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Air New Zealand Limited Air New Zealand Limited Annual Report 2001 AIR NEWZEALANDLIMITEDANNUALREPORT 2001 Brought to you by Global Reports KEY RESULTS Financial • Net Loss after Tax for the Group1 of $1.4252 million (207.1 cents per share (cps)) • Net Loss after Tax, excluding Unusual Items of $173.0 million (25.1cps) • Cash Flow From Operations of $146.3 million (21.3 cps) • Revenue up 117.7 percent to $7,960.1 million • Net Debt to Book Capitalisation (including off-balance sheet items) of 93.7 percent • Total Dividend for year of 4 cps (no final dividend) Operational • Flew 21 million passengers (up 1.1 percent) to 190 destinations • During Ansett fleet groundings managed to deliver 95 percent of passengers to their destinations on the scheduled day at critical Christmas and Easter periods • Flew an extra 25,000 domestic New Zealand passengers in the week following the collapse of Qantas NZ • Successfully launched Freedom Air in the New Zealand domestic market Subsequent Events Ansett • Ansett Holdings Limited placed was into voluntary administration on 12 September 2001 • The effect of this has been to cause Air New Zealand to recognise additional losses of approximately $350 million. This amount includes allowance for the $185 million settlement between the company and the Voluntary Administrator of Ansett International Aviation • Terrorist attacks in the United States on 11 September have had a significantly negative impact or airlines internationally • Consequently, Air New Zealand has initiated schedule changes to respond to lower demand Recapitalisation • Plan announced to seek shareholder approval to recapitalise Air New Zealand by up to $885 million through the placement of new shares to the New Zealand Government • $300 million was received on 15 October as proceeds of a loan agreement with the New Zealand Government. Repayment of this loan is proposed to be by issue of convertible preference shares as part of the above recapitalisation. 1 “The Group” throughout this release refers to all Air New Zealand consolidated businesses (including Ansett Holdings Limited and subsidiary companies). 2 All currency amounts are in New Zealand dollars unless otherwise indicated Brought to you by Global Reports KEY INDICATORS CONTENTS ASKs* REVENUE EARNED (Millions) (NZ$ Millions) Key Results IFC 60,000 8000 7960 7000 Contents 1 50,000 50017 6000 Directors’ Report 4 40,000 5000 Management Discussion 29624 28995 28946 30114 30,000 4000 3656 and Analysis 5 3359 3089 3000 2931 20,000 Board of Directors 11 2000 Corporate Governance 12 10,000 1000 New Zealand Stock 0 0 97 98 99 00 01 97 98 99 00 01 Exchange Disclosures 14 Group Financial Statements 16 Statement of EARNINGS PER SHARE CASHFLOW PER SHARE Accounting Policies 20 (Cents per share) (Cents per share) Notes to Financial Statements 24 40 38 70 69 29 26 Auditor’s Report 53 20 60 58 59 Ten Year Statistical Review 56 0 50 -40 Shareholder Information 58 40 -80 Directors’ Statement 66 30 28 -120 -106 21 Air New Zealand and 20 -160 Star Alliance Partners -200 10 Route Network 67 -207 -240 0 97 98 99 00 01 97 98 99 00 01 Corporate Directory 68 TOTAL ASSETS GEARING (NZ$ Millions) (%) 9,000 8965 100 93 8114 8,000 90 7,000 80 76 70 6,000 60 56 5,000 52 53 4391 4104 50 4,000 3356 40 3,000 30 2,000 20 1,000 10 0 0 97 98 99 00 01 97 98 99 00 01 1 Brought to you by Global Reports DIRECTORS’ REPORT The 2001 Financial Year and subsequent months have been among the most demanding in Air New Zealand’s history. The company has faced challenges unprecedented in the airline industry generally and at Air New Zealand specifically. We close the period with a recapitalisation proposal to be put at our forthcoming Annual Meeting which, if approved, will see the New Zealand Government return as the largest shareholder of Air New Zealand. This recapitalisation proposal would also result in Air New Zealand’s financial position being returned to a more sustainable base from which it can re-develop its strength as the New Zealand national flag carrier. Since acquiring the second half of Ansett Holdings from News Corporation in late June 2000, the Air New Zealand-Ansett Group has endured extremely adverse operating conditions. Much of this has been extensively covered in the media, but still warrants comment in this Annual Report for the 2001 Financial Year. At an industry level, high fuel costs, low exchange rates and intense competition have suppressed airline profitability globally. These influences were foreshadowed in Air New Zealand’s previous Annual Report. Notwithstanding this, the degree to which these factors would affect the company was not known at that time and they have had a significant impact on our 2001 financial year results. For example, the combination of high oil prices and low exchange rates resulted in Air New Zealand’s fuel bill for the year increasing by $378 million. Additionally, intense competition in the