Air New Zealand Announces 2018 Annual Results
Media release
23 August 2018
Second highest profit in Air New Zealand’s history enables
reinvestment in customer experience and staff bonuses
Highlights
• Achieved second highest profit of $540 million
• Investment of approximately $150 million expected over the next four years to enhance customer
experience in key areas, including new cabin experience, digital products and lounges
• Commitment to third short term leased widebody aircraft to further assist with schedule reliability
during ongoing maintenance requirements associated with the global Rolls-Royce Trent 1000 engine
issues
• Staff bonuses of up to $1,800 for all permanent employees who do not participate in a Short Term
Incentive programme
Air New Zealand today announced earnings before taxation for the 2018 financial year of $540 million, an
increase from the prior year result of $527 million, representing the second highest profit in the airline’s history.
Net profit after taxation grew 2.1 percent to $390 million.
Shareholders of Air New Zealand will receive a final dividend of 11.0 cents per share, taking the total ordinary
declared dividend for the year to 22.0 cents per share, an increase of 4.8 percent from the prior year. The
dividend will be paid on 19 September, to shareholders on record as at 7 September.
Chairman Tony Carter praised the strength of the result, which demonstrates the airline’s resiliency.
“This is an impressive financial result, driven by strong revenue growth across the airline’s key markets, as well
as continued focus on sustainable cost improvement, despite significantly higher fuel prices.
“The ability of the airline to achieve its second highest profit in such a challenging environment really speaks to
the focused strategy and unique competitive advantages that Chief Executive Officer Christopher Luxon and his
leadership team have spent years building,” says Mr Carter.
In recognition of the robustness of the 2018 result, the Board has awarded staff bonuses of up to $1,800 to be
paid next week to approximately 8,500 Air New Zealanders who do not have other incentive programmes as
part of their employment agreement.
Mr Luxon acknowledged the impact of external disruptions on the airline’s operational performance and thanked
both customers and staff for their loyalty and support.
“While we are very proud of the financial achievements of the 2018 financial year, I want to acknowledge the
patience and loyalty of our customers who have been impacted by operational disruptions while travelling with
us this year. These disruptions have resulted in a level of service for some that did not meet the high standards
we set for ourselves.
“We do not take our customers’ choice to fly with Air New Zealand for granted and remain focused on making
improvements across all touch points of their travel journey,” says Mr Luxon.
To deliver greater schedule reliability for customers going forward, Air New Zealand will be leasing three
widebody aircraft, two Boeing 777-200s and one Boeing 777-300, as well as making adjustments to its schedule
as the airline continues to work through the maintenance requirements associated with the global Rolls-Royce
Trent 1000 engine issues.
“The adjustments to our schedule will essentially free up two widebody aircraft enabling us to provide greater
schedule certainty for customers. This will include adjusting weekly frequency on our Buenos Aires and Taipei
services, as well as seeking to retime our flights to Tokyo’s Haneda Airport. We are confident that these
proactive steps will result in better reliability for our customers,” says Mr Luxon.
2019 promises to be an exciting year for the airline and its customers, as Air New Zealand will offer more cheap
fares than ever over the next year as domestic jet capacity grows by three to five percent and regional turboprop
capacity grows by five to seven percent.
“One of the benefits of a growing Air New Zealand is more opportunities than ever for Kiwis to snap up a
bargain. In 2019, we will offer more than 2.9 million seats for travel in New Zealand for under $100,” Mr Luxon
says.
This year will also see the launch of new direct services to Chicago and Taipei commencing in November, new
services to Brisbane from both Wellington and Queenstown beginning in December, as well as a new third daily
service added to the Auckland-Singapore route in partnership with Singapore Airlines.
The airline is expecting to receive delivery of 10 Airbus A320/321 NEO aircraft, which will provide continued
growth and cost benefits to the Tasman and Pacific Islands network. Air New Zealand will be the first airline to
fly the Airbus NEO in Australasia. Two Boeing 787-9 aircraft with increased premium cabin space and next
generation Rolls-Royce TEN engines will also join the fleet.
Anticipating continued future domestic network growth, Air New Zealand has announced capital expenditure for
seven Airbus A321 NEO aircraft, with phased delivery expected from 2020 to 2024. The additional aircraft will
be deployed on high demand routes to support further domestic growth. Equipped with new generation engines
and approximately 25 percent more seats, the A321 NEOs are expected to deliver fuel savings and efficiencies
of up to 15 percent compared to the airline’s existing A320 domestic aircraft, helping to reduce carbon emissions.
Air New Zealand’s Pacific Rim growth strategy has allowed for consistently profitable network expansion over
the past five years, with 17 million passengers a year travelling on the airline compared with 13 million back in
2013. The airline is focusing on continued investment in regional lounges, customer contact centres and inflight
products and services to enhance the customer experience.
Mr Luxon said the airline sees positive demand signals in the short term, with strong forward bookings heading
into the peak summer season and passenger growth expected to continue its upward trajectory.
“Looking out over the next two years, the airline is expecting to grow by one million customers a year, reaching
19 million customers by the end of 2020,” says Mr Luxon.
Outlook
Based upon current market conditions and assuming an average jet fuel price of US$85 per barrel, 2019
underlying earnings before taxation is expected to be in the range of $425 million to $525 million.
This excludes an estimated $30 million to $40 million impact from schedule changes prompted by the global
Rolls-Royce engine issues.
Financial Highlights
• Record operating revenue of $5.5 billion, up 7.4%
• Earnings before taxation of $540 million, up 2.5%
• Net profit after taxation of $390 million, up 2.1%
• Operating cash flow of $1 billion, up 14%
• Fully imputed final dividend of 11.0 cents per share, bringing the 2018 full year fully imputed ordinary
dividends to 22.0 cents per share, an increase of 4.8% from the prior year
Ends
Issued by Air New Zealand Public Affairs ph +64 21 747 320
---
AIR NEW ZEALAND 2018ANNUAL RESULT
Forward-looking statements
2
This presentation contains forward-looking statements. Forward-looking statements often include words
such as “anticipate”, “expect”, “intend”, “plan”, “believe”, “continue” or similar words in connection with
discussions of future operating or financial performance.
The forward-looking statements are based on management's and directors’ current expectations and
assumptions regarding Air New Zealand’s businesses and performance, the economy and other future
conditions, circumstances and results. As with any projection or forecast, forward-looking statements are
inherently susceptible to uncertainty and changes in circumstances. Air New Zealand’s actual results
may vary materially from those expressed or implied in its forward-looking statements.
The Company, its directors, employees and/or shareholders shall have no liability whatsoever to any
person for any loss arising from this presentation or any information supplied in connection with it.The
Company is under no obligation to update this presentation or the information contained in it after it has
been released.
Nothing in this presentation constitutes financial, legal, tax or other advice.
AIR NEW ZEALAND 2018ANNUAL RESULT
Business update
Financial results
Outlook
Q&A
Agenda
3
AIR NEW ZEALAND 2018ANNUAL RESULT
Business update
Christopher Luxon
Chief Executive Officer
AIR NEW ZEALAND 2018ANNUAL RESULT
2
•Another strong financial performance despite
challenges, enabled by dedicated customer-focused
culture
•Network expansion driven by profitable growth, focused
on reinforcing and developing our market positions
across the Pacific Rim
•Continuing to invest in the customer proposition
•Working through ongoing issues with Rolls-Royce Trent
1000 engines
•Relentless focus on improving unit cost performance
remains
•Strong investment-grade balance sheet, delivering a
consistent and sustainable ordinary dividend to
shareholders
A resilient business model providing
strong results in all market conditions
5
AIR NEW ZEALAND 2018ANNUAL RESULT
6
Our second-highest result in the airline’s 78-year history
$540m($150m)$390m
Earnings before
taxation
TaxNet profit after
taxation
•Operating revenue $5.5billion, up7.4%
•Earnings before taxation $540 million, up 2.5%
•Net profit after taxation $390 million, up 2.1%
•Operating cash flow $1,031 million, up 14%
358
474
663
527
540
20142015201620172018
Earnings before taxation
($millions)
AIR NEW ZEALAND 2018ANNUAL RESULT
527
(135)
540
-250
-150
-50
50
150
250
350
450
550
650
2017
EARNINGS
BEFORE
TAXATION
IMPACT OF
FUEL
PRICE
2017
COMPARABLE
EARNINGS
2018
EARNINGS
BEFORE
TAXATION
+38%
($ millions)
392
1
Achieved our earnings guidance despite fuel price
headwind of $135 million
1
$135 million impact related to fuel price increase; details on fuel cost movement
provided in supplementary slides.
7
•Outlook statement from August 2017 aimed to
“improve upon 2017 earnings” of $527 million,
based on average jet fuel price of US$60 per
barrel
•2018 average jet fuel (MOPS) price increased
25% to US$75 per barrel
•Hedging gains partially offset increase in fuel
prices, resulting in a net fuel price headwind of
$135 million, or 16%
AIR NEW ZEALAND 2018ANNUAL RESULT
Jeff McDowall
Chief Financial Officer
Financial results
AIR NEW ZEALAND 2018ANNUAL RESULT
9
Revenue
•Passenger revenue excluding FX up 6.7%; reported up 6.9%
–Strong demand up 5.3% oncapacity growth of 5.0%
–RASK excluding FX up 1.6%; reported up 1.8%
•Cargo revenue excluding FX up 9.6%;reported up 10%
Cost
•CASK
1
improved 0.5%
−Reported CASK including impact of fuel price up 4.0%
•Efficiencies contributed $104 million to profitability
•Reported fuel cost up $160 million, 19%
2
driven by:
–Average fuel price increase (net of hedging benefits) of $135 million (16%)
–Volume growth of $30 million, partially offset by $5 million in FX benefits
Robust revenue performance and efficiencies more
than offset increased operating costs
1
Excluding fuel price movement, FX, third party maintenance and other significant items in the comparative year, as disclosed in the 2017 Financial Results.
2
Fuel cost movement details provided in supplementary slides.
AIR NEW ZEALAND 2018ANNUAL RESULT
Changes in profitability illustrate strong contribution
of revenue growth
10
1
Excludes FX of $5 million, fuel cost movement details provided in supplementary slides.
•Third-party maintenance
contracts represent a
significant portion of Other
Revenue growth
•Labour growth continues to
lag ASK growth, up only 2.5%
from prior year
•Maintenance, aircraft
operations and passenger
services includes costs
related to third-party
maintenance contracts
(partially offsetting Other
Revenue)
•Ownership cost increase
driven by higher depreciation
related to aircraft deliveries
and increased investment in
digital and lounges
Additional commentary
AIR NEW ZEALAND 2018ANNUAL RESULT
Record passenger revenues of $4.7B achieved from growth
across the business –Domestic especially strong
11
Sector
2018 RASK performance versus
February 2018 expectations
Domestic
Exceeded expectations
Tasman
Exceeded expectations
Pacific Islands
2
Met expectations
✓
Asia
Met expectations
✓
Americas/Europe
Met expectations
✓
1
Year-on-year movement in RASK.
2
Pacific Islands includes Bali and Honolulu.
(9.3%)
(2.9%)
2.5%
0.6%
H1 2017
(Jul-Dec)
H2 2017
(Jan-Jun)
H1 2018
(Jul-Dec)
H2 2018
(Jan-Jun)
Group RASK
1
(excl. FX)
ASK
growth:
6.6%3.4%5.4%
7.1%
AIR NEW ZEALAND 2018ANNUAL RESULT
12
•Strong volume growth related to:
–Improved loads of high density cargo from Asia and
Japan to United States
–Improved loads on main Tasman ports
–Increased capacity between Pacific Islands and Haneda
Airport (Tokyo)
•Yield improvements driven by:
–Higher value product mix
Cargo business again delivers a strong revenue performance
Revenue
up 9.6%*
Yield
up 3.3%
Volume
up 6.3%
* Reported Cargo revenue increased 10%, inclusive of foreign exchange impact.
