December is the time of the year when travel demands are maxed out across the domestic and international networks, and the recent decline in jet fuel prices has been a great aid too in accelerating most airlines’ post-COVID financial recovery.
Air New Zealand (ASX: AIZ; NSX: AIR) is among the ones who anticipated the news with optimism. The national carrier of New Zealand is today upgrading its half year earnings guidance for FY23 to be in the range of $295 million to $325 million. This compares to the previous guidance range provided on 21 September 2022 of $200 million to $275 million for the half year.
The range is updated by assuming that average jet fuel price will remain steady around US $127/bbl until 31 December 2022. Fuel prices have moderated in recent weeks, currently priced at approximately US$102/bbl. While the prices are around 20 percent higher than pre-Covid levels, the six-month average has declined since the airline’s last market update in September. This allows Air New Zealand to add almost $20 million upside to the guidance range.
Fuel is not the only factor contributing to the earnings update. Current forward sales expectations and expected flying capacity levels are also taken into consideration. To make the HY earnings guidance relevant, Air New Zealand will have to continue flying at approximately 75 percent of pre-Covid capacity levels across the entire network in December, with Domestic running at just under 100 percent, short-haul at about 85 percent and international at around 70 percent.
For the past two months, ticket sales have remained strong. New Zealanders continue to book travel overseas, tourists are coming back to the country, and the majority of the airline’s international destinations have re-opened for passenger travel. The downside is, constrained capacity will continue to impact pricing, therefore pressuring the airline to cater to the extra demand.
To alleviate this pressure, Air New Zealand is focusing on ensuring operational reliability by hiring over 2,200 additional employees into the organisation since February 2022, and welcoming two new A321 neo aircraft into the fleet. These new aircraft add an additional 200,000 seats per year into the domestic network and will help ease capacity restraints alongside the additional employees.
As a comparison, fellow carrier Qantas observed a similar pattern of increasing customer demand as travelling became a high priority ahead of other spending categories. Even so, the Company also highlighted fuel cost as a primary issue that will negatively impact profitability despite already reaching international capacity at around 30 percent below pre-COVID levels. Qantas expected fuel cost to reach approximately $5 billion for FY23 (assuming $208 per barrel), which would be a record high.
It is worth noting that there are many other factors that could unexpectedly slow down the airline’s recovery, therefore impact earnings. The risks include ongoing fuel price volatility, global recessionary risks, continued inflationary pressures and increased costs. Consequently, Air New Zealand is not providing full year guidance at this time.
Air New Zealand’s operating revenue lifted by 9% to $2.7b in FY22, mainly from cargo and domestic revenues. However, this was not enough to cover soaring fuel prices and costs associated with reduced flying capacity, therefore leaving the Company with a loss of $725m (before other significant items and taxation) compared to $444m in the prior year. The Company completed recapitalisation in May 2022, raising $2.2b. As of 23 August 2022, it has available liquidity of $2.3b, consisting of approximately $1.9b in cash and $400m of available funds on the unsecured standby loan facility with the Crown. The cash balance includes $200m of issued redeemable shares which the airline intends to redeem once its recovery is further progressed.
Clara is a Business Reporter for The Sentiment.
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