Modernized Fleets And Global Tourism Will Boost Prospects

Key Takeaways

• Fleet modernization, digitalization, and sustainability initiatives are expected to lower costs, drive efficiency, and strengthen Air New Zealand's competitive position and profitability.
  
• Increased premium demand and international tourism growth, especially from the Asia-Pacific region, support stronger yields and future revenue expansion.
  
• Ongoing capacity constraints, persistent cost inflation, weak domestic demand, high capital requirements, and uncertain transformation gains threaten long-term earnings growth and financial flexibility.

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.

• As fleet modernization accelerates from FY '27 onward with the return of retrofitted aircraft and new fuel-efficient 787s, Air New Zealand is poised to unlock operating scale, reduce unit costs, and recover suppressed capacity, setting the stage for higher revenue and improved net margins.
  
• Rising premium cabin demand and planned expansion of premium-rich aircraft, especially on transpacific routes, support stronger yields and RASK (revenue per available seat kilometer), with premium seats set to increase 12% in FY '26.
  
• Transformation and digitalization initiatives-including deployment of AI tools and automation for cost efficiency and enhanced passenger experience-are expected to drive further EBITDA improvement, productivity, and scalability as network capacity returns, boosting future earnings.
  
• The ongoing growth of international tourism, particularly from Asia-Pacific and Australia, is expected to fuel robust international passenger demand and revenue growth as borders remain open and the region's middle class travels more, particularly benefiting Air New Zealand's unique network.
  
• Strategic investments in sustainability and fleet renewal position Air New Zealand to capitalize on emerging consumer and regulatory preference for lower-emission travel, potentially lowering fuel spend and driving competitive advantage, which should positively impact medium-term net margins.

Air New Zealand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Air New Zealand's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 3.1% in 3 years time.
• Analysts expect earnings to reach NZ$239.0 million (and earnings per share of NZ$0.07) by about September 2028, up from NZ$126.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$315 million in earnings, and the most bearish expecting NZ$151.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the AU Airlines industry at 15.9x.
• Analysts expect the number of shares outstanding to decline by 3.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.21%, as per the Simply Wall St company report.

Air New Zealand Future Earnings Per Share Growth

Risks

• Ongoing engine availability issues with both Rolls-Royce and Pratt & Whitney have materially constrained capacity and led to a 4% network shrinkage, resulting in significant revenue loss (between $280 million to $320 million in FY 2025) and ongoing cost inefficiencies, with uncertainty on when full operations can resume, likely depressing earnings in the medium term.
  
• Structural non-fuel cost inflation-especially in engineering parts, air navigation, and landing charges (with airport fees rising 57% since 2019 and further increases expected)-represents a long-term headwind that is difficult to offset, squeezing net margins and increasing risk if these costs cannot be fully passed onto customers.
  
• Persistent softness in domestic demand, especially in government and corporate travel segments, is expected to continue for at least the next 12 months, making core revenue streams volatile and exposing Air New Zealand to further earnings risk if discretionary travel remains subdued.
  
• Elevated capital expenditure requirements (approximately $3.7 billion to 2030) to modernize the fleet and maintain reliability during a time of uncertain earnings recovery increase financial risk and could limit flexibility for capital returns or reinvestment, impacting long-term profitability.
  
• The ability to continue offsetting rising costs with transformation gains (such as digital initiatives and productivity improvements) is unproven at larger scale, and if these initiatives fail to outpace cost inflation or if inflation proves stickier than anticipated, net margins and earnings growth could be structurally impaired over the long term.

Valuation

• The analysts have a consensus price target of NZ$0.688 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$0.9, and the most bearish reporting a price target of just NZ$0.55.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$7.8 billion, earnings will come to NZ$239.0 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of NZ$0.6, the analyst price target of NZ$0.69 is 12.1% higher.
  
• 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.