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Air NZ Increases Trading Profit to $177.9 million


29 August 2000
Air New Zealand Increases Trading Profit to $177.9 million

Overview

Air New Zealand Limited improved its trading performance in the year ended 30 June 2000, increasing its net surplus after tax and excluding abnormals by 33.6% to $177.9 million ($133.3 million ).

Excluding non-recurring gains, Group earnings before interest, taxation, depreciation, rentals and amortisation (EBITDRA) increased 14.3% to $663.9 million ($580.9 million).

Group revenue increased by 10.9% to $3,723.7 million ($3,359.0 million) under the influences of increased international inbound traffic, benefits from foreign exchange rate changes and an improvement in the Group’s domestic market position in New Zealand.

Total expenditure was $3,560.1 million ($3,208.7 million), and was constrained to an 11.0% increase despite significantly higher fuel prices compounded by adverse foreign exchange rate movements. The latter also had a negative impact on other foreign currency denominated expenditure such as aircraft leasing and US$ interest costs.

Group operating surplus before contributions from associates increased 8.8% to $163.6 million ($150.3 million) with operating cash flow increasing 18.2% to $391.8 million ($331.6 million)

Contributions from associates declined 44.2% to $58.1 million ($104.1 million) largely due to reduction in non-recurring gains in the FY2000 result of Ansett Holdings Limited compared to the previous year. As a consequence, the Group’s operating surplus before tax declined 12.9% to $221.7 million ($254.5 million).

The Group’s total non-recurring gains declined by 89.9% to $8.2 million ($81.2 million). Tax expenses remained steady at $37.3 million ($37.4 million).

Before adjustment to reflect a change in accounting policy this year, the Group’s after tax surplus declined by 13.2% to $186.1 million ($214.4 million), reflected the reduced level on non-recurring gains in the FY2000 results.

Accounting Policy Change

In finalising this year’s results, the Group has adopted the comprehensive method of accounting for deferred tax instead of the partial basis permitted under New Zealand Generally Accepted Accounting Practice (GAAP). The partial basis is also used by many airlines worldwide, including Singapore Airlines and British Airways.

The change is the outcome of a review of Group accounting policy required by the Board subsequent to shareholders’ agreement to the transaction to acquire full ownership of Ansett Holdings Limited. The
change to recognise full liability for deferred taxation is consistent with the direction of international accounting standards and Australian practice. With a significant expansion in the Group’s international activities accompanying its acquisition of full ownership of Ansett Holdings on 23 June 2000, it was considered appropriate and timely to make the change.

The effect of this change is a one-time charge of $786.2 million to bring previously unrecognised tax liability into the Group’s accounts as a debit to the Group’s Statements of Financial Performance. As a result, the Group incurred an overall audited deficit after tax of $600.1 million for FY2000. However, this accounting change is a non-cash transaction. It does not change the underlying financial strength or performance of the Group.

Dividend

The directors propose an unchanged final unimputed dividend of 9 cents per share payable on 27 October 2000 to all shareholders registered as at 13 October 2000.

FY2000 Trading Environment

The Air New Zealand Group improved its trading performance in a difficult environment.

Significantly higher fuel prices, compounded by the lower US$ exchange rate for the NZ$ and A$ were the major negative influence.

Competition intensified significantly on international routes between Australasia and the United States and United Kingdom/Europe markets, across the Tasman, and in the Australian domestic market.

In New Zealand, domestic demand grew modestly during the year, with provincial markets making the most significant contribution to growth. In Australia, domestic demand was buoyant and competition increased.

The lower exchange rates for both the NZ$ and the A$ in some major international markets were reflected in increased inbound traffic demand and more modest growth in outbound demand. However, the most significant increase in international passenger traffic was on short-haul routes between New Zealand and Australia.

Air New Zealand - Operational Performance

International passenger sales revenue increased 12.8% to $2,156.8 million ($1,911.3 million). International passenger revenue per RPK improved 6.6% to 11.3 cents (10.6 cents), reflecting foreign exchange benefits as well as an increase in local yields for the first time since the Asian economic crisis.

Total seat capacity flown by Air New Zealand International was 3.9% higher than the previous year, while its average load factor rose by 1.8% to 70.0% (68.7%). New, high frequency Tasman services were a major contributor to Air New Zealand International’s improved revenue performance during the year.

