Moody’s revises Air NZ rating outlook to ‘stable’ on efforts to deal with fuel prices

Moody’s Investors Service has affirmed state-controlled carrier Air New Zealand’s credit rating and revised its outlook to ‘stable’ from ‘negative’ on the airline’s efforts to deal with high fuel prices.

Auckland-based Air NZ kept its Baa3 senior unsecured issue rating, and was taken off a ‘negative’ outlook after a “rapid response” to escalating fuel prices and dwindling demand, the rating agency said in a statement. It sees the airline’s financial profile improving in coming quarters as its high leverage ease to more moderate levels.

“The outlook change to stable from negative, principally reflects efforts made by the carrier to overcome the worst effects of high fuel prices, combined with weak demand,” vice president and senior credit officer Ian Lewis said.

“A rapid response by Air NZ to the weaker demand conditions and stubbornly high fuel prices over 2011/12 through capacity discipline and tight cost management efforts have assisted the company to restore its profitability and leverage metrics to levels more appropriate with its rating,” he said.

Moody’s put the airline on a ‘negative’ outlook in March 2011 as natural disasters in Christchurch and Japan and rocketing jet fuel prices created uncertainty for the company’s future.

Last month the airline flagged its annual earnings will more than double to between $235 million and $260 million in the year ending June 30.

Moody’s said the airline’s rating is supported by its dominance in the local market, its strong liquidity and an expectation for its financial profile to improve relative to its global peers. It is also supported from the implicit support of having the government as a cornerstone shareholder with about three-quarters.

Air NZ is unlikely to have its rating upgraded due to its reliance on the New Zealand economy, and would come under pressure if competition “substantially” increased, its performance deteriorated or its cash balances dwindled.

The shares rose 1.4 percent to $1.49 yesterday, and have gained 15 percent this year. The stock is rated an average ‘buy’ based on seven analyst recommendations compiled by Reuters, with a median target price of $1.84.