Air New Zealand's unscheduled trading update highlighted the potential for near-term bumper profits, Forsyth Barr broker Andrew Rooney said yesterday. Given low fuel prices and growing revenue, the operating backdrop was ''extremely favourable''.
Forsyth Barr provided a trading update, lifting its before-tax profit forecast by 10% for 2015 and 6% in 2016.
The share target price increased from $2.50 to $2.70 and reiterated the outperform rating.
Mr Rooney said rising demand and lower costs augured well for Air New Zealand, which had recently announced the end of flights to some regional centres, such as Westport and Whakatane.
The board was reluctant to offer any quantitative guidance so early in the financial year, given the inherent volatility in airline profitability.
Air NZ generated thin margins on large revenue. Small changes in revenue and cost could have significant implications in profitability.
''Our upgrades to the before-tax profit over the next two years reflect revenue growth as opposed to lower fuel costs.''
Year-to-year yields were above expectations. October yields were impressive, he said.
''We have confidence in the yield trend continuing near term in light of management comments on strong forward bookings.''
While long-haul capacity would not increase with the Singapore Airlines alliance starting in January, it was not expected to be detrimental to yield, Mr Rooney said.
Forsyth Barr made no changes to its fuel price assumptions.
For 2016, Forsyth Barr continued to assume an average spot and hedged price of Brent crude of $US90 a barrel.
Air New Zealand was unlikely to ultimately keep all the cost benefit given the competitive nature of its market and the potential for some pass-through to customers, he said.
''We keep asking ourselves whether things can get better at Air NZ? The unexpected and positive trading update in the October monthly investor update highlights that conditions have and continue to get better.
"The need for the trading update, given Air NZ's continuous disclosure obligations suggests market expectations are more than 10% lower than management's outlook for full-year earnings,'' Mr Rooney said.
Air NZ was poised to make a decision to fly to a new destination in the United States, The New Zealand Herald reported.
It was understood Las Vegas, Houston and Chicago were under active consideration and the airline could be flying to one of these cities within the next 12 months.
It was likely to use one of its new Boeing 787-900 Dreamliners on the new service.
The airline had said the performance of the plane on transtasman and services to Shanghai had exceeded expectations.
The Dreamliner would be capable of making the journey to either of the three cities non-stop.
Air New Zealand flew to Vancouver, San Francisco and Los Angeles at present and has increased services next year to cope with demand.
The number of Kiwis flying to the United States had surged in the past two years, helped by the strong New Zealand dollar, and the valuable inbound American market had recovered following the global financial crisis.
Interest in flying deeper into the United States had led Air New Zealand to assess a number of possible routes over the past year.
It trialled the Chicago route with a charter flight carrying the All Blacks and their fans for their one-off test against the United States earlier this month.
It had previously flown to Dallas-Fort Worth in Texas and Las Vegas, Nevada, was seen as a top leisure market.
The airline previously ruled out hub airport Denver as a US destination.
Upgrade forecasts
• Profit before tax, up 10% to $419 million in 2015.
• Target share price, $2.70 from $2.50.
• Ongoing lower fuel prices and higher yield drive profit.