AIR NEW ZEALAND 2018ANNUAL RESULT
9.47
9.12
(0.27)
0.22
0.05
0.32
0.03
7
8
9
10
2017 CASKECONOMIES
OF SCALE AND
EFFICIENCIES
PRICETHIRD PARTY
MAINTENANCE
FUEL PRICEFOREIGN
EXCHANGE
2018 CASK
CASK (cents)
•CASK*improved 0.5%
–Reported CASK increased 4.0%, driven by average fuel price increases of 16% and higher costs related to third
party maintenance
•$104 million of efficiencies from cost saving initiatives and economies of scale
•While not driven by capacity (ASKs), an increase in third party maintenance contracts resulted in
additional costs, which were more than offset by revenue contribution
13
*Excluding fuel price movement, FX, third party maintenance and other significant items in the comparative year, as disclosed in the 2017 Financial Results
Relentless focus on unit costs drove underlying improvement
CASK
Improved 0.5%
AIR NEW ZEALAND 2018ANNUAL RESULT
14
Significant growth from Christchurch Engine Centre
joint venture, driven by increased volumes
•Air New Zealand has a 49% ownership stake in a
maintenance, repair and overhaul (MRO) facility based in
Christchurch and operated in conjunction with Pratt &
Whitney
•The investment is equity accounted with the share of
earnings being recognised in the income statement
•Services V2500 engines (powering A319/320/321 CEO
aircraft) for global airlines
•Facility currently has the capability to service 120 engines
each year
−Significant strength in 2018 driven by increased volumes
−Nearing capacity for 2019, growth expected albeit at a slower
rate
26
33
20172018
+27%
Share of earnings of associates
($ millions)
AIR NEW ZEALAND 2018ANNUAL RESULT
15
•Operating cash flow $1,031 million, up 14%,
reflecting:
−Increase in cash operating earnings
−Strong working capital cash flow as the
business grows
−Lower cash taxes paid due to transitional timing
impact of legislative tax changes for engine
maintenance
•Cash on hand of $1.3 billion, down 1.9% from
June 2017
Operating cash flow continues to demonstrate strength
730
1,100
1,074
904
1,031
20142015201620172018
Operating cash flow
($ millions)
AIR NEW ZEALAND 2018ANNUAL RESULT
16
•Gearing was 52.4%, increasing 0.6 percentage
points from June 2017, driven by foreign exchange
and continued investment in fleet
•Stable outlook Baa2rating from Moody’s
•Fully imputed final dividend of 11cents per share,
consistent with the prior year
−Bringing the full year fully imputed ordinary
dividend to 22cents per share, a 4.8% increase
from prior year
Balance sheet remains strong
42.9%
52.4%
48.6%
51.8%
52.4%
20142015201620172018
Gearing (%)
(including capitalisedaircraft operating leases)
10
16
20
21
22
20142015201620172018
Ordinary dividends declared
(cents per share)
InterimFinal
AIR NEW ZEALAND 2018ANNUAL RESULT
17
15
13
3
5
7
17
20202020
2018
Number of Domestic Jet
Aircraft
2019
Temporary transfer of
three Trans-Tasman leased
A320 Aircraft
2020
Three A321 NEOs replace
three Trans-Tasman A320
leased aircraft
2022
Two A321 NEO Aircraft
replace two older leased
A320 domestic aircraft
2024
Two A321 NEO Aircraft
replace two older leased
A320 domestic aircraft
Domestic jet fleet growth forecast
A320 CEOA321 NEO
17
Measured Domestic growth with three A321 NEO
aircraft commencing 2020
~25%
Seat growth from
2018 to 2024
AIR NEW ZEALAND 2018ANNUAL RESULT
Aircraftdelivery schedule (as at 30 June 2018)
Number in
existing fleet
Number
on order
DeliveryDates (financial year)
2019202020212022
Owned fleet on order
Boeing 787-9
111**1---
Airbus A320/A321 NEOs
-13**64-3
ATR72-600
1910**46--
Operating leased aircraft
Boeing 787-9
-2**11--
Airbus A320/A321 NEOs
-5**41--
18
•Forecast investment of $1.5 billion in aircraft and associated assets
through 2022
•Assumes NZD/USD =0.66
•Includes recent commitment for A321 NEO growth aircraft for domestic
jet network (3 units in 2020 and 2 units in 2022)
•Delivery deferral of one A320 NEO for International Short-haul from 2020
will now arrive in 2022
•No assumptions on B777-200 replacement capital expenditure are
included in current forecast
–Still targeting replacement of B777-200 fleet from 2023
* Includes progress payments on aircraft.
** Does not reflect two additional A321 NEO aircraft on order for expected delivery in 2024.
Updating fleet capital expenditure forecast for Domestic units
AIR NEW ZEALAND 2018ANNUAL RESULT
19
Fuel hedging
•Assuming average jet fuel price of US$85 per
barrel for 2019, fuel cost would be ~$1.35
billion
•2019 hedges cover 66%* of consumption
–1H 2019 is 78%* of consumption
–2H 2019 is 53%*of consumption
Foreign exchange hedging
•US dollar is ~80% hedged for 2019 at 0.7105
*Based on fuel hedging disclosure as at 13 August 2018.
** Assumes NZD/USD rate of 0.66.
Mitigating fuel price and FX risk with hedging
1,250
1,300
1,350
1,400
1,450
1,500
$77.5$80.0$82.5$85.0$87.5$90.0$92.5
NZD Cost of Fuel (millions)
Singapore Jet (USD/barrel)
2019 Fuel Cost** sensitivity
Hedged
Unhedged
*
2017ANNUAL RESULT
Christopher Luxon
Chief Executive Officer
Outlook
AIR NEW ZEALAND 2018ANNUAL RESULT
DOMESTIC
21
Market demand continues to be strong
ASIA
PACIFIC ISLANDS
NORTH AMERICA
EUROPE
SOUTH AMERICA
TASMAN
AIR NEW ZEALAND 2018ANNUAL RESULT
22
Actively responding to the global Rolls-Royce engine issues
•To date, impact has been managed by working closely with Rolls-Royce and
supporting capacity with temporarily leased aircraft
•Due to the extension of the Rolls-Royce engine maintenance programme and to
reduce the risk of further customer disruption, we have taken proactive steps to
adjust our schedule
•Notechnicalissues are driving this delay –solely timing related
•Schedule changes will free up the equivalent of two widebody aircraft
•Estimated impact to 2019 earnings before taxation of $30 million to $40 million
AIR NEW ZEALAND 2018ANNUAL RESULT
23
SectorCapacity growthCommentary
Domestic
3% to 5%
•Jet route growth driven by increased flying to Queenstown and
Dunedin
•Strong growth across regional ports
Tasman & Pacific Islands
1
7% to 9%
•Tasman growth with increased frequency and a deeper schedule
to key markets commencing end of October
•Launch of new services to Brisbane from Wellington and
Queenstown
•Annualisationof prior year Pacific Islands growth in 1H 2019
•Introduction of larger A321 NEO aircraft accounts for ~2% of
capacity growth
International long-haul
3% to 5%
•Growth driven by launch of Chicago and Taipei markets in
November, and second daily Singapore flight in April
Group4% to 6%
Current capacity outlook reflects widebody schedule adjustments
1
Pacific Islands includes Bali and Honolulu.
AIR NEW ZEALAND 2018ANNUAL RESULT
24
2019 outlook
Based upon current market conditions and assuming an average jet
fuel price of US$85 per barrel, 2019 underlying earnings before
taxation is expected to be in the range of $425 million to $525 million
This excludes an estimated $30 million to $40 million impact from
schedule changes prompted by the global Rolls-Royce engine issues
AIR NEW ZEALAND 2018ANNUAL RESULT
AIR NEW ZEALAND 2018ANNUAL RESULT
Appendix
AIR NEW ZEALAND 2018ANNUAL RESULT
27
Maintaining a high level of return for our shareholders
1
Excluding fuel price movement, FX, third party maintenance and other significant items.
1
AIR NEW ZEALAND 2018ANNUAL RESULT
827
30
198
63
5
987
0
200
400
600
800
1,000
1,200
2017
FUEL COST
VOLUMEUNDERLYING
PRICE
NET HEDGING
IMPACT
FX
MOVEMENTS
2018
FUEL COST
$ millions
Fuel cost movement in the period
25% increase in
jet fuel price
US$60 to US$75
per barrel
Jun 2018 hedge
gain of $76M
vs
Jun 2017 hedge
gain of $13M
$135M effective
increase in net
fuel price
16%
28
AIR NEW ZEALAND 2018ANNUAL RESULT
* Dividends are fully imputed.
Jun 2018
$M
Jun 2017
$M
Movement
$M
Movement
%
Operating revenue 5,4855,1093767.4%
Earnings before taxation540527132.5%
Net profit after taxation 39038282.1%
Operating cash flow 1,031904127 14%
Cash position1,3431,369(26)(1.9%)
Gearing52.4%51.8%(0.6pts)
Ordinary dividends declared*22.0 cps21.0 cps4.8%
Financial overview
29
AIR NEW ZEALAND 2018ANNUAL RESULT
Jun 2018Jun 2017Movement*
Passengers carried (‘000s)16,96615,9526.4%
Available seat kilometres (ASKs, millions)44,27442,1695.0%
Revenue passenger kilometres (RPKs, millions)36,66234,8145.3%
Load factor82.8%82.6%0.2pts
Passengerrevenue per ASKs as reported
(RASK, cents)
10.610.41.8%
Passengerrevenue per ASKs, excluding FX
(RASK, cents)
10.510.41.6%
Group performance metrics
30
* Calculation based on numbers before rounding.
AIR NEW ZEALAND 2018ANNUAL RESULT
Domestic
Jun 2018Jun 2017Movement*
Passengers carried (‘000s)11,08910,3796.8%
Available seat kilometres (ASKs, millions)6,9056,5974.7%
Revenue passenger kilometres (RPKs, millions)5,7195,3117.7%
Load factor82.8%80.5%2.3pts
Passengerrevenue per ASKs as reported
(RASK, cents)
22.021.23.6%
Passengerrevenue per ASKs, excluding FX
(RASK, cents)
21.921.23.5%
* Calculation based on numbers before rounding.
31
AIR NEW ZEALAND 2018ANNUAL RESULT
32
* Calculation based on numbers before rounding.
1
Pacific Islands including Bali and Hawaii.
Tasman & Pacific Islands
1
Jun 2018Jun 2017Movement*
Passengers carried (‘000s)3,7983,5616.7%
Available seat kilometres (ASKs, millions)12,96312,0397.7%
Revenue passenger kilometres (RPKs, millions)10,5849,7848.2%
Load factor81.6%81.3%0.3pts
Passengerrevenue per ASKs as reported
(RASK, cents)
9.69.24.5%
Passengerrevenue per ASKs, excluding FX
(RASK, cents)
9.69.23.8%
AIR NEW ZEALAND 2018ANNUAL RESULT
33
International
Jun 2018Jun 2017Movement*
Passengers carried (‘000s)2,0792,0123.3%
Available seat kilometres (ASKs, millions)24,40623,5333.7%
Revenue passenger kilometres (RPKs, millions)20,35919,7193.3%
Load factor83.4%83.8%(0.4)pts
Passengerrevenue per ASKs as reported
(RASK, cents)
7.97.9(1.2)%
Passengerrevenue per ASKs, excluding FX
(RASK, cents)
7.87.9(1.3)%
* Calculation based on numbers before rounding.
AIR NEW ZEALAND 2018ANNUAL RESULT
9.1
7.8
7.5
7.0
7.5
6.9
6.6
7.6
8.1
201420152016201720182019202020212022
Aircraft fleet age in years
(seat weighted)
HistoricalForecast
*
34
Projected aircraft in service and fleet age
2019
2020
2021
2022
Boeing 777-300ER
7
7
7
7
Boeing 777-200ER
8
8
8
8
Boeing 787-9
13
14
14
14
Airbus A320
25
19
19
16
Airbus A320/A321 NEO
10
15
15
18
ATR72-600
23
29
29
29
ATR72-500
5
-
-
-
Bombardier Q300
23
23
23
23
Total Fleet
114
115
115
115
*
*
*
* Excludes short-term leases which provide cover for the Boeing 787-9 engine issues
AIR NEW ZEALAND 2018ANNUAL RESULT
358
474
663
527
540
20142015201620172018
Earnings before taxation
($ millions)
Key financial metrics
730
1,100
1,074
904
1,031
20142015201620172018
Operating cash flow
($ millions)
1,234
1,321
1,594
1,369
1,343
20142015201620172018
Cash on hand
($ millions)
42.9
52.4
48.6
51.8
52.4
20142015201620172018
Gearing (%)
(including capitalisedaircraft
operating leases)
10
16
20
21
22
20142015201620172018
Ordinary dividends declared
(cents per share)
InterimFinal
4,652
4,925
5,231
5,109
5,485
20142015201620172018
Operating revenue
($ millions)
35
AIR NEW ZEALAND 2018ANNUAL RESULT
June 2018
$M
June 2017
$M
Referencein 2018 Annual
Financial Results
Earnings beforetaxation540527
Statement of Financial Performance (page 2)
Add back: Net financecosts3344
Statement of Financial Performance (page 2)
Add back: Implied interest in operating leases
1
5759
Note 19 –Operating Leases (page 27)(refer to
aircraft value within Rental and lease expenses
recognised in earnings)
EBIT adjusted for operating lease interest630630
Net debt(including off balance sheet items)2,3992,133
Historical Summary of Debt (page 46)
Equity 2,1761,986
Statement of Financial Position (page 5)
Total capital employed4,5754,119
Average capital employed
2
4,3474,109
Pre-Tax Return on InvestedCapital14.5%15.3%
Pre-tax ROIC calculation
1
Represents the implied interest included in the aircraft operating lease expense within the Statement of Financial Performance; one-third of aircraft operating
lease expense is assumed to be interest expense.
2
Calculation of 2017 Average Capital Employed includes 2016 Total capital employed of $4,098 million.
36
AIR NEW ZEALAND 2018ANNUAL RESULT
Available Seat Kilometres (ASKs)Number of seats operated multiplied by the distance flown (capacity)
Cost/ASK (CASK)Operatingexpenses divided by the total ASK for the period
GearingNet Debt / (NetDebt + Equity); Net Debt includes capitalised aircraft operating leases
Net Debt
Interest-bearing liabilities and bank overdrafts, less bank and short-term deposits, net open derivatives held in
relation to interest-bearing liabilities and interest-bearing assets, plus net aircraft operating lease commitments
for the next twelve months multiplied by a factor of seven (excluding short-term leases in 2018, which provide
cover for Boeing 787-9 engine issues)
Passenger Load FactorRPKs as a percentage of ASKs
PassengerRevenue/ASK (RASK)Passenger revenuefor the period divided by the total ASK for the period
Pre-TaxReturn on Invested Capital
(ROIC)
Earnings before Interest and Taxation (EBIT), and aircraft lease expense divided by three,all divided by the
average Capital Employed (being Net Debt plus Equity) over the period
Revenue Passenger Kilometres
(RPKs)
Number of revenue passengers carried multiplied by the distance flown (demand)
The following non-GAAP measures are not audited: CASK,Gearing, Net Debt, RASK and ROIC.Amounts used within the calculations are derived from
the audited Group financial statements and FiveYear Statistical Review contained in the 2018 Annual Financial Results. The non-GAAP measures are
used by management and the Board of Directors to assess the underlying financial performance of the Group in order to make decisions around the
allocation of resources.
