Air New Zealand Ltd. plans to double passenger and revenue growth in the next few years as it expands in the Pacific Rim region and earns more from established markets such as the U.S.
“I essentially want 5 percent to 7 percent more people flying on Air New Zealand services, which will drive our revenue number up,” Chief Executive Officer Christopher Luxon said in an interview. Revenue growth should reach 5 percent in the 2015 fiscal year, up from 3 percent in the year through June 2013, and the airline is planning for growth rates of as much as 7 percent over the next five years, he said.
Analysts predict revenue growth of 4.2 percent for the 2015 year, according to six estimates compiled by Bloomberg.
New Zealand’s national carrier is boosting sales just as the government prepares to reduce its shareholding to 51 percent from 73 percent as part of an asset-sales program. Luxon, a former Unilever Plc executive who took the reins at Air New Zealand in January this year, said the company’s current NZ$1.49 share price doesn’t fully reflect its value.
“I don’t think it does,” he said in Auckland on Oct. 4. “But equally, aviation is an incredibly volatile industry. Investing in an airline is not for the faint-hearted.”
Air New Zealand shares are up 15 percent this year, compared with a 17 percent gain in the nation’s benchmark NZX50 index.
The shares trade at 7.4 times estimated earnings, compared with an average valuation of 16.8 times for companies on the NZX50, data compiled by Bloomberg show. Six of seven analysts tracked by Bloomberg rate the stock the equivalent of buy.
Prime Minister John Key has indicated the government could reduce its stake in the airline before Christmas. Luxon said while the prospect of the offering may be depressing the stock, a sell-down will bring benefits through improved liquidity.
“The reality is very few shares are actually available on the open market,” he said, adding the latest results make the airline attractive to local and international investors.
Air New Zealand more than doubled net income to NZ$182 million ($151 million) last fiscal year on operating revenue of NZ$4.6 billion.
Luxon said he’s confident of beating those results this year.
“We’ve had a very good start to the year, and we have very strong booking profiles for the coming peak period,” he said. “We’ve got great momentum coming out of North America, China, Japan, our big markets.”
Part of Air New Zealand’s growth strategy has been gaining access to the Australian domestic market through its investment in Virgin Australia Holdings Ltd., in which it is the largest shareholder. It received approval last week to raise its stake in loss-making Virgin to 25.9 percent from 22.9 percent.
“We’re there for the long run,” Luxon said. “We’re investing in a business we think has got a lot of potential.”
While Virgin’s recent results have been “disappointing,” the airline has transformed itself from a low-cost carrier into a full-service operation that is now taking market share from Qantas Airways Ltd., Luxon said.
Air New Zealand’s previous foray into Australia resulted in it being renationalized. Ansett Holding Ltd. went bankrupt less than two years after Air New Zealand took full control of the Australian airline in 2000, forcing the government to rescue the New Zealand carrier.
Luxon said there is no comparison with the investment in Virgin, in which the Virgin Group, Singapore Airlines Ltd. and Etihad Airways PJSC are also major shareholders.
“Our exposure to the investment is very manageable, and the Virgin story is very different,” he said. “It also has a very supportive, strong set of shareholders.”
In its own domestic market, Luxon said Air New Zealand has 84 percent market share and he’s not concerned about competition from budget airline Jetstar, a unit of Qantas.
Air New Zealand plans to open new routes in the Asia-Pacific region to tap what Luxon called “a big shift of power from the Atlantic to the Pacific.”
“At this point there’s nothing I’d be prepared to talk about publicly around new markets, but you should expect in the next year that there’ll be new markets that we’ll be announcing in the Asian region, in the Pacific Rim,” he said.
Air New Zealand’s expansion will be aided by a fleet of 10 Boeing 787-9 Dreamliners, a longer version of the 787.
The Dreamliners are part of a NZ$1.8 billion investment in 21 new aircraft over the next three years that will reduce Air New Zealand’s average fleet age to about five years from nine.
After a four-year delivery delay due to Boeing’s problems with the 787, the first three 787-9s are scheduled to arrive in the second half of next year.
Another source of growth will be the U.S., Luxon said.
Luxon, who before joining Air New Zealand was President and CEO of Unilever Canada, said market research shows 28 million U.S. passport holders want to visit New Zealand before they die, yet only 190,000 came last year.
“Americans have got New Zealand on the bucket list, but they think it’s 42 hours away,” whereas a flight from San Francisco to Auckland takes 12 hours, Luxon said. “So we’ve been working our marketing programs up there to deal with the core barrier, which is perceptions of distance and the travel times associated, to trigger demand.”