Air New Zealand has started the "painful process" of slashing its workforce, with overseas staff first to face losing their jobs.

And the airline is "planning to be a domestic airline with limited international services".

A third of the airline's 12,500 staff may go as the impact of Covid-19 slashes the airline's revenue and will be a test of years of a collaborative approach to labour relations.

In an email sent to staff and Airpoints members last night, chief executive Greg Foran confirms reports in the Herald of major job losses following the revenue plunge from close to $6 billion a year to $500 million.

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Greg Foran started work just as the coronavirus crisis hit. Photo / File
Greg Foran started work just as the coronavirus crisis hit. Photo / File

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Foran said the airline had cut more than 95 per cent of its flights in New Zealand and around the world and warns that staff cuts may be even more drastic.

The only flights remaining are in place to keep supply lines open and transport options for essential services personnel. The airline is in the final stages of finalising its domestic network which could fall from 20 centres to close to half a dozen.

Foran has laid out the parlous state of Air New Zealand's financial position as demand has almost totally collapsed.

''We are no different to a household. We have outgoings like debt repayments, utilities bills, lease payments [in our case planes not cars] etc … and we need income [or as we call it – revenue] to cover all our bills,'' he told Airpoints members.

Before Covid-19 wiped out global air travel, the company had annual revenue of around $5.8b.

"After paying all our bills, that saw us end the last financial year making a profit of $374m. And we had over a billion dollars in the bank, which was our version of the rainy-day account in case an unexpected event hit our business," he said.

"Unfortunately, Covid-19 has seen us go from having revenue of $5.8b to what is shaping up to be less than $500m annually based on the current booking patterns we are seeing. This has the potential to be catastrophic for our business unless we take some decisive action."

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Foran, a Kiwi who headed Walmart United States, started work at the airline as the crisis escalated, and said the only way it would see an improvement in that revenue estimate this calendar year is if Kiwis embrace domestic travel after the alert level 4 is lifted.

The "harsh reality" is that most countries will take a cautious approach to allowing international tourism in the next year, New Zealand included.

International tourism flows make up two-thirds of Air New Zealand's revenue.

Foran said that was billions of dollars in ticket sales the airline wouldn't be booking and more than 1.5 million tourists who won't be arriving here to fly on our domestic network.

"In that light, it is clear the Air New Zealand which emerges from Covid-19 is a much smaller airline and could take years to get back to its former size. Therefore, we are planning to be a domestic airline with limited international services to keep supply lines open for the foreseeable future."

Air New Zealand would be smaller for some time and need fewer staff.

"We expect that even in a year's time we will be at least 30 per cent smaller than we are today," said Foran.

"Our monthly labour cost alone is $110m. We have $960m in cash reserves today, but with very little revenue coming in, our cash balance will fall by tens of millions of dollars each week."

The airline had negotiated a loan with the Government of up to $900m and expected it would need to begin to draw on that within months because outgoings were so high.

Foran made the point that interest rates were up to 9 per cent.

"'Every dollar we use from this loan facility comes with interest [more than double current interest rates for a household mortgage] and must be repaid."

Through collaboration, the airline had been able to reduce costs by asking all staff to take leave without pay, forgo bonuses, reduce hours and consider voluntary exits.

It had also made savings from voluntary pay cuts by the board, himself (his $1.65m pay has been cut by $250,000 for the rest of this financial year) and his executive team, and cancelling all incentive payments for staff on individual employment agreements.

"While these measures help, they only go part of the way to reducing costs to the level we need to be viable in the long-term."

The Government's recently announced wage subsidy may provide some relief which would be helpful, he said.

"We are working with the Government to determine how the subsidy can be applied in our business and in turn to the benefit of our people. The subsidy is, however, a short-term measure and doesn't right-size the business for the future, especially when you consider that even in a year, we will be 30 per cent smaller than we are today.

"But we are grateful that the Government has put in place a scheme that means the cuts to the size of our workforce are not as deep as they may have needed to [be]."

Foran said burdening the airline with massive debt would significantly lessen its ability to compete with airlines emerging from Covid-19.

With many airline failures likely, aircraft will be cheap to operate in new ways which will be a threat to legacy carriers such as Air New Zealand, no matter how nimble they have been recently.

"Unfortunate as it is, our revenue and expenses forecasting indicate that a large-scale reduction of the workforce must occur on top of all our other actions," he said.

"The extent of this reduction is based on conservative assumptions and we may have to change these as the situation evolves, especially if the level 4 alert goes beyond the planned 28 days or border restrictions are in place for a prolonged period."

This week the airline would begin the process of a large-scale reduction of its workforce in the international regions.

New Zealand cuts would follow once the executive agrees a final plan in the coming days.

"These are necessary measures to ensure our nation retains an airline, albeit a smaller one. To be clear, it is shaping up that the size of the Air New Zealand workforce will reduce by up to 3500 roles in coming months. No areas will be immune, whether it is our most senior leaders through to new joiners.

"The situation we find ourselves in is nobody's fault."

He said he was acutely conscious that a smaller Air New Zealand also came with a significant impact on many suppliers, some of whom will probably have to reduce the size of their workforces because it won't be doing as much business with them.

Covid19.govt.nz: The Government's official Covid-19 advisory website

Focus: A look at today’s activity in aviation amid the coronavirus pandemic wreaking havoc for the aviation industry.