Greg Foran: Air New Zealand not price gouging but enjoying ‘tailwinds’

Air New Zealand chief executive Greg Foran. Photo / Alex Burton

Air New Zealand chief executive Greg Foran “absolutely” rejects suggestions that it is price gouging.

The airline has announced a pre-tax profit of $299 million for the six months to December 31, its first positive result in three years and a $377m turnaround on the same time last year. It is on track to make a full-year profit of between $450m and $530m compared to last year’s $725m loss.

Its recovery has been faster and stronger than expected and it could be able to resume dividends this year, three years ahead of what was earlier expected.

The profit has been driven by high demand for seats at a time when there is reduced capacity at Air New Zealand and its competitors, resulting in high airfares which have sparked criticism from travellers.

Asked if Air New Zealand was price gouging, Foran told the Herald: “I would absolutely say that’s not the case. There is no doubt we have some tailwinds in terms of pricing”.

While domestic capacity is about 94 per cent of pre-Covid levels, across its international network, the Tasman and Pacific Islands region was over 80 per cent but long-haul international was at 50 per cent, and Foran said that was where passengers were noticing they were paying more.

“A lot of that is driven by the amount of capacity that’s out there in the market. We’ve seen a lot of people wanting to get out and travel so, you know, if you were say looking to book seats in April four years ago, you will have seen more seats available at cheaper fares.”

With fewer planes and seats, the cheaper fares were snapped up faster, he said. Domestic fares went up by 25 per cent during the past year.

“So it’s not just a case of us raising prices. On top of that, there is inflation, fuel (up 53 per cent) and catering and the air navigation costs and all those things. With pricing, you get aircraft back and you fly them as much as you possibly can.”

Asked if the airline got feedback on airfares from the Government - its 52 per cent shareholder - Foran said it had not.

He said there were 40,000 seats on its domestic network for under $100 over the next three months and if passengers booked in advance there were bargains to be had.

“I’ve got no doubt that if you book a bit later in the process, then you’re going to pay more than what you did several years ago because there are fewer seats available, in particular on international, where by the end of this year international long-haul will still only be operating at 66 per cent of what it was pre-Covid.”

Air New Zealand has eight more long-haul Dreamliner aircraft on order – the first of which will be 787-9 models. But the first of these will not arrive until late 2024 and during the pandemic, it parked up and then disposed of its eight-strong Boeing 777-200 fleet. Foran said the airline was working as quickly as possible to restore as much capacity as it could and had only one 777-300 to bring out of storage. It would hire 3000 staff during the full year to restore numbers to just 1500 short of their pre-Covid level of 12,500.

“We have been employing people as quickly as we can right across the network. We fly our planes as much as we can. All of that is happening as quickly as we can because we know that’s a key driver of keeping prices down.”

It was continuing its wet lease with charter operator Wamos for more capacity on the Auckland-Perth route, while more flying and bigger planes on the domestic network added 10,000 seats a day. More flights by Qantas (which will compete with Air NZ from the middle of the year), the return of Chinese airlines and the entry of Delta Air Lines this year would see “the market play itself out and pricing will start to moderate”.

But Foran doesn’t see airfares returning to pre-Covid levels.

Operating costs for Air New Zealand more than doubled to $2.4b, with costs per available seat kilometre (CASK) increasing by 13.8 per cent, largely thanks to increased fuel prices.

Labour costs were up about 14 per cent and catering up by 38 per cent.

He said while some costs were baked in, there would be some savings through productivity improvements.

Air New Zealand was paid around $170m in wage subsidies during the pandemic but Foran said there was no intention to repay the money.

“I think it’s been reasonably well-documented that over this period, this is a business that’s had three very tough years, lost a third of its workforce, is busy re-employing nearly all of those back again. Shareholders have had a very challenging period during that time.”

Foran said while $299m may seem like a “heck of a profit”, it followed years of heavy losses.

“To put in some context, that’s about what it costs to buy a Dreamliner and we’ve got eight of them coming.”

Profit allowed the airline to invest and innovate and that was good news for both Air New Zealand and the whole country.

On the long-awaited revamp of the Airpoints loyalty scheme for its 3.5 million members, Foran said “good progress” was being made on its 20-year-old technology infrastructure. The Airpoints store had been expanded but the major change of creating another tier to reward its highest-value customers needed new infrastructure.

January’s Auckland floods and the impact of Cyclone Gabrielle had shaved $25m off its forecast full-year profit. The airline was still recovering from disruption to about 100,000 passengers.

Those weather events, on top of disruptive storms in North America over Christmas, had made the challenging job of restarting the airline more difficult.

“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 customers for bearing with the airline through these and other challenges.

“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.”

Foran did not have any concerns about the resilience of Auckland Airport.

“I think we were dealing with an event that was pretty extraordinary in terms of our flooding. I think a lot of people are thinking about what lessons they take either from that or a cyclone. But overall, I don’t have concerns about Auckland Airport and their operations.”

In mid-2020 the airline mapped out a three-pronged strategy – Survive, Revive and Thrive.

Foran said today’s result showed it was now in the early stages of “Thrive”.

“It’s a good start. But I think we’ve got to keep it all in context. We’ve cut off these losses but we’re not getting carried away with anything yet.” The latest result was at the lower end of guidance of $295m to $325m for pre-tax profit and below some analysts’ expectations.

Jarden says that while the airline has delivered a solid operating result and balance sheet strength, the company’s below-consensus full-year guidance (albeit partly reflecting extreme weather events) was likely to disappoint the market.