Coronavirus and Air New Zealand: The good, the bad and the ugly

Air New Zealand is slashing its network capacity by 10 per cent. Photo / Dean Purcell

Air New Zealand has slashed capacity, its new boss has taken a pay cut and the lid is coming down on other staff as Covid-19 bites even harder. Here's what the airline is facing.

The good

Being nimble

In the airline industry's fight to get through the coronavirus crisis as strongly as possible and come back quicker than the competition, Air New Zealand is relatively well placed.
It has been here before (although nothing quite like this) and its experienced executive and operational staff pride themselves on being nimble and quick to react to changing circumstances.

There have been a succession of capacity cuts, first (naturally) in China and Asia and now throughout the rest of its network, which will be cut overall by 10 per cent during the next three months.

Not so long ago its network was growing at close to 7 per cent a year. Forsyth Barr analyst Andy Bowley points out the airline has cut faster than other international airlines, thereby maintaining higher load factors and protecting yields. This "textbook" approach has served well in the past.

"We highlight that it remained profitable through the period of the global financial crisis."

Timely cost cutting

The airline already had a cost-reduction programme well underway after a demand dip early last year, as it looked to cut head office costs by 5 per cent in addition to looking for savings elsewhere.

At the same time as the cost-cutting campaign, the airline deferred up to $750 million worth of new aircraft. In 2021, it is taking delivery of just one ATR and one A320.

Air New Zealand is a completely different airline and company than what it was when it faced its worst financial crisis, in 2001. It needed an $885m government bail out then.

At the announcement of its interim profit last month, the airline had cash on hand of $1 billion, which reflects a slight decline of 4.9 per cent on the same period last year but still at the top end of the target liquidity range of $700 million to $1 billion. It also continues to maintain a stable investment-grade credit rating from Moody's of Baa2.

Gearing was 54.3 per cent and remains in the target range of 45 per cent to 55 per cent. There was a 2.6 percentage point increase in gearing, which reflected continued investment in aircraft.

Bowley says the airline's structural and balance sheet strengths leave it well placed to weather the coronavirus storm.

"In contrast, some of its competitors (for example, Virgin Australia) are more challenged, in our opinion. We believe there is potential for industry rationalisation and consolidation as a result of any prolonged downturn that could be favourable for Air (NZ's) competitive position in the longer term."

The bad

The impact on staff

New chief executive Greg Foran has volunteered for a $250,000 pay cut from his base pay of $1.65 million. Other airlines such as Singapore and Thai have made similar moves. Other executive staff at Air NZ have been subject to a pay freeze since last year. The top 11 earners, apart from the chief executive, were paid between $1.1m and $2.6m last year.

Bowley says the pay cut is also a good signal for frontline staff as well.

Unions and the airline will meet tomorrow with the company. E tū union says there are good lines of communications. However, its head of aviation, Savage, points out that aviation workers are particularly susceptible to the economic impact of Covid-19.

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They are predominantly shift workers, so how much they earn fluctuates according to seasonal and daily flight schedules.

"A sudden drop off like this at what would normally be peak travel season is having a serious effect, especially for part-time workers in loading, cabin crew, cargo, cleaning and catering. Instead of earning maximum amounts and picking up overtime, they are at minimum hours and being asked to take leave."

Mixed benefits from oil price collapse:The wider airline industry is getting a break from the tumbling price of oil, now down to US$35 a barrel. That is down mainly for the wrong reasons — plunging prospects for economic activity.

If Air New Zealand was doing more flying and buying more on the spot market this would be of greater help but it has close to 80 per cent of its fuel hedged at between $54 and $64 a barrel for the rest of the year. But if rival airlines are hedged at higher prices, Air New Zealand has the capability of bouncing back more quickly than them.

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The ugly

A collapse in demand

Air New Zealand is doing what other airlines are doing and suspending any profit forecasting until the situation stabilises. Right now future bookings are impossible to predict.

Last week one carrier was reporting 50 per cent no-shows; passengers not turning up. While those are tickets sold, it illustrates the fear of flying.

Demand ''fell off a cliff'' to Asia last month and as the actual contagion spreads (generating an even greater contagion of fear), it is affecting bookings to other parts of the world.

Late last week, Air New Zealand noted that North America, a previously robust market, was being hit and today's measures became inevitable. Foran said it was difficult to predict future demand patterns.

Air New Zealand chief executive Greg Foran started work as Covid-19 fallout hit. Photo / Supplied

The epidemic could cost passenger airlines up to US$113b ($178b) in revenue this year, the International Air Transport Association warned last week.

That's three times the estimate IATA made two weeks earlier - a sign of how quickly demand for airline seats is collapsing.

Air New Zealand had already cut its guidance for pre-tax earnings to between $300m and $350m for the 12 months ending June 30 from an earlier forecast of $350m to $450m.

The airline pays relatively generous dividends compared to its peers (11c in the interim period) but there must be doubt now about whether it can maintain it as these levels and a cut would give it more financial headroom.

Uncertainty

Nobody has an accurate fix on when the global outbreak may be more contained, more successfully treated and, with luck, ultimately cured. There are faint signs of recovery of capacity in China after it was wiped out by 80 per cent for much of last month. Around the rest of the world that offers a slither of hope for airlines but for now uncertainty rules.