Air New Zealand chief executive Greg Foran says the past year has made him much wiser about airlines.

Although his company delivered another heavy pre-tax loss – it was $440 million in the red in the year to June 30 – it got a taste of the future duringa brief window before Covid-19 struck again.

In May through to July the transtasman bubble was operating, domestic flying was booming with leisure travel at record levels, and Rarotonga was open. This has all largely halted, with nearly all aircraft grounded due to the Delta outbreak and the airline again forced to apply for the government wage subsidy to cover cash burn, which is back again, though Air NZ is not putting a monthly figure on how much money it is getting through.

But Foran has had a glimpse of better times.

“For me personally, compared to where I was say this time last year when I’ve been in in- situ for about six months, I’m not only older butwiser about airlines andI’ve started to understand more about the business and some of the levers,” Foran told the Herald.

“We’re not sitting on our hands here; we’re moving quickly to get ourselves to a position to get out of … we are going to be in a good position on the other side of this”

The airline’s shares were trading down 3c today at $1.51 at lunchtime.

Cutting cost is a big part of what the airline is doing.

Operating expenditure fell by $1.9 billion or 46 per cent, to $2.2b, with variable costs declining substantially as a result of Covid-related capacity reductions

Weekly operating costs had fallen from $49m in the second half of the 2021 financial year to $40m. Pre-pandemic, Air NZ had 12,500 staff but since the pandemic over a third had left or been made redundant. Labour costs decreased by 31 per cent or $367m to $830m because of reduced head count and cuts to discretionary spending.

Throughout the 2021 financial year Foran and other executives had taken a 15 per cent cut in fixed salaries – although with higher short term incentive payments his target remuneration increased from $3.567m to $3.576m.

“We’ve taken quite a bit of cost out of the business … we’ve done a good job of keeping that cost out of the business and at the same time we’re developing new skills, new techniques, new products. I’m actually confident on the other side of this we’re going to have a great business.”

Strain on staff

He said the airline has again applied for the wage subsidy to cover about $5m a week in costs. In the year to June 30, it was paid $56m in wage subsidies, part of $450m in government support, mainly payments under its freight scheme for airlines.

“It’s [the wage subsidy] absolutely critical for us. It doesn’t solve everything but it certainly helps so that is well underway already.”

On the current Delta outbreak and the resulting grounding of aircraft, Foran said it put even more strain on the airline’s 8500 staff who had endured 18 months of uncertainty and working in trying conditions at the frontline, many of them flying into Covid-infected places. In the past week they had dealt with thousands of passengers who had to scramble to get home before lockdown rules came into force.

In the annual shareholders’ review, he said: “We are humbled and inspired by the unwavering commitment of our people and the support of our customers. I am acutely aware of the many sacrifices Air New Zealanders – from the employees who took pay cuts through the year, to the teams who have worked twice as hard to deliver essential export services; from the cabin crew and pilots undergoing regular Covid-19 tests.”

Call centre volumes can soar from about 30 calls at one time to 300 when the government makes announcements, although Foran said most passengers were using the airline’s online booking system. The airline holds $494m in advance ticket sales, down from $726m last year.

It copped flak last year from those unable to reach it, and Foran said in the past week more than 70,000 passengers had used the system to get credits or rebook flights.

About 700 staff had been rehired to crew Airbus A320 planes used on the Tasman and domestic routes, and at airports. Foran said it was “too early to call at this stage” whether they would be retained. Some were on short term contracts.

“Let’s see how this transpires over the next few weeks. What we do know is that the majority of Tasman flying we’re doing is on A320s so if domestic is strong, then those people can get used for that.”

He said it was harder to start up an airline than cut back.

”If this thing is reasonably short, by and large, you weather the storm if you think it’s going to medium term, then I think you’d look at this some other levers that you can take into account knowing all the timethat restarting the airline is actually harder than it is shutting down.”

Revenue slump

The 2021 financial year was the first full year of operating during the pandemic and revenue has shrunk form $5 billion in 2019 to $1.5b.Previously long haul comprised 41 per cent of income, domestic 32 per cent and transtasman and the Pacific 27 per cent. With limited international flying this now meant domestic made up 81 per cent of revenue, transtasman and Pacific 10 per cent and long haul just 9 per cent.

Domestic capacity reached 93 per cent of pre-Covid levels with leisure reaching 130 per cent and corporate demand at 90 per cent. The airline would further enhance its domestic proposition when current restrictions were lifted with more seats in the market and a new schedule to give more choice on timing and price.

Shane Solly, a portfolio manager and research analyst at Harbour Asset Management, boosting domestic services made good sense given the demand there prior to lockdown.

“Amping up that regional service for demand that has been there – put planes on and they will come.”

The deferral of two Boeing 787 purchases for up to four years also made sense, he said.

The airline has not committed to capital expenditure beyond 2028.

“They’re living within their means and doing the clever things like investing in technology in their call centres,” said Solly, who said the result was not as negative as some had forecast.

Air New Zealand cargo revenue of $769m was up 71 per cent, taking into account foreign exchange movements.

The growth was primarily due to the extension of government-supported flights, contributing $333m. There were about 50 dedicated freight flights a week to 16 ports with the transtasman bubble suspended, and about 30 flights per week to 12 ports when the Tasman is open.

For now, the sight of empty terminals was difficult to take, said Foran.

“Clearly we’d much rather be open but these are the cards that we’ve been dealt. I think it’s pretty clear to everyone that this is the right option at the moment.”

Widespread vaccination is the country’s – and the airline’s – ticket out of its current crisis.

“We’ve had in place a strategy in the country that served it reasonably well for the last 12 to 15 months but we’re now in a different situation and that is indicating that the solution out of this is to get vaccinated quickly.”

While vaccinations are not compulsory at Air New Zealand, most crew have had the jabs and Foran said more countries were going to require workers and passengers to be vaccinated before allowing them in. Other measures such as pre-departure testing and arrival testing would become more common.

Tapping into the government loan

The airline is 52 per cent owned by the government and just before lockdown, Finance Minister Grant Robertson told it that a capital raise planned for before September 30 should be deferred. It is now scheduled to take place in the first quarter of next calendar year.

Subject to Cabinet being satisfied with the terms of the proposed capital raise, the Crown has again confirmed that it will participate by purchasing the number of new shares necessary to maintain a majority shareholding.

Last year the government made available a $1.5b loan and so far Air New Zealand has tapped into $350m of that.

Following the capital raise, Air New Zealand expects to repay all amounts drawn under the Government loan.

Cash on hand at June 30 was $266m, a decrease of $172m since the previous year.

Until the capital raise is completed, the airline said it had access to sufficient liquidity under the loan facility, with $1.15b in remaining funds that allow it to continue operating and investing activities.

But it faces increased tax costs. The airline’s operating cashflow for the 2021 financial year benefited from the one-off deferral of around $254m in Fringe Benefit Tax (FBT) and PAYE payments, which will start to be repaid in the 2022 calendar year.

An additional $60m of FBT and PAYE is expected to be deferred in the first quarter of the 2022 financial year and repaid beforeMarch 31 next year.

Air New Zealand has since 2003 paid the government $1.45b in dividends but has suspended the dividend again this year.

The airline says the operating environment is too uncertain to give any future guidance

“Given uncertainty surrounding the current national lockdown, ongoing international travel restrictions and uncertainty regarding the level of demand as these restrictions lift, Air New Zealand has suspended 2022 earnings guidance.”

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