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Air New Zealand goes low-cost international

By Nick Stride

Friday 29th August 2003

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Air New Zealand will take the knife to international fares and costs in the next step of a drive to increase returns.

Announcing a well-flagged $166 million bottom-line profit yesterday, chairman John Palmer said the result, while a big improvement on last year's loss, was still less than shareholders should expect.

With Express Class operating on domestic routes and Tasman Express launched earlier this month, the next "product" would be on international routes.

Managing director Ralph Norris said international passenger services had made a "reasonably significant loss" in the last year, but earnings from cargo had put the division into the black.

Even so, its return on capital was only 2-3%.

The carrier will start replacing capacity cut back to deal with the effects of the Sars virus at the end of December.

Mr Norris declined to give further details of what the new product would entail or when it would be launched.

Mr Palmer said it would draw on the lessons learned from Express Class and Tasman Express.

When Express Class was launched commentators had said it would be good for passengers but not for profits but their fears had proved unfounded.

Domestic travel, with short-flight, relatively concentrated routes was ideal for the low-cost model.

Tasman Express had recognised the requirements of longer routes and had kept business class, meals, and beverages.

Air New Zealand's average international flight length is 10.5 hours so it is unclear what services can be dispensed with in a low-cost model. Mr Norris said that, because it was a network business, there were no LCCs (low-cost carriers) flying "yet," but Air New Zealand needed to position itself for the "inevitable transformation."

Earnings before interest and tax, and last year's huge one-off losses from the Ansett collapse, rose to $233 million, from $89 million.

But the airline is still returning only 6-7% pre-tax on capital employed. Chief financial officer Shane Warbrick said the target was 15% but that would have to be sustainable, not just once every 10 years.

Mr Palmer highlighted the year's strong cash generation.

Operating cashflow was $523 million, from $56 million a year ago including a $232 million Ansett outflow.

However, there were still strong demands for cash from inside the business.

The first of 15 Airbus A320s arrives on September 9. The aircraft will initially all be deployed on Tasman routes, contributing operational savings of 15% an available seat kilometre.

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