport companies needed to lift prices to offset higher costs and, in doing so, might lose volume, given the elasticity implications, he said.
Mainfreight and Freightways were well protected from fuel price increases given the variable fuel adjustment factors built into their pricing.
Customer prices adjusted monthly to reflect fuel price movements. In light of the one month to two month lag between the pump price and variable fuel rate applied to customers when fuel prices increased, Freightways had some temporary cost exposure on its companyowned fleet, Mr Foster said.
‘‘We anticipate regional fuel taxes to be incorporated into the variable fuel rates on a national basis if and as they are implemented. We believe the freight and parcel sectors are reasonably price inelastic, particularly in the shortterm.’’
Mr Foster did not expect volumes to drop as a consequence of fuelrelated price increases.
In contrast, the fuel price exposure for airlines was far higher, despite the hedging approach many airlines took which effectively delayed the impact of changing fuel prices, he said.
The transactional nature of the industry pricing model and more fragmented industry structure meant pricing was much more a function of supply and demand than reflective of oil price moves.
Air NZ’s recent 5% domestic price increases, which had been followed by Jetstar in New Zealand, was evidence of price increases under favourable conditions, Mr Foster said.
However, price increases were more difficult to execute on more competitive international routes.
Air NZ had announced a variety of price increases on international routes weighted towards higher demand areas.
Airline passengers tended to be more elastic — particularly longhaul tourists — than freight and there might be a volume consequence of any price increases.
Forsyth Barr had downgraded its earning forecasts for Air NZ due to higher fuel prices, he said.
The impact on airlines raising fuel prices was also not good for airports, including Auckland Airport.
Various shipping lines, including Maersk, MSC and CMACGM had introduced ‘‘emergency bunker surcharges’’ in recent weeks to help offset higher fuel prices.
Sea freight was less elastic than aviation and the impact on sea freight volumes from rising fuel prices would be lower than other transport modes.
The impact on Port of Tauranga from rising oil prices was expected to be small, Mr Foster said.
Slower container industry growth was exacerbated at Port of Tauranga by its first quarterly share loss in four years.
The share loss was not significant but it was against a backdrop of sustained share gains.
The company’s volume growth outlook for the rest of 2018 and into the 2019 financial year was likely to be subdued although the broader earnings risk from slower than anticipated container volume growth was mitigated by stronger log export volumes in recent months, he said.