Is Air New Zealand a Good Investment?
Air New Zealand is one of the world’s oldest national carriers, flying since 1950s. It has the sixth largest route network in the Southern Hemisphere. Its reputation is the envy of many global peers, with endorsements from travel and business media such as Skytrax and TripAdvisor, plus loyalty awards from Airline Passenger Experience Association. With low cost base due to its partially owned state backing, customer-centricity in operations, and strong balance sheet, Air New Zealand has preserved its place in the list of most desirable airlines for investment purpose.
However, Air New Zealand does not look an attractive investment due to several contingencies associated with airline industry. Airline business is susceptible to a multitude of external factors, including geopolitical disturbances, commodity costs, and high tax burden.
Its prospects get hurt by the thudding regulatory and macroeconomic scenario. Directly or indirectly, airline companies have a confluence of dependencies on these highly dynamic, cyclical, and unaccounted forces. Hence estimating the long-term trend in the industry is a tricky affair.
Air New Zealand’s bottom line has been supported by its partly state funded, and other innovative cost rescue initiatives. It has successfully reduced the operating expenditures per passenger. For instance, in 2017, it eliminated $16.3 million of costs from its fuel bill, leading to a $41 million cost saving. It has also tied up with other airlines to share resources, driving efficiency and cost leadership. These initiatives have enabled Air New Zealand to regulate its cost structure, while providing an adjustable pricing strategy.
However, due to the recent developments in the aviation industry, Air New Zealand faces an uncertain future. The change in customer taste has made it increasingly challenging for the airlines to generate profits. In addition, recent events such as the Brexit are creating an issue for cost and availability of the jet fuel, hindering its business pace. Further, the wage and benefit costs of the crew are significantly impacting the overall profitability of the company.
Though Air New Zealand has been taking measures to address the challenges and protect shareholders’ return, it still has a long way to go. It needs to strategize to mitigate risk, leverage new technologies and utilize its resources in a result-oriented manner to stay ahead in a highly volatile business universe.
Fuel Prices
Airlines across the world have been facing stiff competition due to the spiraling prices of jet fuel. The last few years had seen a steep rise in oil prices, more than doubling from 2016 to November 2018.
This increase in oil prices had imposed a huge burden on airlines, significantly increasing their operating costs. Oil and jet fuel are the biggest operating costs for airlines and comprise over 20-30% of their total operating cost.
The price of jet fuel varies depending on seasons and geopolitical conditions. Air New Zealand largely purchases its fuel from Singapore, which is known to be one of the most expensive vendors for jet fuel. This fuels the urgency for the airline to focus extensively on its efficiency equation.
Airline companies can save on the fuel costs by using newer and more efficient aircrafts, deploying the latest route planning techniques, and coming up with new cost-cutting strategies. Air New Zealand has been making considerable efforts to lower its fuel expenditures. It has revamped its aviation policy to limit fuel usage, and has also started sourcing fuel from competitive vendors.
However, Air New Zealand has no control over the external market forces that set the prices of the fuel and it needs to take proactive measures in order to gain a competitive advantage over its peers. As long as air fuel prices are high, Air New Zealand’s bottom line will undoubtedly be affected as well.
Competitive Landscape
Air New Zealand’s area of business is increasingly competitive. Airlines are relying on price as a differentiator for many years. As the competition increased, the profit margins of the airlines got narrower and their profit-making ability decreased.
To tackle this, airlines have started looking for different strategies to reduce their operating costs and maximize their profits. Air New Zealand has been reducing its operating costs by cutting down on fuel expenses, controlling fleet size, and using a lean workforce. This has helped the airline to remain competitive in the industry despite strong movements of other competitors in the market.
Air New Zealand has also adopted a low-cost pricing strategy to attract customers and build its brand. This strategy has helped the airline to stay competitive in the industry. Air New Zealand has been able to price its air tickets lower than its peers, which has resulted in increased demand for their flights and better sales.
Although this strategy has proved successful in the past, the margin of discounts the airline can offer is also limited due to the constraints of the market. This makes it extremely difficult for the airline to remain competitive against other airlines offering similar discounts and better amenities.