Glossary of key terms
37
2017ANNUAL RESULT
About
Air New Zealand
AIR NEW ZEALAND 2018ANNUAL RESULT
Air New Zealand at a glance
11,900
Air New Zealand
employees based globally
17m
Passengers carried
annually
20
Domestic
destinations
Pacific Rim
Focused network driven by
alliance partnerships
30
International
destinations
78
Years in operation
#1
Corporate reputation
in New Zealand and
Australia
Record
level
Customer satisfaction
Baa2
Investment grade credit
rating from Moody’s
13
Consecutive years of
dividend payments
39
AIR NEW ZEALAND 2018ANNUAL RESULT
New Zealand
Government
52%
New Zealand
institutional
investors
7%
International
institutional
investors
38%
Retail investors
3%
40
Trading and ownership structure
•Dual-listed on the NZX and ASX stock exchanges
•1.3 million average daily trading volume
•Member of the NZX20 index –includes the 20
largest and most liquid companies of the NZX
•New Zealand Government holds 52%
–No direct Board representation
•Seven independent Directors
Share register
(as at 30 June 2018)
AIR
NXZ stock ticker
AIZ
ASX stock ticker
ANZFY
US OTC stock ticker
AIR NEW ZEALAND 2018ANNUAL RESULT
5.0
5.0
8.5
6.5
7.0
5.5
5.5
8.0
16.0
21.0
22.0
18.0
20.0
45.0
20052006200720082009201020112012201320142015201620172018
Ordinary dividendSpecial dividend
of consecutive profitability
Air New Zealand
has achieved
profitability and
dividends through
the cycle
15
years
of consecutive dividends
13
years
41
166166
180
96
221
218
21
82
81
71
181
263
327
463
382
390
2003200420052006200720082009201020112012201320142015201620172018
Net profit after tax
($ millions)
Dividends declared
(cents per share)
AIR NEW ZEALAND 2018ANNUAL RESULT
Inbound and outbound tourism demand remains strong
2.8M
3.0M
3.3M
3.6M
3.8M
20142015201620172018
Inbound visitors to New Zealand*
(in millions and % growth from prior year)
2.2M
2.3M
2.5M
2.7M
2.9M
20142015201620172018
Outbound tourism*
(in millions and % growth from prior year)
*
Statistics New Zealand, year ending 30 June.
+6.8%+5.5%+4.4%+4.5%+11.5%
+3.8%+10.6%+7.4%+5.7%+10.2%
Australia
39%
China
12%
USA
9%
UK
6%
Other markets
34%
International visitor arrivals up 3.8% for the
year ending 30 June 2018
42
Australia
42%
Pacific Islands
15%
USA
7%
China
4%
UK
4%
Other markets
28%
Outbound departures up 6.8% for the year
ended 30 June 2018
AIR NEW ZEALAND 2018ANNUAL RESULT
Resilient core domestic business
1
2
Pacific Rim focused international network
3
Focused on sustainable cost improvements
4
Investment-grade financial strength
Positioned to leverage our
unique competitive advantages
to drive future returns for our
shareholders
43
AIR NEW ZEALAND 2018ANNUAL RESULT
•Most iconic brand in New Zealand
•Unmatched network breadth and depth
−~80% marketshare
−Over 400 flights daily to 20 domestic destinations
•Differentiated in-flight and ground product that is
valued by customers
•Airpoints
TM
programme drives strong loyalty
base with over 2.8 million members* and still
growing
•Investing in the sustainable development of
New Zealand tourism
* Airpoints
TM
membership as at 30 June 2018.
Strong market share to leverage growth from inbound and domestic tourism
1
Resilient core domestic business
44
AIR NEW ZEALAND 2018ANNUAL RESULT
Why revenue share alliances?
✓Partners have “skin in the game” to
sell the route
✓Strength of sales & distribution in local
markets
✓Access to frequent flyer databases
Routes operated solely by alliance partners
Routes operated by Air New Zealand
Pacific Rim focused international
network supported by alliances
2
New routes commencing in the 2019 financial year
45
AIR NEW ZEALAND 2018ANNUAL RESULT
A simpler and modern fleet helps drive improved efficiencies
Focused on sustainable cost improvements
Drivers of improved unit costs
•Network growth
•Fleet investment resulting in fuel
efficiency and up-gauging, as
well as simplification of
operations
•Targeting a stable level of fixed
operating costs to leverage
economies of scale
•High performance engagement
driving a stable level of wage
inflation
•Daily culture of cost focus and
continuous improvement
2012
2018
Fleet complexity
Fleet age
(on a seat-weighted basis)
Ownership profile
(on a seat-weighted basis)
Widebody
B747
B767
B777 family
Narrowbody
B737
A320
Turboprops
ATR72s
Q300
Beech 1900D
Manyfleet types
Fewfleet types
Widebody
B787
B777 family
Narrowbody
A320 family
Turboprops
ATR72s
Q300
8.6years
7.5years
38%leased62%owned
30%leased70%owned
46
3
AIR NEW ZEALAND 2018ANNUAL RESULT
Appropriate level of gearing
Target range of 45% to 55%
Providing stability and financial flexibility over the long-term
Investment grade financial strength
Moody’s creditrating
Investment grade
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
Source: Bloomberg as at 14 August 2018.
47
42.9%
52.4%
48.6%
51.8%
52.4%
20142015201620172018
Financial year
Gearing (%)
(including capitalised aircraft operating leases)
4
AIR NEW ZEALAND 2018ANNUAL RESULT
48
~15%
~10%
Return that exceeds our
pre-tax cost of capital
Excellent return
Sub-optimal return
Putting ROIC
performance into
perspective
14%
16%
19%
15%
14%
20142015201620172018
Pre-tax ROIC
AIR NEW ZEALAND 2018ANNUAL RESULT
Resources
Contact information
Email: investor@airnz.co.nz
Share registrar: enquiries@linkmarketservices.com
Investor website:www.airnewzealand.co.nz/investor-centre
Monthly traffic updates: www.airnewzealand.co.nz/monthly-operating-data
Quarterly fuel hedging disclosure: www.airnewzealand.co.nz/fuel-hedging-announcements
Corporate governance: www.airnewzealand.co.nz/corporate-governance
Sustainability: https://www.airnewzealand.co.nz/sustainability
Find more information about Air New Zealand
49
---
ANNUAL
SHAREHOLDER
REVIEW
2018
2
WHERE WE FLY
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
Kia ora
Key
Routes operated by Air New Zealand
New routes commencing in the 2019 financial year
Routes operated solely by alliance partners
3
WHERE WE FLY
|
CONTENTS
Contents
2018 key highlights 4
Letter from the Chairman 6
Q&A with our CEO 8
Air New Zealanders making a difference 12
Financial commentary 14
Change in profitability 16
Financial summary 17
Financial framework 19
AIR NEW ZEALAND GROUP
1
Created by the global index provider FTSE Russell, the FTSE4Good Index Series is designed to measure performance
of companies demonstrating strong environmental, social and governance (ESG) practices.
4
Awarded Best
Loyalty Programme
in New Zealand
Top Airline
in the World
awarded by US luxury
and lifestyle travel magazine
Condé Nast Traveler
26% improvement
in 2018 total recordable
injuries compared to 2017
5.0 % growth
in network capacity (ASKs)
6 new aircraft
added to fleet during the year;
consisting of 2 B787-9s
and 4 ATR72-600s
2018 KEY HIGHLIGHTS
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
No.1 employer
top rated in New Zealand
39%
of women in
senior leadership positions;
up from 16% in 2012
FTSE4Good
constituent
1
for the second year in a row
No.1 corporate
reputation
in New Zealand and Australia
Over 2.8m
Airpoints
™
members;
up 13% from 2017
934,000
flights paid for by
Airpoints
™
Dollars during the year
2018 Randstad Employer Brand research
Colmar Brunton Corporate Reputation Index 2018
NZ Marketing Association
5
2018 KEY HIGHLIGHTS
AIR NEW ZEALAND GROUP
22 cents
Full year
declared dividend
per share
$1b
Operating cash flow
$540m
Earnings
before taxation
$5.5b
Operating revenue
6
Air New Zealand has again proved the strength and agility
of its business model, generating the second-highest result
in the airline’s history and investing for future success.
11 c e n t s
per share final ordinary dividend
52.4%
gearing
$ 1. 3 b
cash position
22 cents
per share total ordinary dividend
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
LETTER FROM THE CHAIRMAN
A financial
performance
to be
proud of
$5.5 billion
7. 4 %
Operating revenue
$540 million
2.5%
Earnings before taxation
$390 million
2 .1%
Net profit after taxation
$1 billion
Operating cash flow
14 . 5 %
Pre-tax Return on Invested Capital
7
LETTER FROM THE CHAIRMAN
Delivering on our strategy
Our Pacific Rim growth strategy has driven
Air New Zealand’s sustainable results over
the past six years, with a focus on profitable
growth across key markets where our
unique competitive advantages can deliver
long-term returns to our shareholders. This
year is no different, as Air New Zealand
increased capacity by 5.0 percent, reflecting
growth across all regions of the network.
Disciplined investments continued to
support our growth and drive efficiencies,
with continued improvement in lounges,
airport upgrades and additional 275-seat
Boeing 787-9 Dreamliners and 68-seat
ATR aircraft entering the fleet in the year.
Strong financial results
Air New Zealand delivered yet another
impressive financial performance in 2018,
reporting earnings before taxation of
$540 million, the second-highest result in
the Company’s 78-year history. This strong
result compares to $527 million in the
prior year and is an excellent outcome that
shareholders can be proud of, and is even
more significant considering the challenges
of increasing fuel prices during the year.
Operating revenue grew 7.4 percent, and
was the key driver of earnings growth this
year, as the Company’s diversified network
saw continued strong demand and positive
pricing dynamics across most of the major
markets. Significant growth across the
cargo and contract services businesses
also contributed to the strong revenue
performance in the year.
Air New Zealand’s continued focus on
sustainable cost improvement helped
to partially offset rising operating costs,
which were up 9.2 percent, driven
primarily by a 16 percent increase in the
average fuel price. Efficiencies from cost
saving initiatives and economies of scale
contributed $104 million to the result and
enabled a 0.5 percent
1
improvement in
unit costs.
Gearing and dividend
The Company’s balance sheet remains
strong with gearing of 52.4 percent.
This is slightly higher than last year’s
gearing of 51.8 percent and reflects foreign
exchange movements and additional
investment in new aircraft. Air New Zealand
continues to maintain a stable investment
grade credit rating of Baa2 from Moody’s.
As a Board we are very focused on
delivering consistent and sustainable
returns for our shareholders. Having
reviewed the current trading environment
and with the Company’s strong financial
position in mind, the Board is pleased to
declare a fully imputed final dividend of
11.0 cents per share, bringing the total
ordinary dividend for the 2018 financial
year to 22.0 cents per share, an increase
of 4.8 percent.
Staff bonus
One of the key things that sets us apart
from others is our people and their unique
commitment and passion for Air New
Zealand. In recognition of the robustness
of the financial result, the Board has
awarded staff bonuses of up to $1,800
to be paid to approximately 8,500
Air New Zealanders who do not have
other incentive programmes as part of
their employment agreement.
Executive Team changes
In September we will say goodbye to our
Chief Operations Officer Bruce Parton,
after 22 years with the airline. Bruce has
made an immense contribution to the
Company throughout his career, holding
various senior leadership roles before his
appointment to the Executive in 2013.
His role has been accountable for the
major operational areas of the Company
with responsibility for leading more than
7,000 employees.
In July we welcomed Carrie Hurihanganui
as our new Chief Ground Operations Officer,
yet another example of the strong internal
talent development at Air New Zealand.
Board succession
Succession planning is a key focus area of
any Board, and I am pleased to announce
that following the Annual Shareholders’
Meeting in 2019, Dame Therese Walsh
will succeed me as Chairman of Air New
Zealand. Therese will be an excellent
Chairman, and has already served on the
Board for two years. She has the unanimous
support of her fellow Directors and is an
outstanding leader with extremely strong
corporate governance and commercial skills.
Since joining the Board of Air New Zealand
in 2010, it has been my privilege to lead
such an iconic Kiwi company. The year ahead
is full of opportunities, and I look forward to
spending this time supporting Christopher
and the Executive team in all they are doing
to supercharge New Zealand’s success.
Outlook
Based upon current market conditions
and assuming an average jet fuel price of
US$85 per barrel, 2019 underlying earnings
before taxation is expected to be in the
range of $425 million to $525 million.
This excludes an estimated $30 million
to $40 million impact from schedule
changes prompted by the global Rolls-Royce
engine issues.
Tony C ar ter
Chairman
23 August 2018
AIR NEW ZEALAND GROUP
1. Excluding FX, fuel price, third party maintenance and other significant items in the comparative year as disclosed in the 2017 Financial Results.
