Airline well placed to weather virus crisis
Opinion: Seasoned survivor Air New Zealand dusts off the global financial crisis playbook, writes Benje Patterson.
Air New Zealand could be staring down the barrel of more than $100 million of lost profits during the current financial year as the coronavirus pandemic continues to unfold.
Late last month, Air New Zealand gave a special market update to warn that coronavirus could impair profits by $35m to $75m. But over the past couple of weeks, it has become increasingly clear that the situation is likely to be much worse.
Air New Zealand’s sharemarket capitalisation has fallen more than $1 billion since the start of the year, with half of this decline coming since that market update.
My calculations suggest that markets are now pricing in a total profit impairment for Air New Zealand of $85m to $135m due to coronavirus in the current financial year.
In response, the airline has taken drastic action.
Government travel restrictions effectively forced Air New Zealand to cut its China and Korea services, and it has reduced capacity on a variety of other Asian, Pacific and transTasman routes.
In a headline-garnering move to shore up what’s left of demand over the coming months, the airline has also sold domestic flights for as cheap as $9 and Australia fares for $69.
To cap it all off, staff are being asked to consider taking voluntary unpaid leave. Further cost-cutting and capacity reductions can’t be ruled out.
But what do these sudden moves really mean? Is it pandemic stations for Air New Zealand or are these the actions of a shrewd business?
At this stage, the evidence points towards the latter.
Things may get worse before they get better, but Air New Zealand is a seasoned survivor. It was one of the few to come through the global financial crisis unscathed, remarkably remaining profitable even when the sky fell in for other airlines.
Small by global standards, Air New Zealand has the advantage of being able to adapt quickly to a changing market.
Putting the markets’ current expectation of the coronavirus hit against Air New Zealand’s general profit guidance suggests the airline could still return earnings before other significant items and taxation of $250m to $300m this year. Its total market capitalisation sat at close to $2.4b as of Wednesday. Quite a bit of wriggle room to play with before real panic sets in.
Air New Zealand is simply dusting off its global financial crisis playbook and applying the same moves to the current crisis.
The global financial crisis brought with it a deep trough as banks collapsed, and jobs and houses were lost, but the eventual recovery was swift as the globe became awash with cheap money from central bank stimulus. Air New Zealand was poised to capitalise on this recovery and quickly bounced back to record profits.
In the current coronavirus context, it was fortunate to have already begun gearing up for a period of softer demand long before coronavirus hit. This has meant that Air New Zealand isn’t starting from a point of complacency before hunkering down to weather the storm.
A tapering of growth in international visitors to New Zealand during 2019 and a creeping up of fuel prices had seen the airline embark on a cost-cutting exercise. The aim was to become leaner and meaner by trimming business as usual costs by 5 per cent.
Part of this cost-cutting exercise had already involved delaying the delivery of $750m of new aircraft to reduce demands on cash and ensure the airline didn’t have expensive capacity sitting idly on the tarmac. Some recently arrived new aircraft may still need to be parked up, but there will now be a sense of relief that many further deliveries were delayed.
Air New Zealand knows that things will eventually recover, so it just needs to get through the coronavirus crisis in the best shape possible.
But the path to recovery for air travel may be more tentative than it was following the global financial crisis.
Cheap money won’t get people back flying long-haul. International travellers need to have confidence that the pandemic is under control and that their health can be assured.
When and how the situation comes under control is very uncertain. Finance Minister Grant Robertson this week moved from a scenario of saying that tourism and the rest of the economy would be affected for a few months to the whole year.
This uncertainty is cold comfort for Air New Zealand, but the old master of survival knows it just needs to bide its time in the knowledge that things will eventually get better.
Air NZ isn’t starting from a point of complacency before hunkering down.
Benje Patterson is an independent economist.