Air NZ to lift return on back of job cuts

By DANIEL RIORDAN

Lower costs, principally from job losses, are expected to deliver the bulk of the financial benefits from Air New Zealand's merger with Ansett Australia.

Executive chairman Sir Selwyn Cushing said that 60 per cent of the projected $256 million annual boost to earnings (before interest and tax) over the next one to three years would come from lower costs and the rest from increased earnings.

Air NZ is expected to release more details when it announces its annual profit on August 29. But it is thought that non-unionised, white-collar Ansett staff will bear the brunt of the job losses.

Last week, Air NZ began the task of integrating Ansett Australia's operations by replacing most of Ansett's top executives with its own in a new combined structure to run both airlines.

Changes in middle management are expected to be finalised shortly.

One analyst, who asked not to be named, said that he expected another cleanout of Ansett management.

The lack of union representation for such staff meant that Air NZ would find it easier to achieve big cost savings in this area rather than further down the operation.

Safety requirements that mandate minimum staff numbers and the pressure to maintain service standards in the face of fierce competition from other airlines will also restrain Air New Zealand at an operational level.

Simon Botherway, investment manager at Arcus Investment Management, expects Air NZ to get close to its financial target - in the medium if not short-term - with most of its cost savings coming from reducing staff numbers.

He agrees that eliminating management positions as head offices are integrated will be easier than layoffs lower down. "Wholesale sackings will be just too unpopular on either side of the Tasman."

He said attrition was more likely.

Other savings would come from continued integration of the two airlines' engineering operations and procurement areas.

Mr Botherway believed it unlikely that there would be significant savings on fuel, the airlines' major cost.

He said higher revenue would come from route synergies, code-sharing agreements, better feeder traffic flows and in the marketing field.

However, Mr Botherway said Air NZ would be surpassing market expectations to reach the earnings target needed to give major shareholder Brierley Investments a top-up on its sale price.

When Singapore Airlines lifted its stake in Air NZ to 25 per cent, paying Brierley 300c a share for a 16.7 per cent stake, it agreed to pay Brierley another 50c a share if Air NZ increased June 2001-year earnings before depreciation, rent, interest and taxes by 30 per cent.

Singapore will pay Brierley a further 50c a share if Air NZ lifts earnings by 65 per cent.

A 30 per cent increase requires Air NZ to lift earnings from $1.27 billion to $1.65 billion.

Mr Botherway said that the higher figure of $2.1 billion was "totally unobtainable."

While Air NZ restructures Ansett Australia, its competitors continue to hang tough.

Qantas Airways chief executive James Strong reacted strongly when asked about plans by Air NZ, Ansett Australia and Singapore Airlines to use their closer ties to drive costs savings and expand international services.

He said Qantas' integrated structure meant that it had a lot of capability in that regard as well.

Despite Qantas' recording a record annual profit of $A517.9 million ($678.62 million), Mr Strong said that the entry of new domestic competitors and rising costs would present it with its biggest challenge since privatisation.