Australian domestic market resulted in Ansett Australia’s revenues under-performing budget significantly. At a Company level, these influences had a major detrimental effect on the Company’s integration programme for Air New Zealand and Ansett. This programme was intended to capture the significant cost savings and revenue enhancement opportunities that under-pinned the logic for bringing the businesses together. The establishment of a successful Air New Zealand-Ansett Group had always been expected to be a substantial task in view of the issues confronting Ansett. However, the detail and extent of the problems (especially poor maintenance planning) found at Ansett once Air New Zealand had assumed management control from News Corporation was greater than expected. The consequence was unacceptable reliability and punctuality performance which in turn lowered customer satisfaction and manifested itself in declining market share. This issue was most obvious when it led to the groundings of the B767-200 fleet during the Christmas and Easter holiday periods. These groundings occurred as a result of issues uncovered when rigorous maintenance procedures were applied to the Ansett fleet. Problems identified were notified, as legally required, to CASA which decided to halt flying until it could be assured that safety was not being compromised. The impact of this was to dent customer confidence and further market share was ceded to competitors. To address these issues Air New Zealand’s new management team early in the second half of the financial year implemented a two pronged strategy to recover Ansett’s performance. The solutions first involved addressing Ansett’s performance as a full service airline to recover its share of the premium business travel market. The second element of the strategy required development of an opportunity for the Air New Zealand-Ansett Group to compete in the rapidly evolving low cost airline market. Ansett was facing entrenched high costs, unreliable and outdated product and aggressive competition both from Qantas as a full service airline and from new entrants at the budget operator level. This left Ansett losing market share in both sectors and having to follow the enormous pricing discounts being offered at all market levels. 2 Brought to you by Global Reports Ansett’s strengths included its dedicated staff, loyal customer base and well-established brand. These were a key part of the basis on which the company was confident its recovery strategy would succeed. It was understood that Ansett’s recovery would require tough measures on cost reduction while investing heavily in catching up a large backlog of aircraft maintenance falling due during 2001 and 2002. This in turn required substantial capital investment in additional and newer aircraft capacity initially to maintain and then to grow Ansett’s services. Further capital was required to improve in-flight product and terminal standards to remain competitive. With lower costs and revitalised product, Ansett would have been well placed to recover its market share and profitability. Both the established major airlines in Australia had to react to the new entrants offering different service levels. The unrealistic pricing offered by these operators soon saw Impulse facing financial failure until it was effectively acquired by Qantas. Ansett was left without a response in the low cost market and discussions with owners of the new Australian low-cost entrant Virgin Blue were entered into while parallel options, including the expansion of Freedom, were developed. A successful outcome in that market would have added significant value to Ansett itself as it focused on its traditional full service airline role. The deteriorating profitability of Ansett in a rapidly changing industry and newly highly competitive domestic market in Australia, on top of poor financial performance of Air New Zealand’s international operations, meant however that the short term demand for capital to fund Ansett’s revival and establish a position in the low cost market was beyond the existing financial resources of Air New Zealand. Following extensive work by management and by industry advisers, an initial recapitalisation plan was discussed with the New Zealand Government in June 2001 and a formal proposal followed in mid-July. The proposal, supported by Singapore Airlines, included a plan to increase Singapore Airlines’ share ownership to 49 percent by way of a share placement. This placement was proposed to be followed by a pro-rata rights issue to all shareholders and a potential capital notes issue. Combined, these initiatives would have raised capital in excess of NZ$1 billion, allowing Air New Zealand to sustain the ongoing losses at Ansett while completing the integration programme, upgrading the fleet and acquiring Virgin Blue, all of which would have put the business on a sound competitive footing.
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