AIR - Air NZ.

[mikeybycrikey]

PPPHHHHOOOAAAARRR Qantas SP on fire today up around 12% at A$2.36, nearly over-taken AIR's SP which is plainly ridiculous when you consider AIR's earnings record, more modern fleet and quite obviously better management. VAH starting to catch a bid too. American carriers on fire too on Friday last week. AIR SP's reaction to the massive oil price decline looking really under-done on a relative basis. Trading on a forward PE of about 8 even at $2.39. opportunity knocks for a big gain in 2015 ? Definitely one to hold for real as well as in the ST competition for 2015

Considering that Qantas announced today that they expect their "underlying profit" for H1 to be about $300 million, which would (very, very roughly) translate to a PE of about 8.6 for that half, is the price jump in Qantas really unwarranted? It's a bit of a recovery story (although maybe the share price is getting ahead of the real-world recovery).

On the other hand, with Air NZ being well run for a number of years, I would say they are unlikely to significantly increase their profit any time soon. Passenger numbers aren't even really going up in any meaningful way and there is only so much efficiency you can wring out of the same number of passengers.

Also, the airline industry is risky and low margin. The quality of Air NZ's management doesn't change that but it does help mitigate it.

I think Air NZ is pretty fairly priced right now and Qantas is coming out of distressed-pricing. I might've actually bought into QAN at $1.37 if I had thought the SP was going to recover this quickly.

[Beagle]

Qantas, old fleet, high labour costs with ongoing union issues, facing massive capex to update their fleet, Australian economy overly dependent on minerals and a deteriorating manufacturing sector.
Qantas track record and AIR's...no comparison.
Not sure what hymm sheet your reading off regarding AIR being unlikely to increase profits anytime soon. Suggest you have a look at their most recent update.

[Schrodinger]

Qantas hardly flies anywhere these days. They do the bare minimum, such as Syd-Melb and Syd/Melb-LA/London. Its Jetstar that services the majority of routes now. They do all the flights to/from Asia for instance. Their staff are based overseas, and all their maintenance is outsourced offshore. Their cost base is low. Eventually Qantas will no longer exist, and Jetstar will fly everywhere. So instead of negotiating with unions or paying for old planes, they are simply (and quietly) retiring routes and planes and handing them off to Jetstar. Au Revoir Qantas.

KW don't you think there is a little political capital tied to Qantas and having them disappear/fold is not in the national interest? This was evident when the NZ Gov forked out $1B to bail out Air NZ...I cant see the Gov letting Qantas disappear.

[brend]

Two more dreamliners on order. 9 version

https://nzx.com/companies/AIR/announcements/258634

[Beagle]

Two different markets KW. Air aiming for full service, modern aircraft, Jetstar simply isn't in the same league. I believe AIR will eventually exercise all its remaining options on the Dreamliner and they'll have a fleet of 18 of these beautiful new fuel efficient aircraft. Once pax have experienced all the advantages of aircraft like these or the new A380's I believe a fairly significant percentage of customers will seek these type out in their future travel plans.
Like anything in life you get what you pay for and while its fair to say there will always be a certain number of pax who choose the cheapest, there's a good percentage who want a quality experience with their national airline and are prepared to pay a bit more for it.

Good to see all three new 787-9's scheduled for delivery this year are here and now earning their keep on the Japan and China routes.
The substantial extra cargo capacity will come in real handy for fresh commodity exports and they can carry a full payload of circa 15 tons of freight and full pax over 8,000 nm's my pilot friend tells me, (previously they had to juggle freight and cargo on some 767 routes depending on loading). There are grounds to believe VAH will now make a positive contribution to AIR's 2015 result.

[mikeybycrikey]

Not sure what hymm sheet your reading off regarding AIR being unlikely to increase profits anytime soon. Suggest you have a look at their most recent update.

I didn't say they weren't going to increase profit, I said they weren't going to significantly increase their profit. With falling fuel prices and more efficient aircraft, the profit is almost certainly going up.

