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Air New Zealand AIRA AIRB : Sell. 2.50 ps market, expected downside 
1.50 ps

Air New Zealand is a 42% associate of BIL Ltd. , a New Zealand 
Investment company listed in the UK and Australia, and comprises 14.2% 
at book value of the assets of this company

Report summary:         Consensus about oil price inflation firming
                        Airlines around world being sold off
                        Air New Zealand recently acquired 50% interest 
in 
                        loss making Ansett Australia from TNT
                        Air New Zealand extremely vulnerable to short 
selling
                        Air New Zealand Put Options available on NZFOE

Around the world, inflation fears are becoming more focused on 
commodity price inflation. Oil stocks in the US are up 20%, and in New 
Zealand Fletcher Energy is up 25% since May. There has been selling 
pressure on airlines, more pronounced in the last few days with a 
consensus developing in the US that higher oil prices are here to stay. 
This will actually concern energy intensive products in the US due to 
reliance on oil and natural gas fired power stations, but is not 
perceived to be a problem in New Zealand due to the preponderance of 
hydroelectric power and long term contracts for natural gas. Some 
smaller niche airlines have gone bust worldwide.

It would be advisable to dump Air New Zealand shares and rights. Even 
with a 40% hedging exposure, increases of 40% in Jet Fuel will lead to 
much reduced profits. This is because Air New Zealand has recently 
acquired about 50% of loss making Ansett Australia, an airline 
significantly larger than itself, sacrificing its cash mountain to do 
so. As well, the losses sustained due to a forty percent rise in av gas 
would be of the order of $120m, halving AIR net profits by itself. 
There are also concerns that wages will rise at about 3% above 
inflation this year, leading to margins decreasing by another $20m. The 
tourism downturn due to the high value of the New Zealand dollar and 
changing destination preferences, as well as a net downturn in South 
East Asia (Japan up, everywhere else down), also means that we expect 
at the very most no net volume growth and pressure on margins this year 
(note the share prices of other NZ stocks in the tourism sector viz. 
CDL Hotels, Tourism Holdings, New Zealand Experience and Shotover Jet, 
which have halved this year). The impact of a negative Commerce 
Commission finding on predatory pricing by wholly owned Freedom Air 
could also impact.

My own estimate of AIR profits for this financial year is of the order 
of $50m NZ. This is down from $259m NZ last financial year, and is on a 
increased number of shares, as the company is in the middle of a rights 
issue. The enterprise ratios of airlines worldwide will decrease, due 
to the oil increase, but not to this extent. This profit figure also 
assumes that the oil price does not increase still further, which is a 
possibility. Because of the increased number of shares available during 
the rights issue, and due to the availability of AIR put options on the 
NZFOE (which US merchant bank Merrill Lynch makes a market for), short 
selling is a significant possibility. Holders would do well to sell 
their shares before this news is widely appreciated

                                Paul Taylor
                                        -Famo Triangle



--
ptaylor@codeworks.gen.nz (Paul Taylor)
The BBS Works -- +64 9 625 2851 NZL New Zealand's Oldest BBS !