Airlines burn money when it’s all going bad, they can earn just as quickly when they’re in a sweet spot. That’s where Air NZ finds itself right now, with high demand and competitors still not back in the market.
It’s worth noting that this time three years ago Air New Zealand was offering one-way fares across the Tasman from as low as $69 in a “Hail Mary” bid to stimulate crumbling demand. Bargains like this are a dim memory – one-way flights across the Tasman are often running to four figures and that is what is driving this dramatic turnaround.
It only has 50 per cent of long-haul international capacity back in the air – another driver of price pressure in airlines which are a textbook study of how principles of supply and demand works. Right now there is a shortage of planes and people to service them and a surplus of people wanting to fly.
Operating revenue was close to $3.1 billion, 5 per cent up on the first half of the last full pre-Covid year, 2019. Passenger revenue grew to $2.5 billion as capacity, excluding cargo-only flights, more than tripled, driven by increased long-haul flying.
Across all operations, revenue per available seat kilometre (RASK) increased 17.7 per cent excluding foreign exchange, a reflection of constrained capacity, strong customer demand and the return of corporate travellers.
Revenue in advance (air fares bought in advance) stands at $1.7b although there is an airfare credit component to that.
In releasing its interim results today the airline’s chief executive Greg Foran acknowledged high prices.
“Airfares are higher than they were pre-Covid. Like many businesses, we’re facing a high inflation environment with increased fuel, labour and other supplier costs at a time when more customers are wanting to travel, and that flows through to ticket prices.”
A key focus had been bringing back much-needed capacity to minimise the impact of higher prices on customers. It has eight more long-haul Dreamliner aircraft on order but the first of these will not arrive until 2025 and during the pandemic it parked up, then disposed of, its eight-strong Boeing 777-200 fleet.
“With six Boeing 777-300ER widebody aircraft now returned into service, three new domestically configured A321neo aircraft delivered and a fully crewed leased aircraft to serve the Auckland-Perth route, we are adding capacity back at pace,” he said.
During a briefing for analysts he said domestic fares were up 25 per cent for the last six months.
“We do appreciate that pricing is high – there are more people flying than there are seats available, not just at Air New Zealand.”
While they may fall, they were unlikely they’ll go back to where they used to be.
In spite of high prices, there was no sign of domestic demand falling with forward bookings ahead of pre-Covid levels and helped by the return of international tourists using the domestic network.
For the second half of this financial year capacity is forecast to be up to 100 per cent of pre-Covid levels on its domestic network, 80 per cent on the Tasman and Pacific Islands and 80 per cent on long-haul routes.
Foran acknowledged bumpy travel for many passengers who have faced flight delays, cancellations and lost bags, especially at peak travel times.
“We know we have more work to do to tackle customer concerns like long wait times at our call centres, getting planes to depart and arrive on time, lost baggage and getting refunds back in a timely manner.”
He thanked passengers for bearing with the airline through these and other challenges since it restarted flying.
“We’re very aware that flying is not currently the pain-free experience it should be and getting back into shape is a key priority.”
He said the airline had learned that restarting an airline is much harder than shutting down.
During the past six months, the airline had embarked on its biggest hiring drive in its history, with 2000 staff added and another 1000 to be hired by the end of the year to get to 10,900 staff. At peak, just before the pandemic, the airline had a staff of 12,500.
The shortage of airport workers was the most acute.
Operating expenditure more than doubled to $2.4 billion compared to the first half of last year, reflecting substantially higher flying activity compared to the prior period. Costs increased in most areas as the airline rebuilt its network and operational support base. Reported costs per available seat kilometre (CASK) increased 13.8 per cent, largely as a result of increased fuel prices.
Labour costs were up about 14 per cent and catering up 38 per cent.
Foran said a strong Air New Zealand was good for the country. The Government (which owns 52 per cent of the airline) recognised this early in the pandemic, stepping in to bail out the company with what went on to be more than $2 billion of indirect and direct support, including freight and wage subsidies.
The airline may announce the return to paying dividends when it reports its full-year result in August, a welcome sign for those who have backed it during the toughest period in the history of commercial aviation.
