Air NZ bleeds from debacle

By DANIEL RIORDAN

Air New Zealand says its condition has improved from critical to stable, although it remains in intensive care.

The airline, 82 per cent Government-owned, yesterday cleared out what it hoped was the last of the fallout from its disastrous investment in Ansett, posting a bottom-line loss of $376.5 million for the December six months.

Included in the red ink were unusual costs from continuing operations of $300.9 million, largely related to the separation of Ansett in September, and a loss from continuing operations of $75.6 million.

The company's bottom-line profit a year ago - when it was a different beast in a far tamer jungle - was $3.8 million.

Managing director Ralph Norris said the airline hoped to climb back to profitability within two years, but acknowledged that its balance sheet needed improving.

He would not be drawn on the likelihood that the airline would need the extra $150 million the Government had offered on top of the $885 million already invested.

But he said a rights issue was another option.

Analysts said the airline would need both as it navigated international skies still turbulent from September 11 and prepared to protect its home market - traditionally its most profitable - in the face of an enlarged operation from Qantas.

ABN Amro analyst Malcolm Davie said Air New Zealand would need to again call on the Government.

"They're in a two-year haul to profitability and they won't be able to get their gearing down enough from selling assets - what they've got to sell isn't big enough."

JBWere analyst Peter Sigley said Air New Zealand was in a watershed phase.

"Board and management obviously have huge issues they need to confront, but they're tackling things head-on and that's probably as much as you can ask."

The investment community would have liked to have heard more details about the airline's recovery plans than its top brass were able to provide yesterday.

Even after last year's recapitalisation, Air New Zealand's balance sheet is stretched. At December 31, gearing (as measured by debt-to-debt plus equity) was 93.8 per cent. After the recapitalisation on January 18, it reduced to 53.1 per cent, or 78.2 per cent (aircraft operating leases included).

Norris said that gearing was still too high. He hoped to lower it through more profitability and selling non-core and under-performing assets.

Air New Zealand's load factor during the period fell from 72.3 per cent to 70.2 per cent.

Domestic loads were unchanged at 66 per cent and international loads down from 72.9 per cent to 70.7 per cent.

Like most airlines the fall-off in passengers was notable among high-yielding business travellers.

Domestic yield fell 7.3 per cent to 30.6c per revenue passenger kilometre because of tougher competition (Qantas and its partner Origin Pacific). International yields fell 9.1 per cent to 11.1c per revenue passenger kilometre and overall yield dropped 4.7 per cent to 13.3c per revenue passenger kilometre.

Falling yields were partially offset by falling fuel prices.

Air NZ unwound much of its fixed hedging cover in September and it benefited from the rapid fall in fuel prices in October as global demand dropped faster than production cuts.

The fuel bill fell $54.5 million to $324.6 million for the period.

Norris said about 50 per cent of the airline's fuel costs were hedged for the rest of the year.

The stable New Zealand dollar had also helped.

He said talks with Virgin Blue on operational links in Australia were progressing, but there was no prospect at this stage of Virgin Blue - or Qantas - taking an equity stake in Air NZ.

Redundancies at Air New Zealand cost $40 million.

Chairman John Palmer said a 17 per cent reduction in management cut salary costs by 30 per cent.

The company was close to reaching its target of cutting total staff from 9600 to 8800.

Finance Minister Michael Cullen said the result was "broadly in line with expectations" because the recovery plan was in its early stages. But Opposition parties said the $885 million payment was "just the first instalment".

Roger France was named the company's new deputy chairman.

Air New Zealand's share price closed unchanged at 34c yesterday.

* Further confirmation that things are tough in the aviation world came when Cathay Pacific reported its result yesterday.

The Hong Kong-based airline lost HK$662 million ($197.77 million) in the December six months. It made just HK$657 million ($196.31 million) for the full year compared with a record HK$5 billion ($1.49 billion) in 2000.

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