The Government has a golden opportunity to sell down its stake in national carrier Air New Zealand but it must act quickly to maximise the sale proceeds.
Air NZ is being reported as the next sell-down likely to be undertaken by the Government as it continues with its sales programme for state-owned assets.
Reports from Australia say the sell-down may be announced next week but the Government yesterday declined to make any comment regarding the timing of any possible Air NZ sell-down.
The shares last traded at $1.70 but brokers say the value of the company is higher than the share price indicates.
The Government already owns more than 70% of the listed company after a previous Labour administration bailed the company out and stopped it being sold to overseas competitors.
If the Government is going to sell down another 20% or so of the airline, now is the best possible time.
For many investors, the airline industry remains a no-go sector due to a history of extreme earnings volatility, an inability to provide a return above its cost of capital and a high degree of debt.
Air NZ has historically exhibited the first two of those characteristics.
In the financial years from 2003-13, the company's normalised earnings before tax experienced six years of declines averaging -23% and four years of increases averaging 7%.
Air NZ did not achieve a rate of return on capital above its cost of capital from 2006 to 2012.
However, over the past decade Air NZ has managed industry and economic cycles well, relative to other airlines, underpinned by a strong domestic franchise and prudent borrowing.
The airline never made a loss in the 2003-13 period and since 2005, has paid out a dividend every year of between 5c per share and 8.5cps.
Brokers suggest Air NZ is about to enjoy a golden period. Structural changes have resulted in a strong 2013 financial year and underpinned a solid 2014.
In February 2012, the airline outlined expected profit improvement initiatives totalling more than $195 million to be implemented by 2015.
In August 2012, the company announced its profit improvement programme was well ahead of schedule with target improvements up to $250 million, of which $130 million was to be achieved during 2013.
The drivers included an overhead cost review, a continued focus on ancillary revenue (seat select, OneUp and OneSmart), the benefits of a modern fuel-efficient and lower-maintenance fleet and a re-engineering of the international network to serve the most lucrative markets.
The profit improvements and the Virgin Australia alliance have resulted in Air NZ firing on all cylinders with domestic New Zealand, transtasman and long-haul routes all profitable.
Air NZ announced yesterday it would fully support the rights issue announced by Virgin Australia.
The $A350 million ($NZ394 million) capital raising will further strengthen Virgin Australia as it consolidates and builds its position in the Australian domestic and international airline markets.
Air NZ holds 22.9% of Virgin Australia shares and has regulatory approval in Australia to increase that to 25.99%. Air NZ said it would take up its full pro rata entitlements along with other major shareholders Singapore Airlines and Etihad Airways.
Air NZ will spend between $A81 million and $A116 million on the rights issue.
The global airline financial performance is closely linked with broader economic conditions. When global economic production and world trade remain weak, airlines suffer. When growth improves, airlines benefit.
The International Air Transport Association (IATA) says while the outlook for 2014 is encouraging, it expects a divergence between North America and Asia-Pacific.
While both will benefit from lower oil prices, the consolidation story in the United States and North Atlantic, along with an improving economy, will be a key driver.
Asia-Pacific will be affected by lower growth and weak cargo markets.
Earlier this week, the Waitangi Tribunal found the Crown had made a series of Treaty breaches at the expense of local iwi during the construction and operation of the Genesis Energy-owned Tongariro hydro-electric power scheme.
But Finance Minister Bill English said he did not expect claims for compensation or other redress would derail the Government's planned partial privatisation Genesis expected early next year.
Genesis will be the hardest of the Government's energy companies to sell. It is the smallest and last one to be sold after Solid Energy was taken off the sale list.
Analysts have told the Otago Daily Times work is being carried out on how to split up Genesis and sell it to existing listed power companies, including the recently listed Mighty River Power and Meridian, along with others including TrustPower and Contact.
Selling down Air NZ before the citizens initiated referendum later this year on asset sales is a likely option for the Government.
Labour Party SOE spokesman Clayton Cosgrove said National's rush to sell Air New Zealand shares before the asset sales referendum was desperation and demonstrated arrogance of the highest order.
''National today refused to rule out selling Air New Zealand shares before November 30.
That means the sale is being rushed in a desperate bid to get it done before the asset sales referendum.
That is shockingly arrogant and an insult to the democratic rights of New Zealanders.''
