Air NZ Long-Haul Review Aims to Stop NZ$1 Million a Week Losses
Aug. 31, 2011
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Air New Zealand is reviewing the long-haul routes bleeding more than NZ$1 million a week and expects to make changes by the end of the year.
The NZX-listed airline yesterday posted normalised earnings before tax for the year ended June 30, down 45 percent on the previous year at NZ$75 million -- although it predicted a better financial performance in the current year.
The airline has prepared plenty of extra capacity for the Rugby World Cup, with 95,000 visitors expected during the tournament.
Chief executive Rob Fyfe said the operating conditions of the past six months had been the most difficult the airline had faced in a decade.
Air New Zealand's international long-haul network continued to struggle against the backdrop of high jet fuel prices and a rising Kiwi dollar stifling inbound tourism demand from key markets like the United States and United Kingdom, which also continued to experience tough economic conditions, Fyfe said.
"International markets remain volatile and this has an impact on the demand for New Zealand as a destination," he said.
"This has seen long-haul routes in our network lose more than NZ$1 million a week in the first six months of this calendar year.
"No stone will be left unturned as we rigorously review our business model, the routes where our capacity should be deployed, our sales and marketing strategy and alliance partner opportunities."
A process of change would start before Christmas, Fyfe said.
The combination of reduced demand for travel as a result of the devastating Christchurch and Japan earthquakes, extra capacity into Christchurch to help the relief effort and compassionate fares had resulted in an estimated NZ$70 million negative impact on earnings, he said.
Short-haul markets had shown strong performance throughout the period with passenger demand up 9.3 percent on the back of a 5.5 percent rise in capacity, Fyfe said.
"One of the key initiatives was the introduction of our 'seats to suit' initiative on the Tasman where we now offer a broader range of products to compete more effectively with the diverse competitors that we fly up against on those routes," he said.
"The Tasman now, [and] it's not often I can say this, is making a positive contribution to the airlines profitability."
A transtasman alliance with Virgin Australia started on July 26.
"The positive customer feedback so far is encouraging and we look forward to the resulting financial benefit as we progress through 2012 and longer term."
In the absence of further deterioration in global economic conditions and an escalation in fuel prices the company expected a better financial performance in the 2012 financial year.
Air New Zealand's shares closed down 2c yesterday at NZ$1.09.
Goldman Sachs head of research Marcus Curley said: "It is a situation where the result itself underplays the profitability of the business given that they did battle against pretty significant headwinds, with the earthquakes in particular.
"Once demand levels normalise and you start to see some benefits from both the product developments, the alliance with Virgin and greater fuel efficiencies with the new aircraft you should see the profitability substantially higher than where it is at the moment," Curley said.
"The long-term question is whether that's actually high enough and what more needs to be done to improve the returns."
Chairman John Palmer said the natural disasters and sustained high fuel prices had dramatically altered what had been shaping up to be a positive full-year result.
"Nevertheless, this backdrop of adversity has again highlighted the resilience of Air New Zealand in the most challenging of times," Palmer said.
International financial markets were incredibly uncertain, he said. "The effect of that in all consumer areas where we fly internationally is that confidence is low and hence the prospects are clouding our view about what is possible."
The company was contemplating a bond issue of about NZ$150 million, with an announcement expected shortly.
"Despite our strong balance sheet, we think that the opportunity to diversify our funding -- particularly given the state of international financial markets -- may well be timely."