Q. What achievements
are you most proud of
in 2018?
A. I think there is a great deal to be proud of this year.
We have achieved the second-highest financial result in our
history while dealing with some extraordinary operational
challenges, and through it all, our people across the
business have really stepped up for our customers.
If we put 2018 into context, we dealt with the rupture
of the fuel pipeline into Auckland last September, the
unscheduled maintenance issues on the Rolls-Royce
Trent 1000 engines, a number of extreme weather events
and rising fuel prices. It’s been a rough road at times as
we’ve navigated our way through these issues, and I’m
immensely proud of the way Air New Zealanders from
all areas of the business have pulled together in the face
of these challenges.
For example, we’ve had off duty cabin crew and pilots
volunteering at airports to help with check-in, and
supplementing crews on flights that needed to stop
and refuel. Staff across the whole business have been
going above and beyond to keep our customers moving
quickly and safely. It is that kind of dedication to going
the extra mile for our customers which has always set
Air New Zealand apart from other airlines.
Q. What investments
are you making in
customer experience?
A. Our customers are the core of our business and Air New
Zealand is hugely committed to improve the experience they
have when they fly with us. Our goal is to offer the best travel
experience of any airline in the world and to succeed, we need
to continuously look for ways to improve.
This year we have further invested in the airport experience
particularly for customers travelling to and from regional
New Zealand, opening lounges in Hamilton and Palmerston
North, as well as Queenstown, and making investments in
our airport kiosks to streamline the check-in experience.
We continue to upgrade our fleet, with Airbus A320/321
NEO aircraft commencing on our Tasman and Pacific Islands
network later this year. I’m proud to say that Air New Zealand
will be the first airline to operate the NEO in Australasia.
Beginning in 2020, we will also be introducing A321 NEO
aircraft on our domestic routes, which will provide significantly
more seats and fuel efficiency than the current aircraft.
This year is also exciting as we look to replace our Boeing
777-200 fleet. Given the long lead times to receive aircraft,
we recently issued a request for proposal to the airline
manufacturers and expect to announce a decision on the
replacement aircraft in the next six to eight months. Those
aircraft will then come into service towards the end of the 2022
calendar year. Along with the new aircraft, we will be looking
at improvements to the inflight product we offer our customers
including seats, inflight entertainment, food and more.
8
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
Q&A WITH OUR CHIEF
EXECUTIVE OFFICER
Chief Executive Officer Christopher Luxon
answers key questions on Air New Zealand’s
performance and priorities for the future.
Q. You brought up the engine
issues impacting the Boeing
787 Dreamliners – how is
Air New Zealand addressing
the impact to customers?
A. The global Trent 1000 engine issues have been a
significant challenge for the airline this year but in my
opinion, we have responded quickly and have done
everything in our control to minimise the disruption for our
customers. Our engineering and maintenance teams have
been working hard with the team at Rolls-Royce to manage
the maintenance requirements and get our engines into its
facility in Singapore as quickly as possible.
In saying all of this, I’m very aware that many of our
customers have experienced delays and disruption to their
travel plans, and that the onboard experience on some of
our leased aircraft has been different to what customers
expect when travelling with Air New Zealand. We made
a conscious decision in December when the engine
issues first came to light that we would do everything in
our power to keep our customers moving. That is a very
different approach to many of the other airlines globally
who chose instead to cancel thousands of flights and left
their customers stranded, but we know that it’s been a bit
suboptimal at times.
We are working hard to improve both operational and
service reliability – for example, we have secured three
short-term dry lease aircraft (which means that our pilots
and our crew will operate these aircraft). In addition, after
being advised in late August that there is likely to be a
timing-related delay in getting some of our engines back,
we have made schedule adjustments to essentially free up
two widebody aircraft and give greater schedule certainty
to our customers.
We are also investing in people, adding staff to our contact
centre and other key customer touchpoints. While the
engine issues are not in our control, the relationship with
our customers is what matters most, so we must continue
to stay on our game and go the extra mile to ensure their
travel journey with Air New Zealand is an enjoyable one.
Q. Air New Zealand will be
launching four new routes
this coming year – how
do these destinations fit
into Air New Zealand’s
growth strategy?
A. Our Pacific Rim growth strategy has allowed for consistently
profitable network expansion over the past seven years,
with 17 million passengers a year travelling on the airline
compared with 13 million back in 2013. The new routes we
will be flying this year complement this focus.
On the Tasman, we will be commencing new direct services
to Brisbane from Wellington and Queenstown beginning
in December. Australia is our biggest international market,
with over 1.4 million inbound visitors this year and we have
about 35 percent market share, the largest of any airline on
the Tasman. As such, these new routes will strengthen our
already strong customer proposition in Australasia.
Turning to long-haul, we will begin flying directly to Chicago
in November, further deepening our footprint into the US
market. We are proud to offer our customers more ways to
get between New Zealand and the United States and more
connection opportunities beyond our US gateways than
any other airline in the world, thanks to our strong strategic
alliance with United Airlines. Revenue alliances with our
airline partners have been a key enabler of our profitable
growth in large long-haul markets.
Finally, Taipei will become our seventh destination in Asia,
and will be another strong addition to our network. New
Zealand welcomed approximately 42,000 visitors from the
area this year, all of whom had to use multi-stop options to
get here. This route will further grow and diversify our Asian
network, which has been a key pillar of growth.
9
Q&A WITH THE CHIEF EXECUTIVE OFFICER
AIR NEW ZEALAND GROUP
Q. Can you give an update
on Air New Zealand’s
role in supercharging
regional New Zealand?
A. At Air New Zealand we recognise that we have a responsibility
to supercharge New Zealand’s success socially, environmentally
and economically. In order to do this, we need to promote
regional New Zealand and our rich cultural history.
Earlier this year we announced a partnership with Nga
-
ti Porou,
which we hope will generate economic and social growth in
Taira
-
whiti Gisborne. The East Coast is a pivotal piece of
New Zealand’s rich cultural history and we have worked
closely with Nga
-
ti Porou for the past two years now, as we
both believe that Taira
-
whiti Gisborne is one of the jewels in the
New Zealand tourism proposition that is yet to meet its
potential. By working with local iwi in a co-ordinated way, we
are creating a new model for regional economic development
– driving tourism flows, growing exports and creating more
jobs. We have done this purposefully and deliberately – we
want to set up a roadmap that can be rolled out to other
regions across New Zealand to drive regional development
and sustainable tourism. For us, it was vital that we embarked
on this journey in partnership with local iwi, who like us aspire
to leave New Zealand in a better place for future generations.
We hope that this will open a new chapter in the role that
Air New Zealand can play in supporting the aspirations of
iwi around the country.
Q. There is discussion
of a global pilot
shortage. Is it impacting
Air New Zealand?
A. At Air New Zealand we have about 1,500 pilots. We’ll take
on about 150 new pilots this year and we’ve successfully
recruited those and are well set up for the year, but we do
recognise that things are changing and if we don’t do things
differently in the future we may have a pilot shortage problem.
We are working with various stakeholders to determine how
we can get more people interested in flying, so that we can
continue to ensure a good pipeline of pilots over the next
generation. As an example, we have been working closely with
our unions to develop a clear career pathway, so that we can
go into schools and communicate with kids exactly what is
needed to become a pilot. That level of discussion also means
convincing parents that there is a secure future in becoming
a pilot, and it is therefore worth the investment that is required
to train and earn the necessary credentials. Another area
where we are looking to provide greater clarity is making
sure that people studying and training to become pilots have
greater visibility as to what their first jobs may be, thereby
providing more confidence and security early in their career.
Q. How does Air New Zealand
promote diversity in
the workplace?
A. We know the benefits that diversity brings to organisations
culturally and commercially and it is important that we
represent the customers we serve. At Air New Zealand we
have an ambitious Diversity and Inclusion strategy. I believe
it is critical to our success that we foster an environment
and culture where our people feel valued and empowered
to do their jobs, irrespective of labels like gender, ethnicity,
sexuality or age.
In recent years, we have formed our Ma
-
ori & Pasifika,
LGBTQI, Women and Asian employee networks, and created
development opportunities and programmes for diverse talent
through initiatives such as Women in Leadership, Emerging
Leaders and TupuToa Internships.
We have seen tangible results in our investment in gender
diversity programmes focused on developing women for
leadership positions, with 39 percent of our Senior Leadership
Team comprised of women this year, which is close to our
company-wide female representation of 42 percent. Our
focus continues to be on improving this proportion, as well
as increasing the number of women in groups such as pilots,
engineering and maintenance and digital.
In addition to gender diversity, we are working to develop and
increase under-represented minority groups into management
roles. This includes embedding inclusivity and cultural fluency
as a key part of all leadership touchpoints through such
initiatives as weaving Ma
-
ori cultural competency through
leadership programmes and providing coaching on cultural
protocols and Te Reo Ma
-
ori for senior leaders.
We are dedicated to creating an environment where our
people feel connected and developed. Looking ahead, we
will continue to invest in a variety of areas to help create
a sense of belonging across the airline.
Q. Can you discuss
your thoughts on the
changes within the
Executive Team this year?
A. The Executive spends a great deal of time on succession
planning and ensuring that the talent population across
the senior levels of the airline have the right mix of skills
and experience. We work hard to actively develop our
people across the business and were thrilled this year to
be able to appoint two internal candidates, Nick Judd and
Jeff McDowall, to the Executive Team after conducting a
global search. Both Nick (our Chief Strategy, Networks and
Alliances Officer) and Jeff (our Chief Financial Officer)
have a wealth of experience with the airline and each bring
their own unique skills and experience to the team, so we are
excited to have them on board.
10
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
11
Q&A WITH THE CHIEF EXECUTIVE OFFICER
AIR NEW ZEALAND GROUP
I think the fact that we can develop, retain and promote such
high calibre talent is a testament not only to the airline’s
strong culture, but to the approach we have taken around
internal and external talent development. The investment in
talent programmes and building a stronger pipeline of internal
candidates for succession roles has been a deliberate move
over the past six years and we are really proud of the results.
Another great example of internal talent development and
succession planning is the planned departure of our
Chief Operations Officer Bruce Parton this September,
after 22 years of immense contribution to Air New Zealand.
We have been fortunate enough to welcome back Carrie
Hurihanganui, who spent 18 years with the airline before
joining National Australia Bank last year. Carrie brings a
very customer-focused perspective to the role of Chief
Ground Operations Officer, having started with Air New
Zealand as a flight attendant in 1999 while she studied
for her Bachelor of Business Management degree from
Massey University. Carrie then built deep experience
through numerous senior roles across airports, crew,
airline operations and customer experience.
I am personally very excited to see the contribution that the
new members of the Executive Team will bring to the airline
as we look to innovate and further build upon our strengths.
Christopher Luxon
Chief Executive Officer
23 August 2018
Nick Judd – Chief Strategy, Networks and Alliances Officer
Carrie Hurihanganui
– Chief Ground Operations Officer
Jeff McDowall
– Chief Financial Officer
L- R .
12
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
AIR NEW ZEALANDERS
MAKING A DIFFERENCE
Taking Te Reo Ma
-
ori
to the skies
Captain Sara Mulvey, a domestic pilot who has worked for
Air New Zealand for 10 years, started using Te Reo Ma
-
ori to
welcome passengers on board her flights and for some inflight
communications in September. She sees it as an important way
to normalise use of the Ma
-
ori language in New Zealand and has
been pleased to receive compliments from passengers at the end
of the flight.
“The feedback from customers is overwhelmingly
positive and there is a great appreciation for the language being
heard on our airline – some customers even make the effort to
thank me in Te Reo at the end of their flight,”
says Sara.
Since starting to use Te Reo inflight, Sara has had colleagues
approach her for guidance on use of the language and hopes
to encourage others to follow in her footsteps and embrace the
use of Te Reo Ma
-
ori in New Zealand.
“I would love to see New
Zealand embrace our culture and I hope when my children are
adults they will hear Te Reo Ma
-
ori as much as they hear English.”
Keeping our customers
moving in tough times
Imagine this: you head to the office and the minute you sit down
at your desk you are told there is a typhoon expected to land in
Tokyo and at the same time, an aircraft is being held in Nadi as
a result of volcanic ash cloud – how do you ensure the minimum
amount of disruption to the daily flight schedule and take care
of the impacted customers on those flights? Those are the types
of scenarios that Air New Zealand’s Customer Care team must
work through on a daily basis.
24 hours a day, 7 days a week, a team of 60 people working at
the airline’s Auckland Airport campus is dedicated to responding
to issues that might impact the on-time performance of flights
across the domestic and international network. Customer
Journey Managers focus on passenger care, social media alerts
and customer recovery – with an overarching goal of keeping
customers moving safely and quickly to their destinations.
“Dedication and resilience with a dash of good humour are the
words I would use to describe the team,”
says Doug Grant, Senior
Manager Customer Care and Communications, noting that the
average tenure of the team is 17 years, and that maturity and
knowledge is extremely valuable when coordinating time-sensitive
decisions with operations, flight planning crew, airports teams
and communications to mitigate impact to customers and keep
them in the loop as much as possible. Anita Hawthorne, General
Manager Customer Experience noted that the Customer Care
team exemplifies the strong internal culture that differentiates the
airline, saying,
“it is the extra mile that the team consistently works
towards, under some tough circumstances, that underpins what
makes Air New Zealanders so special and why customers feel
such a strong bond with Air New Zealand.”
