ANNUAL SHAREHOLDER REVIEW 2013 the airline has benefited from outstanding leadership, When Tony Carter assumes the Chairmanship after this Significant embracing a culture of innovation and calculated risk taking. year’s Annual Shareholder Meeting on 27 September, shareholders and customers alike can be confident that There are numerous examples of Air New Zealand’s leading the progress will continue. Tony is an experienced and innovations, including creative safety videos, the acclaimed Skycouch and a revolutionary new airport experience using successful business leader with a great understanding of self check kiosks and bag drops for customers. competitive markets and the importance of customer focus. The airline today bears little resemblance to that of a It has been a privilege for me to lead this iconic company. progressJohn Palmer – CHAIRMAN decade ago. Fuel prices are at levels that would have been We’ve made great progress on many fronts and our people unimaginable in 2001, and yet Air New Zealand has remained can be proud of what they have achieved. Despite all the consistently profitable through a range of adverse economic industry pressures, we are again generating acceptable conditions and global events. It is one of very few airlines shareholder returns. The challenge for the new Board and globally to maintain an investment grade credit rating. management is to further improve on that momentum – I’m confident that they can. Having the Crown as a majority shareholder has given the airline the stable ownership dynamic required to successfully I wish Tony, the Board and the Air New Zealand family all the execute this turnaround story. The New Zealand government very best in the next stage of the journey. has received in excess of $500 million in dividends during this time, and the fact that the airline is being held up as a model for the mixed ownership programme is testament to how far we’ve come from the dark days of 2001. John Palmer – CHAIRMAN THE 2013 FINANCIAL YEAR WAS ONE OF SIGNIFICANT PROGRESS FOR AIR NEW ZEALAND. Profit before taxation was $256 million, an increase of 172% on the previous year. Net profit after taxation was $182 million. This is our best result in five years, and it is pleasing to note that we have comfortably exceeded our initial guidance of more than doubling last year’s profit figure. Operating cash flow was a record $750 million, reflecting the strength and quality of the result. A number of factors have contributed to this, including the benefits of a modern, more fuel efficient fleet and an optimised global network with fewer underperforming routes. All parts of the network contributed positively, which hasn’t always been the case. Following a period of disappointing results, we are now making good progress towards our goal of delivering sustainably improved returns to shareholders. Having reviewed the current trading environment and the airline’s financial position, the Board has declared a fully imputed contents final dividend of 5.0 cents per share. 2 > Chairman’s report 4 > CEO’s report After nearly 12 years as your Chairman and this being my last 8 > Executive team annual report, it is timely to reflect on some of the events 12 > Financial commentary and changes that have driven the business over that time. 13 > Change in profitability 14 > Financial summary The collapse of Ansett Australia and the events of 9/11 Cover image © Airbus S.A.S 2013 provided a challenging environment in which to start Photo by Exm Company rebuilding Air New Zealand in late 2001. Since that time, 2 Air New Zealand Annual Shareholder Review 2013 LEFT TO RIGHT: Rob Jager, Paul Bingham, Dr Jim Fox, Tony Carter – DEPUTY CHAIRMAN, Jan Dawson and Roger France Air New Zealand Annual Shareholder Review 2013 3 Our Domestic network is in good shape. We have added Large investments have been made as Virgin Australia Firing on all further capacity during the past year and seen demand goes through this critical growth phase, and we are continue to increase. Our turboprop network throughout confident of its success going forward. New Zealand is one of the best in the world, and we are Clearly, we are not alone in that view, with both Singapore focused on keeping it that way. Our new ATR72-600 Airlines and Etihad Airways making significant investments, turboprop aircraft are steadily entering service, further forming a group of strong and supportive shareholders. boosting capacity on these routes. The biggest change has been the turnaround of our cylinders At the Paris airshow in June of this year we took delivery International long haul network, which is now profitable of our first new sharklet equipped Airbus A320. The Christopher Luxon – CHIEF EXECUTIVE OFFICER and positioned for growth. During the past year we have sharklet is essentially an extension of the aircraft’s main continued to see