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Air NZ: Don't give Virgin a monopoly

By Nick Stride

Friday 28th February 2003

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Air New Zealand used yesterday's profit release to mount a campaign to keep its Freedom Air low-cost subsidiary out of Virgin Blue's clutches.

Without Freedom, chairman John Palmer told a news conference, the airline faced a future as "a downsized domestic airline at best."

He said all three operating businesses ­ international, the new Express Class domestic service, and Freedom ­ were critical to Air New Zealand having a successful future because they gave travellers a range of choices.

His comments were reinforced by chief executive Ralph Norris, who said Freedom was integral to the airline's future.

Virgin Blue's submission to regulators scrutinising the proposed alliance with Qantas insists Air New Zealand must be made to sell Freedom to preserve competition on transtasman and domestic routes. It has said it would be an interested buyer and is probably the only airline that would be.

Mr Norris said its demands amounted to "asking for a monopoly in one airline segment." Freedom was a strong contributor to Air New Zealand's $94 million net profit for the December first half.

Mr Norris said its transtasman service turned in one of the best returns on capital in international operations.

The sharply higher group result ­ the airline lost $376 million in the same period a year earlier, mostly because of the Ansett collapse ­ showed the cut-down Express Class had been a success. But the higher New Zealand dollar and cost-cutting had more effect on the bottom line.

Overall revenue was flat at $1.84 billion as the higher traffic stimulated by Express ­ passenger numbers on main trunk routes were up 30% ­ was offset by its lower fares.

Costs fell by 8%, or $121 million, to $1.44 billion. The biggest contributor was a $61 million lower fuel bill as the rising dollar cut US dollar costs. A lighter maintenance workload also helped.

Work during the period was mostly labour-intensive airframe maintenance while in the previous period a lot of capital-intensive engine modification had been done. The higher dollar had also cut the US dollar cost of parts.

Mr Norris said controllable costs such as labour and the cost of sales had also been cut. The lower expense bill fed through into higher cashflows and profit.

Operating cashflow rose by $514 million to $326 million, from a negative $188 million a year ago. Earnings before interest and tax were up $201 million to $150 million.

That translated into an annualised ebit return of 8% pretax on the airline's $5.6 billion of capital including capitalised leases.

Mr Palmer said that was still not good enough "in relatively favourable operating conditions." The gearing ratio fell to 69.6%, from 73.8%, but Mr Palmer said the balance sheet still needed shoring up.

The airline hopes to make a decision on a mooted rights issue by the end of June.

It is sticking to its full-year forecast profit before unusuals and tax of $230 million after making $138.3 million in the first half.

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