Air NZ posts first half profit of $93.9m vs previous $376m loss

By NZPA

Thursday 27th February 2003

Air New Zealand today showed it had come out of intensive care, announcing a December half year net profit of $93.9 million compared with a $376 million loss a year ago.

Despite the return to comparative health, the company will not pay a dividend.

Total operating revenue rose 29 percent to $1.86 billion.

The operating surplus before unusuals rose to $138.3 million from a $235.0 million loss. Tax of $40.5 million was provided compared with the year ago tax credit of $41.5 million.

Earnings per share came to 3 cents against a 50cps loss a year ago.

Air NZ and Qantas are currently attempting to get a proposal past competition regulators whereby Qantas takes a 22.5 percent stake for $550 million.

The company in December forecast a full year net profit before unusuals of $230 million and chairman John Palmer said he was sticking with that at the moment although with caveats that the international situation could severely influence that.

"There is no doubt however that the uncertain world stage will negatively impact our business, with passenger numbers, yields and fuel prices all likely to be affected."

Mr Palmer called it a "good result" and said "we are quietly determined that there will be many more like this".

"While the board is very pleased with the progress made in returning the business to profitability, there is much still to be done," Mr Palmer said.

He said Air NZ had benefited from lower fuel costs and a higher New Zealand dollar -- factors not controllable by management and he said the company had to be careful in taking credit for them.

"However, we have also had strong passenger growth when compared with the prior period, and we can take credit for that. What has also been particularly pleasing has been the reduction of controllable costs such as cost of sales."

Cash flow for the six months was "a very creditable" $326 million, up $514 million from a net cash outflow of $187 million in the prior comparable period when the result was still bleeding from the collapse of Ansett Australa.

Mr Palmer said it was important to note that the profit had been derived from the use of $5.6 billion in assets, including capitalising all aircraft operating leases.

"Our annualised ebit (earnings before interest and tax) return on these assets, allowing for the impact of operating leases, is only approximately 8 percent pre-tax, nominal.

"In the board's view this is not acceptable, particularly given the very high levels of risk in the airline business and the fact that these returns were achieved during a period of relatively favourable operating conditions."

Chief executive Ralph Norris said Air NZ's forward booking profile was down by around 10 percent for March, particularly in the US and Japanese markets, but showed recovery again in April and May.

Mr Palmer said the industry had chronic over-capacity which was eroding shareholder value for many airlines.

Air NZ was changing its model as shown by its new Express Class in domestic operations to find a sustainable model. But the proposed alliance with Qantas was vital.

Mr Palmer said the airline's expectations was that shareholders would vote on the alliance plan in the final quarter of this year, assuming regulator approval.

"The combination of the Alliance, Air New Zealand Express Class and Freedom Air are critical to Air New Zealand having a successful future."

"Without all three, our future at best is as a downsized domestic airline."

During the half year Air NZ flew 7.3 percent more revenue passenger kilometres than in the prior period.

Mr Norris said the new Express Class was a major contributor to increasing passengers numbers.

But he said Freedom Air's successful repositioning should not be overlooked. Attempting to pre-empt suggestions Freedom should be divested as part of the Qantas deal, Mr Norris said the stand-alone brand had an exciting future.

"Freedom Air is integral to our future."

Air NZ's yields fell 7.4 percent, mainly due to the introduction of the Express Class.

Fuel costs fell $61 million in the half year, helped by the stronger NZ dollar and hedging policies.

Air NZ's engineering business, ANZES produced an ebit result of $25 million, an increase of 17 percent over the prior period and it had a strong order book.

Air NZ's debt gearing had been cut ducing from 73.8 percent at June 30 to 69.6 percent at December 31.

"While these gearing levels are still considered too high, it is pleasing to see them moving consistently in the right direction," Mr Norris said.

He reiterated that Air NZ planned a rights issue to improve the balance sheet. The timetable had been put back to the first half of 2003 from the first quarter.

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