improvement in both demand and yields, wing, improving performance while reducing fuel burn. and we are acutely focused on making sure we have our The efficiency gains of this aircraft are tangible, as is the network optimised to market dynamics. improved customer experience of a wider, quieter cabin. The Pacific Rim offers us significant growth opportunities, IN THE COMING YEARS, THE AIRBUS and it is pleasing to report that we are seeing consistent traffic increases on our routes. While China in particular will A320 WILL FORM THE BACKBONE OF OUR see strong travel growth to New Zealand, we are actively DOMESTIC NETWORK, REPLACING THE exploring other opportunities in Asia and expect to be in OLDER GENERATION BOEING 737-300 AND a position to make growth related announcements during The fortunes of REDUCING OUR COST BASE AS THEY ARRIVE. the coming year. Air New Zealand CAPACITY UNIT and our nation (ASKs) YIELD COST up OPERATING up to LOAD improved REVENUE c FACTOR are inextricably 1.7% up 13.6 increased to 3.0% linked. 3.0% per RPK 83.6% We play a critical role in connecting families, friends, tourists and businesses to, from and within New Zealand. I am incredibly proud of the efforts of our 11,000 people in delivering a much improved result in the 2013 financial year. Our Tasman and Pacific Islands routes continue to go from strength to strength due in part to our Seats to Suit fare Air New Zealanders have a commitment to customer care, structure, which allows us to offer a range of competitive a resilience, spirit and attitude that are the envy of our fares and service levels within the same aircraft. competitors. They also have a wonderful maturity that was abundant as I transitioned into my first year as Chief Along with our alliance partner Virgin Australia we are Executive Officer and I would like to take this opportunity committed to maintaining a strong competitive position on to thank all Air New Zealanders for the way they have the Tasman and believe the alliance is delivering a superior embraced our Go Beyond strategy and the organisational offering for our customers with access to 35 domestic structure that supports it. Australian ports. I would also like to acknowledge the outstanding In July this year the Australian Competition and Consumer contribution of my Executive team, which is the best I have Commission issued its draft decision to reauthorise worked with in my career. Together we have a resolute our alliance. We will continue to develop and enhance focus on success and growth to build on the wonderful cooperation between our two airlines. work that has gone in over the past decade. We have increased our economic ownership interest One of my key priorities when I started on 1 January this in Virgin Australia to 22.99%. Our strategy behind this year was to rapidly build strong relationships with key investment is simple – it gives us an efficient, cost stakeholders who influence the fortunes of Air New Zealand. effective exposure to the growing domestic Australian These include our local tourism industry and trade market, as well as reinforcing our alliance relationship. partners, airports, alliance partners, government officials While Virgin Australia’s recent financial performance and the investment community. has been disappointing, it is making great progress Wherever I go there is incredible interest in Air New Zealand in rebranding as an airline which appeals to all market and our company is held in high regard. segments, including corporate customers. 4 Air New Zealand Annual Shareholder Review 2013 Air New Zealand Annual Shareholder Review 2013 5 We are continuing to modernise our wide body fleet. be worthwhile and we are looking forward to getting this The new Boeing 777-300ERs are performing very well, aircraft into service around the middle of 2014. offering significant efficiency improvements over the Our Cargo network continues to perform well, achieving retiring Boeing 747-400s. We have two more of these solid revenue growth in a challenging industry. During aircraft due to be delivered in the second half of the the year the team have been focused on building a 2014 calendar year. wider network with interline partners, providing greater During 2014 we will begin refurbishing our Boeing 777- connectivity for our exporters and importers. 200ER fleet. This is a significant investment for us, and Our Airpoints programme continued to grow during will see a total of eight aircraft upgraded over a 12 month the year, up 17% to more than 1.4 million members. period. Our inflight product will then be better aligned Our customer engagement also continues to improve, across both B777 variants that we operate, including with 20% more customers now earning Airpoints with entertainment systems, premium cabins and our award our retail partners, and further growth in activations of winning Skycouch.