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Double whammy of tariff wars and Hong Kong civil unrest takes toll on airline profits: worse to come from COVID-19 outbreak before forecast rebound

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February 28th 2020

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New Air New Zealand (Air NZ) CEO, Greg Foran, believes the airline has the resilience to withstand the challenges posed by the coronavirus outbreak, COVID-19, after the carrier posted a sharp decline in interim net profit for its 2019-2020 year. Read More »

On Thursday, Air NZ announced net profit fell 32.7%, to NZ$101 million (US$63.4 million), in the six months to December 31 2019, from NZ$150 million in the prior corresponding period.

Revenue rose 2.9% to NZ$3.04 billion, the carrier said in a regulatory filing to the New Zealand and Australian stock exchanges. The company is listed on both sides of the Tasman.

Earnings before other significant items and taxation, which removed one-off items and were regarded as the best indication of financial performance, fell 8.8%, to NZ$198 million.

The airline said the first half result reflected a slower demand growth environment, weakness in the global cargo market and the political unrest in Hong Kong.

The airline has revised downwards its capacity forecast for the remainder of the financial year in response to the COVID-19 outbreak as well as weaker demand on trans-Tasman flights and some domestic leisure routes.

It planned to cut capacity on domestic routes by 1%-2% for the full 2019-2020 fiscal year, compared with an expected 2%-3% reduction before the COVID-19 outbreak.

Trans-Tasman and Pacific Islands capacity was forecast to be flat to 1% higher, down from a 2%-3% increase previously.

Long-haul routes are planned to expand by 3%-4% compared with previous guidance of 7%-8%.

"We have the ability to scale these adjustments up or down depending on how the situation progresses," Foran said during the company's first half results conference call on Thursday.

The carrier has temporarily suspended nonstop flights from Auckland to Seoul Incheon and Shanghai as well as temporarily reducing services to other Asian destinations including Hong Kong and Tokyo. There also have been flight reductions on some Tasman and domestic routes.

The airline estimated the COVID-19 outbreak would have a net negative impact on earnings in the range of NZ$35 million to NZ$75 million.

"At this point it is clear there will be an adverse impact to the current year's financial performance as a result of COVID-19," Foran said.

"I am confident that we will weather this storm. That's not to say it won't be challenging. It will be. But the strategic advantage we have spent years investing in and enhancing will help us deliver during this time."

On Wednesday, Virgin Australia reported weakened demand across its international and domestic markets due to COVID 19 after it announced an interim loss for the six months to December 31, 2019.

The combined interim losses of Virgin Australia (VA) and its low-cost carrier (LCC), Tigerair Australia, slumped to A$97.3 million (US$ 63.7 million) compared with a net profit of A$54.8 million in the prior corresponding period.

Revenue rose 1.5%, to A$3.12 billion, the group said in a regulatory filing to the Australian Securities Exchange (ASX). Underlying profit before tax, the airline's preferred measure of financial performance, tumbled 87%, to A$14.5 million.

VA said capacity across the airline group would be cut by 3% in the second half of its year with the impact of COVID-19 estimated to range from A$50 million to A$75 million for the period.

“The coronavirus outbreak is having a significant effect on the travel industry. We are seeing weaker domestic and international demand,” VA CEO, Paul Scurrah, said in a statement.

“We are responding to this with immediate steps to minimise the impact to the Group’s financial position. Our team is keeping a close eye on intakes and we’ll continue to respond accordingly as conditions evolve,” he said.

Scurrah said Tigerair Australia’s fleet would be scaled back from 13 aircraft to eight and the airline would exit five routes by October 2020.

China's big three airlines, Air China, China Eastern Airlines (CEA) and China Southern Airlines (CSA) are due to publish their financial results for calendar 2019 in coming weeks. The Cathay Pacific group’s results will be announced next Wednesday week.

Analysts were bearish about Greater China airline performance following a soft first half impeded by sluggish economic growth, trade disputes, civil unrest and currency fluctuations.

The coronavirus outbreak and the results from other airlines published so far have added to the negative sentiment.

"We have revised 2020 revenue-per-kilometer assumptions from around 9% growth to around a 15% decline for the Big Three," Morningstar equity analyst, Ivan Su, wrote in a research note dated February 21.

"Coupled with price cuts that will lead to lower yields, we expect top lines to decline by approximately 20%."

Su said the revised forecasts took into consideration supportive government policies that aimed to cut fees and reduce taxes for airlines.

He said airlines are expected to undertake more cost reduction measures, such as offering unpaid leave, as the Cathay Pacific group has done, and push back aircraft deliveries.

But the Morningstar analyst expressed some optimism about the longer term outlook. "A high level of fixed operating costs means earnings will likely go negative for 2020, but we forecast a strong recovery in 2021," Su said.

One of the largest travel businesses in China, the Trip.com Group, has delayed the publication of its calendar 2019 financial results from February 26 to March 18 "due to the evolving situation brought on by the novel coronavirus outbreak in China", it said.

"The revised date would give the company more time to observe business conditions and provide visibility for the first quarter of 2020," Trip.com Group said in a statement on February 21.

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