Air NZ reports bottom line loss of $376m for half year

11.00 am

Air New Zealand has moved from critical to stable but is still in intensive care, the airline's new chief executive Ralph Norris said today after reporting a December half-year loss of $376.5 million.

The 82 per cent Government-owned airline posted a loss from continuing operations of $75.6 million and unusual losses of $300.9 million, mainly relating to the collapse of Ansett.

The company, which will not be paying a dividend, said it had positive cash flow of $44.9 million and Mr Norris said it was starting to emerge from its problems that required a $885 million capital injection from the Government.

"We are of the view that we will return to profitability within the next 24 months, preferably sooner rather than later," Mr Norris said at a presentation of the results.

The company was still weighing up whether to take up an option on another $150 million of capital from the Government and was also mulling a rights issue.

Mr Norris said Air NZ talks with Australian discount airline Virgin Blue were still in the very early stages and at this stage did not include the prospect of equity partnership.

Mr Norris would not discount the possibility of some equity input from Qantas but any such an arrangement would seriously affect the Star Alliance of major airlines that Air NZ belongs to but Qantas does not.

He gave an assurance that the decks of everything associated with Ansett had been cleared.

The half year loss compared to a $3.8 million profit in the same period a year ago and comes six months after the carrier wrote off its investment in Ansett and posted a net loss of $1.4 billion.

Air NZ shares rode out the result and were unchanged at 34 cents.

Brokers said the result was not a shock and the market would want to see moves back to profitability.

Mr Norris blamed the terrorist attacks on the United States and the subsequent retaliatory actions as having a major impact on demand for international air travel.

Finance Minister Michael Cullen commented that the result was "broadly in line with expectations".

"The Government insisted as a condition of last year's rescue package that the company develop a credible plan to return to financial health.

"That strategy is still only in the very early stages of implementation and will take a little while to deliver results," Dr Cullen said.

While the capital base was not strong, it would allow the company to rebuild and restructure its business strategies and operations, Mr Norris said.

Measures taken to reduce Air NZ's exposure to the airline downturn were insufficient for the longer term.

"We are rethinking the way we do business."

Given the degree of volatility in the business, hitting targets would remain challenging, he said.

Reviews of both its short and long haul operations would mean the airline may rethink its fleet configuration.

Important in the review process would be to listen to the airline's customers, he said.

The half year loss from continuing operations was $88.1 million before a tax credit of $12.5 million.

Earnings before interest and tax from continuing operations resulted in a loss of $48.4 million, compared with a profit of $40.1 million for the equivalent period in the 2001 financial year.

The unusual items included a $349.7 million charge relating to the separation from Ansett. That included a $182.7 million settlement with Ansett's administrators, Ansett wages and salaries paid following the date of administration ($39.0 million), Ansett International guarantees ($41.0 million) and IT separation costs ($35.3 million).

In addition, a provision for Air New Zealand staff redundancies arising from the loss of Ansett led to a charge of $40.0 million.

Offsetting these was a reduction in the provision for deferred consideration due to News Corporation of $59.8 million.

Air NZ's overall load factor during the period fell to 70.2 per cent from 72.3 per cent with domestic loads essentially unchanged at 66 per cent and international down from 72.9 per cent to 70.7 per cent.

Like most airlines the fall-off in passengers was most pronounced amongst high-yielding business travellers.

Domestic yield fell 7.3 per cent to 30.6 cents per RPK as aggressive competitive activity further affected profitability. International yields fell 9.1 per cent to 11.1 cents per RPK.

Declining yields were partially offset by falling fuel prices. Air New Zealand unwound much of its fixed hedging cover in September and consequently 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.

Even after the recapitalisation, Air NZ's balance sheet is highly stretched. At 31 December, gearing (as measured by debt to debt plus equity) was 93.8 per cent and following the completion of the recapitalisation on January 18, it reduced to 53.1 per cent or 78.2 per cent if aircraft operating leases are included.

"Air New Zealand believes that this level of gearing is still too high given the volatility of earnings within the industry and is focused on increasing fixed-cost coverage ratios through improved profitability and the sale of non-core and under-performing assets," the company said.

- NZPA