Airline still faces uphill battle

By Phil Boeyen, ShareChat Business News Editor

Thursday 7th March 2002

Air New Zealand's (NZSE: AIR) new chief executive continued to sound the warning bells after the company delivered a loss of $376.5 million for the six months ended December.

Included in the first half result was a charge against earnings of $349.7 million for items relating to the separation from Ansett. The amount covered settlement with the voluntary administrator, wages and salaries, guarantees and IT separation costs.

The company also provided $40 million in the charge for Air New Zealand staff redundancies arising from the loss of Ansett. Offsetting these was a reduction in the provision for deferred consideration due to News Corporation of $59.8 million.

While the bottom-line loss was not unexpected the airline also revealed the damage from continuing business, which recorded a pre-tax loss of $88.1 million excluding unusual items on total revenue of $2.58 billion, down from $4.31 billion previously. Cash flow from continuing operations was positive, however, at $44.9 million.

Newly appointed CEO Ralph Norris says it has been an extremely challenging six months for the global airline industry and not the least for Air New Zealand

"The terrorist attacks on the United States and the subsequent retaliatory actions continue to have a major impact on demand for international airline travel.

"Additionally the generally weak global economic conditions have resulted in reduced high-yield business traffic, placing substantial pressure on airline industry profitability."

Mr Norris says the fall in high-yield passengers resulted in significant yield erosion for the company, with overall gross passenger yield falling 4.7% from 14 cents per revenue passenger kilometre (RPK) to 13.3 cents.

"Domestic yield fell 7.3% to 30.6 cents per RPK as aggressive competitive activity further impacted profitability. International yields fell 9.1% to 11.1 cents per RPK. Passenger revenue fell 9.2% when compared with the equivalent period in the 2001 financial year."

Cargo revenue was also down by 7.9% to $147 million and other revenue fell 10.3% to $260 million.

On the upside the company says declining yields were partially offset by falling fuel prices, dropped by $54.5 million to $324.6 million for the period.

Looking ahead Mr Norris says that the earnings targets included in the company's plan remain very challenging, notwithstanding the successful completion of the recapitalisation.

"Achieving them is not certain, particularly given the degree of volatility in the industry and operating leverage within the business."

The airline boss also notes that while divesting non-core businesses such as the Jetset travel subsidiary may be important in the short-term, their effect longer term is only incremental.

"To drive the step-change in performance necessary to rebuild the airline we commenced a comprehensive strategic planning process last year and are well advanced in a review of our short-haul network of around four hours flight time or less.

"We will follow this with a detailed review of the long-haul network. These reviews will examine thoroughly our fleet and product options for these markets."

Air New Zealand will also need to arrange an alliance with an Australian airline now that Ansett is no longer in operation and is reported to have been in talks this week with Richard Branson's value airline Virgin Blue. Ideally Virgin Blue will join the Star Alliance, thereby offering Australian feeder passenger the ability to earn air points.

Rival Qantas belongs to the OneWorld partnership programme and since the demise of Ansett the stronger Star Alliance group is no longer represented in Australia.

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