Air New Zealand faces $46m accounting hit, updates earnings guidance

Air New Zealand aircraft lined up at Auckland International Airport. Photo / Dean Purcell

Air New Zealand has released details of a $46 million non-cash hit on its full-year earnings as well as gains and expenses of withdrawing from London later this year and costs of redundancy from its two-year cost-reduction programme.

Although its pre-tax guidance of $350m to $450m remains the same as forecast last August, the outlook excluded the impact of new accounting standards for leases.

These "Other Significant Items" represent events that are not reflective of the airline's underlying financial performance, the airline said in a notice to the NZX.

'"Accordingly, Air New Zealand has amended its earnings guidance definition for the current financial year to make it clear that these items are not included in the earnings guidance numbers."

The airline will provide further details of earnings guidance for the full year when new chief executive Greg Foran releases the interim result on February 27.

This would include a picture of demand and bookings outlook as well as any expected impact from recent events, such as the coronavirus in China. The non-cash accounting charge of about $46m results from the disestablishment of certain US dollar-denominated debt as fair-value hedges.

This will appear in the interim result.

This followed clarification issued by the International Financial Reporting Interpretations Committee.

Other components of the "other items" are:

• A gain of about $21m resulting from the partial sale of airport slots at Heathrow Airport (it flies there daily) to an undisclosed party, following the airline's withdrawal from the Los Angeles to London route. This will not be reflected in the interim results. The remaining sale of airport slots is expected to be recognised in the airline's 2021 financial year for a value of the same amount bringing the total value for the transaction to approximately $42m.

• Reorganisation costs in the range of $20m-$25m resulting from business transformation as part of its two-year cost-reduction programme, as well as expected costs associated with the withdrawal from the Los Angeles to London route. These will be recognised as a $13m cost in the half-year result.

The pre-tax guidance assumes a jet fuel price of US$75 a barrel. Last year the average price was close to US$80 but has dipped in the past few months and is now averaging under US$73 around the world.

Based on the experience of the 2003 Sars outbreak, airlines around the world are expected to take a hit from the current coronavirus. Then air travel from Asia dipped by close to 10 per cent but rapidly recovered when the outbreak was contained.

Air New Zealand flies daily to Shanghai and Hong Kong and any widespread resistance to air travel could hit it particularly hard as leisure travellers stop flying. Overseas tourists also fill about 40 per cent of the airline's domestic planes.

Air New Zealand is also experiencing a dip in demand across the Tasman as Kiwis are less inclined to travel to bush fire affected regions and long-haul passengers from Europe who visit both Australia and this country are also put off.

The airline's share price was trading as high as $3.01 last Friday but fell to $2.91 yesterday.