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Air New Zealand Interim Report Financial Year 2002
Key Results
Financial
· Net Earnings After Tax from continuing operations; a loss of $75.6 million,
excluding Unusual Items
· Post-tax Unusual Items from continuing operations; a loss of $300.9 million
· Positive cash flow from continuing operations of $44.9 million
Operational
· 15.4 billion Available Seat Kilometres (down 1.9 percent)
· 10.8 billion Revenue Passenger Kilometres (down 4.7 percent)
· Expansion of Freedom Air network to include new Australian and New Zealand
ports
Strategic
· Recapitalisation successfully completed
· Appointment of Mr Ralph Norris as Chief Executive Officer and Managing
Director
· Six new appointees to Board (total Board size reduced to eight plus Managing Director)
Chairman's Review
Air New Zealand has reported its financial and operating results for the first half of Financial Year 2002. Before detailed analysis and discussion of these results, I would like to briefly review the recapitalisation and reorganisation that the airline has undergone during this period.
Recapitalisation
The recapitalisation of the company was enabled through the support of the New Zealand Government (the "Crown") and began with the Crown advancing Air New Zealand a loan of $300 million in October 2001. This loan provided working capital to meet the immediate needs of the business.
Following shareholder approval in December 2001, the second stage of the recapitalisation was completed on 18 January 2002. This involved the repayment of the $300 million loan, plus accrued interest, through the issue of 1,279,866,438 unlisted Convertible Preference Shares (at 24 cents per share) to the Crown. These shares carry a cumulative 5 percent dividend and full voting rights. They convert to Ordinary Shares in Air New Zealand on a one-for-one basis on 31 January 2005 or such earlier date as the Crown elects.
At the same time, a further 2,166,666,667 Ordinary Shares were issued to the Crown by the company at 27 cents per share resulting in additional proceeds of NZ$585 million. Post-recapitalisation, Air New Zealand has 4,203,354,290 shares on issue, with the Crown becoming the largest shareholder, owning 82 percent of the voting stock in the company. The shareholdings of existing owners were diluted by the issue of shares to the Crown resulting in the ownership by Brierley Investments and Singapore Airlines reducing to 5.5 percent and 4.5 percent respectively. Neither of these shareholders will have representation on the Board following the resignations of Mr Wilson QC and Dr
Cheong.
The proceeds from the issue of Ordinary Shares were used to repay all outstanding unsecured borrowings of the company - approximately $600 million.
Reorganisation
In parallel with this recapitalisation, a reorganisation of the company's management structure was implemented. We were very fortunate to have the services of Mr Roger France in the role of Executive Director for the period from October 2001 until the appointment in February 2002 of Mr Ralph Norris as Chief Executive Officer and Managing Director. Roger played an integral part in the recapitalisation negotiations and ably steered Air New Zealand through difficult times. He continues to contribute to the business through his ongoing role as a member of the Board of Directors.
Roger oversaw the substantial review of the management team which resulted in a 17 percent reduction in management headcount and approximately 30 percent reduction in salary costs. Following that restructure we now have a lean and experienced management team who are dedicated to rebuilding Air New Zealand into a company that shareholders and New Zealanders can be proud of.
We also now have in place a substantially new team of Directors reflecting the structural and ownership changes that have taken place over the past six months. While not yet complete, this new Board has diverse business experience which will bring new vigour to the challenges we still face. I look forward to the contributions from Ken Douglas, Jane Freeman, Warren Larsen and John McDonald, the new directors who join Roger France and myself as non-executive Directors.
I would like to pay particular tribute to Dr Jim Farmer QC who recently resigned from the Board to return to his legal practice. As Acting Chairman, Dr Farmer played a critical role in ensuring the survival of Air New Zealand through what was clearly one of the most difficult periods in the airline's history. To Dr Farmer, and all retiring and resigning Directors, we thank you for your contribution.
I would also like to extend my sympathies to the staff, suppliers and customers affected by the unavoidable decision that saw Ansett placed in Voluntary Administration, particularly those whose hopes have again been dashed by the failure of the Tesna bid for Ansett's operations. This underscores the difficulty of the present environment for the aviation industry.