Risk Management
Given the nature of airline business, risk management is of utmost importance for Air New Zealand to protect its investors’ interest. Airline companies have to monitor and proactively respond to a host of external factors, such as economic cycle, geopolitical uncertainties, and commodity costs. To be profitable, the airline has to identify, understand, assess, and manage the risks associated with its operations.
Air New Zealand has been working hard towards a risk mitigation program that involves close monitoring of key risk areas such as fuel price fluctuations, currency exchange, and credit risks. The airline has also implemented various measures to reduce the risk of suppliers becoming insolvent.
Air New Zealand has also stepped up its safety and security standards to protect its employees, its operations, and its assets. It has put in place a host of policies and procedures to prevent any unexpected occurrences.
However, the airline still faces the risk of legal and regulatory actions, as government regulations are highly unpredictable. It also faces competitors such as Qatar Airways and Emirates, who are known for their high-quality services, and the risk of losing market share.
Endorsements
Air New Zealand has been actively pursuing initiatives to build its brand and increase its visibility in the market. To this end, the airline has partnered with several leading travel and business magazines.
These endorsements have helped Air New Zealand to increase the number of passengers through its flights. The airline has been receiving some awards from these publications for its customer-centricity and loyalty services.
The endorsement of Air New Zealand’s services by popular publications has not only helped to bolster its brand, but has also enabled the airline to reduce its marketing costs. This has been a great advantage for Air New Zealand, as it can now channelize its resources to other areas that provide higher return on the investment.
Air New Zealand has also been partnering with several promotional agencies to acquire more endorsements. These initiatives have enabled the airline to expand its reach in the market and increase its number of customers.
Financials
Air New Zealand has been able to sustain its profitability due to its solid financial position. The airline has always maintained strong financials, and is well-capitalized.
The airline’s balance sheet portrays a healthy amount of cash reserve, which allows the company to make long-term investments and weather any external factors affecting the airline. This reserves provide Air New Zealand with financial flexibility and give it an advantage over its peers.
Air New Zealand’s financial performance has been backed by its stringent cost saving measures. It has adopted a lean operating model, enabling it to contain its cost structure, while providing a diverse range of services.
The airline has also been able to rise above other airlines when it comes to efficient operations. This efficiency has been helpful in controlling the cost of operations, thus driving the overall profitability of the airline.
Nevertheless, Air New Zealand has been facing challenges due to lack of hedging activities in response to macroeconomic developments. The airline needs to formulate strategies to enable it to protect itself from current and future market forces, and remain on course to achieve their long-term financial objectives.
Employee Retention
Air New Zealand has always emphasized employee retention as a key part of its business strategy. The airline recognizes its workforce as its most important asset and has been investing in training and development of the same. This has enabled the employees to understand the changing industry dynamics, align their skill sets with the requirements, and ensure the delivery of superior services.
Air New Zealand also provides the employees with a safe working environment and attractive benefits schemes. This encourages the employees to stay for a longer period of time. The airline maintains a healthy relationship with its workforce by providing them with growth opportunities and communication channels where they can express their grievances and expectations.
In addition, Air New Zealand has created a culture of learning and development by providing various educational and professional development programs to its employees. These measures have enabled Air New Zealand to attract and retain skilled employees and maintain a well-trained and professional staff.
Air New Zealand has also invested in modern technologies to enable its workforce to become more productive and efficient in their operations. This has enabled Air New Zealand to have a well-trained and up-to-date staff, and reduce employee turnover.
Technology
In recent years, Air New Zealand has made considerable investments in advanced technologies, such as Artificial Intelligence (AI) and automation systems, to improve its operations. These have enabled the airline to have a more efficient workflow and become more cost-effective in its operations.
AI-related technologies have enabled the airline to better manage its customer databases and enable its crew to be more prompt in their service. This has helped Air New Zealand make its operations smoother and more convenient by leveraging digital technologies.
Air New Zealand has also been using automation systems to automate certain processes, such as booking and ticketing, which have helped to significantly reduce costs. Furthermore, the airline is leveraging data analytics and machine learning solutions to improve its customer service, as well as save on operational costs.
AI-related technologies have also enabled Air New Zealand to anticipate customer needs and create tailor-made products and services. This
