30 Apr 2013

Air NZ recovering faster than expected - analyst

7:14 am on 30 April 2013

Morningstar analyst Nachi Moghe says Air New Zealand's earnings recovery has happened faster than expected, but it won't necessarily have an impact on his valuation of the stock.

He values the airline's shares at $1.50, just below Friday's close at $1.51.5, and says his focus is on the long term.

Last week, Air New Zealand upgraded its pre-tax profit guidance for the year ending June to between $235 - $260 million with second-half earnings likely to be as much as double the result in the same period last year.

Mr Moghe said passenger growth is helping to grow earnings, but lower overheads, cutting of unprofitable routes, code-sharing agreements and replacing the fleet with more fuel-efficient planes are also paying off.

He said passenger growth will help soak up excess capacity sooner, alleviating pricing pressure but the industry continues to be plagued by minimal barriers to entry.

Competitors can easily add capacity, particularly on the highly profitable domestic and trans-Tasman sectors, hurting passenger numbers.

Mr Moghe is also concerned about higher oil prices.

His current recommendation on the stock is "hold" and says the shares are suitable for more risk-tolerant investors.