Air New Zealand boss Greg Foran on coronavirus: Airline can weather the storm

Air New Zealand chief executive Greg Foran started at the airline early this month. Photo / Supplied

A tough year for Air New Zealand will get even tougher, but boss Greg Foran says he is confident the airline can ''weather the storm'' engulfing airlines as a result of the coronavirus outbreak.

Although the sharp drop in demand will hurt full-year earnings, the airline was ''resilient,'' he said.

The airline had a strong core in the domestic market and staff experienced in handling operational challenges.

''I'm confident that we will weather this storm,'' he said.

Air New Zealand, which has $1 billion in cash, had a strong balance sheet and capital spending programme that allowed it to maintain an interim dividend of 11c.

Its shares have been hammered in the past month, and in volatile trading yesterday initially climbed from $2.40 to $2.53 but closed at $2.37.

In releasing its six-month results to December 31 today, the airline reiterated guidance it released earlier in the week, saying that while the situation is uncertain, based on current assumptions of lower demand as well as the benefit of the announced capacity reductions and lower jet fuel prices, it currently expects a hit on earnings in the range of $35 million to $75m as a result of Covid-19.

At the midpoint of the estimated range, which is approximately $55m, the airline is targeting earnings before other significant items and taxation to be in a range of about $300m-$350m. It says it will update the market if there are material developments.

Into the storm

The coronavirus has disrupted travel around the world. Photo / Bloomberg

Foran took over Air New Zealand's top job on February 3, just as travel bans were coming into force and the impact of the epidemic was starting to be widely felt throughout the airline and travel industries. The International Air Transport Association predicts Asian-Pacific airlines alone will lose out on almost US$28b ($44b) in revenue this year because of fallout from the virus.

Foran said during a call with analysts that there was ''obvious uncertainty'' but Air New Zealand had the ability to quickly scale capacity to meet changing demand.

Chief financial officer Jeff McDowall has been with the airline for 20 years and said the challenge of the coronavirus was ''unprecedented' but would be temporary.

It was hard to get much certainty over forward bookings as the impact had been felt for just a few weeks, he said.

Asian markets had been hit hard, there was some softening across the Tasman and in the New Zealand domestic market, where overseas visitors make up to a quarter of passengers.

McDowall said Pacific Island flights had not been hit by any drop-off and there were signs that more passengers were keen to fly through the United States en-route to Europe.

Taking action

The airline has, or will, cut some routes and capacity including:

• Total Asia capacity decreased by 17 per cent from February to June

• Temporary suspension of Shanghai services from January through to late March

• Temporarily suspending Seoul services from March to June

• Additional capacity adjustments across Asia, primarily focused on Hong Kong

• 3 per cent targeted capacity reductions, focused on services to Sydney, Melbourne and Brisbane from March to May

• Reallocated efficient Boeing 787-9 aircraft from lower demand Asia routes to Honolulu and Bali

• Increasing market development activities to stimulate demand

• Overall domestic capacity reductions of 2 per cent from March to April focused on leisure destinations of Christchurch and Queenstown, which have seen greatest impact of softening demand

Foran said staff from across the business had been working around the clock to manage the outbreak's impact.

''We have demonstrated the ability time and again to respond quickly to changing market conditions. We have a highly capable and experienced senior leadership team who have dealt with challenges such as this before and I am confident that we will effectively navigate our way through this,'' he said in notes with the release of the interim profit.

This week the airline said it would postpone a function planned for next week to celebrate its 80th birthday because of the impact of the coronavirus.

''As you can appreciate our senior leaders are keenly focused on navigating our way through this challenge facing the airline and the tourism industry as well as supporting our staff in the most impacted offshore regions,'' said the airline's chair, Dame Therese Walsh.

Tough first half

AirNZHalfYr

The airline reported a 9 per cent slide in underlying earnings to $198m for the six months to December 31 - the day the World Health Organisation became aware of a mystery virus in the central Chinese city of Wuhan.

In the six months Air New Zealand reported a 32 per cent drop in net profit to $101m. McDowall described the results as ''solid''.

Earnings reflected slower growth in demand, weakness in the global cargo market due to trade tension and ongoing unrest in Hong Kong, where tourism slumped last year.

However, operating revenue had grown 3 per cent to just over $3b in spite of a 9 per cent hit to cargo.

Although fuel prices had fallen, this benefit was offset by the lower value of the New Zealand dollar.

Staff costs had grown by 1.3 per cent to just over $681m but this was below capacity growth of 2.8 per cent and reflected reduced incentive payments as well as the impact of cost initiatives aimed at saving $60m over two years.

Maintenance costs for third party contracts also increased, however this was more than offset by the related revenues.

The airline says it is nearing the end of the latest round of Dreamliner engine problems. Photo / Alan Gibson

Ownership costs increased by 7.1 percent, driven by the arrival of new, efficient aircraft including the airline's 14th Boeing 787-9 Dreamliner in a premium-heavy configuration.

McDowall said three Dreamliners had been out of action over summer due to Rolls-Royce engine problems but this would be down to one on the ground by the end of next month.

Foran's ''directed diagnostic''

The new chief executive has called for feedback from 1200 senior staff and the airline's highest value frequent fliers on how to improve the business as part of a 100-day period of burying himself deep in the workings of the airline.

He comes from a retail background, his last job being as head of Walmart US, and like his predecessor Christopher Luxon, had no airline experience before joining Air New Zealand.

The results of his strategic review will be known around the middle of the year.

Yesterday he told analysts he preferred the term ''directed diagnostic'' to describe what he was doing with a team from across the business, looking at areas including route development, profitability, culture, loyalty programmes and sustainability.

It would look at ''strategic opportunities and risks'' and perform a tricky balancing act.

''While we still have further work and analysis to do, it is clear that we need to remain vigilant at this part of the economic cycle and continuously deliver the high-quality standard of service our customers expect from us, while improving our financial performance,'' he said in a letter to in the interim financial report

He has big goals. ''My overarching vision is to make Air New Zealand a company that all companies, not just other airlines, aspire to be like – whether it be from a financial or operational perspective, or in terms of the culture, the customer experience, product innovation or passion for sustainability.''