Analysts deflate trans-Tasman travel bubble optimism

Benefits to airlines and airports of the trans-Tasman bubble may already have been priced in, and anyway could flow more to NZ, say analysts.

Hobart is one airport tipped to benefit from the trans-Tasman bubble. Picture: Nikki Davis-Jones

More flights will be good news to the troubled airline and airport industry, but analysts are tipping the positives of the New Zealand-Australia travel bubble to mainly flow to our Kiwi neighbours.

Analysts have broadly maintained neutral or buy ratings on Sydney and Auckland airports and Qantas, but the upcoming capital raising at Air New Zealand has led many to retain their sell rating.

Strong pre-pandemic flight levels from Australia to New Zealand suggest benefits from the newly announced bubble will flow east across the Tasman.

Citi analysts estimate that trans-Tasman travel contributed up to 40 per cent of Auckland International Airport (AIA) revenue before the pandemic struck.

That’s compared to only 10 per cent for Sydney International Airport (SYD).

Analysts are tipping slight upsides for Melbourne and Hobart airport, which may enjoy further activity, but like the broader airport sector, continued international border disruptions will continue to affect profitability.

“We therefore see the announcement as being more meaningful for AIA than for SYD,” Citi said.

Citi notes considerable uncertainties around future disruptions to travel, as well as high ticket costs and capacity constraints may also impact potential revenue recoveries from the travel bubble.

Auckland International Airport is expected to break even on the trans-Tasman bubble, with profitability still hampered by New Zealand’s conservative border closures.

The much-vaunted travel bubble has been looming for almost a year, with several fits and starts in 2020.

This has led Citi analysts to suggest any potential share price impact has already been priced in by the market.

Despite this Qantas rose 3.7 per cent by lunch on the news, while Sydney Airport slipped 0.48 per cent.

Auckland International Airport also slipped 0.84 per cent, while Air New Zealand was flat.

Citi analysts also note both Sydney and Auckland airports are trading “at/above long term average multiples”, even on pre-COVID earnings.

Macquarie analysts take a similar view to Citi, but note current scheduling of flights sees about 90 per cent of pre-COVID capacity from Air New Zealand to Australia by June, set to peak at 97 per cent in August.

“(Air New Zealand) remains priced for a swift and full return to profitability, while significant dilution will come from the equity raising by June,” Macquarie said.

Goldman Sachs was pleased by the border bubble announcement, reiterating its buy rating on Qantas, which looks set to benefit from the bubble in its competition with Virgin.

The newly-relaunched Virgin, now held by Bain Capital, will not be offering flights to New Zealand until at least the end of October.

Qantas and Jetstar are expected to operate 122 return flights per week across 15 routes across the Tasman.

This would put flights at 83 per cent of pre-COVID capacity, well up from the current 3 per cent of pre-pandemic flights currently crossing the ditch.

Goldman Sachs also notes the potential of any recovery is highly contingent on the effectiveness of Australia’s vaccine rollout, which may limit “the need for domestic border closures”.

“Despite the solid recovery in domestic travel, we think the (Air New Zealand) is not structured to deliver profitability until a material recovery in international travel is achieved,” Goldman Sachs analysts said.

Originally published as Analysts deflate trans-Tasman travel bubble optimism