Air New Zealand [NZX:AIR] surprised investors this week by announcing pre-tax earnings of $540 million.
That’s a net profit of $390 million…$8 million more than last year.
And all during a period of higher fuel costs.
But then Chairman Tony Carter announced that they’d be paying staff a $1,800 bonus and that dividends would be bumped up a cent.
You’d think that investors would appreciate the good news. Big profits? More passengers? Big bonuses?
Unfortunately not. The revelation actually spooked investors…and the stock has tanked by 4.25% at the time of writing.
Why does good news sometimes trigger negative stock movements?
In this case, my suspicion is that investors viewed the large bonuses as a poor use of capital. Maybe it would be better used in repairing the airline’s deteriorating Dreamliner fleet…or expanding its domestic jet capacity.
But the fact is that Air NZ has been offering staff large bonuses for years. Last year, the bonus was $1,700. And the year before that it was an incredible $2,500.
So I believe that these staff bonuses have become part of Air NZ’s continuous remuneration strategy…not necessarily a one-off event.
The real reason for the stock price drop was likely the disappointing forecasts for the upcoming year. As RadioNZ reports:
‘The airline forecast underlying earnings of between $425m to $525m for the coming year, compared with the past year’s $540m.’
Why the lower forecast?
Well, Air NZ is in a strange period in terms of their fleet. Older Boeing 787 Dreamliners are experiencing significant engine problems. Most of those planes have been temporarily grounded for repairs.
Those repairs will cost $30–40 million alone.
In the meantime, Air NZ have to lease three 777s from Boeing. That’s going to increase operating costs as well.
And it’s going to require rejigging schedules and possibly cutting back on flights.
For investors, this means that 2019 will be a rebuilding year for Air NZ.
Here at Money Morning New Zealand, we think this might be a good opportunity to invest into a major Kiwi business with a reliable track record.
Three high-flying stock tips
Today, we’ll take a look at several stocks in the aviation industry that could take off in the next few years. The first two are listed on the New Zealand Stock Exchange (NZX) and the third stock is listed on the Australian exchange.
- Air New Zealand [NZX:AIR]
The first stock is Air New Zealand. As we’ve mentioned, we believe that investors have been temporarily spooked by a low forecast for 2019. However, this year’s strong financials and the company’s focus on improving its assets will, in our opinion, help the company grow faster in the years to come.
The stock’s price-to-earning ratio is currently between 10 and 11. The price is below $4 per share. It’s likely that you already own some stock in the company through your KiwiSaver, but you might need to check your specific fund to confirm.
- Auckland International Airport [NZX:AIA]
As the largest airport in New Zealand, nearly all visitors pass through Auckland International Airport. It’s shown strong profits and dividends over the past few years.
Additionally, this organization is somewhat unique in the industry in that it has several branches beyond just the airport. As the Motley Fool reports:
‘Auckland Airport also has a retail, car park and property development business. In addition to owning the airport, it is gradually building a large industrial, commercial, and retail precinct around the airport on land it owns. This provides an additional source of revenue with higher margins for the business.’
This past year’s revenue growth of 8.5% is solid and passenger count is up by 5.7% between domestic and international sectors. In its most recent earnings announcement, AIA’s CEO, Adrian Littlewood, announced that it would be expanding its presence in the hotel industry. Another good sign for future growth.
- Alliance Aviation Services [ASX:AQZ]
Our third aviation pick is Alliance Aviation Services, based in Australia. The company is a charter service that focuses on flying workers and subcontractors in and out of remote projects around Australia. A majority of their clients come from the energy and mining industry.
We believe that the stock will benefit from a near-monopolistic presence in a niche market as well as an interdependence with Australia’s energy and mining market…which we also believe has strong potential over the next few years.
When the Chinese economy crashed a few years ago, it took down the Australian commodities market along with it. Since then, the market has shown signs of a sustainable rebound…and perhaps greater opportunity with Chinese businesses. If this forecast comes true, Alliance Aviation Services could experience a parallel upward trajectory.
With a market cap of only AU$281 million, this small-cap stock has certainly been flying under the radar. Its stock is currently selling at under AU$2.50 per share at a P/E ratio of about 15x.
Going forward, we’ll keep an eye out for updates on Air NZ’s changing fleet. We’ll also monitor for Auckland Airport’s new expansion into the hotel industry. And finally, you’ll want to watch the Aussie commodities market for a correlated move in Alliance Aviation’s stock price.
Fasten your seatbelts.
Editor, Money Morning New Zealand