Thursday, September 27, 2007

Reality needs to Bite

In 2002 Air New Zealand Ltd [AIR.NZX] was at one of its lowest points in years, although like most airlines it had lost billions in the past, this time its predicament meant the New Zealand taxpayer bailed it out via the present Labour Government, to the tune of more than $NZ 1 Billion.

The alternative would have been the entire collapse of the airline, New Zealand's national carrier.

Since then it has done comparatively well, posting acceptable profits and attracting large shareholders.

Its profits since 2002 though have barely got close to the cool billion that the taxpayer forked out to rescue it and on opportunity cost alone has lost a minimum of $250 million on top of that.

Shareholders, taxpayers and voluntary ones alike, need to remember that the airline biz is an extremely fickle one. One that is littered with bankruptcy, failure and many broken dreams, especially in New Zealand.

Long-term, Air New Zealand, like every other airline that there ever has been, with a few notable exceptions, has never made any money.

Air New Zealand's advantage has always been its highly profitable domestic airline monopoly that has propped up its less competitive international division.

While in the past this domestic near monopoly and at present duopoly has had a handful of half serious challenges by competitor airlines that have all failed, the latest drive to compete against the large bully incumbent by Virgin Blue looks set to be the most serious challenge to the big Koru yet.

Virgin has large amounts cash to fund their push, larger than any other prospective airline has had in the past. Virgin has challenged the dominant incumbent airline in all the markets that it has entered. They are in New Zealand for the long haul and will make it hard for Air New Zealand in the most profitable part of their business.

Air New Zealand will fight back hard though but will risk a backlash by the Kiwi flying public when they lower their fares to match Virgin's low prices. Realizing that they have been gouged for generations could be a bitter pill for Kiwis to swallow.

Air New Zealand's small International division, while making acceptable profits by airline standards, is still struggling with meager returns on capital and would be losing money if the cash they were using to operate was borrowed(see taxpayer funded bailout)like most other airlines.

The current profit isn't likely to continue for much longer as the pressures of international and domestic competition start to bite. Being such a small airline Air New Zealand is already struggling hard to compete with the lower costs associated with being a larger player or a traditional low cost operator like Virgin or Virgin Blue.

Investors in airlines seem to get wrapped up in the perceived "glamour" of the airline biz while at the same time forgetting that rather than eagles soaring their investment is more likely to be a spruce goose or an albatross.


AIR @ Share Investor

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Long Term View: Air New Zealand Ltd
John Palmer Tipples on the Shareholder
Mike Pero and Air New Zealand: Capitalism vs Socialism
Rob Fyfe's "Environmental Extremism"
Reality Needs to Bite
Air New Zealand wants another taxpayer bailout

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