(signed)
John Palmer, Chairman
Chief Executive's Review
Welcome to this my first review of performance as Chief Executive Officer and Managing Director of Air New Zealand. Whilst I have only recently assumed this role, I have been a member of the Board of Directors for the past three years and have gained an insight into the major issues facing the airline and the industry in general.
This 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.
At Air New Zealand we have had the additional challenges of the separation from Ansett and the recapitalisation of the company; tasks that have placed enormous pressure on all our staff. I am proud to say that we are beginning to emerge from this process.
Air New Zealand welcomed the recent announcement by the Australian Securities & Investments Commission (ASIC) that there is no sound basis for instituting proceedings in respect of insolvent trading or possible breaches of director's duties. The company will continue to co-operate fully with ASIC in its ongoing enquiries into the adequacy of disclosures made to the market in the period leading up to 12 September. This matter, which ASIC notes involves "considerable complexities" has already been reviewed by the Market Surveillance Panel of the New Zealand Stock Exchange. The panel found that the company's market disclosures met the requirements of its Listing Rules and consequently the Australian Stock Exchange Listing Rules applicable to Air New Zealand.
Looking forward we have completed the recapitalisation to the point where Air New Zealand now has a sufficiently stable (albeit not strong) capital base to allow us to rebuild and restructure our business strategies and operations.
Restructuring
The airline industry has changed dramatically in the past six months. Demand and yields have fallen considerably and the old airline business models are being overtaken by those of the value-based airlines. To meet this change Air New Zealand has taken some immediate measures which reduce its exposure to poor performing routes but this will not be sufficient longer-term. We are rethinking the way we do business. We recognise the changing needs of our customers and will align our products and costs to profitably meet these needs.
Our short-term response has included the reduction of capacity on selected trans-Tasman, trans-Pacific and Asian routes. We have also added capacity on other Tasman and Asian routes as demand has required, including the expansion of the Freedom Air network to include new Australian ports. We have implemented necessary price increases on unprofitable routes and targeted a range of fares to respond to specific customer demands.
We have begun divesting non-performing or non-core businesses. The sales of Jetset businesses have been agreed, including a preferred airline relationship with the new owners of the retail business. This agreement provides us with representation through over 750 travel agencies in Australia, mitigating some of the impact of the separation from Ansett. The potential sale of our ski business, nzski.com, is also underway. This is a profitable business with a great position in the New Zealand ski industry but does not fit within our core airline activities. These sales will ensure that we focus our efforts on those businesses which are, or can become, profitable and have clear strategic fit.
Notwithstanding the importance of these initiatives 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 (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.
I consider myself fortunate to be taking on this challenge surrounded by a team of dedicated employees who are renowned for the warmth of their service and their commitment to the airline. This quality service culture is key to our business success. It is only by listening to our customers, understanding what it is that they value and are willing to pay for in their travel experience, and then structuring our business around that, that we will remain competitive. I will be focusing my energy, time and experience on this and look forward to being part of the renaissance of Air New Zealand. It does not promise to be an easy task, but it is one that I am confident that we can achieve and will look back on with pride.
(signed)
Ralph Norris, Chief Executive Officer and Managing Director
Consolidated Performance Review
Difficult trading conditions resulted in the continuing businesses of the Group reporting a half-year pre-tax loss of $88.1 million excluding Unusual Items. Tax credits of $12.5 million resulted in a net loss after tax of $75.6 million excluding Unusual Items.
Group Earnings before Interest and Tax from continuing operations resulted in a loss of $48.4 million. This compares with a profit of $40.1million for the equivalent period in the 2001 financial year.
The results for the period included significant Unusual Items. The most important amongst these was a charge against earnings of $349.7 million for items relating to the separation from Ansett. This charge includes the settlement with Ansett Voluntary Administrator ($182.7 million), Ansett wages and salaries paid following the date of administration ($39.0 million), Ansett International guarantees ($41.0 million) and IT separation costs ($35.3 million). In addition a provision for Air New Zealand staff redundancies arising from the loss of Ansett led to a charge of $40.0 million. Offsetting these was a reduction in the provision for deferred consideration due to News Corporation of $59.8 million .
