Love is nice ... but cash is better for Air NZ

By CHRIS DANIELS aviation writer

Air New Zealand has pulled out of a spiral into bankruptcy, but says it needs more than patriotism to keep it on the path to profitability.

The airline, 82 per cent owned by the Government, yesterday revealed a loss of $319 million, dominated by a final $389 million write-off of its failed investment in Ansett Australia.

If all goes according to plan, this will be the last time Air New Zealand accounts will have to include write-offs and redundancy payments stemming from Ansett's collapse.

A strong second half of the year enabled the airline to exceed expectations by announcing a net profit after tax of $39 million, down $1 million from the previous year.

Despite the turnaround from last year's record $1.4 billion loss, chairman John Palmer yesterday said that the newly "stabilised" company had a risky future and needed more capital.

"Air New Zealand is still recovering from a major failure of its previous strategy," he said.

"It still has a weak balance sheet and poor profitability, and it operates in an industry that is volatile and operates under intense pressure."

He acknowledged the "overwhelming" public support Air NZ had received, but said "that doesn't provide a sufficient business foundation for a competitive, New Zealand international airline".

Referring to discussions with Qantas on the Australian carrier's desire for a stake in its transtasman rival, Palmer said Air New Zealand went into the new financial year "with a general recognition in the company that its current form is not a long-term option".

"Under these circumstances the board is compelled to make changes to strengthen the company, and would be foolhardy if it ignored any potentially valuable option.

"That is why we are seriously discussing the potential for a strategic partnership with, and equity investment by Qantas."

Palmer said both airlines saw benefits from such a partnership "in terms of the competitive pressures that are confronting us in international markets".

Regardless of the result of the talks, he said, the board thought next year's results would be much better than those of the past year.

He expected to be able to report earnings before interest and tax of more than $100 million, up from the $89 million this year.

Despite these positive projections, Palmer again referred to the risk of increased international competition " and the potential for higher fuel prices or more terrorist attacks.

His repeated references to competitive pressures have been seen by some as a possible pointer to the direction that talks with Qantas are taking.

Air New Zealand is changing its whole structure, starting with domestic routes. Changes to these were announced last month.

Its Freedom Air subsidiary will this year put planes on the "leisure routes" between the main New Zealand cities and Brisbane.

Fifteen new Airbus A320 aircraft will begin arriving in October next year. Air New Zealand says these will save about 15 per cent on operating costs.

A revamp of its long-haul routes will need a lot more money, as its business class seats and on-board entertainment systems are outdated compared with those of rivals.

Managing director and chief executive Ralph Norris said the airline's restructuring plans did not depend on the Qantas talks.