Coronavirus 'could take $100m off Air New Zealand's profit'

Air New Zealand could face a profit drop of $100 million or more because of the impact of coronavirus, commentators say.

The airline warned shareholders last month that the virus could reduce its profit by $35m to $75m this financial year.  

Last year, it made $270m after tax, which was down on the previous year's $390m.

But independent economist Benje Patterson said the impact could be more significant than that. He said the situation had evolved quickly since the market update.

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"The airline's market capitalisation has plunged $1 billion since the start of the year, with $400m of that fall coming since the downgrade announcement," he said.

"The most recent declines in Air New Zealand's share price suggest that markets are pricing in expectations of a much steeper fall in Air New Zealand's profits. My estimates highlight that markets could already be pricing in up to a $125m fall in profit."

AIir New Zealand last year invested in relaunching flights to Seoul. The first flights flew in November. It has now suspended those flights again until the middle of the year. It has also suspended flights to China and cut flights to Samoa.

Patterson said that was likely to go on for some time.

"Even if the government yields to pressure from the World Health Organisation and reduces travel restrictions, the viability of these routes from a financial perspective is likely to be limited by weaker consumer demand.

"This weakening of consumer demand is also not limited to the Chinese and Korean markets. Air New Zealand has reduced capacity on other routes and sold trans-Tasman flights for as low as $69 and domestic fares for $9. The airline is trying to shore up demand on its fleet as it looks to one of the quieter periods of the year during the autumn shoulder season."

He said some people might think it was the influence of new chief executive Greg Foran implementing the discount tactics of his former employer, Walmart.

"But a quick look at what the airline is doing from an human resources perspective suggests the problems are beginning to run deeper. Air New Zealand has taken the unusual step of asking staff to take voluntary unpaid leave – this is a page straight from the global financial crisis corporate playbook and is a way of trying to protect vulnerable short-term cash flow.

"Some recently arrived new aircraft might  need to be parked up. Having such underutilised and expensive capital sitting idle will be another factor weighing on managements' mind. There will be a sense of relief that many further aircraft deliveries have already been delayed."

Irene King, former Aviation industry Association chief executive and now industry commentator, said the situation was volatile, which made predictions difficult.

She said the travel restrictions being implemented were more extensive than they were during the Sars outbreak.

Social media was also making the world more globally connected and people were taking their own decisions about what risk might b associated with travel, she said.

"You hear people saying 'we're not going to travel overseas, we'll holiday domestically'. That's great for the New Zealand economy but Air New Zealand's exposure is largely international."

She said international data showed that the impact of the virus was significant but it was not clear how long it would continue for.

In some cases, decisions that were made were out of the airline's control, she said.

Air New Zealand halved its flights to Samoa after the country ruled all passengers would need a medical certificate.

"We do know that aviation goes off a cliff spectacularly but it's also the first sector to bounce. I think things will stabilise."

There were opportunities for customers to pick up cheap travel opportunities, she said. "People have to decide their own appetite for risk… people often think of risk as being a bad thing but it is also an opportunity."

Some of the cheap flights were for travel until the end of the year.

"At some point they will develop a vaccine which is effective. There is no reason why they won't. Some people will say 'am I going to let my life be dictated by this? Many of us don't."

A spokeswoman for Air New Zealand said it would not comment on finance matters outside of sharemarket disclosures.