Air NZ now looks to the long haul

By CHRIS DANIELS aviation writer

Air New Zealand is turning its attentions to the future of its long-distance services, with some big, expensive and potentially risky decisions needing to be made.

Announcing its annual financial results in Auckland yesterday, chief executive Ralph Norris said the company was studying how it might re-organise its long-haul business, after already successfully reinventing its domestic operations.

He said the airline was now looking at what planes would be suitable for this part of the business, and also at options for refurbishing its existing fleet of long-haul jets.

The $93 million earned from Air NZ's international business in the past year came largely from cargo, with international passengers accounting for "a reasonably significant loss" to the company, said Norris.

Money coming from domestic and the Tasman routes made Air NZ books look a lot rosier than last year though, with the announcement of a $166 million after-tax profit, up from a dramatic loss of $319 million the year before. Revenue was largely stable, but costs were down 5 per cent, meaning earnings before interest and tax jumped by 162 per cent from last year.

The 2002 results were dragged down by an unusual item of $386.5 million - due to the collapse of its Australian airline Ansett in 2001.

Norris, who has been presenting the airline's case for an alliance with Qantas to competition regulator the Commerce Commission, would not be drawn on any outlook for the company in the coming year.

In recognition of yesterday's profit, Air NZ staff were awarded bonuses of up to $500 each for their efforts over the past year.

Domestic operations were very successful over the past year, said Norris, with traffic up 22 per cent after the introduction of its low cost-low fare "express" services.

Norris outlined some areas of $33 million in cost savings the airline had been able to achieve in the past year. They included a drop of 32 per cent in aircraft leasing costs, due mainly to the increasing value of the kiwi dollar. Interest costs were well down, as were fuel costs.

In particular, "operating cash flow for the year of $523 million is a tremendous performance", he said. "This represents a turn-around of $467 million from the 2002 year."

The positive cash flow helped reduce gearing from 74 per cent to 65 per cent, but the airline still wanted this down further, to between 45 per cent and 55 per cent. In the past financial year, long-term debt has dropped from $1.02 billion to $831.5 million, which included an early repayment of $98.7 million in long-term debt in April.

Debt levels were still too high despite this fall, said Norris, as the recent reduction had been helped by the strength of the kiwi dollar. This need to cut debt was one reason why the company would not be paying a dividend.

He referred to "continuing firm capital demands", coming from within the business, which included the financing of the new fleet of Airbus A320 planes, which will soon be flying across the Tasman.

Regardless of the big jump in profit, overall company results were described yesterday as "sub-optimal".

Chief financial officer Shane Warbrick said the airline had a target of returning 15 per cent before tax on capital employed. This latest result was between 6 per cent and 7 per cent.

When asked about prospects for a rights issue, Norris said he had "no news". With the future of the Qantas alliance undecided, it would not be possible to go to the market with a prospectus.

If approved by the Commerce Commission, Qantas will invest up to $550 million into Air NZ, buying itself a 22.5 per cent stake in the company and gaining two seats on its board of directors.

Air New Zealand has spent $11 million pushing for the alliance and Norris said yesterday he expected at least another $2 million to be spent trying to get it approved.