Air New Zealand Limited - Recent Financial Theories

Abstract

Recent financial theories argued firms can increase their values through hedging by reducing taxable income, agency cost and the cost of financial distress. This report provides a qualitative and quantitative analysis of corporate risk management for the company Air New Zealand. We uses a time series OLS regression model. The fair value of derivatives is used as dependent variable to measure the extent of financial instrument usage. The result shows that the use of derivatives by Air NZ fails to add value to the company.

1. Introduction

Air New Zealand Limited is the national airline and flag carrier of New Zealand. Based in Auckland, New Zealand, the airline operates scheduled passenger flights to 56 destinations locally and internationally. Air New Zealand is a member of the Star Alliance global airline alliance, having joined in 1999. Air New Zealand originated in 1940 as Tasman Empire Airways Limited (TEAL), a flying boat company operating trans-Tasman flights between New Zealand and Australia. TEAL became wholly owned by the New Zealand government in 1965, whereupon it was renamed Air New Zealand. The airline was largely privatized in 1989, but returned to majority government ownership in 2001 after a failed tie up with Australian carrier Ansett Australia. As of 2008, Air New Zealand carries 11.7 million passengers annually.

Do hedging create firm value has been a popular topic argued through decades. In this report we are going to identify whether Air New Zealand create value through hedging. In this report we are going to discover the following questions what kinds of risks are faced by Air New Zealand. How does Air NZ manage such risks and does the company hedge effectively?

The following of this report is sorted as 2.risks faced by Air NZ; 3.Air NZ risk management; 4.Air NZ hedging strategies; 5.Literature;