Documents released for Air New Zealand's $2.2 billion capital rescue show in detail the financial devastation wrought by Covid-19, and the headwinds and tailwinds in which the airline is now flying.
Air New Zealand's funding plan comprises $1.2b of new equity, $600 million of redeemable shares and a new $400m four-year Crown loan facility.
The funds will be used to repay $850m of an existing Crown loan and provide $950m for the airline to rebuild its pandemic-ravaged international network, as well as continued growth of its domestic operations and other parts of its business, including its loyalty scheme.
The airline has to invest in new aircraft and remodel new and existing business class cabins with seats which, according to reports today, look more like those of its competitors, and will be fitted to existing planes for around $400m to $450m.
The undrawn $400m new Crown loan will be used as backup should it be needed before 2026.
Jarden analysts say the size of the recapitalisation allows the airline to retain its investment grade credit rating - Moody's rates it as Baa2 stable outlook - by increasing available liquidity from $1.4b to about $1.8b.
How far the airline fell
The airline's revenue fell off a cliff from mid-February 2020 and although domestic operations got near to pre-pandemic levels in the middle of last year, overall revenue is still just 20 per cent of pre-Covid levels.
In response to Covid-19's impact on passenger demand, it took action across its business to reduce operating costs, defer capital outlays and secure liquidity.
This included cutting the workforce by 33 per cent from around 12,000 in December 2019 to 8000 last December. It suspended all short-term incentive schemes and cut executive and board remuneration for two years.
Air New Zealand also got out of non-essential property leases and consolidated its regional heavy maintenance to Christchurch.
As part of capital management it suspended dividends, which may be restored in 2026, renegotiated aircraft leases and deferred rent on property leases. It retired eight 777-200ERs, taking the airline's total widebody fleet to 21, and deferred delivery of A321neo and ATR72-600 planes. It also deferred delivery of its 787-9s by a year to 2024 and negotiated more flexibility with Boeing.
Govt support
The airline also set out in detail support from its 51 per cent owner - the Government:
• Negotiated $2b liquidity comprised of a Crown loan and redeemable shares
• Obtained confirmation of Crown's participation in current rights offer
• Was awarded government-supported cargo contracts worth $620m in revenue since May 2020
• Got wage subsidy support of about $170m
• Received about $85m in support under the aviation relief package
• Got tax related relief of $65m and used IRD-approved PAYE deferrals
Air New Zealand has seen encouraging early signs in recent booking activity since the Government's February and March announcements on easing border restrictions.
International booking activity increased after the Government's announcements about the removal of self-isolation restrictions and the proposed phased lifting of travel restrictions.
Booking activity was predominantly transtasman - where fewer airlines are now flying compared to pre-pandemic numbers - and North American flights, with Asia and Pacific Islands bookings being subdued.
The airline said increased activity reflected an element of pent-up demand. An increase in booking activity after those announcements, and bookings related to the three-times-a-week New York service starting in September, have been "encouraging".
Domestic bookings are still affected by Omicron, with booking activity predominantly related to leisure travel, but the airline expects a strong improvement as Omicron concerns abate.
It cautions that "the recent booking activity is not necessarily an indication of a consistent trend or trajectory and longer-term trends in bookings are subject to rapidly changing Covid-19 travel restrictions, the recovery of demand, competition and other factors outside Air New Zealand's control".
The rebuild
In the presentation, the airline said that although the operating environment will remain uncertain, by controlling what it can, its capacity based on available seat kilometres (ASKs) will reach 90 per cent of pre-Covid levels in the 2025 financial year.
Key assumptions for this are:
• Domestic flying continues uninterrupted and without restriction.
• From the middle of this year, international travel - excluding China and
Hong Kong where borders are expected to remain closed - is uninterrupted, with no self-isolation restrictions, and testing requirements easing for inbound and
outbound customers on Air New Zealand's key routes.
• By 2025, aggregate passenger demand for domestic, Tasman and Pacific Islands travel will marginally exceed FY19 (financial year) levels, supported by network growth into those markets; and aggregate passenger demand for longhaul will be slightly lower than FY19 levels (because of fewer ASKs flown overall), and have a more gradual pace of recovery relative to shorthaul markets.
• No long-term structural changes in travel behaviour or trends post-pandemic, including those resulting from environmental sustainability concerns, health issues related to Covid19, technological change, or changes in customer preference.
• Until March 2023, the Government freight scheme will support cargo flight revenue to assist targeted revenue recovery - noting the level of support will reduce as passenger demand returns.
• The competitors that were present in FY19 will progressively re-enter the market
through to FY25, with capacity at levels broadly similar to FY19 at that point.
• Otherwise, no major changes in the competitive environment or airfare pricing
on Air New Zealand's key domestic and international routes compared to FY19.
Drilling down on risk
In a further breakdown of key risks, Air New Zealand says the Covid-19 impact is significant, ongoing and uncertain. The material decline in demand for international and domestic air travel has had an unprecedented material adverse effect on Air New Zealand's financial position and performance. In FY20 and FY21, Air New Zealand made statutory losses before taxation of $629m and $415m respectively.
In February it announced that it expected losses before tax for this financial year to exceed $800m, although it now believes they will be less than that.
"There is a risk that losses continue in future years. If the restrictive actions taken to combat Covid-19 persist (whether in New Zealand or globally), Air New Zealand's operational and financial performance could deteriorate further. It is inherently difficult to make accurate assumptions about future financial and operating performance in this uncertain environment."
Other measures may be introduced or extended by the New Zealand Government or other governments which could reduce demand, including pre- and post-flight testing and self-isolation requirements.
The airline says it is not given any heads-up on such measures by the Government.
"Air New Zealand does not have any additional information in relation to border opening or the removal of travel restrictions and does not receive any specific information in this regard from the New Zealand Government as its majority shareholder."
In "general terms", the airline has assumed that from the middle of this year New Zealand's borders will be fully open, and not restricted or closed again, to most of the markets it flies to and the requirement for vaccinated travellers regardless of nationality to self-isolate on arrival is removed and not reinstated.
Prolonged travel frictions such as isolation and testing requirements at the New Zealand border may reduce passenger demand and therefore revenue below current planning assumptions and impose additional costs on Air New Zealand.
"If those assumptions are incorrect and/or passenger demand does not return at the expected levels and pace, the expected improvement in Air New Zealand's financial performance may not eventuate or may take longer to eventuate."
The airline has also assumed that there will be no structural changes to passenger demand over the longer term. Reduced demand could be caused by factors such as:
• Environmental sustainability concerns.
• Lower customer confidence in the health risks of flying related to Covid-19.
• Changes in customer preferences or booking behaviour.
• Concerns about New Zealand as a destination, depending on the prevalence of Covid-19.
• Reduced travel for business, including because of greater familiarity with remote access technology for businesses and associated cost savings.
• Reduced travel for business and leisure because of any economic downturn and impacts on customers' disposable income.
The airline sold its last slots at Heathrow in 2020.