Air NZ Outperforms Original FY02 Target

Air NZ Outperforms Original FY02 Target

Wed 28 August 2002

The financial performance of Air New Zealand during the last financial year was better than anticipated in the business plan produced to support the recapitalisation of the company, the Chairman of Air New Zealand John Palmer said in announcing the company's results for the 2002 financial year ended last June.

"We have pulled out of a nose-dive," he said," but we still have a very long way to go before we can say we are on a stable flight path and satisfactory returns are assured. The battle to achieve acceptable commercial results is far from over."

Air New Zealand reported an operating profit after tax and before unusual items of $39 million from continuing operations, and a net loss (after unusual items and tax) of $319 million for the year. No dividend payment has been recommended.

"The progress of the company has been faster than anticipated," Mr Palmer commented. "It has been helped along by the tail wind of favourable exchange rate movements and a period of fuel price stability as well as the business re-engineering that has been carried out."

Financial

After adjustments to remove the impacts of Ansett from the company's 2001 financial year result, the company's total revenue declined by 9.5% to $3,624 million, compared to the previous year's total revenue of $4,025 million, largely due to decreased off-shore travel demand following the September 11 terrorist attacks in the United States.

On the same basis, the company's operating expenditure declined by 11.3% to $2,953 million ($3,331 million in FY01), supported by favourable foreign exchange rates, fuel prices, and business re-engineering at Air New Zealand.

Net interest charges decreased by 52% to $56 million with the repayment of some $600 million in unsecured credit following the recapitalisation of the company at the end of 2001.

The company's operating surplus before unusuals and tax increased by 34% to $33 million over the position at the end of its last financial year.

A tax credit for the year of $6 million resulted in the operating profit after tax and before unusuals of $39 million.

The most significant unusual item in the 2002 year was a charge of $389 million for items relating to the separation from Ansett, which had previously been announced in the company's first half results for the year. Other unusual items included a $34.6 million reduction in liability flowing from a revaluation of the deferred consideration payable to News Corporation in regard to Ansett, a charge of $52.6 million arising from a change to the accounting treatment of the Airpoints Frequent Flyer Scheme, and the Fringe Benefit Tax provision adjustment already mentioned.

Strategic

Mr Palmer said business re-engineering since the beginning of 2002 had already achieved a tighter business structure involving leaner management, debt repayment, new credit lines, spending disciplines, aircraft lease re-negotiation, and non-airline asset sales. New airline strategy, products and services had been developed and major capital investment decisions on new aircraft and information technology had been taken.

The company is applying a fuel hedging policy that sees two thirds of its fuel requirements hedged for the forthcoming quarter with the hedging level progressively declining over the remainder of the year. The hedging profile is aligned with the company's forward booking profile and regularly rolled forward.

"The company's strategic focus is on the start-up of new low-fare Express Class domestic services in November, the development of specifications for the new short-haul international services to be introduced on Tasman and Pacific Island routes next year, and the revamping of long-haul services in 2004," Mr Palmer said. "The company has also initiated important work on upgrading its information technology infrastructure and simplifying its business procedures to lower costs and improve efficiency."

"The new Board of Directors are bringing fresh skills, style, and involvement to the governance of Air New Zealand and management," he said. Mr Palmer also described the relationship between the company and its new major shareholder, the New Zealand Government, as "exemplary".

"Management and staff have demonstrated their strong commitment to the recovery of the company. We have gained very positive commitments from many employees to control labour costs going forward. Because our result is better than was anticipated when we entered into discussions with unions at the beginning of the year, we intend to reward that commitment with a modest one-off payment to employees other than our senior executives," Mr Palmer said.

"There is a general recognition within the company that its current form is not a long-term option. Air New Zealand is recovering from a major failure of previous strategy, has a weak balance sheet, poor profitability, and operates in an industry that is volatile and under intense pressure.

"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. Both airlines see potential benefits from such a partnership in terms of the competitive pressures that are confronting us in international markets.

"Discussions have not reached the point where anything is sufficiently developed for the Board of

Air New Zealand to make any more detailed comment or recommendation to shareholders. There are still many complex issues that must be resolved before the viability and potential contribution of a closer relationship with Qantas can be properly evaluated against other options available to the company. We will announce any outcome just as soon as we can.

"The Board will not recommend deal unless it is in the best interests of Air New Zealand, ensures its continuing autonomy under New Zealand control, enhances its prospects for sustainable growth, and contributes to New Zealand's interests.

Outlook

"Directors are currently confident that the company's performance in the 2003 financial year will exceed the result delivered in 2002. Earnings before interest and tax of more than $100 million are achievable - though a significant challenge if current circumstances continue," Mr Palmer said.

"However, our confidence is qualified by an awareness that the international airline industry is in a fragile state, operating substantial excess capacity and cutting fares to secure or stimulate demand. There are also significant uncertainties around the future trend of fuel prices as international tensions continue in the Middle East, and the potential for major international market disruption from another terrorist attack still stands as a significant risk.

"We have done better than anticipated. We can do better. However, there is potential for sudden and significant change in our operating environment that makes it impossible to forecast results a year out with any degree of certainty," Mr Palmer said.

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