Air NZ braces for big loss, more changes coming

Air NZ says travel remained very restricted. Photo: supplied
In light of this and the fact there was very little revenue coming in during Alert Levels 3 and 4, the airline is now expecting to report an underlying loss for the 2020 financial year. Photo: supplied
Air New Zealand has confirmed it expects to report an underlying loss for the 2020 financial year while estimating hedging losses and aircraft impairments of up to $560m.

The airline, which said today it has yet to draw on the Government's $900m loan, says while the recent move to Alert Level 2 allowed it to get its domestic engine turning again, it is clear that it will take some time for demand to return to pre-Covid levels.

"We are preparing for a scenario in which the airline is still 30 per cent smaller than pre-Covid levels in two years' time" says chief financial officer Jeff McDowall.

For the second half of the 2020 financial year, Air New Zealand's network capacity is expected to be approximately 50 per cent lower than the prior comparative period, driven by a reduction of approximately 90 per cent in the fourth quarter.

In light of this and the fact there was very little revenue coming in during Alert Levels 3 and 4, the airline is now expecting to report an underlying loss for the 2020 financial year.

Air New Zealand said that as of yesterday, it had short-term liquidity of approximately $640m, which does not include any funds from the $900 million loan facility with the Government.

"We have not yet needed to draw down on the government loan facility, as we continue to utilise all available levers to reduce our cash burn and right-size the business to reflect the expectation that, for some time, our airline will be smaller than it was pre Covid-19" says McDowall.

In a market update, the company said it would feel the impact of $85m-$105m from fuel hedging de-designation, aircraft impairment charges of $350m-$450m, and reorganisation costs of up to $160m in the full financial year.

The airline has already implemented a number of actions across every aspect of its cost base and capital expenditure portfolio, including:

• Labour reductions of approximately 30 per cent, or 4,000 employees, which is expected to drive annualised savings of $350 to $400 million
• Suspension of all short-term incentive schemes for the 2020 financial year
• Reduction of the Executive team by 30 per cent
• A 15 per cent reduction in the salary of the chief executive and executive team, together with a 15 per cent reduction in Director fees through to December 2020
• Institution of a hiring freeze and voluntary leave options
• Deferral or cancellation of almost $700 million in expected capital expenditure to December 2022, including deferrals of planned A321 NEO deliveries
• Decision to ground the airline's Boeing 777-200 and 777-300 fleet until at least the end of calendar 2020

As a result, McDowall says Air New Zealand expects to reduce its average monthly cash outflows by approximately $50 million to $60 million for the 2021 financial year.

"Like all businesses at this time, we find ourselves facing an environment where revenues will be a small fraction of what we are accustomed to. Over the course of the last few months we have acted at pace to implement both short-term and structural cost saving measures to adapt to this new environment, and we will continue to seek out further opportunities to consolidate facilities, reduce capital spend, review fleet composition, supply chain costs and adjust our labour base further.

"We know that demand for air travel will eventually rebound, so we are cognisant of striking the right balance between removing cost from the business and ensuring the airline is in a strong position to ramp up as demand recovers" says McDowall.

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