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Air New Zealand remains in a strong position

24 February 2006

Profit down but Air New Zealand remains in a strong financial position

Air New Zealand has announced a Net Profit before Unusuals and Tax of $81 million for the six month period ending 31 December 2005, a 45 % decrease ($65 million) on the same period last year.

Net Profit after Tax was $46 million, a 55% decrease ($56 million) on the previous period.

Despite this, the Company has grown yield and traffic by $136 million over the half year, implemented significant cost savings and continues to drive for further overall efficiencies.

“It is quite clear that the Airline is facing unprecedented fuel costs, which have unduly affected the result for this period,” said Chairman John Palmer. “A 36 percent increase in fuel prices over this period combined with a reduction in fuel hedging gains has placed considerable pressure on earnings.”

Air New Zealand’s financial position remains strong with gearing at 54%, cash at $1.1 billion and operating cash flow up 41% to $233 million, compared with $165 million for the same period last year.

“Consistent with our earlier indications to the market, the Board has approved the payment of a fully imputed dividend of 2.5 cents per share, payable on 23rd March 2006. The record date is 10th March 2006. A strong balance sheet, and a secure management team under Rob Fyfe, gives the Board confidence on the current level of dividend payout,” Mr Palmer said.

“The Airline is firmly confident of its strategic direction,” said Chief Executive Officer Rob Fyfe. “Despite very difficult operating conditions, we have clear visibility of the changes we need to make to ensure this Company remains competitive.”

Mr Fyfe said streamlining and simplifying the business would now dominate his agenda.

“Air New Zealand will become a nimble and fast moving airline, able to rapidly adapt to change more quickly than its competitors. I am determined to implement the necessary measures to ensure this happens.”

Mr Fyfe said the 2006 financial year and some of the 2007 financial year will serve as transition periods.

“By December 2006, the new long-haul product will be on all routes. The Airline will have a refreshed brand identity in place.

“New route opportunities and a distinctive new New Zealand themed customer experience offer the chance to grow the business by opening up new markets and luring back customers.

“We are also on track to realise $100 million in cost savings in 2006 with a further $115 million in savings in the 2007 financial year, an increase of $35 million on previous targets,” Mr Fyfe said.

Volatile jet fuel prices, exchange rates and competitor activity remain risks to the business. In the short-term, the Company has substantial foreign exchange and fuel hedge cover in place that allows for some certainty on the Company’s operating cost base.

Currency hedges are in place on a significant portion of the Airline’s future aircraft commitments. Over the longer-term, the strategies being implemented by Air New Zealand are focused at growing the business together with improving operating margins.

Results of operations

In the six months to December 2005, Air New Zealand flew 6 million passengers, an increase of 4.5 per cent. Group capacity, as measured by Available Seat Kilometres (ASKs), increased 4.2 per cent to 17.1 billion ASKs. Group traffic, as measured by Revenue Passenger Kilometres (RPKs), increased 4.2 per cent to 13 billion RPKs. As traffic growth matched capacity expansion, passenger load factor was stable at 76.1 per cent.

In this reporting period, network yields were up 3.8 per cent to 11.7 cents per RPK (December 2004: 11.3 cents per RPK).

If the loss arising on conversion of foreign currencies to New Zealand dollars is factored out, then Group yields were up 6 per cent. Therefore, any weakening in the New Zealand dollar will have a positive influence in passenger yields.

Short-haul passenger numbers increased 5 per cent to 5.2 million. Capacity grew 9.2 per cent to 7.5 billion ASKs. Traffic of 5.4 billion RPKs was up 6.3 per cent. The resulting load factor was 1.9 percentage points lower at 72.7 per cent.

Short-haul yields were up 6.4 per cent to 16.7 cents per RPK. This improvement was due to a 8.4 per cent improvement in Tasman yields as Air New Zealand gained a slight market share premium over capacity share through effective marketing, and pricing strategies.

Long-haul passenger numbers increased 1.5 per cent to 823,000. Capacity remained stable at 9.6 billion ASKs. Traffic increased 2.8 per cent to 7.6 billion RPKs, even with the negative influence of the high New Zealand dollar. As traffic outstripped capacity, load factor increased 1.6 percentage points to 78.8 per cent.

Long-haul yields reduced 1.2 per cent to 8.1 cents per RPK. The strong New Zealand dollar was a negative influence on both yields and demand for travel on long-haul markets. Adjusting for the negative influence of currency, long-haul yields were up by 2.9 per cent.

Profitability

Total operating revenue of $1.9 billion was up 7.7 per cent.

While operating revenue was up, the Company’s operating margins ended the period down 3.5 percentage points. A number of factors, some controllable and some not, had an impact on this period’s operating cost base. The table below shows the key movements in the revenue and operating cost lines that impacted on profitability.

Key influences on the 2006 interim profit : $m
2005 Interim profit before unusuals and tax 146
Passenger yield improvement (excluding currency impacts) 78
Passenger traffic improvement 58
Labour cost increase (37)
Fuel cost increase (174)
Fleet transition costs (35)
Net impact of foreign exchange (5)
Cost improvements 46
Other 4
2006 interim profit before unusuals and tax 81

Yield improvements, adjusted for the higher New Zealand dollar, of $78 million were a positive influence on the financial result.

Traffic growth contributed $58 million to profitability.

Increased activity and wage adjustments contributed to a $37 million increase in labour cost.

Fuel usage increased as capacity grew. This combined with higher jet fuel prices (up 36 percent) and reduction in jet fuel hedge gains - $46 million in hedge gains this year compared with $57 million in 2004 - contributed to a $174 million rise in the Company’s fuel bill.

As signalled to the market previously, Air New Zealand will incur $59 million in costs as we transition to our new fleet. Of this, $35 million was incurred in the first half.

The result includes a negative currency impact of $5 million. Air New Zealand has benefited from the strong currency in the recent past, but this trend is starting to reverse as the impact on yields and demand for travel outweighs the currency related reduction in the Airlines cost base.

After taking into account taxation of $26 million and unusual items of $9 million, related to the closing of the wide-body engine maintenance line, net profit after tax was $46 million.

Business Restructuring

In October 2005 the Company announced a proposal to outsource wide body maintenance (aero-engines and airframes). In December 2005, after consultation with staff and union representatives, the decision was announced to outsource aero-engine maintenance which results in 110 employees being made redundant. Associated costs of $9 million have been recognised in the interim result.

The Company also announced its intention to work with employee representatives on a counter proposal regarding wide-body airframe maintenance. This counterproposal was subsequently accepted by the Company in January 2006. On 23 February 2006 after union members ratified their counterproposal, the Company announced its intention to discontinue with its plan to outsource wide-body airframe maintenance. As a result, up to 200 positions could still be disestablished on top of the 110 redundancies announced in December 2005.

The Company is also planning other significant restructurings which could lead to further redundancy and associated costs in the second half of the 2006 year, including:

The potential outsourcing of aircraft cleaning, affecting 114 employees who have been given the opportunity to transfer to a new employer or accept redundancy;

Disestablishment of the In-flight Service Director role and the introduction of new Flight Service Managers, where a number of staff are currently considering voluntary redundancy; and

Significant reorganisation of corporate functions across the Company, impacting approximately 470 employees.

ENDS

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