Air NZ to spend $1.35b on new Boeing long haul fleet

5.00pm

Air New Zealand today announced plans for a $1.35 billion makeover of its long haul fleet that will allow to operate more economically and open new routes to China and India.

It said it would purchase four new Boeing 777-200, two 7E7s and lease a further four 777-200s.

"Today marks one of the most exciting and pivotal moments in Air New Zealand's history," chief executive Ralph Norris told media and analysts in Auckland.

The announcement marks the second phase of the national flag carrier's rejuvenation following its $885 million bailout by the Government in 2001 and the shakeup of the industry in the fall-out from the September 11 attacks.

The company had adopted a new low cost business model on domestic, trans-Tasman and Pacific routes, relying heavily on its new fleet of cost efficient Airbus A320 aircraft. The airline had also been considering Airbus aircraft to replace its ageing long-haul fleet of Boeing 747s and 767s.

Chicago-based Boeing was chosen as supplier after an "exhaustive and robust 18 month evaluation process," Mr Norris said.

The deal includes an option for Air NZ to buy up to another 42 long haul aircraft.

Air NZ must get shareholder approval for the deal because of the size of the deal but that is a shoo-in given the Government's 82 per cent holding. Mr Norris said Air NZ would fund the purchases internally but the airline also planned to take up the option of $150 million of extra funding offered by the Government in addition to its $885 million 2001 bailout.

It would be part of a pro-rata rights issue that would net the company roughly $183 million all up. Air NZ had cash reserves of $894 million at the end of last year.

"We have -- within our existing resources and forecast cash flows -- the ability to fund these purchases. With some bank debt and financings, which we have no doubt that we will be able to raise, it's well within the servicing capabilities of the company," Mr Norris said.

Air NZ said the new Boeing aircraft would allow it to develop new routes and increase frequency on existing routes, as well as providing an overall increase in passenger and cargo capacity.

Operating costs and financial performance would improve.

Four of the new 300-plus seat Boeing 777-200 ER aircraft will be leased from International Lease Finance Corporation.

The purchase and lease of the eight 777 aircraft along with the necessary infrastructure to maintain them would cost more than $1 billion.

The first five aircraft were expected to be delivered between September next year and April 2006, with the other three introduced in the last half of 2006.

Meanwhile, the delivery date for the two smaller 7E7 aircraft, capable of carrying about 230 passengers, was still to be determined, but it would coincide with the retirement from service of the remaining 767s.

The cost of the 7E7s and necessary infrastructure to support them was more than $350 million.

The 7E7, Boeing's first all-new passenger jet in a decade, was designed to save cash-strapped airlines money on fuel and operating costs. It will use up to 20 per cent less fuel than other aircraft of its size, travel at speeds similar to today's fastest wide body jets and carry up to 50 per cent more cargo than today's similar size aircraft.

The decision to secure options to buy a further 42 aircraft reflected its belief in the potential to expand its long haul passenger and cargo business, Mr Norris said.

UBS Warburg regional airline analyst Timothy Ross described the securement of the options as "a little punchy".

"Options cost you nothing but they do lock in price. The more options you have, clearly the better bargaining you have on price".

Air NZ group general manager Rob Fyfe said the decision to buy now was to take advantage of a buyers' market.

The initial acquisition of the 10 aircraft would increase Air NZ's long-haul seat capacity by 20 per cent by early 2007.

No decisions had been made on new routes but from Auckland the 777 could reach China, South America and much of North America.

"The 7E7 will push this boundary out even further and open up more destinations in each of these locations."

UBS's Mr Ross told NZPA these were "legitimate growth options".

"Clearly China is a market that most airlines have got firmly on their radar as providing potential growth."

He also said it was likely Air NZ would like to capitalise on its US West Coast franchise.

He saw little growth opportunities in the UK or Europe unless the airline was able to secure additional landing rights.

Mr Ross saw few implications in today's announcement for Air NZ's proposed alliance with Qantas which has chosen Airbus aircraft for its future long haul fleet requirements.

Air NZ shares which were placed in a trading halt before the market opened pending the announcement closed one cent down at 41 cents.

- NZPA