Air New Zealand's Eroding Returns: A Warning for Investors

Air New Zealand, once a symbol of New Zealand's aviation prowess, now faces mounting financial headwinds that demand investor scrutiny. Over the past five years, the airline's Return on Capital Employed (ROCE) has plummeted to a meager 4.2%, nearly half the industry average of 8.9%. This stark underperformance, paired with stagnant capital deployment and rising financial risks, paints a troubling picture of a business in decline. For investors, these trends are not merely statistical curiosities—they are red flags signaling a mature, uncompetitive enterprise with little room to grow.

The ROCE Dilemma: Profitability in Free Fall

ROCE, a critical metric for assessing how effectively a company generates returns from its capital, has been Air New Zealand's Achilles' heel. From 6.6% in 2020, its ROCE has deteriorated to 4.2% by December 2024—a 36% decline. Compare this to the airline industry average of 8.9%, which has held steady, and the contrast is stark. The erosion is driven by stagnant earnings: EBIT (earnings before interest and tax) fell from NZ$228 million in mid-2024 to NZ$218 million by year-end, even as capital employed (total assets minus current liabilities) edged higher to NZ$5.2 billion.

This underperformance suggests Air New Zealand is failing to capitalize on growth opportunities or compete effectively in an industry where peers are securing better returns. For investors, a ROCE below the cost of capital—let alone half the industry benchmark—means the company is destroying value, not creating it.

Stagnant Capital Employed: A Sign of Stagnation

Air New Zealand's capital employed has remained flat since 2020, hovering between NZ$5.2 billion and NZ$5.3 billion. While total assets grew slightly to NZ$8.8 billion by December 2024, this was offset by a fixed liability burden of NZ$3.6 billion in short-term debt. A company that cannot deploy capital to expand operations or modernize its fleet risks becoming irrelevant in an industry where competitors like Qantas and Delta Air Lines are investing in fuel-efficient aircraft and digital services.

The lack of capital reinvestment signals either a lack of viable opportunities or poor decision-making. Either way, it underscores a business stuck in neutral—a far cry from the dynamic growth investors expect.

High Liabilities and Financial Risk

Air New Zealand's reliance on short-term financing is alarming. Current liabilities account for 41-42% of total assets, a ratio higher than many peers. This heavy dependence on short-term debt exposes the company to liquidity risks, especially if interest rates rise or revenue falters. Airlines are cyclical businesses, and in downturns, overleveraged firms face brutal choices—cutting costs further or defaulting.

The balance sheet's fragility is a non-trivial risk for shareholders, who have already seen the stock price crumble.

Stock Performance: A Mirror of Investor Discontent

The market has already rendered its verdict. Over five years, Air New Zealand's stock has lost 64% of its value, with a further 20% decline by December 2024. This depreciation reflects investor skepticism about the company's ability to reverse its downward spiral.

The Bottom Line: Time to Exit?

The data paints a clear picture: Air New Zealand is a mature, low-margin business with structural issues. Its declining ROCE, stagnant capital, and precarious balance sheet suggest it lacks the agility to compete in an industry where peers are thriving. Investors seeking growth or profitability would be better served elsewhere.

For those still holding the stock, now is the time to reconsider. The metrics point to a company in secular decline—one where even a recovery in travel demand may not suffice to close the gap with competitors. In an era where capital allocation matters most, Air New Zealand's underperformance is a cautionary tale. Act now, or risk further erosion of value.

Investors: Heed the warning signs. Consider trimming or exiting your position before the headwinds become hurricanes.