Air New Zealand’s Greg Foran on when long-haul travel could resume

Air New Zealand chief executive Greg Foran doesn’t expect long-haul international travel until next year, as the airline continues to face heavy losses while government support winds down.

Air NZ is carefully watching global competitors to get the right timing for its network rebuild.

Asked where the airline’s first long-range destination might be, Foran said Singapore had been discussed.

“There’s talk of potentially Singapore may be an option. We’ll have to see what eventuates and what the Government feels about things.”

The airline had to find a balance between not committing to rebuilding its long-haul network too quickly, and being left carrying costs, and outpaced by the competition.

“This time next year expect to do some international flying, but I don’t think it will be significant in terms of numbers.”

Foran said the airline was looking intensely at how the global market was recovering, and alliances with partners such as United Airlines and Singapore Airlines would be crucial for Air New Zealand, in addition to the domestic codeshare it has with Qantas

“We’re riding that line very carefully — we’re turning things back on in a careful and controlled manner.”

The airline had already written down $338 million of the value of its eight 777-200 aircraft, which had an average age of 14 years and are parked in long-term desert storage. These aircraft wouldn’t fly again for the airline. And Air New Zealand announced today that it has deferred to 2024 taking delivery of the first of its eight new Dreamliner aircraft.

It now has the option to order either 787-9 or 787-10 aircraft and no decision has been taken on the final mix.

“If you don’t need them right now you can take a bit of a delay,” said Foran. “We’ve not only delayed the first one but we have a series of [rights] that allow us to position the arrival of new planes with the departure we’ve got in the fleet,” he said.

The saving on deposits and ownership costs was significant.

In a trading update, the airline said the first aircraft had been due to enter the fleet in the 2023 financial year, but as a result of Air NZ’s strong relationship with Boeing, agreement has been reached to move the delivery of this plane out to the 2024 financial year.

The update included:

Heavy losses to continue

Air New Zealand expects losses before other significant items and taxation “will not exceed” $450m for the 2021 financial year.

Despite the domestic market continuing to perform strongly and the fact that bookings on the Tasman and Cook Islands routes continue to build, a lot of uncertainty remains.

The airline is not expecting any meaningful recovery in long-haul demand in the 2022 financial year, notwithstanding global vaccination programmes and the potential for long-haul borders to begin reopening progressively in the second half of the financial year.

“Underlying operating performance is expected to gradually improve over the coming financial year but international border reopenings, fuel and currency fluctuations, and the recovery of long-haul travel demand continues to remain highly uncertain. All of these factors are important to the airline’s financial performance.”

Air New Zealand had benefited from a number of tailwinds in the form of government support and other mechanisms that would wind down.

For the current year, government financial support under the air cargo support schemes is expected to contribute between $320m and $340m in total cargo revenue.

The Maintaining International Air Connectivity (MIAC) scheme provided the airline with the support needed to operate an average of 30 international flights per week until the end of October, and Foran told the Herald he expected the scheme to wind down after that.

Operating cashflow has also benefited from the one-off deferral of about $310m in PAYE payments this year, which will start to be repaid in the 2022 financial year.
The trading update cautioned that given the current environment, the outlook for the 2022 financial year remains uncertain.

Foran said the airline was effectively no longer burning cash and had not had to tap into the Government’s backstop loan of $1.5 billion, of which drawdowns of $350m were announced in February.

“I would say the underlying operating of the business is good and our move from survive to revive is real,” he said.

Going to the market

Air New Zealand was aiming to undertake a capital raise before September 30 this year, and a portion of the proceeds will be used to repay any amounts drawn under the government loan.

There was a flurry of successfulcapital raising by airlines and airports last year, but Foran said he was confident Air New Zealand would get the timing right.

It announced a delay to the process in February.

“That was on the back of what we saw occurring on the Tasman — it would have been inappropriate to launch something as that was emerging. We know a lot more about the vaccines, not only their efficacy but also the timing of the rollout for New Zealand, we can all see will be a determiner of when borders will reopen,” said Foran.

”It allows us to be more precise on what is the capital we are going to raise and that is something we are deeply involved in right now.”

The Government has already said it would retain its 52 per cent stake in the airline after the raise and Foran said it was now working with Treasury advisers.

“We want to get it done before September 30. I think we are doing a good job of getting this business to a state where we not only will have a really successful capital raise; we’re going to be in great shape as we pull through Covid to the other side.”

Two-speed recovery

Domestic capacity is now about 90 per cent of pre-Covid levels, and corporate demand continues to show strong signs of recovery, averaging about 80 per cent of historical levels for the past three months. Importantly, load factors (the percentage of seats occupied) were also tracking in a similar range, the update says.

Transtasman capacity was currently about 70 per cent of pre-Covid levels. Load factors on the Tasman are expected to recover “gradually”, with the airline focusing on offering customers a reliable and stable schedule of flying.

The Pacific Islands network is yet to reopen, with the exception of the Cook Islands, which is seeing demand exceed pre-Covid levels, although this route represents less than 2 per cent of the airline’s total pre-Covid capacity.

Loads for the Cook Islands are also building well, particularly into the school holiday season.

However, long-haul international passenger travel remains highly restricted, with passenger volume currently less than 5 per cent of pre-Covid levels while international borders to all but Australia and the Cook Islands remain effectively closed.

Bonus for staff

After what it says was one of its toughest years, 8000 staff will be recognised via an award of $1000 worth of company shares to all permanent employees.

“This is the right thing to do given the mahi and sacrifices Air New Zealanders have made to get the airline through survive and into its revive phase,” said Foran.

“By awarding shares to our employees, we want them to have the chance to benefit from the future success- we will really need their help to deliver.”

The share award will be made in the last quarter of this calendar year, timed to come after the capital raise. It will be available to New Zealand and Australian employees, and as a cash equivalent for those in other nations.

During the past five years the share price has peaked at $3.59 but last March was at 86c.In trading following today’s announcement, it was steady at $1.61.

Foran said he was immensely proud of the way Air New Zealand staff had responded to the Covid-19 crisis.

“Some pilots and crew spent more than 100 days in isolation to help reunite thousands of overseas Kiwis with their loved ones. Our cargo team has helped take 100,000 tonnes of New Zealand product to the world. Day in and out, our people have done, and continue to do, everything they can in challenging and changing conditions to keep our customers safe.”

In addition, after 15 months of reduced salaries, the airline will end employee salary reductions fromJuly 1 and this applied to the executive and directors.

More than a third of 12,500 staff had been laid off since Covid hit.

”We looked after them with any redundancy payments. We’ve done everything we can to look after the 4500 who are no longer with us and brought several hundred back,” said Foran.

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