Morningstar | The Departure of Air New Zealand’s CEO Does Not Impact our View or FVE
Air New Zealand’s CEO Christopher Luxon has resigned from his position with the airline. During his seven years at the helm, the company has performed well, generating average returns on invested capital, or ROIC, of almost 11%, marginally above the weighted average cost of capital. This is a solid achievement given volatile fuel prices, the highly competitive environment and capital intensity of the airline industry. We don’t expect no-moat businesses like airlines to sustain excess ROIC. Additionally, during the same period, the company has maintained a track record as a reliable dividend payer, with DPS growing by an average of around 20% per year during the same period, albeit off a low base. Air New Zealand’s largely unsuccessful (former) partnership with Virgin Australia is one for the negative column, but on balance we believe his tenure was positive.Luxon will remain in the role until Sept. 25, 2019, and in the meantime the board will search both domestically and internationally for a suitable replacement. The impending change in leadership does not impact our view on the company, our no-moat rating or our NZD 2.60 (AUD 2.50) per share fair value estimate. The stock is fairly valued at the current price.
We make no changes to our earnings expectations and we continue to expect low-single-digit EPS growth on average during the next five years. A key component of our assumptions is for the Brent crude oil price to decline modestly from the current USD 63 per barrel, reaching our midcycle forecast of USD 60 by fiscal 2021. Demand is likely to remain soft in the near to medium term, but this will be partially offset through a number of ongoing cost saving initiatives which are targeting AUD 60 million annualised by the end of fiscal 2019. We believe this target is achievable and will help group EBITDA margins increase by approximately 300 basis points to 20% by fiscal 2021 and remain at this level thereafter.
Air New Zealand is engaged in the transportation of passengers and cargo on an integrated network of scheduled airline services to, from and within New Zealand. Through its subsidiaries, Co. is also engaged in aviation, aircraft leasing and financing, investments, and engineering services. Co.'s geographical segments are New Zealand, Australia and Pacific Islands, United Kingdom and Europe, Asia, and America.
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