Partnership With Singapore Airlines And Fleet Upgrades Will Expand International Reach

Key Takeaways

• Strategic product reinvigoration and innovative designs are poised to enhance customer experience and boost future revenue growth on premium routes.
  
• Overcoming aircraft availability constraints and focusing on digital advancements are expected to improve efficiency and positively impact margins and net earnings.
  
• Operational inefficiencies, increased competition, economic slowdown, and inflationary pressures threaten Air New Zealand's revenue growth, net margins, and financial stability.

Catalysts

Provides air passenger and cargo transportation on scheduled airlines services in New Zealand, Australia, the Pacific Islands, Asia, the United Kingdom, Europe, and the Americas.

• The strategic reinvigoration of Air New Zealand's product offerings, such as the seats to suit product and innovative cabin designs like the BP Luxe and SkyNest, is expected to drive future revenue growth by attracting more customers and enhancing customer experience on premium routes.
  
• Overcoming current aircraft availability constraints due to maintenance issues in the A321neos and Boeing 787 Dreamliners could lead to significant efficiency improvements, reducing operational costs and positively impacting net margins once resolved.
  
• Expansion into digital advancements, including enhanced self-service offerings and improved ancillary revenue conversions, is likely to boost revenue streams and improve net earnings through cost efficiency and increased customer engagement.
  
• Commitment to significant marketing activities over the next 12 months and strategic alliances, such as the renewed partnership with Singapore Airlines, indicate growth potential in international market share, positively impacting future revenue.
  
• Air New Zealand's continued investment in fleet upgrades and the introduction of new aircraft, despite facing supply chain delays, positions the company for long-term earnings growth through increased operational capabilities and potential market expansion.

Air New Zealand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Air New Zealand's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 4.0% in 3 years time.
• Analysts expect earnings to reach NZ$293.4 million (and earnings per share of NZ$0.07) by about February 2028, up from NZ$146.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$348.8 million in earnings, and the most bearish expecting NZ$246.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 14.4x today. This future PE is lower than the current PE for the AU Airlines industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.65%, as per the Simply Wall St company report.

Air New Zealand Future Earnings Per Share Growth

Risks

• Aircraft availability issues, particularly with the A321neo and Boeing 787 fleets, have severely impacted operational efficiency and are expected to continue affecting capacity for the next 12 to 24 months, potentially restricting revenue growth.
  
• Increased competition in the North American routes and a weaker demand from New Zealand point of sale could result in reduced passenger yields, negatively affecting revenue and earnings.
  
• The ongoing economic slowdown in New Zealand, compounded by reduced business travel spending by corporates and government, presents a risk to domestic revenue and net margins.
  
• Inflationary pressures and elevated costs across the airline's operations, including labor and third-party charges, are likely to impact net margins and overall profitability.
  
• The projected increase in widebody aircraft CapEx and uncertainties around aircraft delivery timelines could strain cash flow and liquidity, impacting future earnings and financial stability.

Valuation

• The analysts have a consensus price target of NZ$0.664 for Air New Zealand based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$0.8, and the most bearish reporting a price target of just NZ$0.52.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$7.4 billion, earnings will come to NZ$293.4 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of NZ$0.62, the analyst price target of NZ$0.66 is 5.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.