13
AIR NEW ZEALANDERS MAKING A DIFFERENCE
AIR NEW ZEALAND GROUP
Reducing inflight waste
Inflight waste is a huge challenge for the airline industry, so we
are focused on playing our part and reducing the amount of
waste we generate. Air New Zealand has a number of initiatives
in place to help us to reduce inflight waste.
In the past year, the recycling rates on our domestic jet
network have improved by 8 percent as a result of stronger
collaboration between cabin crew and our operational teams
to collect and separate recyclables. Liza Rolleston-Kerr, cabin
crew on our domestic network says,
“Customers and crew
alike are very supportive of our sustainability efforts. We are
seeing more and more customers bringing their own refillable
bottles and keep cups on board which is great.”
On the international network, one of our initiatives to reduce
inflight waste has already hit its first-year target, diverting
150 tonnes of waste from landfill in a year. A further 82
tonnes of glass has also been diverted from landfill in the
past year, taking the total amount to more than 230 tonnes
– close to the equivalent weight of one of our empty Boeing
777s. Gina Eberle, Flight Service Manager, International
Inflight Services says,
“Our people are so passionate about
sustainability – they have so many great ideas for doing things
differently and continuously improving our processes – they
always want to do more.”
Inspiring the next generation
of female engineers
Air New Zealand was proud to celebrate International Women
in Engineering Day in June this year with a number of activities
aimed at celebrating women in the industry and inspiring the
next generation of females.
Partnering with not-for-profit organisation inKIND on its Finding
Rosie project, Air New Zealand Fleet Technical Manager Jane
Campbell and Reliability Engineer Georgia Craies had the
privilege of taking Year 5 and 6 school girls from Viscount School
in Mangere on a tour of our engineering hangers in Auckland.
The Finding Rosie project aims to encourage primary-school girls
into science, technology, engineering and maths (STEM) careers
by finding real life Kiwi Rosies to share their career stories.
The girls, many of whom had never been on a plane before, were
thrilled to watch an aircraft being towed into the hanger, sit in the
cockpit of one of our Boeing 787-9 aircraft and hear more about
what it’s like to be an aircraft engineer.
Engineer Georgia Craies said that it was,
“amazing watching
their faces light up when they see the planes and start realising
what is out there and how big the industry is.”
School girls
from Viscount School
in Mangere ready
to tour one of our
engineering hangers
in Auckland
Revenue
Operating revenue increased by $376
million to $5.5 billion, an increase of 7.4
percent on the prior year. Excluding the
impact of foreign exchange, operating
revenue increased 7.1 percent.
Passenger revenue increased by $303
million to $4.7 billion, a 6.9 percent
increase. Excluding the impact of foreign
exchange, passenger revenue increased
by 6.7 percent. Capacity (Available Seat
Kilometres, ASK) increased 5.0 percent,
reflecting growth across all regions of the
network. Demand (Revenue Passenger
Kilometres, RPK) grew ahead of capacity
at 5.3 percent, resulting in an improved
load factor of 82.8 percent.
Passenger Revenue per Available Seat
Kilometre (RASK) for the Group improved
1.8 percent, due to increased demand
and the impact of stabilising competition.
Excluding the benefit of foreign exchange,
RASK improved 1.6 percent.
International long-haul capacity increased
3.7 percent due to the commencement of
a new service to Haneda airport in Tokyo,
increased frequency on the Buenos Aires
and Vancouver routes and larger gauge
aircraft on some of our services to the
United States. Demand on international
long-haul routes increased 3.3 percent, with
load factor declining 0.4 percentage points
to 83.4 percent. International long-haul
RASK decreased by 1.2 percent reflecting
the additional capacity growth into Japan
and increased competition on the Atlantic
which impacted the London service.
Excluding the adverse impact of foreign
exchange, RASK declined by 1.3 percent.
Short-haul capacity grew 6.6 percent,
driven by increased frequency on domestic
main trunk routes such as Auckland
to Queenstown, as well as increased
frequency to Honolulu and Bali and
larger-gauge aircraft on a number of
Tasman, Pacific Islands and domestic jet
routes. Demand growth of 8.0 percent
exceeded capacity, with load factors
improving by 1.1 percentage points to
82.1 percent. Short-haul RASK increased
3.4 percent, and excluding the impact of
foreign exchange, increased 3.0 percent,
driven by strong demand and stabilising
competition on the Tasman.
Cargo revenue was $370 million, an
increase of $35 million or 10 percent.
Excluding the favourable impact of foreign
exchange, cargo revenue increased 9.6
percent. Volume grew 6.3 percent and the
yield increased 3.3 percent.
Contract services and other revenue was
$436 million, an increase of $38 million
or 9.5 percent on the prior year. The
increase reflected higher third-party
maintenance and ancillary revenue. There
was no impact from foreign exchange.
14
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
FINANCIAL COMMENTARY
The result, the second-highest
in the Company’s history, was
driven by strong capacity growth
matched by increased demand
and supported by cost initiatives
and scale economies, which
more than offset increased fuel
prices in the year.
Air New Zealand’s
earnings before
taxation for the 2018
financial year were
$540 million
up 2.5 percent on
the previous year.
Net profit after
taxation was
$390 million
an increase of
2.1 percent.
Expenses
Operating expenditure increased by $352
million, a 9.2 percent increase on the prior
year, largely driven by higher fuel prices.
Excluding the additional $135 million related
to increased fuel prices, the impact of
unfavourable foreign exchange movements
and third-party maintenance costs,
operating expenditure increased 4.7 percent
on a 5.0 percent increase in capacity.
Costs per ASK increased 4.0 percent
this year, driven by fuel price increases,
foreign exchange and increased costs
related to third-party maintenance contracts.
Excluding those items, costs per ASK
improved 0.5 percent, as efficiencies
achieved throughout the cost base offset
inflation. Economies of scale and efficiencies
contributed $104 million in savings.
Labour costs were $1.3 billion for the
period, an increase of $33 million or 2.6
percent. Excluding the impact of foreign
exchange, labour costs increased 2.5
percent on a 5.0 percent increase in
capacity. Rate and activity increases
throughout the year were partially offset
by productivity improvements. Headcount
increased by 184 full time equivalent (FTE)
employees to 11,074 FTEs, a 1.7 percent
increase compared to the prior year.
Fuel costs were $987 million, increasing by
$160 million or 19 percent. Excluding the
$5 million benefit from foreign exchange,
fuel costs increased by 20 percent. The
largest driver of the increase was underlying
fuel prices which increased 25 percent,
however this was offset by the impact of
hedging benefits of $63 million, resulting in
a net price related increase of $135 million or
16 percent. Also contributing to the increase
was 3.6 percent growth in volume ($30 million),
net of fleet efficiencies from new aircraft.
Aircraft operations, passenger services
and maintenance costs were $1.3 billion,
an increase of $115 million or 10 percent
on the prior year. Increased capacity,
passenger numbers and price increases
drove increased aircraft operations and
passenger services expenses. Maintenance
expenditure increases were driven by third-
party maintenance activity, higher jet fleet
engine costs and growth in the fleet.
Sales and marketing and other expenses
increased by $31 million, or 5.1 percent,
due to increased loyalty programme
activity, commission volumes, property
and digital costs, partially offset by lower
advertising costs.
Depreciation, rental and lease expense and
funding costs increased by $18 million or
2.3 percent. Excluding the impact of foreign
exchange, costs increased by 2.9 percent,
reflecting an increase in aircraft depreciation
due to delivery of new aircraft, as well as
digital and lounge refurbishment costs.
The impact of foreign exchange rate changes
on the revenue and cost base in the year
resulted in a favourable foreign exchange
movement of $19 million. After taking
into account a $13 million unfavourable
movement in hedging, overall foreign
exchange had a net $6 million positive
impact on the Group result in the year.
Share of Earnings of Associates
The share of equity earnings of
associates reflected $33 million from the
Christchurch Engine Centre, an increase
of $7 million, driven by continued growth
in engine volumes.
Cash and Financial Position
Cash on hand at 30 June 2018 was
$1.3 billion, a small decrease of $26
million from 30 June 2017 with net aircraft
additions, dividends and debt repayments
being offset by strong operating cash flows.
Operating cash flows were $1.0 billion,
an increase of 14 percent from the prior
year, reflecting improved cash operating
earnings, an increase in working capital
cash flow and lower tax payments related
to the change in legislation regarding the
treatment of engine maintenance.
Net gearing, including capitalised aircraft
operating leases, increased 0.6 percentage
points to 52.4 percent. The increase
was primarily due to foreign exchange
movements and the purchase of new
aircraft offset by strong operating earnings.
A fully imputed final ordinary dividend
has been declared of 11.0 cents per
share, bringing the full year 2018 ordinary
dividends declared to 22.0 cents per share,
an increase of 4.8 percent.
15
FINANCIAL COMMENTARY
Earnings before taxation
AIR NEW ZEALAND GROUP
$ MILLION
700
600
500
400
300
200
100
0
2018
2 0142015
358
2016
474
2 017
663
527
540
Dividend
Record date:
7 September
2018
Ex Dividend
date:
6 September
2018
Dividend
Payment date:
19 September
2018
The key changes in profitability, after isolating the impact of foreign exchange movements, are set out in
the table below*:
June 2017 earnings before taxation
Passenger capacity
$193 m
- Capacity increased by 5.0 percent from growth across the
network due to the impact of a new Haneda route, increased
frequency on Buenos Aires and Vancouver routes, increased
widebody services and frequency across the Tasman and Pacific
Islands network and domestic growth
Passenger RASK
$99 m
- Revenue per Available Seat Kilometre (RASK) improved 1.6
percent excluding FX driven by strong demand on the Domestic
and Tasman and Pacific Islands routes. Loads increased by
0.2 percentage points to 82.8 percent
- Long-haul RASK declined by 1.3 percent excluding FX and loads
declined 0.4 percentage points on additional capacity growth
- Short-haul RASK improved by 3.0 percent excluding FX and
loads improved 1.1 percentage points
Cargo revenue
$32 m
- Higher cargo revenue due to increased volumes of 6.3 percent
and yields of 3.3 percent
Contract services and other revenue
$38 m
- Increase in third party maintenance and ancillary revenue
Labour
-$32 m
- Increased activity (net of improved productivity) arising from
capacity growth and general rate increases
Fuel
-$165m
- The average fuel price increased 16 percent compared to the
prior year (net of hedging benefits). Consumption increased by
3.6 percent due to an increase in capacity offset by fleet efficiencies
Maintenance
-$32 m
- Increase in third party maintenance work, increased jet fleet
maintenance and growth in fleet
Aircraft operations and passenger services
-$81 m
- Increased activity and price increases
Sales and marketing and Other expenses
-$30 m
- Increased loyalty programme activity, commission volumes,
property and digital costs partially offset by lower
advertising costs
Depreciation, lease and funding costs
-$22 m
- Increase in depreciation reflecting new aircraft deliveries offset
by reduced funding costs
Net impact of foreign exchange movements
$6m
- Net favourable impact of currency movements on revenue and
costs offset by higher foreign exchange hedging losses
Share of earnings from associates
$7m
- Improved earnings from Christchurch Engine Centre driven by
growth in engine volumes
June 2018 earnings before taxation
* The numbers referred to in the Financial Commentary on the previous page have not isolated the impact of foreign exchange.
16
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
CHANGE IN PROFITABILITY
$527m
$540m
Financial Performance
12 MONTHS TO
30 JUNE 2018
$M
12 MONTHS TO
30 JUNE 2017
$M
Operating Revenue
Passenger revenue
Cargo
Contract services and other revenue
4,679
370
436
4,376
335
398
Operating Expenditure
Labour
Fuel
Maintenance
Aircraft operations
Passenger services
Sales and marketing
Foreign exchange losses
Other expenses
5,485
(1, 294)
(987)
(352)
( 6 11)
(295)
(357)
(19)
(278)
5 ,10 9
(1, 261)
(827)
(321)
(556)
(266)
(352)
(6)
(252)
(4 ,193 )( 3 , 8 41)
Operating Earnings (excluding items below)
Depreciation and amortisation
Rental and lease expenses
1,292
(525)
(227)
1,268
(493)
(230)
Earnings Before Finance Costs, Associates and Taxation
Net finance costs
Share of earnings of associates (net of taxation)
540
(33)
33
545
(44)
26
Earnings Before Taxation
Taxation expense
540
(150 )
527
(14 5)
Net Profit Attributable to Shareholders of Parent Company
390382
Interim and final dividends declared per share (cents)
Net tangible assets per share (cents)
22.0
179
21.0
164
Cash Flows
12 MONTHS TO
30 JUNE 2018
$M
12 MONTHS TO
30 JUNE 2017
$M
Cash inflows from operating activities
Cash outflows from operating activities
5,472
(4 , 4 41)
5,227
(4,323)
Net cash flow from operating activities
Net cash flow from investing activities
Net cash flow from financing activities
1,031
(778)
(279)
904
(616 )
( 513 )
Decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
(26)
1,369
(225)
1,594
Cash and Cash Equivalents at the End of the Year
1,343 1,369
17
CHANGE IN PROFITABILITY
|
FINANCIAL SUMMARY
AIR NEW ZEALAND GROUP
FINANCIAL SUMMARY
Financial Position
AS AT
30 JUNE 2018
$M
30 JUNE 2017
$M
Bank and short-term deposits
Trade and other receivables
Inventories
Derivative financial assets
Income taxation
Other assets
1,343
576
75
187
4
68
1,369
386
86
19
-
27
Total Current Assets
2,253 1,887
Trade and other receivables
Property, plant and equipment
Intangible assets
Investments in other entities
Derivative financial assets
Other assets
77
5,035
170
118
2
191
120
4 ,74 5
14 9
95
-
175
Total Non-Current Assets
5,593 5,284
Total Assets
7,846 7,171
Trade and other payables
Revenue in advance
Interest-bearing liabilities
Derivative financial liabilities
Provisions
Income taxation
Other liabilities
562
1,322
431
1
117
-
263
462
1,177
317
65
87
36
261
Total Current Liabilities
2,696 2,405
Revenue in advance
Interest-bearing liabilities
Provisions
Other liabilities
Deferred taxation
185
2,303
151
27
308
184
2,197
183
23
193
Total Non-Current Liabilities
2 , 9 74 2,780
Total Liabilities
5,670 5 ,18 5
Net Assets
2,176 1,986
Issued capital
Reserves
2,226
(50)
2,238
(252)
Total Equity
2,176 1,986
The summary financial information has been derived from, and should be read in conjunction with, the Air New Zealand Group Annual Financial Statements
(the ‘Annual Financial Statements’). The Annual Financial Statements, dated 23 August 2018, are available at: airnzinvestor.com. The summary financial
information cannot be expected to provide as complete an understanding as provided by the Annual Financial Statements. The accounting policies used in
these financial statements are attached in the notes to the Annual Financial Statements.
