Is this the end of tourism's golden run?

Air New Zealand’s move to slash its full year earnings forecast has raised fears that tourism may be nearing the end of its golden run.

The national flag carrier’s shares were at one point down 47 cents or 14.4 per cent at $2.80 after it cut pre-tax earnings guidance to a range of $340 million to $400 million for the June year due to slower-than-expected revenue growth.

The previously announced guidance was for underlying earnings before tax of $425m to $525m, which excluded an estimated $30m to $40m impact of schedule changes prompted by the global Rolls-Royce engine issues.

If the forecast came in at the mid-point, the guidance would represent a 16 per cent decline.

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Air NZ said the revision reflected updated revenue forecasts based on recent forward booking trends.

“Revenue growth is forecast to remain positive, albeit at a slower rate than previously anticipated,” it said.

Markets showing signs of slower growth include leisure travel within domestic New Zealand and softening inbound tourism traffic.

Caught in Air NZ’s downdraft were Tourism Holdings, down 29c at $4.82 and Auckland International Airport, down 25c at $7.28.

“This is somewhat concerning for the broader economy, as a first sign of weakness for inbound tourism, which has been growing strongly for several years and is now New Zealand’s biggest export earner,” NZ Funds senior portfolio manager Josh Wilson said.

“The most direct read-across for other listed companies is Auckland Airport, with Tourism Holdings and Sky City possibly impacted to a lesser extent,” he said.

Mark Lister, head of private wealth research at Craigs Investment Partners, said the tourism sector, and possibly the broader economy, was facing a change in tempo.

“We have been negative on Air NZ for a while now on the basis that the tailwinds of recent times have turned into headwinds,” he said.

“From that perspective, it does not really surprise me that the share price is having a bit of a tough time,” he said.

“Tourism and air travel is a very cyclical business so as soon as you see economic growth come off the boil, that’s one of the first things that tends to decline,” Lister said.


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Graphic / NZHerald
Graphic / NZHerald

Grant Davies, an investment advisor at Hamilton Hindin Greene, said airlines often experience volatile earnings in a highly competitive international market that can be exacerbated by high capital spending needs.

“You’re going to have good years and bad years, but it’s hardly dire straits at the moment,” he said.

Davies said Air New Zealand, which is just over half owned by the Government, is often a bellwether for tourism-related companies.

Tourism has been on a strong growth trajectory for many years.

Last week, Stats NZ data showed almost 386,000 international visitors arrived in New Zealand during November, up 7 percent from a year earlier, for an annual increase of 3.6 percent at 3.85 million.

In the same month, the accommodation survey showed guest nights were up 3.8 percent from a year earlier at 3.54 million, with domestic stays 4.2 percent higher at 1.8 million and international guest nights up 3.4 percent at 1.73 million.

Harbour Asset Management portfolio manager Shane Solly said Air NZ’s rapid rate of slowdown had come as a surprise, especially since some had expected an earnings upgrade.

“They are still looking at reasonably strong growth but not as strong has it has been,” he said.

“We have had a period of abnormally strong growth over the last four or five years, and we are just slowing back to a more normal level,” Solly said.

Cost cutting looks likely for Air New Zealand after the earnings downgrade.

In an internal email to staff, chief executive Christopher Luxon said the revised guidance reflects updated revenue forecasts based on recent forward booking trends but that “difficult decisions” lay ahead. Luxon did not specifically mention job cuts.

“To be clear, our revenue growth forecast is still positive but the rate of growth is likely to be slower than previously thought. Markets showing signs of slower growth include domestic leisure travel and softening inbound tourism traffic.

“Clearly, it is concerning not to meet our original profit guidance statement to the market and as an executive [team], we are commencing a review to get the business back on a stronger financial footing for the remainder of FY19 and into FY20,” Luxon said.

– Additional reporting, BusinessDesk.


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