Air NZ shares move ahead of extension to share buyback scheme

Friday 27th September 2013

Shares of Air New Zealand rose 6 cents today to trade at $1.50, ahead of the announcement at the annual general meeting in Auckland that the company is to extend its share buyback scheme for a further year.

Air NZ shares closed last night at $1.44, opened at $1.455 and by 11.45am were trading at $1.50. The buyback was announced at the annual meeting, which began at 2pm.

The company plans to purchase up to 3 percent or up to $45 million of its shares, whichever is the lower, over the next 12 months and comes as its 73 percent shareholder, the New Zealand government, signals its intention to sell down a chunk of its holding while retaining a 51 percent majority stake.

Outgoing chairman John Palmer, who is replaced from today by former deputy chair Tony Carter, was unable to shed light on the government's intentions.

However, Prime Minister John Key has indicated the selldown is likely to be placement to institutions and could occur before Christmas.

Addressing the meeting, the chief executive for the past nine months, Christopher Luxon told shareholders the company was easily able to absorb the planned expenditure of $1.8 billion on new aircraft in coming years.

Current gearing was around 39 percent and would rise to around 50 percent as the fleet renewal took place, which was well within the company's target gearing range of between 45 and 55 percent.

He also defended the company's 23 percent investment in Virgin Australia, which he conceded had recently turned in "quite disappointing" financial results, but could not be compared with Air New Zealand's failed investment in the early 2000s in Ansett Australia.

The major differences between Ansett and Virgin were that Virgin's three shareholders - Air NZ, Singapore Airlines, and Etihad Airways - were "well-resourced shareholders who see its long term value" and unlike Ansett, had a new fleet and associated low cost base, said Luxon.

It was the "fourth leg" in Air New Zealand's broader strategy and was a cost-effective way of tapping into an Australian domestic market of 23 million people and create feeders for Air New Zealand services into New Zealand.

The other three legs were the domestic New Zealand services, improving the economics of the trans-Tasman routes, and getting the international business contributing positively to results.

The company reported its strongest result in five years in the last financial year, and its third best result ever.

Palmer recounted coming to the Air New Zealand board in 2001, just after the Twin Towers attack in the US and following the collapse of Ansett Australia.

"The airline today bears little resemblance to that of a decade ago," he said. "Fuel prices are at levels that would have been unimaginable in 2001 and yet Air New Zealand has remained consistently profitable through a range of adverse economic conditions and global events."

Crown ownership had provided "the stable ownership dynamic required to successfully execute this turnaround story," said Palmer, who has also experienced the opposite of Air New Zealand's success in the last year through his chairmanship of the financially troubled state-owned coal company, Solid Energy.

Luxon said the key to Air New Zealand's future was not only growth, but a relentless focus on removing costs from the business. This was driving reduced staffing needs, in part because renewing the airline's fleet of planes would reduce maintenance requirements.

"It's clear while an airline needs to be good at many things to succeed, it's the inability to maintain a low cost base and ultimately to remain profitable that has proven to be a downfall of many carriers in the past.

"Although great customer service is paramount in our industry, in the end it cannot trump high costs. A low cost base preserves profits. The more profitable an airline, the more formidable it is as a competitor and the more it can invest in driving future growth."

Answering a shareholder question, Luxon defended the recent decision to abandon services into Masterton, saying the 19-seater planes that served the town were the most expensive to service, per seat, in the whole Air New Zealand fleet and the airline's coverage of regional towns was exceptionally high by world standards.

BusinessDesk.co.nz

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