Air New Zealand has confirmed it expects to report an underlying loss for the 2020 financial year while estimating hedging losses and aircraft impairments of up to $560m.

The airline, which said today it has yet to draw on the Government's $900m loan, says while the recent move to Alert Level 2 allowed it to get its domestic engine turning again, it is clear that it will take some time for demand to return to pre-Covid levels.

"We are preparing for a scenario in which the airline is still 30 per cent smaller than pre-Covid levels in two years' time" says chief financial officer Jeff McDowall.

For the second half of the 2020 financial year, Air New Zealand's network capacity is expected to be approximately 50 per cent lower than the prior comparative period, driven by a reduction of approximately 90 per cent in the fourth quarter.

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In light of this and the fact there was very little revenue coming in during Alert Levels 3 and 4, the airline is now expecting to report an underlying loss for the 2020 financial year.

It currently has $640 million of short-term liquidity, versus $1 billion prior to the outbreak. That doesn't include any of the $900 million Government loan facility.

"We have not yet needed to draw down on the government loan facility, as we continue to utilise all available levers to reduce our cash burn and right-size the business to reflect the expectation that, for some time, our airline will be smaller than it was pre Covid-19" says McDowall.

In a market update, the company said it would feel the impact of $85m-$105m from fuel hedging de-designation, aircraft impairment charges of $350m-$450m, and reorganisation costs of up to $160m in the full financial year.

Air New Zealand aircraft on the tarmac at the Auckland. Photo / Jason Oxenham
Air New Zealand aircraft on the tarmac at the Auckland. Photo / Jason Oxenham

Cash Burn

Measures taken to minimise cash burn include slashing 4,000 jobs or 30 per cent of the workforce, which is expected to drive annualised savings of $350 million to $400 million.

It has deferred or cancelled almost $700 million in expected capital expenditure to December 2022, including deferrals of planned A321 NEO deliveries.

The combination of these and other measures mean it expects to reduce its average monthly cash outflows by approximately $50 million to $60 million for the 2020 financial year.

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More changes are likely, including possible further job losses.

"We will continue to seek out further opportunities to consolidate facilities, reduce capital spend, review fleet composition, supply chain costs and adjust our labour base further," said McDowall.

He added, however, "we know that demand for air travel will eventually rebound, so we are cognisant of striking the right balance between removing cost from the business and ensuring the airline is in a strong position to ramp up as demand recovers."

Focus Live: The Government is handing Air New Zealand a $900 million lifeline as it copes with the coronavirus fallout.

Unparalleled impact

The Covid-19 pandemic has had an unparalleled impact on the aviation industry, and the future landscape of the airline will look vastly different to what it does today, chief executive Greg Foran says.

"This is without a doubt the most significant challenge our airline, and indeed the entire aviation industry, has ever faced. The implementation of domestic travel restrictions and border closures have been incredibly effective at slowing the spread of Covid-19 in a number of countries, including here in New Zealand, but they have also had a profound impact on demand for air travel.

"Throughout this pandemic, Air New Zealand's focus has first and foremost been on protecting the health and safety of our customers and our team, while also taking swift and decisive action to protect the long term viability of the airline and preserve liquidity. We are doing everything in our power to ensure Air New Zealand emerges strongly from this crisis.

It did not provide specific guidance due to uncertainty regarding demand for air travel under New Zealand's alert level 2, the period of time in which social distancing will be required on the aircraft and the timing of a shift to alert level 1.

McDowall said demand for air travel will eventually rebound.

"So we are cognisant of striking the right balance between removing cost from the business and ensuring the airline is in a strong position to ramp up as demand recovers."