Air New Zealand is slashing costs as it adjusts to the economic impact of Covid-19. Photo / NZ Herald
Air New Zealand is slashing costs as it adjusts to the economic impact of Covid-19. Photo / NZ Herald
Even the most pessimistic of "black swan" scenarios could not have prepared Air New Zealand for the situation that it finds itself in today, the airline's chief financial officer Jeff McDowall said.
Air NZ, in an update issued to the NZX, confirmed that it expects to report an underlying lossfor the 2020 financial year while estimating hedging losses and aircraft impairments of up to $560 million.
The airline, which has yet to draw on the Government's $900m loan, said while the recent move to Alert Level 2 allowed it to get its domestic side up and running again, it was clear that it would take some time for demand to return to pre-Covid levels.
"But for aviation and tourism industry specifically, the impact of Covid-19 has been so significant that even a pessimistic black swan scenario could not have envisioned the situation that we find ourselves in today," he said.
McDowall said the first of six or seven weeks of the border closures and lockdowns, the airline was functioning at less than 5 per cent of its total network capacity, and making "substantially less" revenue.
"While alert level 2 is really positive, we have been able to get more of our domestic business up and running," he said.
"We are still only operating at a small fraction of our normal networks," he said.
Under level two, McDowall was "cautiously optimistic" that its domestic "engine" would pick up over the coming months.
Air NZ had been building up balance sheet strength over the past five years, which had put it in a strong position at the start of the crisis.
But the airline had to quickly shore up its liquidity, first the $900m loan from its half owner, the Government, and through making structural cuts in its fixed costs.
Air NZ chief financial officer Jeff McDowell. Photo / NZ Herald
To do that, Air NZ had to reduce its workforce by 30 per cent or 4000 people, resulting in cost savings of $350m to $400m a year.
"To say that was agonised over this would be an understatement, but we had to face up to the reality that the landscape of our industry had changed," he said.
Early this month, Air NZ backed down and announced it will refund all passengers on cancelled US flights after Consumer called out the company for its practices.
McDowall said the airline had been refunding prepaid tickets but that a number of customers had opted to take credits.
"The rate of refunds has been mitigated quite a bit because of that."
Commenting on capital expenditure, McDowall said the biggest change on that front was the deferred delivery of three Airbus A321s from 2021 to 2022.
For the second half of the 2020 financial year, Air NZ's network capacity is expected to be approximately 50 per cent lower than the prior comparative period, driven by a reduction of about 90 per cent in the fourth quarter.
In light of this and the fact there was very little revenue coming in during alert levels 3 and 4, the airline is now expecting to report an underlying loss for the 2020 financial year.
It currently has $640m of short-term liquidity, versus $1 billion prior to the outbreak. That doesn't include any of the $900m Government loan facility.
"We have not yet needed to draw down on the Government loan facility, as we continue to utilise all available levers to reduce our cash burn and right-size the business to reflect the expectation that, for some time, our airline will be smaller than it was pre Covid-19," he said.
In its market update, the company said it would feel the impact of $85m-$105m from fuel hedging de-designation, aircraft impairment charges of $350m-$450m, and reorganisation costs of up to $160m in the full financial year.
