Nearly all of Air NZ's Boeing 777 fleet is in deep storage. Photo / Brett Phibbs
Air New Zealand does not expect passenger demand to return to last year's level until 2023 at the earliest and it faces continued losses next year.
The airline has reported a 264 per cent hit to after-tax profit to record a loss of $454 million in the year to June 30 - and that included more than seven months of largely normal operations. The loss is its first in 18 years.
Air NZ has staunched its monthly cash burn from $175m a month to $85m, largely through deep cuts to staff, but it is within days of having to tap into the Government's $900m backstop loan. The airline started this calendar year with $1 billion in cash but by this week that had fallen to $245m.
The airline estimates that its future cash burn will average $65m to $85m a month while international travel restrictions are in place, one-off costs continue to fall and assuming the resumption of domestic travel with no social distancing requirements, and the continuation of Government-supported cargo services.
"We've got reasonably good at projecting cash forecasts and that's led us to advise the Government that we will be beginning to start drawing down their loan facility in the very near future," said chief executive Greg Foran.
The Government is a 52 per cent shareholder and the airline is in discussions with ministers over the loan. Asked about the possibility of raising further equity, Foran said "we're in discussions with them."
The loan facility is in two tranches: one of $600m with an effective interest rate initially expected to be between 7 and 8 per cent; and a second tranche of $300m with an effective interest rate expected at 9 per cent.
Asked about the higher than market interest rate, Foran said when border restrictions were imposed from March 11, the airline had quickly turned to the Government for backing.
"So we decided the right thing to do for the airline was to secure some liquidity which we did."
Foran, who started in the job in early February, said he was "not at liberty" to discuss the interest rate.
The airline has already paid a $5m commitment fee and the loan will be available until May 27, 2021.
Airlines around the world are in a desperate battle for survival, with more than 20 failing or bailed out and scores more needing government guarantees - like Air New Zealand - to give them a fighting chance.
Foran describes the Covid-19 crisis as the worst economic event to hit the industry.
A presentation accompanying the results shows the unparalleled hit on airlines, which suffered an immediate near-20 per cent hit to capacity following the 9/11 terror attacks but this year were hit with a 90 per cent plunge in seat numbers in March.
After 2001, capacity recovered within 12 months, but this year it is still hovering around 50 per cent of normal, with most analysis pointing to few signs of a full recovery for years.
Air New Zealand's capacity dropped by 95 per cent in April. But aided by Government-subsidised cargo flights and stronger than expected domestic passenger demand in June and July, flying has recovered some ground.
Before the re-emergence of Covid in the community and alert levels being raised, the important domestic part of the airline's business had built to 70 per cent. With the exclusion of China, that far exceeded other countries including Australia and Britain, and was also higher than in the United States. Pre-Covid, Air NZ had more than 80 per cent of the domestic market here and dominated corporate and government travel.
Foran described the latest restrictions on domestic flying (only essential workers through Auckland) as a blow but said the experience of earlier in winter made him optimistic the market would bounce back.
In June the airline released a three-pronged strategy: survive, revive and thrive over the next two years, with a target of healthy profits in 2022.
"We're getting towards the point where we're beginning to emerge into the revive stage of the airline," said Foran. "We were feeling that right up to August 11 (when the latest lockdown was announced).
"We have a bit of a setback - we're on the cusp of revive here and we're feeling pretty good about getting this up and running in due course."
Under level 2 restrictions, physical distancing meant capacity on main trunk jets was reduced by more than a third and on regional turboprops by 50 per cent, making it difficult to operate profitably without raising fares. Jetstar has quit flying here after a strong return and Foran doesn't think it will be back until it could sell as many seats as possible under level 1.
Masks must be worn on planes from Monday and airlines say these keep passengers safe without the need for distancing. Foran today said his airline was talking to officials about the policy.
"Nothing has changed at this point in terms of anything new. But like any system people are going to continue to look for ways to enhance it and make it better."
New processes and personal protective equipment had kept crew from contracting Covid since April 7.
He said airlines with a strong domestic business would be better placed for recovery.
"I think about airlines that will do reasonably well as we emerge from this - it is probably going to be those ones that had good solid domestic businesses."
International travel makes up two-thirds of Air NZ's revenue in a typical year but the airline is not speculating on when this will resume, due to uncertainty over the reopening of international borders. Long-haul international was around 40 per cent of revenue, which this year fell 16 per cent to $4.8b.
"Timing is reliant on decisions by various individual governments and authorities - all borders will not reopen simultaneously."
Foran said it was not clear how the international competitive landscape would look in the medium to long term, but modelling work was being done.
But in its presentation Air New Zealand says it will position itself to leverage a strong domestic presence and stimulate travel on the Tasman and Pacific Islands in the medium term and be a smaller airline with fewer long-haul routes in the long term.
Shane Solly, senior portfolio manager at Harbour Asset Management, said the airline was doing a good job of ''controlling the controllables'' and hadn't cut too heavily so was in a good position to grow from its limited operations - when the time came.
He said it needed to raise equity to give it a more flexible capital structure and if this was pushed further towards the end of the year by October's election it may not necessarily be bad. Capital raising when there was more information around border re-opening would give potential investors more certainty.
From April about 4000 of the airline's 12,000-plus staff have been laid off through redundancies, voluntary exits or furlough mechanisms. Since June the company has sought a further $150m in labour savings although redundancies are a last resort and Foran said today "there are no plans to decrease or either increase our staffing levels".
Layoffs have so far yielded labour cost savings of 11.4 per cent and because of the dramatic reduction in flying, operating costs, excluding redundancy expenses, had fallen by half.
The airline has benefited from wage subsidy payments of $75m to the end of June and a further $40m since then. It has been paid $21m from the Government's freight subsidy scheme which runs to the end of the year and has supported more than 250 charters.
As part of cash burn reduction, the airline will save $700m in capital expenditure through to December next year. This includes reduced hangar, digital and infrastructure spending, suspension of dividends, grounding of the Boeing 777 widebody fleet until at least the end of the year and deferral of the delivery of five Airbus A321 NEOs into the 2022-23 financial period, and one ATR72-600 into 2021.
Top executive salaries have also been cut by 15 per cent and so have board fees, until the end of the year. Foran's full-year base salary would have been $1.65m and this fell to $1.4m for that period, and between his start date and June 30 he was paid $594,000. No short term incentives were paid.
In the last financial year the number of management staff paid more than $1m has fallen from 12 to nine (excluding former chief executive Christopher Luxon who appears in both financial years' accounts).
Foran said that it was important to make salary sacrifices given the company's financial position.
"We're asking everyone in the company to do it."
He said Covid-19 had highlighted once again that the core strength of the airline is its people and their ability to respond to change quickly.
"Whether it be volunteering to crew repatriation flights to unfamiliar ports, dealing with substantial increases in volume at the call centre, or our cargo team's efforts to keep New Zealand exporters connected to global markets, the response of our people has been nothing short of remarkable."
He again apologised for the way the airline handled the processing of customer credits.
"I would also like to thank our customers for their ongoing support and patience" he said.
Air New Zealand is not giving guidance for the coming year, given uncertainty over travel restrictions and demand but "each of the scenarios we are currently modelling suggest we will make a loss in 2021."
Foran said shrinking a business was a much different challenge to growing one.
"One of the great delights would be to be part of a team here that deals with this enormous crisis, and then helps emerge on the other side, a stronger and better airline. I'm completely up for this."
BGH's tilt at Tourism Holdings has sparked more merger and acquisition speculation.