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Air NZ to defer $750 mln of capex to help weather slowing demand

Thursday 28th March 2019

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Air New Zealand plans a series of cost-cutting measures to weather slowing demand including deferring $750 million of capital spending on fleet upgrades.

The airline carried out the review after it lowered profit guidance for the 2019 financial year at the end of January in order to "ensure a return to earnings growth in the lower growth environment," said chief executive Christopher Luxon. 

Air New Zealand has been impacted by a slower pace of growth in domestic travel and inbound tourism after several boom years.  

In January the national carrier said annual earnings may fall by as much as 37 percent as it deals with disruptions caused by global issues with Rolls Royce engines and slowing travel growth. Today it reaffirmed that it expects pre-tax earnings of $340-400 million in the year ending June 30.

It now plans for network growth of 3 percent to 5 percent on average over the next three years, revised down from 5 percent to 7 percent. 

Aircraft capital expenditures of approximately $750 million will be deferred to ensure capacity growth better reflects the slower demand growth environment, it said. It will defer by one year the delivery of three A321NEO aircraft planned to operate on the domestic network. It will delay by two years the delivery of one A320NEO aircraft designated for trans-Tasman services.

On the long-haul side, it will defer by at least four years the delivery of two long-haul aircraft as part of a widebody fleet programme to replace the airline’s B777-200 fleet. That will reduce the level of capital expenditure expected in the 2020-2023 financial years. 

The deferral of delivery times for the four A320/A321 NEOs and two widebody aircraft will have a positive impact on the airline’s free cash flow and return on invested capital, said Luxon. 

The airline also plans a two-year cost reduction programme, targeting more than $60 million in annualised savings. That is in addition to ongoing annual savings of $50 million achieved during the past three years, it said. 

It will remove inefficiencies in the 2019 financial year to mitigate network and passenger disruption related to the Roll-Royce engine issues. It also plans to reduce overhead costs by approximately by 5 percent "which will be delivered through a combination of reprioritisation of spend, process efficiencies and automation."

Chair Tony Carter says the board fully supports the recommendations of the review and the management team’s ability to deliver stronger results for the airline’s staff, customers and shareholders.

The stock last traded at $2.415 and is down 22 percent so far this year. 


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