Air NZ in for slow recovery

By ELLEN READ

Air New Zealand is warning that it could face a slow climb back into profitability, after yesterday revealing a dramatic plunge in returns for the six months to December.

Net profit for the half year was just $3.8 million, down from $127.2 million in the second half of 1999.

A dismal performance by Ansett Australia, increased competition across the Tasman, soaring fuel prices and the exchange rate all took their toll.

"The outlook for the second half is uncertain and there is potential for further deterioration in operating results in the short term," warned the airline, which is 30 per cent owned by Brierley Investments and 25 per cent by Singapore Airlines.

The company said the result - which represented the first six months of trading after the full acquisition and consolidation of Ansett Australia - was disappointing, but that it had been foreshadowed late last year.

Air New Zealand acquired the 50 per cent of Ansett that it did not already own from News Corp last July.

Air New Zealand's total operating revenue for the six months to December 31 was $4.31 billion - up from $1.8 billion in the second half of 1999 due to the inclusion of Ansett.



Air New Zealand said the problems faced during the half year included:

Fuel prices at 10-year highs.

The New Zealand and Australian dollars at all-time lows against the US dollar.

Increased competition in the Australian market after the introduction of two new low-cost airlines, and significant additions to capacity on Australian main trunk, transtasman and Pacific routes by major international competitors.

The introduction of a goods and services tax in Australia.

The Sydney Olympics, which meant a cut in demand for Australian domestic services. This offset gains from increased in-bound international traffic.

Also, the integration of Air NZ and Ansett was slower than expected, and savings were lower than predicted.

However, Air New Zealand chairman Sir Selwyn Cushing was confident that the company would still achieve about $350 million of additional earnings before interest and tax over a three-year period from the Ansett purchase.

He said Air New Zealand planned to proceed with a capital notes programme over three to four years to raise money to help pay for fleet modernisation, particularly at Ansett.

Analysts said although the first-half result was at the low end of forecasts, it had been expected and the reasons were fairly obvious.

"I think it was a result the market was largely expecting because they'd been pretty up front about what the situation was and where they were tracking," DF Mainland head of research Bruce McKay said.

The company's warnings about the future were of concern, but hopefully the worst was over, he said.

Problems with Ansett would continue to have a negative effect on Air New Zealand's earnings, he said, "but in a couple of years' time it should hopefully be in a lot better shape and be able to produce some very good earnings."

The company would not disclose Ansett's trading performance, but chief financial officer John Dell described it as "very disappointing."

Alongside the dismal profit announcement, new chief executive Gary Toomey unveiled a revamped executive management structure designed to "revitalise group performance and profitability."

The reshuffle establishes an integrated group of units to replace the previously self-contained airline business units.

Analysts said the aim was to end the "them and us" mentality that often occurred when one company acquired another.

Air NZ also said it expected to sell its remaining stake in networks communications firm Equant by June, the end of its financial year, as part of a $100 million asset sale programme.

Part of that sum will come from an already announced deal with US jet engine maker Pratt and Whitney for Air NZ's Christchurch engineering operation.

A third deal is in the offing but the company would not discuss it, citing commercial sensitivity.