Air New Zealand soars on award winning service

August 26, 2016

AIR New Zealand boss Christopher Luxon believes his carrier is in “fantastic shape’’ to cope with new competition in its home market and plans to build on successful efforts to convince Australian  travellers to use Auckand as a one-stop hub for travel to the Americas.

The Kiwi carrier on Friday joined Qantas in announcing a record 2015-16 annual profit but warned increased competition will hamper the chances of another historic result in the current financial year.

The airline announced an annual net profit of $NZ463m, up 42 per cent on the previous year, and a 40 per cent increase in pre-tax profit to $NZ663 million.
But it expects pre-tax profit to fall to between $NZ400m and $NZ600m in fiscal 2017, assuming jet fuel remains at $US55 per barrel for the rest of the year, as it fends off increase competition from US, Gulf and Chinese carriers.

“Unilke other airlines we’ve given a range; that range was very broad very early on the year,’’ Luxon told AirlineRatings. “As the year progresses we’ll have much more visibility as to how it’s panning out but if we land a result anywhere in that range that will be our second or our third best result ever. So it’s a still a pretty impressive result.’’

Air NZ’s preferred measure of profit — earnings before tax and significant items —was up a massive 70 per cent to $806m as operating revenue rose 6.2 per cent to $NZ5.2 billion and earnings from passengers increased 8.9 per cent to $NZ4.5 billion.

The result included a loss of $NZ86m on the carrier’s investment in Virgin Australia with $NZ63m realised on its sale of a 19.98 per cent stake to China’s Nanshan Group.

Luxon said the split with Virgin had been “chronically overplayed’’ in Australian reports and the reason for the split was commercial. 
The airlines would continue to work together through their alliance from both a revenue and cost perspective in areas such as maintenance and biofuels.

“The fact we were able to sell to Nanshan and HNA  and others were able to come on to the register is very good,’’ he said “They are shareholders that will continue to support Virgin incredibly strongly and well.’’

Shareholders will receive a fully imputed ordinary dividend of NZ10 cents per share, bringing the total for the year to NZ20 cents, and a special dividend of NZ25 cents per share. There was also good news for staff with more than 8000 staff who do not have an incentive program set to receive payments of up to $NZ2500. 

Luxon said the airline ended the year with customer satisfaction levels at record highs and brand health in “excellent shape’. However, he acknowledged the impact of increased competition as other international airlines add capacity into New Zealand.   This includes increased competition by US carriers across the Pacific as well as new direct services to Auckland from the Middle East and China.

He said there was no doubt customers had more choice but he was confident that the right pricing, products and services would help Air NZ stay a step ahead of the competition.

He believed the medium and long-term demand curve for Air New Zealand remained “very, very good’’ and the challenge was to use “incredibly well’’ the levers the airline had around revenue and capacity management.

“But the bottom line is I think that Air New Zealand’s in fantastic shape to compete and compete very strongly with our competition,’’ he said. The increased competition comes as Air NZ is expanding its trans-Pacific reach on new routes to markets such as Houston, Buenos Aires, Beijing and Ho Chi Minh City.

Luxon said that was working well because the airline had spent months researching the new markets rather than just sending aircraft “willy-nilly’’ to destinations.

“We spent 18 months really understanding South America and all the customer dynamics: the channels by which we sell the tickets, which partners we need to make that come to life and work for us,‘’ he said noting Buenos Aries had made a positive contribution from “day one’’. “So our literacy about how to unlock new markets and to build new businesses has really grown tremendously.’’

The Air NZ chief also sees great opportunity to build up Auckland as a one-stop hub from cities such as Perth and Adelaide. He said Australians already accounted for about 40 per cent of the traffic to Buenos Aries and were second only to Argentinians and Brazilians.

“You’ll see us I think more purposely and intentionally work on how we make the banks across the Tasman tie into international services and you’ll see us put a lot more resources into Australia in order to do that,’’ he said.

Air NZ is continuing to upgrade its fleet and has been refurbishing lounges. It recently announced it would spend more than $NZ100m increasing the number of premium seats on its Boeing 787-9 Dreamliner’s and refurbishing its Boeing 777-300ER fleet. The airline currently has seven Dreamliners with two more due to arrive before Christmas and three due next year.

The three scheduled to be delivered from October next year will arrive in a new configuration that increases the number of Business Premier seats from 18 to 27 and the number of premium economy seats from 21 to 33.

Its unique Spaceseat will be axed on the B777s in favour of the B787 seat, increasing the number of premium economy seats from 44 to 54. The new 777 interiors will feature refreshed Business Premier and economy seats as well as eX3 Panasonic inflight entertainment system used on the Dreamliner.

Luxon said the Spaceseat had done well for the airline over the past six years but the Dreamliners had allowed it to do a side-by-side comparison which had found its new premium seat was doing well in terms of customer preference and rating.

He agreed that premium economy was becoming a big trend with airlines, noting that “everyone’s piling into it’’. “We had a premium economy set up many years ago and I think we’ve proven that we’ve got a very competitive product,’’ he said.

“Obviously for us from an Air New Zealand perspective, when you’re travelling from New Zealand you tend to be travelling 12 to 14 hours so premium economy’s been a really great way for people to say I want to be able to buy space, essentially, and cocoon myself a little bit. 

“In Business Premier, people want very much a lie flat bed experience and our seat option has worked incredibly well for that purpose.’’

The airline, which has been increasing the proportion of aircraft it owns, also plans to exit its Boeing 767-300ER fleet by the second half of 2017. It expects overall capacity to grow 4 to 6 per cent this financial year with growth of up to 9 percent on domestic routes, between 3 and 5 per cent on the Tasman and 4 to 6 per cent on its international network.  

Replacing Boeing 737 and Beech 1900D aircraft on its domestic routes with Airbus A320 and ATR turboprops helped drive domestic capacity   growth of 8.5 per cent last financial year while increased international flying saw capacity grow by 16 per cent as traffic measured in revenue passenger kilometres grew  by 16.2 per cent.

Capacity growth of 5.1 per cent on Tasman and Pacific Island routes outstripped traffic growth of 3.8 per cent.

Macqurie Equities analysts, who have a neutral recommendation on Air NZ, said the result contained some positives in terms of a reduction in gearing, the special dividend and commentary around a sustainable ordinary dividend.

“The moderation of capacity is both good in terms of rational response, but negative with it reacting to competitive pressures,’’ analysts Nick Mar and Warren Doak said. “The guidance is weak, well below our numbers and consensus with headwinds from competition which may impact investor sentiment.’’