Share RegistrarAnnual Financial StatementsInvestor Relations Office
LINK MARKET SERVICES LIMITED
Level 11, Deloitte Centre
80 Queen Street, Auckland 1010, New Zealand
PO Box 91976, Auckland 1142, New Zealand
Email: enquiries@linkmarketservices.com
Website: linkmarketservices.com
New Zealand Phone: (64 9) 375 5998
New Zealand Fax: (64 9) 375 5990
Australia Phone: (61) 1300 554 474
The Annual Financial Statements are available
by visiting our website airnzinvestor.com
OR you may elect to have a copy sent to you
by contacting Investor Relations.
ELECTRONIC SHAREHOLDER
COMMUNICATION
If you would like to receive all investor communications
electronically, including interim and annual
shareholder reviews, please visit the Link Market
Services website linkmarketservices.com
or contact them directly (details to the left).
Private Bag 92007, Auckland 1142, New Zealand
Phone: 0800 22 22 18 (New Zealand)
Phone: (64 9) 336 2607 (Overseas)
Fax: (64 9) 336 2664
Email: investor@airnz.co.nz
Website: airnzinvestor.com
18
FINANCIAL SUMMARY (CONTINUED)
AIR NEW ZEALAND ANNUAL SHAREHOLDER REVIEW 2018
19
FINANCIAL SUMMARY (CONTINUED)
|
FINANCIAL FRAMEWORK
AIR NEW ZEALAND GROUP
FINANCIAL FRAMEWORK – OUR 2018 PERFORMANCE
Capacity
growth
5.0%
Baa2 rating
Stable
CASK
1
improved
0.5%
Gearing
52.4%
Pre-tax
ROIC
14 .5%
Ordinary
dividends
declared
0.22
Profitable GrowthCapital DisciplineShareholder Returns
Targeting pre-tax
ROIC > 15 %
Targeting a consistent
and sustainable
ordinary dividend
Capacity growth in-line
with New Zealand tourism
growth over medium term
Maintain investment
grade credit rating
Continuous CASK
improvement
Gearing between
45% to 55%
Risk Management
Funding flexibilityHedgingLiquidity
Operating cash flow
2 014
1,200
1,000
800
600
400
200
0
$ MILLION
201520162 0172018
1,031
730
1,100
1,074
904
Operating revenue
2 014
$ MILLION
201520162 0172018
5,231
4,925
6,000
5,000
4,000
3,000
2,000
1,000
0
5,485
4,652
5,109
Ordinary dividends declared
2 014
25
20
15
10
5
0
CENTS PER SHARE
201520162 0172018
16
22
10
20
21
1
Excluding fuel price movement, FX, third
party maintenance and other significant
items in the comparative year, as disclosed
in the 2017 Financial Results.
Net profit after taxation
2 014
500
400
300
200
100
0
$ MILLION
201520162 0172018
327
390
263
463
382
Helping our
precious
passengers
take flight
wheretonext.nz
---
ANNUAL
FINANCIAL
R E SULTS
2018
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
AIR NEW ZEALAND GROUP
1*This document, in conjunction with the Air New Zealand Annual Shareholder Review 2018, constitutes the 2018 Annual Report to shareholders of Air New Zealand Limited.
DIRECTORS’ STATEMENT
The directors of Air New Zealand Limited are pleased to present to shareholders the Annual Report* and financial statements for
Air New Zealand and its controlled entities (together the “Group”) for the year to 30 June 2018.
The directors are responsible for presenting financial statements in accordance with New Zealand law and generally accepted accounting
practice, which give a true and fair view of the financial position of the Group as at 30 June 2018 and the results of the Group’s operations and
cash flows for the year ended on that date.
The directors consider the financial statements of the Group have been prepared using accounting policies which have been consistently applied
and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed.
The directors believe that proper accounting records have been kept in accordance with the requirements of the Financial Markets Conduct Act 2013.
The directors consider that they have taken adequate steps to safeguard the assets of the Group, and to prevent and detect fraud and other
irregularities. Internal control procedures are also considered to be sufficient to provide a reasonable assurance as to the integrity and reliability
of the financial statements.
This Annual Report is signed on behalf of the Board by:
Tony C ar ter Jan Dawson
Chairman Deputy Chairman
23 August 2018
Contents
Statement of Financial Performance 2
Statement of Comprehensive Income 3
Statement of Changes In Equity 4
Statement of Financial Position 5
Statement of Cash Flows 6
Statement of Accounting Policies 7
Notes to the Financial Statements
1. Revenue Recognition and Segmental Information 10
2. Expenses 11
3. Taxation 11
4. Earnings Per Share 12
5. Cash and Cash Equivalents 13
6. Trade and Other Receivables 13
7. Inventories 14
8. Other Assets 14
9. Property, Plant and Equipment 15
10. Intangible Assets 17
11. Investments in Other Entities 18
12. Revenue in Advance 20
13. Interest-Bearing Liabilities 20
14. Provisions 21
15. Other Liabilities 22
16. Distributions to Owners 23
17. Share Capital 23
18. Reserves 27
19. Operating Leases 27
20. Capital Commitments 28
21. Contingent Liabilities 28
22. Financial Risk Management 28
23. Offsetting Financial Assets and Financial Liabilities 38
24. Related Parties 39
Independent Auditor’s Report 40
Five Year Statistical Review 44
Corporate Governance Statement 48
Directors’ Profiles 61
Interests Register 63
Directors’ Interests in Air New Zealand Securities 64
Indemnities and Insurance 64
Employee Remuneration 65
Subsidiary and Joint Venture Companies 69
Other Disclosures 70
Securities Statistics 71
Operating Fleet Statistics 72
General Information 73
Shareholder Directory 75
The accompanying accounting policies and notes form part of these financial statements.
2
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES
2018
$M
2017
$M
Operating Revenue
Passenger revenue
Cargo
Contract services
Other revenue
4,679
370
193
243
4,376
335
164
234
Operating Expenditure
Labour
Fuel
Maintenance
Aircraft operations
Passenger services
Sales and marketing
Foreign exchange losses
Other expenses
1 5,485
(1, 294)
(987)
(352)
( 6 11)
(295)
(357)
(19)
(278)
5 ,10 9
(1, 261)
(827)
(321)
(556)
(266)
(352)
(6)
(252)
2(4 ,193 ) (3,841)
Operating Earnings (excluding items below)
Depreciation and amortisation
Rental and lease expenses
19
1,292
(525)
(227)
1,268
(493)
(230)
Earnings Before Finance Costs, Associates and Taxation
Finance income
Finance costs
Share of earnings of associates (net of taxation)
11
540
40
(73)
33
545
43
(87)
26
Earnings Before Taxation
Taxation expense
3
540
(150 )
527
(145)
Net Profit Attributable to Shareholders of Parent Company
390382
Per Share Information:
Basic earnings per share (cents)
Diluted earnings per share (cents)
Interim and final dividends declared per share (cents)
Net tangible assets per share (cents)
4
4
16
34.7
34.4
22.0
179
34.0
33.5
21.0
164
STATEMENT OF FINANCIAL PERFORMANCE
For the year to 30 June 2018
The accompanying accounting policies and notes form part of these financial statements.
3
AIR NEW ZEALAND GROUP
STATEMENT OF COMPREHENSIVE INCOME
For the year to 30 June 2018
NOTE
2018
$M
2017
$M
Net Profit for the Year
Other Comprehensive Income:
Items that will not be reclassified to profit or loss:
Actuarial losses on defined benefit plans
Taxation on above reserve movements
3
390
-
-
382
(3)
1
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:
Changes in fair value of cash flow hedges
Transfers to net profit from cash flow hedge reserve
Net translation gain on investment in foreign operations
Changes in cost of hedging reserve
Taxation on above reserve movements
-
159
(92)
2
12
(21)
(2)
65
(32)
-
(8)
(8)
Total items that may be reclassified subsequently to profit or loss
6017
Total Other Comprehensive Income for the Year, Net of Taxation
6015
Total Comprehensive Income for the Year, Attributable to Shareholders of the Parent Company
450397
The accompanying accounting policies and notes form part of these financial statements.
4
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
STATEMENT OF CHANGES IN EQUITY
For the year to 30 June 2018
NOTES
SHARE
CAPITAL
$M
HEDGE
RESERVES
$M
FOREIGN
CURRENCY
TRANSLATION
RESERVE
$M
GENERAL
RESERVES
$M
TOTAL
EQUITY
$M
Balance as at 1 July 2017
2,2389(16 )(245)1,986
Net profit for the year
Other comprehensive income for the year
-
-
-
57
-
3
390
-
390
60
Total Comprehensive Income for the Year
- 57 3 390450
Transactions with Owners:
Equity-settled share-based payments
Equity settlements of long-term incentive obligations
Dividends on Ordinary Shares
17
17
16
5
(17)
-
-
-
-
-
-
-
-
-
(248)
5
(17)
(248)
Total Transactions with Owners
(12) - - (248)(260)
Balance as at 30 June 2018
2,226 66 (13 ) (103)2,176
NOTES
SHARE
CAPITAL
$M
HEDGE
RESERVES
$M
FOREIGN
CURRENCY
TRANSLATION
RESERVE
$M
GENERAL
RESERVES
$M
TOTAL
EQUITY
$M
Balance as at 1 July 2016
2,252(9)(15)(120 )2,10 8
Net profit for the year
Other comprehensive income for the year
-
-
-
18
-
(1)
382
(2)
382
15
Total Comprehensive Income for the Year
- 18 (1) 380397
Transactions with Owners:
Equity-settled share-based payments
Equity settlements of long-term incentive obligations
Dividends on Ordinary Shares
17
17
16
5
(19)
-
-
-
-
-
-
-
-
-
(505)
5
(19)
(505)
Total Transactions with Owners
(14) - - (505)( 519 )
Balance as at 30 June 2017
2,238 9 (16 ) (245)1,986
The accompanying accounting policies and notes form part of these financial statements.
5
AIR NEW ZEALAND GROUP
NOTES
2018
$M
2017
$M
Current Assets
Bank and short-term deposits
Trade and other receivables
Inventories
Derivative financial assets
Income taxation
Other assets
5
6
7
22
8
1,343
576
75
187
4
68
1,369
386
86
19
-
27
Total Current Assets
2,2531,887
Non-Current Assets
Trade and other receivables
Property, plant and equipment
Intangible assets
Investments in other entities
Derivative financial assets
Other assets
6
9
10
11
22
8
77
5,035
170
118
2
191
120
4,745
14 9
95
-
175
Total Non-Current Assets
5,5935,284
Total Assets
7, 8 4 67,171
Current Liabilities
Trade and other payables
Revenue in advance
Interest-bearing liabilities
Derivative financial liabilities
Provisions
Income taxation
Other liabilities
12
13
22
14
15
562
1,322
431
1
117
-
263
462
1,177
317
65
87
36
261
Total Current Liabilities
2,6962,405
Non-Current Liabilities
Revenue in advance
Interest-bearing liabilities
Provisions
Other liabilities
Deferred taxation
12
13
14
15
3
185
2,303
151
27
308
184
2,197
183
23
193
Total Non-Current Liabilities
2 , 9 742,780
Total Liabilities
5,6705 ,18 5
Net Assets
2,1761,986
Equity
Share capital
Reserves
17
18
2,226
(50)
2,238
(252)
Total Equity
2,1761,986
Tony Carter Jan Dawson
Chairman Deputy Chairman
For and on behalf of the Board, 23 August 2018
STATEMENT OF FINANCIAL POSITION
As at 30 June 2018
The accompanying accounting policies and notes form part of these financial statements.