However they're not growing their market. I looked at their latest market update and it told me "Revenue passenger kilometres (RPKs) were 0.8% higher" in October over the previous year. If I look back at 2009 vs 2014, revenue is up 1.2%. In 5 years. RPKs are also only up 3.5%. These are not significant increases.

EBIT/Revenue has gone from 1.7% in 2009 to 8.6% in 2014. There is only so much profit even AIR can get out of static revenue.

So, I'm pretty happy with my analysis there.

On the other hand, AIR also says "there had been an encouraging start to the year with solid forward bookings into the high season." So, maybe that indicates there will be some revenue growth. And the company is in a much better long-term position now then it was five years ago.

[Beagle]

Craigs have them on a 2015 Net profit before tax of $474m up 33% on 2014 and that was before Opec couldn't agree on output reductions and oil prices moved significantly lower.
That's pretty "significant" in my book for a company trading on such a modest multiple and is now probably quite conservative especially with VAH now in the black.

[h2so4]

If a company is not growing but is generating huge profits then the dividends will flow to its shareholders. Isn't that what AIR does?
I don't think I would base my case on no revenue growth. The idea of any business is to generate profits and manage its assets well.

[Beagle]

When I worked at Telstra, their corporate travel policy was that people had to fly whatever was the cheapest flight that was available that day. Whether that was on Qantas, Virgin or Jetstar was immaterial. I wonder how many other companies have similar corporate travel policies in order to save money. The leisure travel market is very price sensitive - thats why sites like Webjet, Expedia and SkyScanner exist - to root out the cheapest air fare possible. And for the ad hoc market, those of us who travel only because the airline put a "too good to refuse" offer in the market, there is no other consideration. I went to London and Tokyo for no other reason than there was a too good to pass up fare offer (Singapore Airlines for London and Jetstar for Tokyo) You might not choose to fly anything other than AIR but it would be a mistake to assume that others feel the same way. Most people I know fly whatever is cheapest.

I'd suggest you mix mainly with younger people so its easy to form a slightly biased view of what "most people" want.
I am curious if you have flown Jetstar domestically ? When Forest and I, ("gulp", dare I admit this...flew Jetstar to the AIR ASM) mainly because scheduling suited better and gave more time for the dinner afterwards we were both distinctly unimpressed, I was shocked. Here's a typical review from seat guru from a lady that's only 5 ft 3 inches

AKL to Wellington - Worst flight ever like being squashed into a tiny coffin, i was almost hysterical with claustrophobia by the time we landed. I am only 5 foot 3 and my knees were jammed gainst the seat in front, with the back of it almost in my face, could not put my tray down at all. Had to sit sideways and stare out the window with loud music on headphones to try and keep calm. Total nightmare, go with Air NZ instead as their A320 planes have a pitch of 30-33 as opposed to the pathetic 29 on this awful plane.

My mum recently flew to Dunedin on Jetstar and she is about 5 ft 6, (I take after my Dad) and she found it really cramped too. Old planes crappy service and sardines in a can. Honestly I had some difficulty breathing on the flight back from Chch, whether that was the sardine tin super duper tight seat, the excess alcohol drunk before hand or my blood pressure getting up from both I'm not sure but my knees were crammed in so hard against the seat in front it was physically painful, (I'm 6 ft tall so God knows how anyone taller copes). Honestly....never again at any price. the service was almost non-existent and you had to pay for anything and I just decided to grin and bear it...I've had more comfortable and less painful experiences in a dentists chair. 29 inch pitch seats is an absolutely disgusting travesty on the concept of air travel.

I havn't flown Jetstar internationally and wouldn't. My good mate Peter is just back from a trip to Aussie and was flown Jetstar by the company he was hired by so perhaps you're suggestion that some Australian companies have a policy of cheapest is more pervasive in Australia ?

I'd be more than happy to fly Singapore Airlines or Emirates to London on their new A380's. Both top quality airlines with great planes and great service from what I hear.

[h2so4]

Tell any kiwi you fly Jetstar and be prepared for the backlash.