Nervous Air NZ looks for strongest solution

By NZPA

Wednesday 28th August 2002

Air New Zealand had a better result than some expected but the airline said it was still not confident it could survive the turbulent aviation industry as it was.

The company has announced a bottom-line loss of $319 million and an operating profit after tax but before unusuals of $39 million for the June year.

But the nervous airline said its balance sheet was still weak and there were plenty of uncertainties ahead, which was why it was in talks with Qantas.

"There is a general recognition within the company that its current form is not a long-term option," chairman John Palmer told a press conference in Auckland today.

"Under these circumstances, the board is compelled to make changes to strengthen the company and would be foolhardy if it ignored any potentially valuable option."

Qantas has indicated it wants to take a stake of up to 25 percent of its New Zealand rival, but the deal is controversial after the collapse of Air NZ's Ansett subsidiary in Australia last year, which plunged the company into a $1.4 billion loss -- the largest in New Zealand's corporate history.

Mr Palmer stressed no deal had been done, but he hinted that the domestic fare war that has opened up between Air NZ and Qantas was a concern.

"Competition is increasing and it is far from rational," he said. "Fuel prices are firming, so is the US dollar exchange rate and both are detrimental to our costs."

Managing director Ralph Norris confirmed that Air NZ was working on a back-up plan that did not involve a Qantas stake.

Both men declined to make further comment, but there was speculation that that a Qantas deal could be made more palatable through a public share float at the same price.

Today's result showed the airline was recovering, albeit slowly. Its pre-tax operating profit of $33 million was a 34 percent improvement on last year.

But the bottom line was dragged down by several abnormals, including an expected charge of $389 million in residual Ansett costs.

"The result side of it is probably not too bad," ABN Amro Craigs head of equities Bryon Burke told Reuters. He said the operating result was perhaps slightly ahead of expectations and the writedowns were largely as expected. Analysts' expectations varied so widely that some said it was too close to call, but some believed the net operating profit would come in between $10 million and $30 million.

Market reaction was muted, with Air NZ shares dived up as much as five cents, 7.8 percent after the announcement, but recovered to close just 1 cent down at 63 cents.

"The result, and the forward looking comments about what they expect to earn next financial year are disappointing," said Grant Williamson, a partner at stock broker Hamilton, Hindin, Greene.

Mr Palmer said the 2002 performance was better than anticipated in the business plan produced to support the recapitalisation of the company.

But he said "the battle to achieve acceptable commercial returns is far from over."

Shorn of Ansett, Air NZ's full year sales fell 54 percent to $3.67 billion. Total revenue declined by 9.5 percent to $3.62 billion, largely due to fewer offshore passengers following the September 11 attacks and lower capacity in Ansett's wake.

Earnings before tax and interest fell to $89 million from $142 million a year earlier. A stronger currency, lower fuel prices and savings on its maintenance, marketing and other expenses helped offset the dire figures.

Apart from Ansett, unusual items included a $34.6 million reduction in liability resulting from a revaluation of the deferred consideration payable to News Corp in regard to Ansett, a charge of $52.6 million arising from a change to the accounting treatment of the Airpoints Frequent Flyer scheme, and a tax credit of $6 million.

The airline is 66 percent hedged against future fuel price increases.

Asked whether Air NZ could survive alone, Mr Norris said the issue was whether that was the model most likely to ensure the airline's success.

"I think that it was very obvious even prior to September 11 that this model was very much broken."

Air NZ also announced a one-off loyalty payment to all staff except senior executives to thank them for the labour concessions they had made during the year.

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