Operations
Overall Available Seat Kilometres (ASKs) for the period decreased by 1.9 percent to 15.4 billion when compared with the prior corresponding period. Revenue Passenger Kilometres (RPKs) decreased 4.7 percent to 10.8 billion when compared with the equivalent period in the 2001 financial year, resulting in a decrease in overall passenger load factor from 72.3 percent to 70.2 percent.
In the New Zealand domestic operation, ASKs increased period-on-period by 26.3 percent to 1.9 billion. This increase is primarily attributable to the increase in capacity implemented by Air New Zealand following the collapse of the Qantas New Zealand operation. The increase was spread evenly through the period. Similarly New Zealand domestic RPKs increased by 27.2 percent to 1.2 billion, again due to the increased market share following the Qantas New Zealand collapse. Passenger load factor in the domestic business was essentially unchanged at approximately 66 percent.
This increase in domestic capacity and passenger numbers was more than offset by declines in the international operations. International ASKs were13.5 billion for the review period, a decrease of 4.8 percent over the corresponding period in the 2001 financial year. The profile of this decrease was strongly influenced by the reductions in capacity implemented following the 11 September attacks. In July and August International ASKs were down only slightly on the previous year but the closure of US air space during September, and the subsequent capacity cuts in response to declining demand for the balance of the period, resulted in the more significant overall decrease. International RPKs declined 7.7 percent to 9.6 billion with slight increases in July and August offset by significant declines in the post-September 11 period. International passenger load factors declined from 72.9 percent to 70.7 percent.
Profitability
The decrease in demand for air travel was most pronounced among high-yielding business travellers during the period with slowing global economic activity compounded by the terrorist attacks. This resulted in significant yield erosion for Air New Zealand with overall gross passenger yield falling from 14.0 cents per RPK to 13.3 cents per RPK, a decline of 4.7 percent. Domestic yield fell 7.3 percent to 30.6 cents per RPK as aggressive competitive activity further impacted profitability. International yields fell 9.1 percent to 11.1 cents per RPK. Passenger revenue fell 9.2 percent when compared with the equivalent period in the 2001 financial year. Cargo Revenue fell 7.9 percent to $147.0 million and Other Revenue fell 10.3 percent to $260.0 million
Declining yields were partially offset by falling fuel prices. Air New Zealand unwound much of its fixed hedging cover in September and consequently benefited from the rapid fall in fuel prices in October as global demand dropped faster than production cuts. Air New Zealand's fuel and oil costs fell $54.5 million to $324.6 million for the period. The average fuel cost for the period was US$30.3 per barrel, compared to US$45.9 per barrel in the prior corresponding period. Labour costs fell one percent to $374.6 million.
Positive cash flow from continuing operations was $44.9 million.
Balance Sheet
As the recapitalisation of the company was completed after the end of the reporting period, the balance sheet position at 31 December 2001 was substantially different to the post-recapitalisation balance sheet. At 31 December gearing (as measured by debt to debt plus equity) was 93.8 percent.
Following the completion of the recapitalisation on 18 January 2002, gearing reduced to 53.1 percent. If aircraft operating leases are notionally included by capitalising the annual lease payment at the industry accepted factor of 7, the gearing increases to 78.2 percent.
Air New Zealand believes that this level of gearing is still too high given the volatility of earnings within the industry and is focused on increasing fixed-cost coverage ratios through improved profitability and the sale of non-core and under-performing assets.
Outlook
At the Annual Shareholders Meeting in December 2001, Air New Zealand stated that the outlook for the industry remained very uncertain and that the earnings targets included in the company's plan are very challenging. Notwithstanding the successful completion of the recapitalisation, these targets remain very challenging and achieving them not certain, particularly given the degree of volatility in the industry and operating leverage within the business.
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