6
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES
2018
$M
2017
$M
Cash Flows from Operating Activities
Receipts from customers
Payments to suppliers and employees
Income tax paid
Interest paid
Interest received
5,434
(4,297)
(81)
(63)
38
5 ,187
(4 ,130 )
(116 )
(77)
40
Net Cash Flow from Operating Activities
51,031904
Cash Flows from Investing Activities
Disposal of property, plant and equipment, intangibles and assets held for resale
Disposal of investments in quoted equity instruments
Interest-bearing asset receipts
Distribution from associates
Acquisition of property, plant and equipment and intangibles
Acquisition of quoted equity instruments
Interest-bearing asset payments
2
24
2
33
-
-
16
(809)
-
(18)
60
68
137
8
(853)
(23)
(13 )
Net Cash Flow from Investing Activities
(778)(616 )
Cash Flows from Financing Activities
Interest-bearing liabilities drawdowns
Rollover of foreign exchange contracts*
Equity settlements of long-term incentive obligations
Interest-bearing liabilities payments
Dividends on Ordinary Shares
17
16
347
(20)
(17)
(329)
(260)
512
9
(19)
(485)
(530)
Net Cash Flow from Financing Activities
(279)( 513 )
Decrease in Cash and Cash Equivalents
Cash and cash equivalents at the beginning of the year
(26)
1,369
(225)
1,594
Cash and Cash Equivalents at the End of the Year
51,3431,369
*Relates to gains/losses on rollover of foreign exchange contracts that hedge exposures in other financial periods.
STATEMENT OF CASH FLOWS
For the year to 30 June 2018
7
AIR NEW ZEALAND GROUP
STATEMENT OF ACCOUNTING POLICIES
For the year to 30 June 2018
Reporting entity
The financial statements presented are those of the consolidated Air New Zealand Group (the Group), including Air New Zealand Limited and its
subsidiaries, joint ventures and associates.
Air New Zealand’s primary business is the transportation of passengers and cargo on scheduled airline services.
Statutory base
The parent company, Air New Zealand Limited, is a profit-oriented entity, domiciled in New Zealand, registered under the Companies Act 1993
and listed on the New Zealand and Australian Stock Exchanges. Air New Zealand Limited is a FMC Reporting Entity under the Financial Markets
Conduct Act 2013 and the Financial Reporting Act 2013.
Basis of preparation
Air New Zealand prepares its financial statements in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”). NZ GAAP
consists of New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) and other applicable financial reporting standards as
appropriate to profit-oriented entities. These financial statements comply with NZ IFRS and International Financial Reporting Standards (“IFRS”).
The financial statements were approved by the Board of Directors on 23 August 2018.
Basis of measurement
The financial statements have been prepared on the historical cost basis, with the exception of certain items as identified in specific accounting
policies and are presented in New Zealand Dollars which is the Group’s functional currency.
Use of accounting estimates and judgements
The preparation of financial statements requires the use of certain critical accounting estimates. It also requires the directors to exercise their
judgement in the process of applying the Group’s accounting policies. Estimates and associated assumptions are based on historical experience and
other factors, as appropriate to the particular circumstances. The Group reviews the estimates and assumptions on an ongoing basis.
Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements
are disclosed within the specific accounting policy or note as shown below:
Area of estimate or judgement Note
Revenue in advance Note 1 Revenue recognition and segmental information
Aircraft lease return provisions Note 14 Provisions
Estimated impairment of non-financial assets ‘Impairment’ accounting policy
Note 9 Property, plant and equipment
Residual values and useful lives of aircraft related assets Note 9 Property, plant and equipment
Taxation Note 3 Taxation
Contingent liabilities Note 21 Contingent liabilities
Significant estimates are designated by an
symbol in the notes to the financial statements.
Significant accounting policies
Accounting policies are disclosed within each of the applicable notes to the financial statements and are designated by a symbol.
The principal accounting policies applied in the preparation of these financial statements have been consistently applied to all periods presented,
except as detailed below.
Where necessary, comparative information has been reclassified to achieve consistency in disclosure with the current period. An amount of $3
million has been reclassified within the Statement of Financial Performance from ‘Other significant items’ to ‘Other expenses’ for the year ended
30 June 2017.
Air New Zealand has elected to early adopt all NZ IFRSs and Interpretations that had been issued by the New Zealand Accounting Standards Board,
except as noted below. The early adoption did not have a material impact on the financial statements.
8
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
For the year to 30 June 2018
NZ IFRS 9 (2014) - Financial Instruments has not been adopted early. It includes a framework for classification and measurement of financial
instruments and a single, forward-looking impairment model. This Standard, which becomes effective for annual reporting periods commencing
on or after 1 January 2018, will have no impact on the financial statements.
NZ IFRS 15 - Revenue from Contracts with Customers has not been adopted early. This standard has an objective of a single revenue
recognition model that applies to revenue from contracts with customers in all industries. This standard, which becomes effective for
annual reporting periods commencing on or after 1 January 2018, will not have a significant impact on the financial statements other than
reclassifications and additional disclosures.
The impact of NZ IFRS 15 will be presented in the annual financial statements for the year ending 30 June 2019 and the requirements will be
retrospectively applied to the comparative period. The timing of recognition of the consideration for certain ancillary services will change to align
with the principal performance obligations associated with the services provided. Although the net impact is not material, the related revenue will
be reclassified from ‘Other revenue’ to ‘Passenger revenue’. The cost of procuring third party products or services to fulfil Airpoints redemptions
will also be reclassified from ‘Sales and marketing’ to offset against the related redemption revenue reported within ‘Passenger revenue’.
Reclassifications in the comparative year ended 30 June 2018 will result in an increase in ‘Passenger revenue’ of $17 million, a decrease in
‘Other revenue’ of $30 million and a decrease in ‘Sales and marketing’ of $13 million.
NZ IFRS 16 - Leases has not been adopted early. This standard will fundamentally change the accounting treatment of leases by lessees.
The current dual accounting model for lessees, which distinguishes between on balance sheet finance leases and off balance sheet operating
leases, will no longer apply. Instead, there will be a single, on balance sheet accounting model for all leases which is similar to current finance lease
accounting. Lessor accounting remains similar to current practice. This standard, which becomes effective for annual periods commencing on or
after 1 January 2019, will have a significant impact on the financial statements. The Group is in the process of working through an implementation
project for the new Standard, which will be finalised over the next 12 months.
In accordance with the transition provisions of NZ IFRS 16, comparatives will not be restated, with the cumulative effect being recognised in opening
retained earnings at the date of initial application of 1 July 2019. The Group is in the process of evaluating the transitional accounting policy choices
available under this approach.
The most significant areas of impact upon adoption of NZ IFRS 16 are set out below:
- recognition of a right of use asset and lease liability for operating leases on the Statement of Financial Position;
- recognition of depreciation and interest expense instead of operating lease rental expense in the Statement of Financial Performance;
- classification of the principal portion of lease payments as ‘Financing activities’ within the Statement of Cash Flows with the interest portion
continuing to be presented within ‘Operating activities’; and
- additional foreign exchange exposure in respect of the retranslation of the additional United States Dollar (USD) denominated aircraft
operating lease liabilities recognised in the Statement of Financial Position.
NZ IFRS 17 Insurance Contracts has not been adopted early. It provides consistent principles for all aspects of accounting for insurance contracts.
This standard, which becomes effective for annual periods commencing on or after 1 January 2021, will not have a significant impact on the
financial statements.
The significant accounting policies which are pervasive throughout the financial statements are set out below. Other significant accounting policies
which are specific to certain transactions or balances are set out within the particular note to which they relate.
Basis of consolidation
The consolidated financial statements include those of Air New Zealand Limited and its subsidiaries, accounted for using the acquisition method,
and the results of its associates and joint ventures, accounted for using the equity method.
All material intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated on
consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Unrealised gains on transactions between the Group, joint ventures and its associates are eliminated to the extent of the Group’s interest in the
joint ventures and associates.
Where a business combination is achieved in stages, previously held equity interests in the acquiree are remeasured to fair value at the acquisition
date and any corresponding gain or loss is recognised in the Statement of Financial Performance.
9
AIR NEW ZEALAND GROUP
STATEMENT OF ACCOUNTING POLICIES (CONTINUED)
For the year to 30 June 2018
Foreign currency translation
Functional currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in
which the entity operates (the “functional currency”).
Transactions and balances
Foreign currency transactions are converted into the relevant functional currency using exchange rates approximating those ruling at
transaction date. Monetary assets and liabilities denominated in foreign currencies at the balance date are translated at the rate ruling at that
date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange
rate at the date of the transaction. Foreign exchange gains or losses are recognised in the Statement of Financial Performance, except when
deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
Group companies
The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into
the presentation currency as follows:
(a) assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the date of that Statement
of Financial Position;
(b) income and expenses for each Statement of Financial Performance are translated at exchange rates approximating those ruling at
transaction date; and
(c) all resulting exchange differences are recognised as a separate component of equity and in Other Comprehensive Income (within Foreign
Currency Translation Reserve).
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency
instruments designated as hedges of such investments, are taken to equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Impairment
Non-financial assets are reviewed at each reporting date to determine whether there are any indicators that the carrying amount may not be
recoverable. If any such indicators exist, the asset’s recoverable amount is estimated. The recoverable amount is the higher of an asset’s fair value
less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised in
the Statement of Financial Performance for the amount by which the asset’s carrying amount exceeds its recoverable amount. For the purposes of
assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units).
Financial assets carried at amortised cost are assessed each reporting date for impairment. If there is objective evidence of impairment, the
difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original
effective interest rate, where appropriate, is recognised in the Statement of Financial Performance.
10
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS
For the year to 30 June 2018
1. Revenue Recognition and Segmental Information
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be
reliably measured, regardless of when payment is made. Revenue is measured at the fair value of the consideration received or
receivable. Specific accounting policies are as follows:
Passenger and cargo revenue
Passenger and cargo sales revenue is recognised in revenue in advance at the fair value of the consideration received. Amounts
are transferred to revenue in the Statement of Financial Performance when the actual carriage is performed. Unused tickets are
recognised as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and
historical trends.
The Group operates various code share and alliance arrangements. Revenue under these arrangements is recognised when the
Group performs the carriage or otherwise fulfils all relevant contractual commitments.
Loyalty programmes
The fair value of revenues associated with the award of Airpoints Dollars to Airpoints members as part of the initial sales transaction
is deferred to revenue in advance, net of estimated expiry (non-redeemed Airpoints Dollars), until such time as the Airpoints member
has redeemed their points. The fair value of consideration received in respect of sales of Airpoints Dollars to third parties is deferred
to revenue in advance, net of estimated expiry, until such time as the Airpoints member has redeemed their points. The estimate of
expiry is based upon historical experience and is recognised in net passenger revenue at the time of the initial sales transaction.
Contract services revenue
Where contract related services are performed over a contractually agreed period, and the amount of revenue, related costs and
stage of completion of the contract can be reliably measured, revenue is recognised by reference to the stage of completion of the
contract at balance date. Other contract related revenue is recognised as services are performed.
Other revenue
Other revenue includes lounge revenue, Koru membership subscriptions, commissions and fees and is recognised at the time the
service is provided. Dividend revenue is recognised when the right to receive payment is established.
Finance income
Interest revenue from investments and fixed deposits is recognised as it accrues, using the effective interest method where appropriate.
Segmental information
Air New Zealand operates predominantly in one segment, its primary business being the transportation of passengers and cargo on an integrated
network of scheduled airline services to, from and within New Zealand. Resource allocation decisions across the network are made to optimise the
consolidated Group’s financial result.
2018
$M
2017
$M
Analysis of revenue by geographical region of original sale
New Zealand
Australia and Pacific Islands
United Kingdom and Europe
Asia
America
3,267
695
2 74
476
773
3 , 0 41
621
278
440
729
Total operating revenue
5,4855 ,10 9
The principal non-current assets of the Group are the aircraft fleet which is registered in New Zealand and employed across the worldwide
network. Accordingly, there is no reasonable basis for allocating the assets to geographical segments.
11
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year to and as at 30 June 2018
2. Expenses
Additional information in respect of expenses included within the Statement of Financial Performance is as follows:
2018
$M
2017
$M
Superannuation expense
Audit and review of financial statements*
Fair value movement on divestment of Virgin Australia**
Legal settlements (included within Other expenses)***
51
1
-
3
47
1
(22)
16
* Other fees were paid for assurance engagements including Greenhouse Gas inventory review of $18k (30 June 2017: $21k), student fee
protection audit of $5k (30 June 2017: $5k) and a US Passenger Facility Charge audit of $46k (30 June 2017: $77k). Non-assurance
fees were paid for tax compliance work undertaken for the Corporate Taxpayers Group of $17k (30 June 2017: $13k), sustainability
reporting of $16k (30 June 2017: $20k), global workforce research database of $88k (30 June 2017: nil) and other services of $5k
(30 June 2017: employee speak-up line service of $20k).
** As at 30 June 2016 the Group held a 2.5% shareholding in Virgin Australia Holdings Limited (Virgin Australia) which was classified as
an ‘Investment in quoted equity instruments’ and stated at fair value with changes in fair value being recognised through profit or loss.
On 4 August 2016 the Group participated in a Virgin Australia one for one pro-rata rights issue for a cost of $23 million. The investment
was fully disposed by October 2016 for $68 million. The fair value movement (net of disposal costs) from 30 June 2016 to the date of
disposal of $22 million was recognised through the Statement of Financial Performance within ‘Other expenses’.
