Last year we had strong capacity growth of 6% which to the surprise of some analysts given the soft economic conditions was matched by demand growth of 6%.
This year our airline is growing at its fastest rate in its 75 year history with capacity growth of 12% and despite this revenue passenger kilometres flown are actually up 12.2% with YTD group wide load factor very strong at 84.2% up 0.6% from 2015. (November 2015 operating stat's)
Management was so confident of the performance in this half that way back in early October 2015 at the annual meeting they predicted 1H Fy16 profit would
exceed $400m. This seems very early in the half year to make such a bold projection and caught most people I talked to at the ASM by surprise. They must be extremely confident.
Since the annual meeting we've seen load factors being announced that exceed last year, very strong tourism growth of 9%, well up on last year and very strong outbound tourism growth, Kiwi's are travelling more and taking advantage of cheap fares, e.g. their New Year sale fares look very reasonable to me as noted by Winner above.
Since their last fuel hedge disclosure of 24 November 2015 where they announced they were only 40% hedged too 2H Fy16 fuel costs we've seen Brent spot come down from $46 barrel to just on $30.
Based on best known information in the peak summer period AIR will be enjoying very low fuel prices as they embark upon their new routes to Buenos Aires and Houston so the cash register is clearly in overdrive at present.
What to do with all that cash ?
Last year cash flow from operations was a remarkable $1.1b, just on $1 per share ! Tony Carter after the ASM mused that perhaps this is the highest operating cash flow of any NZX company ?
Yes they have a $2.6b fleet upgrade program over the next 4 years but normal depreciation with the expanded fleet size will be approx. $1.8b over this period so by my estimation so that's really only a net outlay in the order of $600m after fleet disposal proceeds from the 767's and Beechcraft 1900's. Further, some of the new acquisitions will be by way of operating lease not purchase.
But wait there's more ! Some of the cost of the two Dreamliner's that came online in early FY16 was funded by up-front payments in FY15 and they specifically mentioned they'd made more advanced payments on these aircraft (implying more than normal), to gain further discounts from Boeing so the politically correct speak of $2.6b of new fleet isn't really going to drain cash flow at all !
Begs the question of the size of the special dividend this year. Previous year's, when announced have been 10 cps but I suspect that doesn't cut the mustard any more and we'll see something considerably higher.
Yes Oil prices are not sustainable over the long run at these level's but the outlook looks benign to me. Almost zero world-wide economic growth so where is the demand going to come from to drive oil back up ? Even if it does revert to $70 or $80 barrel in the medium term the company is well positioned with a modern fuel efficient fleet and might actually gain a competitive advantage with oil at that level.
So that brings me to my musings of what does the statement in early October of company will exceed
$400m for 1H Fy16 really mean.
$400m looks very, very conservative to me. I'd be surprised if the first number wasn't a 5. Anyway we can talk all we like but some of you might be wondering what I've been doing as actions speak louder than words. I was topping up in the low 290's while in Siberia...the thought of all those future juicy dividends kept me very warm
I am hoping for an interim dividend of 15 cps up from 6.5 cps and final of 20 cps up from 9.5 cps together with a special of 20cps, (all fully imputed). Stock trades cum the forthcoming interim dividend and I think the SP remains very well supported by the fundamentals of what is a very well managed airline. Further, I believe contrary to the view stated by some, that many Kiwi's are very parochial and chose to fly their national airline. I also believe that AIR as one of N.Z.'s preeminent employers are able to pick and chose the cream of the crop when it comes to employees and the calibre of the staff you meet on board reflects that.
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