Accounts leave punters in dark over airline's plight

By Peter V O'Brien

Friday 22nd March 2002

Investors looking for reassurance that Air New Zealand is recovering got little help from the accounts for the six months ended December.

Comments accompanying the interim report said earnings' targets included in the company's plans remained very challenging "notwithstanding the successful recapitalisation" and achieving them was not certain, given the degree of volatility in the aviation industry and operating leverage within the airline's business.

Air New Zealand's principal financial information was a composite of pre-Ansett and post-Ansett situations. Apart from that matter, various figures have been quoted about the actual loss after removal of the Ansett factor but some cannot be ascertained from the report filed with the Stock Exchange. (There was nothing sinister in that; it depended on what figures were relevant for particular purposes. The report complied in all respects with exchange requirements.)

Ansett is no longer an Air New Zealand problem, so an assessment of the current situation is best made through concentrating on the figures for continuing activities. They were given in a supplementary statement of financial performance and showed that not all the company's difficulties could be dumped on the Ansett experience.

Revenue from continuing activities was down compared with the corresponding period of the previous year across the three activity categories of passenger, cargo and mail, and other.

They were also down on a "back-to-back" six-months' comparison (second half of 2001 compared with first half of the current year) but that relationship was subject to seasonal factors in addition to the general ups and downs of the industry. September 11 would also have affected a valid first-half/second-half revenue comparison.

Passenger revenue from continuing activities was $1.43 billion in the period, 9.2% down on the $1.58 billion earned in the corresponding period of the previous year (full year, $3.13 billion), cargo and mail brought in $146.98 million, a decline of 7.8% from $159.5 million (full year, $314.41 million) and "other" accounted for $259.88 million, a 10.3% drop on $289.77 million (full year, $629.64 million).

Total revenue fell $187.57 million, or 9.25%. Operating expenditure from continuing activities declined but the dollar figure was $107.17 million (6.34%), insufficient to offset the $187.57 million revenue fall.

Adjustments for depreciation and amortisation and for rental and lease expenses (mainly aircraft) left earnings before interest and tax at a $48.39 million loss. The comparable loss was $28.74 million in the first half of last year and $4.82 million for the full 12 months.

Deduction of net interest charges of $39.74 million ($68.88 million) produced a pre-tax loss before unusual items of $88.13 million ($28.74 million).

The loss was $4.82 million on the same basis for the year ended June, a figure which indicated an "improvement" in the second half but was buried in Ansett and other factors.

Air New Zealand has to address the issue of inadequate cashflow in its move to desirable financial strength and performance. The company could inject as much capital and borrowed funds as available from government and private sources but would still go under unless it produced solid, positive cashflows commensurate with its financial size and operational activities.

It was well off the cashflow pace in the six months ended December and seems likely to remain so for some time. The report said positive cashflow from continuing operations was $44.9 million. That figure could be accepted but my many calculations based on figures in the report failed to reveal it.

Operating cashflow before adjusting for discontinued items was a negative $187.4 million but even at a positive $44.9 million was minimal in relation to shareholders' equity of $125.73 million and total assets with a gross value of $4.08 billion. Air NZ was recapitalised after December 31.

The company said gearing (debt to debt plus equity) was 93.8% at December 31 but reduced to 53.1% after recapitalisation on January 18.

It would increase to 78.2% of aircraft - operating leases were notionally included by capitalising the annual lease payment at the industry accepted factor of seven.

The ratio improved from its former derisory level but the relationship between cashflow from operations and the group's size is still small. Cashflow from operating activities is struck after deducting payments to suppliers and employees, interest paid and income tax paid from receipts from customers, interest received and dividends received.

It is the money that keeps a company going. It is not the same as profit, which is accounted for on an accrual basis and assumes debtors will pay up and creditors will be paid.

Taxpayers, through the government, can pump in capital and debt. They can do nothing about cashflow from operational activities.

Comments from our readers

No comments yet