ANALYSIS
New Zealand travellers, take a bow.
You’ve helped propel the national carrier to its second-best profit in its history. Air New Zealand’s underlying earnings of $585m are second only to the $663m it reported in 2016 as 16 million passengers – mainly Kiwis – have climbed on board.
The airline describes the latest result as “pivotal” and it is a dramatic turnaround on last year’s underlying loss of $725m, part of the $1.9b in accrued losses during the pandemic.
A $412m net profit compares to a loss of $591m in what could be the biggest turnaround in New Zealand corporate history. After three years of suspended dividends, it is paying a special dividend of 6c.
Paying out nearly half of net profit means the Government, which owns 51 per cent of the airline will be paid about $100m, some reward for the $2 billion-plus of direct support and backstop funding and loan guarantees during the pandemic. Its diverse base of other shareholders will be paid the other half.
Good news, and the unionised staff will be getting a bonus of close to $2000.
Chief executive Greg Foran’s realised remuneration cracked the $3m mark, totalling $3.133,918m, up from $2,347,263 last year.
The number of staff earning more than $100,000 also rose, with the number of management staff up from 949 to 1364. The number of aircrew, engineers and those based overseas on more than $100,000 rose from 2345 to 3068.
Apart from the satisfaction of knowing they’re flying on an airline that’s profitable again and is getting new planes, there’s nothing in the result to specifically reward passengers.
Across the Tasman, Qantas today announced more than 1 million sale fares, and frequent flyers to share in more than one billion bonus points as a “thank you”.
Air New Zealand isn’t the only airline to report near-record or record profits this year. Qantas today reported an underlying $2.7 billion profit after racking up $7b in losses during the previous three years. Airlines are in a sweet spot: high demand and reduced competition.
For Air New Zealand, operating revenue for the 2023 year was $6.3b, driven by passenger revenue of $5.3b, reflecting the full reopening of New Zealand’s borders.
Revenue was up 9 per cent on its pre-pandemic highs. The network grew 80 per cent compared to the prior year, with increased capacity in the second half as the airline returned its remaining widebody aircraft to service and resumed flying to all offshore destinations.
The strength of customer demand, particularly “visiting friends and relatives” and leisure-based travel, remained over the course of the year, supporting higher yields in an environment where capacity was limited as airlines around the world worked hard to ramp up their operations.
This means airlines have more pricing power, fares have soared and Air New Zealand addressed the question before it was asked.
‘’We know increased costs and high demand has made flying more expensive,’’ said Foran. Pressed for more detail, he said fares were up between 30 per cent and 35 per cent compared to 2019.
His advice is to book early. He also holds out hope for travellers that with increased capacity from Air NZ and other carriers in this market, fares will come down. But not to pre-pandemic levels.
Domestic capacity was restored to 94 per cent and international capacity 71 per cent of pre-Covid levels in the financial year.
Operating expenditure was substantially higher than last year at $5b (last year it was $2.7b) reflecting the significant increase in flying. Costs increased across all areas as the airline further restored the international network and increased operational resilience.
Reported costs per available seat kilometre (Cask) increased 2.6 per cent, largely as a result of higher fuel prices. Underlying Cask, which excludes the impact of fuel price, foreign exchange and third-party maintenance as well as the reduction in wage support subsidies, improved 15 per cent.
This was a result of efficiencies from greater network activity partly offset by non-fuel price inflation of approximately 6 per cent and a change in the flying mix due to a reduction in lower-cost cargo-only services and a proportionally greater increase in long-haul and short-haul passenger flights. Fuel consumption increased almost 90 per cent due to greater flying activity, and that cost jumped from $560m to $1.5b.
Labour costs were $1.4b, an increase of $465m or 48 per cent from the prior year. Full-time equivalent labour (FTE) increased 29 per cent to approximately 11,500 compared to 8900 in the prior year. Air New Zealand announced it will add two new ATR72-600 turboprop aircraft and two new Airbus A321s into its fleet late next year, adding 768,000 seats per year.
In response to high demand across the airline’s regional network, the two 68-seat ATRs will boost capacity by more than 5700 seats per week and fly customers to regional destinations such as Tauranga, Nelson and Gisborne.
The 214-seat Airbus aircraft will be configured for international flying and will serve Tasman and Pacific Island routes. They’ll add more than 9000 seats per week to the network, ensuring the airline has more capacity across the Tasman than any other airline, giving customers great choice at competitive prices.
Foran said while adding more seats is an important part of working to reduce prices, like all New Zealand businesses costs continue to rise significantly in many areas, and the reality is that airfares are unlikely to return to pre-pandemic levels.
“Our customers have supported us as we’ve rebuilt Air New Zealand and we know it’s important to offer a range of fares that are accessible to all New Zealanders. Investing in new aircraft means more seats available at more times and at reasonable prices.”
These additional four aircraft mean the airline has a total of 16 aircraft joining the fleet including eight Boeing 787 Dreamliners, six Airbus A321 and two ATR72-600, all scheduled for delivery between 2024 and 2028. Forecast capital expenditure over that period will be $3.6b (including the cost of retrofitting 14 existing Dreamliners.
The airline will be soon announcing further details on a leased Boeing 777-300ER, which will add 3000 more seats per week to its international network. This would bring the total 777-300 fleet to eight. But the airline suffered a setback last week when a catering truck damaged one of its Dreamliners at Auckland Airport and there is no firm date for repairs to the carbon fibre plane to be finished. Foran says the ding to the Dreamliner is frustrating. Pratt & Whitney engine problems have also hit domestic and short-haul capacity.
The tailwinds the airline enjoyed during the 2023 financial year were unique with significant customer demand, constrained market capacity and lower fuel prices in the second half.
“As such, we believe the 2024 financial year will be more reflective of future financial performance,” it says.
In the first half of the 2024 financial year, customer demand remains.
“We are mindful of the uncertain economic environment however and acknowledge there are a number of factors that may impact future customer demand and profitability,” the airline says. “These factors include increased international competition, volatile fuel prices, a weaker New Zealand dollar, ongoing wage inflation and increased airport charges.”
In its long-haul markets, Air NZ says it is well positioned to take on more competition.
In Asia, competition is expected to increase in major markets, including China, but it is seeing strong demand from the Indian market and deep alliance relationships in these markets will support scale and depth. It is bracing for a surge in capacity from competitors from North America over summer but says there is no current impact on pricing or demand.
The airline stopped giving guidance of annual results before the pandemic and that isn’t changing.
“Given the uncertainty and volatility of some of these macroeconomic factors, the airline will not be providing guidance at this time.”
The airline sold its last slots at Heathrow in 2020.