Air New Zealand is moving towards an all-Dreamliner fleet. Photo / Brett Phibbs
Air New Zealand can take some comfort from events overseas after sinking to a heavy pre-tax loss of $376 million for the past six months.
While the airline talks about light at the end of the tunnel, rival Qantas reports that it's not a mirage. It has also tumbled to a fourth consecutive half-year underlying loss ($1.4b), but the Australian airline says that with border restrictions easing, in the middle of this month it had its best week for international bookings since before the pandemic.
Air New Zealand chief executive Greg Foran says that despite the remaining uncertainty around future travel demand and the ongoing impacts on financial performance, there is light ahead for his airline.
"Looking at what is happening around the world and at home, we can see the path back to the Revive phase of our Survive, Revive, Thrive plan."
The airline had already seen a spike in international bookings.
But whether Air New Zealand will enjoy the same sustained increase in international bookings as across the Tasman will depend on border settings in this country. Unlike Australia, New Zealand still requires self-isolation and isn't open to foreign visitors until July at the earliest. With long and short-haul international flying contributing two-thirds of Air NZ's passenger revenue, it is forecasting a heavy full-year loss of around $800m.
"There remains a large degree of uncertainty on the impact of the Omicron variant on demand for domestic travel for the remainder of the financial year," said the airline.
"Additionally, while recent clarity on the phasing of border openings for New Zealand is helpful, the timing of reduced or removed self-isolation restrictions remains unclear, driving continued uncertainty in the level of demand for international air travel.
"Self-isolation restrictions are expected to continue to have a substantial adverse impact on international demand in the second half of the 2022 financial year, and for as long as those restrictions exist."
The airline didn't announce a long-delayed plan to raise what is expected to be more than $1.2 billion of capital, but says it still intends to do so - although it has attached some important riders.
"Air New Zealand intends to launch an equity capital raise before the end of March or shortly thereafter, subject to market conditions."
Andrew Steele, director equity research at Jarden, said the airline's weak interim result reflected a very challenging operating environment.
"Given the current Omicron outbreak is still ramping up, the lack of a capital raise does not come as a surprise. Similarly, while full-year guidance is for a loss greater than our current expectations, a loss of this magnitude is understandable given the difficult and highly uncertain travel environment."
The world is rapidly opening up - figures from flight data provider OAG show weekly capacity is now 81.2 million seats and overall capacity is now 23.5 per cent below the same week in 2019 - but the airline industry has been hit with a familiar problem: soaring oil prices. Those prices are now their highest in seven years and today hit US$96 ($140) a barrel. Analysts say intensifying conflict in Ukraine could push them to US$120 a barrel.
The total fuel cost at Air New Zealand, which benefited from some hedging gains, rose from $152m to $174m.
Airline chair Dame Therese Walsh said the cost of fuel had been increasing significantly. "Although we have hedging strategies in place, we expect to see these rising costs start to come through in the second half and beyond."
Cash burn was impacted by reduced domestic bookings due to lockdowns and the suspension of the transtasman and Cook Islands travel bubbles. The airline is also making regular PAYE and fringe benefit tax payments. Average cash burn is now $51m a month, down from $96m in the prior corresponding period.
The airline says it continues to actively engage with the Crown as it assesses its longer-term capital structure and funding needs. This includes the revised support package with $500m of additional liquidity, announced in December.
"This better positions the airline during the period up to its recapitalisation including an ordinary equity raising. The revised package has increased the overall liquidity support to $2b."
As of this week, the airline has available liquidity of $1.4b, consisting of about $170m in cash, $240m of available funds on the Crown facility and $1b of redeemable shares.
The total amount drawn on the Crown facility as at December 31, 2021, was $545m and by February 23 it was $760m.
Based on the current demand profile and with the last of three PAYE repayments to the Crown of approximately $100m due in March, the airline expects it will begin issuing redeemable shares next month. The redeemable shares become available, and will be accessed incrementally, once $850m has been drawn under the Crown facility.
Foran said limited international travel on top of local lockdowns in the first half of the financial year had a huge impact on this interim result.
"The airline has typically derived two-thirds of its revenue from its international passenger network and much of that was effectively grounded for the majority of the first half."
After sporadic lockdowns in 2020 and 2021, Auckland's longer lockdown and border restrictions contributed to the loss in the first half and an extremely challenging time for the airline's 8400 staff.
Continued restrictions on international travel, the national lockdown that began in August 2021 and the extended period of travel restrictions for the Auckland region hit the airline's operating revenue. Passenger numbers were down 26 per cent from the corresponding period in financial year 2021 and down 84 per cent compared to pre-Covid levels.
Foran paid tribute to his staff. "I couldn't be prouder of our Air New Zealand whānau for what they've achieved this year so far. Everything from adding flights so Northland could remain connected to the rest of the country while the Auckland border was in place, to the digital solution for our customers to seamlessly upload their vaccine pass to their Air New Zealand app."
It was bringing back about 250 cabin crew and pilots, and has restarted one of its Boeing 777-300s to do some of the cargo heavy lifting.
"Looking further out to the end of this calendar year, we will be ramping up more passenger flights to North America and looking forward to starting up our direct service to New York City."
Cargo was a bright spot during the first half, with revenue of $482m, up 29 per cent. Growth was primarily due to an increase in government-supported flights and heightened seasonal demand, contributing $194m to cargo revenue in the period.
Walsh said that although optimism for the future was well-founded, the 2022 financial year is the airline's most difficult yet.
"It would be easy to think the first year of the pandemic had the biggest impact on Air New Zealand's finances," she said.
However, only the final quarter of the 2020 financial year was affected, and in the 2021 financial year the airline was able to access relief support from the Government through various subsidies, PAYE deferrals and cargo support schemes. The domestic network largely kept flying across the 2021 financial year and the transtasman and Cook Islands bubbles gave a boost to the second half of 2021.
The airline's statutory losses before taxation of $376m include a $9m loss from other significant items (aircraft impairment and foreign exchange losses on uncovered debt) compared to a $105m loss before taxation for the first half of the previous financial year.
The airline sold its last slots at Heathrow in 2020.