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Air New Zealand’s first half profitability appears to have
plateaud, with pre-tax earnings at a similar level for the past three financial
years, this according to the Centre for Asia Pacific Aviation is both good news and
bad news for the New Zealand flag carrier.
According to the Centre for Asia Pacific Aviation’s Senior Consultant, Ian Thomas, “the good news is the airline has achieved a sustainable earnings recovery through
the accelerated operational and capital restructuring which taken place since 2001. Gearing is down to a meagre 44% and shareholders’ equity has climbed to NZD1.49
billion, compared to just one third of that in 2001. All of this augurs well for the New Zealand Government, and its ambitions to unload its majority stake”.
“There are warnings signs, however, in the latest result – a 2.9% lower NZ$102 million net profit, and 2% lower NZD146 million before tax and unusuals, for the six
months to December 31, 2004”, said Mr Thomas.
Firstly, the growth in passenger volumes is not translating into revenue. While passenger numbers rose by 7.5%, turnover from ticket sales edged up by only 2% to
NZD1.4 billion despite a 6.1% increase in capacity network-wide.
Group yield declined by 3.8%, due in part to the impact of a strengthening New Zealand dollar on international services, but the erosion of returns was higher on
short-haul operations at 4.9%. The main reason for that was the Tasman, which has emerged as a serious concern for Air New Zealand, given its large exposure to
movements in the Australia-New Zealand market. The airline is reviewing its options here, but there are really only two choices – it can move its Tasman product
upmarket and face the cost consequences, or more likely reposition at the bottom end with a more basic passenger offering. With Pacific Blue scaling up its services,
Emirates continuing to empty capacity into the market, and fare pricing under pressure, going downmarket increasingly seems to be a more attractive option.
Similar to Qantas, manpower costs rose during the period by 3%, reflecting the unionised labour pool. However, Air New Zealand improved its sales and marketing
overheads by 9.3%, largely through commission cuts, which helped reduce unit costs by 5%.
Another major concern is the performance of Air New Zealand Engineering Services, which has seen its earnings topple by 57.7% in the half with the appreciating local
currency affecting competitiveness and Qantas transferring work elsewhere. This situation will only worsen as Air New Zealand introduces its new B777s and phases
out older aircraft, reducing the flow of maintenance work generated internally.
“Air New Zealand will be pinning its hopes for profit growth in the future on its new long-haul product, which incorporates a “super economy” product offering 40-inch
seat pitch, and an upgraded business class. If it fails to realise these benefits, or key markets face additional competition, as seems likely, the pressure will intensify on
the airline to maintain earnings levels”, said Mr Thomas.
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