Air New Zealand domestic passenger sales revenue increased 21.0% to $585.1 million ($483.5 million), in part due to the effect of industrial disruption to the services of the Group’s main domestic competitor. Domestic passenger revenue per RPK improved 4.3% to 30.9 cents (29.6 cents). Total domestic seat capacity flown was increased by 4.7%, while the average domestic load factor improved 10.8% to 66.6% (60.1%). Air New Zealand domestic airlines achieved gains in both market share and yield over the year.

Air New Zealand cargo and mail revenue declined by 18.3% to $317.4 million ($388.3 million) which was a strong performance in the absence of revenue from the domestic freight business sold during the previous year.

Revenue from external contracting of engineering and terminal services increased 5.1% to $404.2 million ($384.5 million). Revenue from other activities grew 36.0% to $260.3million ($191.4 million).

Air New Zealand Group operating expenses increased by 11.0% to $ 3,560.1 million ($3,208.7 million), principally driven by higher fuel prices, a 4.0% increase in total seat capacity flown, and a 10.5% increase in international airline flight frequency, mainly on Tasman routes.

Air New Zealand’s jet fuel expense increased 44.0% to $463.7 million ($322.0 million) despite savings of approximately $40.7 million from the Group’s jet fuel price hedging. Fuel consumption increased by only 2.0% to 327.2 million gallons (320.9 million gallons).

Excluding jet fuel and foreign exchange impacts, Group costs per ASK increased by just 3.5% despite a 10.5% increase in frequency, reflecting the Group’s continuing focus on cost control.

During the year, Air New Zealand completed a fleet rejuvenation programme which entailed the introduction of 20 modern, more efficient jet and turboprop aircraft to replace 12 older aircraft in the international and domestic fleet. The average age of the main fleet aircraft (more than 50 seats) was reduced to a very low 5.7 years compared with 8.4 years at the beginning of the year.

In June, Air New Zealand Limited increased its 50% interest in Ansett Holdings Limited of Australia to full ownership. Consideration for the purchase of the outstanding 50% from The News Corporation Limited was A$580.0 million (NZ$744.0 million) plus a deferred consideration representing 10.5% of Air New Zealand’s market capitalisation, payable in cash or shares between June 2002 and June 2004.

Because the purchase of the final 50% of Ansett was completed only one week before the year’s end, the financial results continue to reflect equity accounting of only 50% of Ansett’s earnings.

Ansett - Operational Performance

Ansett Holdings Limited’s surplus after tax declined 7.9% to A$144.4 million (A$156.9 million).

The decline is mainly due to a decreased contribution from non-recurring gains in FY2000 and the impact of fuel prices and foreign exchange on the operating costs of a business with a significantly higher domestic base than that of Air New Zealand. These changes more than offset a one-off benefit of A$43.8 million arising from an adjustment of Ansett’s deferred tax liability as a result of the Australian Government’s decision to reduce its corporate tax rate.

Ansett’s jet fuel expense increased 49.5% to A$362.4 million (A$242.4 million) despite savings of approximately A$37.4 million from jet fuel price hedging. Fuel consumption increased by only 0.5% to 274.2 million gallons (272.7 million gallons).

Excluding jet fuel and foreign exchange impacts, Ansett’s costs per ASK decreased by 1.5%.

Revenue from Ansett’s domestic operations increased 2.5% to A$2,445.5 million (A$2,385.3 million). Ansett’s domestic operating capacity was increased 3.0% and load factors were lifted 2.2% to 73.9% (72.3%). However yield declined 2.6% to A17.6c (A18.1c) due to increasing domestic competition. Domestic operating costs per ASK increased 2.5% to A12.5c (A12.2c), leading to an overall decline in profit before tax of 38.3% to A$101.9 million(A$165.1 million).

Ansett International (49% owned by Ansett Holdings) improved its operating profit before tax and abnormals 146.3% to A$8.1 million (deficit of A$17.5 million). A significant restructuring of its operations was the main factor in a 5.3% reduction in Ansett International’s operating costs per ASK. Average load factor increased to 71.5% (70.0%) and revenue increased 4.6% to A$324.8 million (A$310.4 million).

Ansett Holdings’ result included non-recurring gains of A$0.3 million (A$55.9million).

After adjustment for New Zealand GAAP, Ansett’s contribution to the Air New Zealand Group for FY2000 declined 39.8% to NZ$61.3 million (NZ$101.7 million).

