Trials For Onboard Wi-Fi And Fleet Upgrades Will Improve Customer Experience

Key Takeaways

• Strategic initiatives in digital enhancements, aircraft retrofitting, and infrastructure investments aim to boost revenue, improve margins, and enhance operational reliability.
  
• Confidence in long-term profitability is demonstrated by a buyback program, indicating potential undervaluation and shareholder value enhancement.
  
• Ongoing engine maintenance issues and inflationary pressures are straining operations, reducing capacity and revenue growth, and impacting net margins amid North American competitive expansion.

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 introduction of digital bag tags and trials for onboard domestic Wi-Fi and electric demonstrator aircraft are forward-looking initiatives aimed at enhancing customer experience and operational efficiency, potentially leading to increased revenue through improved service offerings and operational cost savings.
  
• The retrofit of the Boeing 787 Dreamliner fleet with new interior products, including business premier luxe seats, can attract more premium passengers, thereby increasing revenue potential and enhancing earnings by catering to higher-margin segments.
  
• The expansion of the Christchurch Engine Center for long-term business opportunities and investment in new hangars show a commitment to infrastructure that can reduce long-term operational costs and improve aircraft availability, thus enhancing margins and operational reliability.
  
• Air New Zealand's strategic transformation initiatives such as live chat and operational efficiencies are expected to yield a second-half EBITDA benefit, indicating potential for improved net margins as these initiatives help offset inflationary pressures.
  
• The announcement of a buyback program reflects confidence in long-term operational improvements and profitability, expected to enhance earnings per share (EPS) by reducing the share count and returning capital to shareholders, signaling potential undervaluation to the market.

Air New Zealand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Air New Zealand's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 3.7% in 3 years time.
• Analysts expect earnings to reach NZ$278.5 million (and earnings per share of NZ$0.08) by about March 2028, up from NZ$123.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$245.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 17.1x today. This future PE is lower than the current PE for the AU Airlines industry at 17.3x.
• Analysts expect the number of shares outstanding to grow by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.79%, as per the Simply Wall St company report.

Air New Zealand Future Earnings Per Share Growth

Risks

• The ongoing engine maintenance issues, particularly with the Rolls-Royce and Pratt & Whitney engines, are causing significant operational disruptions and are expected to persist for 2 to 3 years, impacting overall capacity and potentially reducing revenue growth.
  
• The 4% decline in overall capacity due to grounded planes significantly affects passenger revenue, which decreased by 5%. This could continue to pressure revenues and net margins if engine issues aren't resolved promptly.
  
• The uncertainty surrounding the timeline for engine maintenance resolution impacts planning, leading to inefficiencies and additional costs, which had already resulted in an estimated $40 million adverse financial impact on earnings, affecting net margins.
  
• The competitive expansion in the North American market with industry capacity up 50%, despite Air New Zealand's limitations due to fleet constraints, might lead to pressure on yields and earnings in the future.
  
• Inflationary pressures across the aviation ecosystem, including rising costs in labor, maintenance, and landing charges, increase expenses and put pressure on net margins, especially given current inefficiencies related to reduced flying capacity.

Valuation

• The analysts have a consensus price target of NZ$0.702 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$0.85, and the most bearish reporting a price target of just NZ$0.59.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$7.6 billion, earnings will come to NZ$278.5 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 9.8%.
• Given the current share price of NZ$0.62, the analyst price target of NZ$0.7 is 11.0% 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.