Risky Business: Investing in Air New Zealand's Uncertain Future

Why are so many new investors so keen to buy shares in Air New Zealand right now? I think the theory is that it's good to buy when the market is down (correct) and why not buy something that is down 67% when it will surely survive becasue at the worst, the government will bail them out.

The problem with this thinking is that if governments bail out companies, they often take a share ownership in the company.

Thats what happened in 2008 when banks like RBS and Lloyds were bailed out in the UK. Using Lloyds as an example a shareholder would have watched their share price go from $6 to $1 in the GFC and concluded the bank will survive so its a good price to buy in at. Lloyds is too big too fail.

Plenty of new investors were attracted to buy into the eye of the storm. But when the government bailed them out they took a 47% ownership of the company meaning investors owned half as much of the company as they had bought. The share price went down to 20 cents and stayed down there for many years to come and now trades at 33 cents 12 years later.

You've got the same risk with Air New Zealand. Profits might eventually come back up, but your share of the profit might be diminished.

Debt is already unacceptably high at 65% of total assets, and obviously with revenue severely diminished that debt is going to go up a lot.

So why would you buy into the eye of the storm when there are low debt companies that have been sold off due to indiscriminate selling.

We're looking at funds like Dimensional that are ultra diversified with an emphasis on fundamentals like profitability and value (not based on market cap) and individual companies we are looking at are ones with strong balance sheets (low debt and high cash) and not sectors like tourism.

I think investors going in for Air New Zealand are looking for a brilliant short term return but they are taking on a lot more risk than they realise, as there is a risk of their shareholding being diluted. At a time when there are great investments to be had with far less risk, I can only conclude there are better ways to invest your money than to get onboard with Air New Zealand