Holidays Act hits flier's labour bill

By Duncan Bridgeman

Friday 27th August 2004

As if the operating environment for airlines wasn't tough enough already, Air New Zealand's owner has slapped a potential $40 million extra cost on the company.

The Holidays Act, implemented by the government in April, resulted in an additional $17 million of labour expense for the year to June, it was revealed at a results briefing on Wednesday.

On an annual basis the company anticipates increased costs of 2.5-5% of overall labour costs, or $20-40 million a year to implement the act.

Air New Zealand chief executive Ralph Norris highlighted the difficulty for the company by noting the increase did not result in any corresponding gain in productivity.

Air New Zealand, 72% owned by the government, is severely affected by the act because a large proportion of its staff work shifts or overtime.

Norris and chairman John Palmer painted a sombre outlook for the next 12 months, forecasting further yield weakness in the short haul market amid rising fuel costs and cutthroat competition on the transtasman route.

However, despite billions of dollars being lost in the global industry, Air New Zealand remained a profitable airline, posting a flat $166 million net profit after tax for the June year.

The company has a billion dollar bank balance and expects to be in a position to declare a return to dividends next year of 25-35% of after-tax profits.

The result came on total operating revenue of $3.5 billion, down 3% on the previous corresponding period.

While the stronger New Zealand dollar over the past 12 months contributed $100 million of savings on fuel costs, profits on ticket sales bought in overseas currency were adversely affected.

Overall fuel costs were down 7% but the continued rise in fuel prices forced the company to announce an increase in fuel surcharge on ticket prices.

The company's short haul business segment suffered significant fare discounting in the period. Average fares, down 20%, translate to an 8% fall in yield.

Analysts at Macquarie Equities forecast further yield weakness in the short haul market of up to 7% over the next 12 months.

"Increasing competition and fuel prices will keep a lid on any growth in the medium term," a Macquarie research note said.

Meanwhile, Palmer said the company still intended to carry out its $200 million capital raising but not until the outcome of appeals to regulators on the proposed alliance with Qantas.

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