Moody's changes Air NZ rating outlook to 'negative'

Moody's changes Air New Zealand's rating outlook to 'negative'

March 21 (BusinessDesk) - Air New Zealand's credit rating outlook was lowered to ‘negative’ from ‘stable’ because of the Christchurch and Japanese earthquakes and escalating jet fuel prices.

Moody's affirmed Air New Zealand's “Baa3” senior unsecured rating.

The change “reflects the heightened operating uncertainty and incremental effects of recent earthquake events in Christchurch, New Zealand as well as Japan, on top of the already escalating price of jet fuel in recent months and which recently climbed in excess of US$130 a barrel,” said Ian Lewis, a Moody's vice-president and senior credit officer.

Last week, Air New Zealand issued a profit warning for the same reasons. The airline doesn't expect to be profitable in the six months ending June and full-year normalised net profit is expected to fall below $100 million. Air New Zealand's normalised first-half net profit was $96 million.

Moody's says while the flow-on impacts of the earthquakes and their duration are difficult to quantify precisely, they create significant uncertainty for the airline's earnings, at least in the short to medium term as demand falls on a number of key routes.

“While the company has performed well and exited the GFC (global financial crisis) with a solid balance sheet and strong liquidity, the magnitude and duration of these simultaneous and exogenous factors is outside the company's control,” Lewis said.

The airline's “Baa3” rating is supported by its dominant position in its core domestic market, strong liquidity and currently solid financial metrics relative to its major global peers as well as its ownership by the New Zealand government whose support is implicit.

Air New Zealand's rating outlook could revert to stable if and when the current uncertainty abates and if jet fuel prices moderate. “On the other hand, further negative rating pressure could evolve if there is evidence of sustained weakness in Air New Zealand's financial profile.”

Moody's will be concerned if the airline's debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) rises above four times, if its EBIT-to-interest ratio falls below two to 2.5 times or if its EBITDA profit margin falls below 20%, all on a sustained basis.

“The rating could also be pressured if Air New Zealand's liquidity deteriorates meaningfully or should the company pay excessive dividends to shareholders.”

Air New Zealand's shares are trading at $1.13, up one cent from Friday. They fell from $1.19 before the profit warning to as low as $1.06 and have been trending lower since hitting $1.54 in early January.

(BusinessDesk)

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