Poor show by Ansett costly for Air NZ

By DANIEL RIORDAN

Air New Zealand has found another $96 million in annual benefits from integration with Ansett Australia, and more are on the way.

Executive chairman Sir Selwyn Cushing says the company's earlier forecasts of lifting annual earnings before interest and tax by $256 million over the next one to three years now look too low.

Instead, he expects to realise $350 million a year - 60 per cent from cost cutting and 40 per cent from higher revenue.

Benefits for the current financial year, within the Air NZ and Ansett operations, are expected to be $175 million.

"The more we look into it, the more benefits we find."

Sir Selwyn made his comments as Air NZ yesterday reported a bottom line loss of $600.1 million for the year to June 30, with a $786.2 million one-off accounting change obscuring an improved operational performance.

It was a much better result than it looked, overcoming hefty increases in fuel costs, and would have been stronger were it not for a poor performance from then 50 per cent subsidiary Ansett.

The airline's trading profit excluding abnormals improved 14.3 per cent to $663.9 million and the net profit after tax and excluding non-recurring items rose 34 per cent to $177.9 million, about $30 million ahead of most analysts' expectations.

The big one-off loss from a previously unrecognised tax liability does not affect cash flows. It was done to bring Air NZ into line with Australian and international accounting policies.

Cavill White Securities analyst John Cairns said the size of the item reflects the depreciation charges on planes.

"It's a one-off charge that doesn't really impact on the company's economic value."

However, the change did affect the balance sheet, reducing equity and increasing the ratio of debt to debt plus equity to 66 per cent from 34 per cent. That high gearing ratio will ease back to 60 per cent after a rights issue and to around 55 per cent by June 30 next year.

The accounts were in transition, with Ansett treated as an associated company in the profit and loss account but consolidated in the balance sheet.

Air NZ's revenue for the year increased 10.9 per cent to $3.72 billion as a result of increased inbound traffic, the benefits of the lower NZ dollar and an improved NZ domestic market.

Expenditure rose 11 per cent to $3.56 billion largely due to higher fuel prices compounded by foreign exchange rate movements affecting such things as leasing and US interest rate costs.

Sir Selwyn indicated that the announcement of a new chief executive would be made within a couple of weeks. Decisions on who would fill the remaining top executive jobs in the integrated Air NZ-Ansett Australia were also close.

The company has confirmed it will make a $285 million renounceable pro-rata rights issue in October, underwritten by JB Were, to pay for the $A580 million acquisition of the second half of Ansett Australia, settled in June.

Both 30 per cent shareholder Brierley Investments and 25 per cent shareholder Singapore Airlines have said they will take up their entitlements.

Pricing details will be announced in mid-September, but analysts expect a one-for-three rights issue at about $1.50 a share.

Sir Selwyn said the board was still considering the possible issue of capital notes. There has been talk in the market of a $150 million issue.

Sir Selwyn said projects had already been approved to generate $107 million of the $175 million in annual savings expected from integration.

They include cost savings from procurement initiatives ($24 million), engineering integration ($26 million), network revenue management ($28 million) and rationalisation of the sales and distribution team ($25 million).

He would not be drawn on what redundancies there might be.

"As far as reallocation of human resources in Australia, I don't think I'm prepared to say exactly what form that will take at the moment."

Newly acquired Ansett Holdings did not have a good year. While Ansett's international operations improved, a worse performance from the bigger domestic business dragged overall operating profit down 28 per cent to $101.6 million and bottom-line profit fell 8 per cent to $144.4 million.

Growth in passenger numbers, revenue and load factors was more than offset by the impact of higher fuel prices and the lower Australian dollar, as well as fiercer competition in the Australian market sparked by new entrants Impulse and Virgin.

Sir Selwyn said costs escalated, margins came under heavy pressure and the ratio of business traffic fell away.

While Ansett struggled, both Air NZ's domestic and international operations did better than last year, with higher load factors and yields helping to offset the 44 per cent increase in fuel costs they faced (to $464 million).

Air NZ had hedged 40 per cent of its fuel requirements for this year at the equivalent of $US26-30 a barrel.

Fuel and foreign exchange fluctuations continued to be a concern, said Sir Selwyn.

"Those factors aside, there are solid prospects for a significant improvement in group performance for the year 2001."

He said strong inbound tourism should continue with the Olympics and weak Australasian currencies.

The firm announced an unchanged, unimputed final dividend of 9c.

Sir Selwyn said Air NZ might get a one-off gain in the current year from selling shares in the Dutch data network provider Equant.

Air NZ's Equant shares are in the books at zero but at today's price are worth $69 million.

Chief financial officer John Dell said the company expected to return to paying tax within the next 12 to 18 months and might therefore be in a position to pay an imputed dividend with the final dividend of the current financial year.

Air NZ A shares closed yesterday down 1c at 173c and the B shares were down 5c at 225c.