Balance Sheet Changes

The Group’s balance sheet at 30 June 2000 fully incorporates Ansett Holdings Limited for the first time – subsequent to the settlement of full acquisition on 23 June 2000.

Together with the change in accounting policy in relation to the full recognition of deferred taxation liability, this has resulted in significant changes to the balance sheet.

Total Group assets increased 104.7% to $8,989.4 million ($4,390.7 million).

Net interest bearing debt increased 172.0% to $3,107.6 million ($1,142.3 million), mainly due to the consolidation of Ansett debt in the Group’s balance sheet and the utilisation of a A$420.0 million loan facility to fund the purchase of News Limited’s interest in Ansett., The Group’s gearing ratio increased to 66.2% (34.9%). Balancing this increase in debt and gearing levels, liquidity (measured by net cash and short term deposits) increased 137.9% to $695.5 million ($292.3 million).

Shareholders’ funds decreased 25.2% to $1,588.3 million ($2,124.0 million) due to the change in accounting policy previously noted. The Group’s equity ratio declined to 17.7% (48.4%) reflecting both the change in accounting for deferred taxation liability and the consolidation of Ansett in the Air New Zealand Group’s accounts. The proposed rights issue will restore balance sheet ratios to conservative industry levels.

Proceeds from fixed asset sales decreased 38.9% to $144.4 million ($236.3 million) and were mainly derived from the sale of aircraft. Other asset sales included a benefit of $54 million from the sale of approximately 34% of the Group’s total interest in Equant NV in December 1999. The Group’s remaining Equant shares currently have a market value of approximately $69 million.

Rights Issue

Air New Zealand announced that it will be proceeding with a renouncdeable pro-rata rights issue to shareholders in October to raise approximately $285 million. Final details on the pricing, structure and timing of the issue will be announced in mid-September. J.B.Were has been appointed Organising Broker and Underwriter for the issue.

Both Singapore Airlines and BIL NZ Assets Limited have advised that they will take up their entitlements under the issue.

Outlook

Inbound demand for air travel to New Zealand and Australia is expected to continue to grow at encouraging levels, bolstered by the gathering strength of economic recovery in Asian markets and the high profile of the Olympic Games in Sydney in September.

Outbound demand from the Australasian region is steady, but is unlikely to improve significantly without some strengthening of third party foreign exchange rates for the New Zealand and Australian dollars. Trans-Tasman traffic and domestic demand in New Zealand and Australia are likely to enjoy modest growth, arising from forecast economic growth rates in both economies.

Operating costs continue to be affected by fuel price trends and foreign exchange rate movements, particularly for the US$ which is the currency in which 44% of the Group’s FY2000 costs were met.

Competition in the Australian domestic market can be expected to intensify with significant increases in capacity being deployed by incumbent competitors and new entrants on main trunk routes. Ansett is well placed to defend its position against start-up operators attempting to build profile by offering restricted quantities of cut-price fares on the limited additional capacity they are introducing to the market.

The Group’s ability to capture growth in international and regional demand, meet the challenge of intensifying regional competition and counter external cost pressures has been enhanced by integration with Ansett Australia.

The Group now possesses an Australasian airline business which ranks among the world’s top 20 airlines in terms of total passenger carrying capacity and operating revenues. It has increased funding and purchasing capabilities, and a vastly expanded range of fleet deployment, route and scheduling options at its disposal.

Confidence in the strategies being pursued by the Group was reflected in Singapore Airlines Limited purchase of 25% of Air New Zealand in the form of B shares, the maximum shareholding that the New Zealand Government will permit a single foreign airline to hold. The 25% parcel was acquired as to 16.7% from Brierley Investments Limited on 8 August 2000 following an earlier purchase of 8.3% on the open market. BIL NZ Assets Limited retains 30% of Air New Zealand in the form of A shares.

While the process of obtaining necessary government approvals for transactions relating to the Ansett acquisition and the Singapore Airlines investment was protracted, plans are well advanced to develop the domestic and international strength of the Group’s Australasian airline business. A new Group executive is largely in place, and projects are rapidly being undertaken to unlock on-going benefits in earnings before interest and taxation of over $350 million per annum within the next three financial years, with EBIT benefits in excess of $175 million already identified for achievement in the current financial year.

Sir Selwyn Cushing
Executive Chairman

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