*** Legal settlements include court penalties (A$15 million) and costs (A$2 million) related to allegations of anti-competitive conduct in
the air cargo business in Hong Kong and Singapore which were the subject of proceedings by the Australian Competition and Consumer
Commission (ACCC). The amount was fully provided for within the financial statements and was paid on 23 July 2018 (refer Note 21 for
further details).
3. Taxation
Current and deferred taxation are calculated on the basis of tax rates enacted or substantively enacted at reporting date, and are
recognised in the income statement except when the tax relates to items charged or credited to other comprehensive income, in
which case the tax is also recognised in other comprehensive income.
Deferred income taxation is recognised in respect of temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements.
Deferred income tax assets and unused tax losses are only recognised to the extent that it is probable that future taxable amounts
will be available against which to utilise those temporary differences and losses.
Judgements are required about the application of income tax legislation. These judgements and assumptions are subject to risk
and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of
current and deferred tax assets and liabilities recognised in the Statement of Financial Position and the amount of other tax losses
and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised tax assets
and liabilities may require adjustment, resulting in a corresponding credit or charge to the Statement of Financial Performance.
2018
$M
2017
$M
Current taxation expense
Current year
(56) (121)
Deferred taxation expense
Origination of temporary differences
(56)
(94)
(121)
(24)
Total taxation expense recognised in earnings
(150 )(14 5)
Reconciliation of effective tax rate
Earnings before taxation
540 527
Taxation at 28%
Adjustments
Non-deductible expenses
Virgin Australia
Non-taxable income
Equity settlements of long-term incentive obligations
Over provided in prior periods
Foreign tax paid
(151)
(4)
-
-
5
1
(1)
(14 8 )
(6)
6
1
5
-
(3)
Taxation expense
(150 )(14 5)
The Group has $225 million of imputation credits as at 30 June 2018 (30 June 2017: $265 million).
12
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year to and as at 30 June 2018
3. Taxation (continued)
Deferred taxation
Deferred tax assets and liabilities are attributable to the following:
NON-AIRCRAFT
ASSETS
$M
AIRCRAFT
REL ATED
$M
PROVISIONS
AND
ACCRUALS
$M
FINANCIAL
INSTRUMENTS
$M
PENSION
OBLIGATIONS
$M
TOTAL
$M
As at 1 July 2016
Amounts recognised in Other Comprehensive Income
Amounts recognised in earnings
13
-
2
285
-
17
(126 )
-
5
(3)
6
-
(5)
(1)
-
164
5
24
As at 30 June 2017
15 302 (121) 3 (6)193
Amounts recognised in Other Comprehensive Income
Reclassification*
Amounts recognised in earnings
-
-
-
-
(68)
91
-
68
3
21
-
-
-
-
-
21
-
94
As at 30 June 2018
15325(50)24(6)308
* Reclassification relates to a change in taxation legislation in relation to engine maintenance.
Deferred tax assets and liabilities are offset on the face of the Statement of Financial Position where they relate to entities within the same
taxation authority.
There are no unused tax losses available to carry forward against future taxable profits (30 June 2017: Nil).
4. Earnings per Share
Basic earnings per share is calculated by dividing the profit attributable to shareholders of the company by the weighted average
number of ordinary shares on issue during the year, excluding shares held as treasury stock. Diluted earnings per share assumes
conversion of all dilutive potential ordinary shares in determining the denominator.
2018
$M
2017
$M
Earnings for the purpose of basic and diluted earnings per share:
Net profit attributable to shareholders
390 382
Weighted average number of shares (in millions of shares)
Weighted average number of Ordinary Shares for basic earnings per share
Effect of dilutive ordinary shares:
- Performance rights and share options
1,123
11
1,123
17
Weighted average number of Ordinary Shares for diluted earnings per share
1,1341,14 0
Basic earnings per share
Diluted earnings per share
34.7
34.4
34.0
33.5
13
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
5. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits, current accounts in banks net of overdrafts and other
short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
Cash flows are included in the Statement of Cash Flows net of Goods and Services Tax.
Cash and cash equivalents, as stated in the Statement of Cash Flows, are reconciled to the Bank and short-term deposits balance in the
Statement of Financial Position as follows:
2018
$M
2017
$M
Cash balances
Other short-term deposits and short-term bills
61
1,282
33
1,336
Total cash and cash equivalents
1,343 1,369
Reconciliation of Net Profit Attributable to Shareholders to Net Cash Flows from Operating Activities:
Net profit attributable to shareholders
Plus/(less) non-cash items:
Depreciation and amortisation
Loss/(gain) on disposal of property, plant and equipment, intangibles and assets held for resale
Impairment on property, plant and equipment, intangibles and assets held for resale
Share of earnings of associates
Changes in fair value of investments in quoted equity instruments
Movement on fuel derivatives
Foreign exchange losses/(gains)
Other non-cash items
390
525
4
3
(33)
-
8
2
13
382
493
(3)
8
(26)
(23)
(5)
(5)
12
Net working capital movements:
Assets
Revenue in advance
Liabilities
912
(185)
14 6
158
833
(52)
89
34
11971
Net cash flow from operating activities
1,031904
6. Trade and Other Receivables
Trade and other receivables are recognised at cost less any provision for impairment. Bad debts are written-off when they are
considered to have become uncollectable.
2018
$M
2017
$M
Current
Trade and other receivables
Prepayments
424
152
295
91
576386
Non-current
Other receivables
Prepayments
-
77
2
118
77120
14
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
2018
$M
2017
$M
Current
Amounts owing from associates
Contract work in progress
Interest-bearing assets
Assets held for resale
Other assets
1
45
7
1
14
1
10
-
11
5
6827
Non-current
Interest-bearing assets
Assets held for resale
Other assets
175
1
15
164
1
10
191175
In the prior year the Group entered into sale and purchase agreements for six Beech 1900D aircraft which were disposed by the end of
the 2018 financial year. An impairment loss of $2 million was recognised in relation to these aircraft for the year ended 30 June 2018
(30 June 2017: $8 million). Spares related to exited fleets are being marketed for sale and it is expected that proceeds will be received over
the next three years. The carrying value of the assets held for resale reflects the lower of their previous carrying value at the date of transfer
or external market assessments of the fair value, less costs to sell.
Current interest-bearing assets include registered transferable certificates of deposit (RTDs). Non-current Interest-bearing assets include
floating rate medium term notes (MTN) that mature in September 2020 and floating rate Certificates of Deposit with no fixed maturity date.
The RTDs and MTNs have been provided as security over credit card obligations incurred by Air New Zealand. These are subject to potential
offsetting under master netting arrangements.
7. Inventories
Inventories are measured at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO)
cost method. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable
selling expenses.
2018
$M
2017
$M
Engineering expendables
Consumable stores
59
16
70
16
7586
Held at cost
Held initially at cost
Less provision for inventory obsolescence
63
68
(56)
68
74
(56)
Held at net realisable value 12 18
7586
8. Other Assets
Amounts owing from related parties
Amounts owing from related parties are recognised at cost less any provision for impairment.
Contract work in progress
Contract work in progress is stated at cost plus the profit recognised to date, using the percentage of completion method, less
any amounts invoiced to customers. Cost includes all expenses directly related to specific contracts and an allocation of direct
production overhead expenses incurred.
Interest-bearing assets
Interest-bearing assets are measured at amortised cost using the effective interest method, less any impairment.
Assets held for resale
Non-current assets are classified as held for resale if their carrying amount will be recovered through a sale transaction rather
than through continuing use. The sale must be highly probable and the asset available for immediate sale in its present condition.
Non-current assets held for resale are measured at the lower of the asset’s previous carrying amount and its fair value less
costs to sell.
15
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
9. Property, Plant and Equipment
Owned assets
Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and accumulated impairment
losses. Cost includes expenditure that is directly attributable to the acquisition of the item and in bringing the asset to the location
and working condition for its intended use. Cost may also include transfers from equity of any gains or losses on qualifying cash flow
hedges of foreign currency purchases of property, plant and equipment.
Where significant parts of an item of property, plant and equipment have different useful lives, they are accounted for separately. A
portion of the cost of an acquired aircraft is attributed to its service potential (reflecting the maintenance condition of its engines) and
is depreciated over the shorter of the period to the next major inspection event, overhaul, or the remaining life of the asset. The cost of
major engine overhauls for aircraft owned by the Group is capitalised and depreciated over the period to the next expected inspection
or overhaul.
Capital work in progress includes the cost of materials, services, labour and direct production overheads.
Finance leased assets
Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. All other
leases are classified as operating leases. Upon initial recognition, assets held under finance leases are measured at amounts equal to
the lower of their fair value and the present value of the minimum lease payments at inception of the lease. A corresponding liability is
also established. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to
that asset.
Manufacturing credits
Where the Group receives credits and other contributions from manufacturers in connection with the acquisition of certain aircraft
and engines, these are either recorded as a reduction to the cost of the related aircraft and engines, or offset against the associated
operating expense, according to the reason for which they were received.
Depreciation
Depreciation is calculated to write down the cost of assets on a straight line basis to an estimated residual value over their economic
lives as follows:
Airframes 18 years
Engines 6 – 15 years
Engine overhauls period to next overhaul
Aircraft specific plant and equipment (including simulators and spares) 10 – 25 years
Buildings 50 – 100 years
Non-aircraft specific leasehold improvements, plant, equipment, furniture and vehicles 2 – 10 years
AIRFRAMES,
ENGINES AND
SIMULATORS
$M
SPARES
$M
PLANT AND
EQUIPMENT
$M
LAND AND
BUILDINGS
$M
CAPITAL WORK
IN PROGRESS
$M
TOTAL
$M
2018
Carrying value as at 1 July 2017
4,244
83132219 674 ,74 5
Additions
Disposals
Depreciation
Transfers
Transfer to assets held for resale
Foreign exchange differences (refer Note 22)
487
(24)
(410 )
195
-
57
14
(10 )
(7)
-
(1)
-
7
-
(32)
33
-
-
5
-
(37)
14
-
-
241
-
-
(242)
-
-
754
(34)
(486)
-
(1)
57
Carrying value as at 30 June 2018
Represented by:
Cost
Accumulated depreciation
Provision for impairment
4,549
6,606
(2,057)
-
79
147
(68)
-
14 0
448
(308)
-
201
455
(236)
(18)
66
66
-
-
5,035
7,722
(2,669)
(18)
Carrying value as at 30 June 2018
4,5497914 0201665,035
16
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
9. Property, Plant and Equipment (continued)
AIRFRAMES,
ENGINES AND
SIMULATORS
$M
SPARES
$M
PLANT AND
EQUIPMENT
$M
LAND AND
BUILDINGS
$M
CAPITAL WORK
IN PROGRESS
$M
TOTAL
$M
2017
Cost
Accumulated depreciation
Provision for impairment
5,789
(1,802)
-
200
(103)
-
404
(275)
-
409
(180 )
(18)
61
-
-
6,863
(2,360)
(18)
Carrying value as at 1 July 2016
Additions
Disposals
Depreciation
Transfers
Transfer to assets held for resale
Foreign exchange differences (refer Note 22)
3,987
578
(30)
(390)
128
(9)
(20)
97
13
(17)
(9)
-
(1)
-
12 9
3
(1)
(31)
32
-
-
2 11
4
-
(31)
35
-
-
61
201
-
-
(195)
-
-
4,485
799
(48)
(461)
-
(10 )
(20)
Carrying value as at 30 June 2017
Represented by:
Cost
Accumulated depreciation
Provision for impairment
4,244
6,076
(1, 832)
-
83
166
(83)
-
132
420
(288)
-
219
442
(205)
(18)
67
67
-
-
4 ,74 5
7,171
(2,408)
(18)
Carrying value as at 30 June 2017
4,24483132219674 ,74 5
2018
$M
2017
$M
Airframes, engines and simulators comprise:
Finance leased airframes and engines
Owned airframes, engines and simulators
Progress payments
1, 413
2, 871
265
1, 614
2,300
330
4,5494,244
Land and buildings comprise:
Leasehold properties
Freehold properties
188
13
204
15
201219
Certain aircraft and aircraft related assets with a carrying value of $3,373 million as at 30 June 2018 (30 June 2017: $3,213 million)
are pledged as security over secured borrowings and finance lease obligations.
Impairment
Air New Zealand Gas Turbines (ANZGT) provides overhaul services to aero derivative engines that are applied to energy production
and marine industries. Over recent years a down turn in the market has resulted in a decline in activity and profitability of the
business. Impairment provisions of $18 million have been recognised against the land and building assets of the business in previous
years. During the year ended 30 June 2018 the assets were assessed for impairment based on a value in use discounted cash flow
valuation. Cash flow projections were sourced from the 2019 financial year plan and extrapolated into the future using a 2% growth
rate and adjusted for any one-off transactions. Key assumptions include exchange rates, customer demand, market supply and
terminal values. These assumptions have been based on historical data and current market information. The cash flow projections
are particularly sensitive to fluctuations in exchange rates and economic demand. The cash flow projections are discounted using
a 9% discount rate. The impaired carrying value was found to be appropriate as at 30 June 2018 and 30 June 2017.
Residual values
Estimates and judgements are applied by management to determine the expected useful life of aircraft related assets. The useful
lives are determined based on the expected service potential of the asset and lease term. The residual value, at the expected date
of disposal, is estimated by reference to external projected values and are influenced by external changes to economic conditions,
demand, competition and new technology. Residual values are denominated in United States dollars and are therefore sensitive to
exchange fluctuations as well as movements in projected values. Residual values and useful lives are reviewed each year to ensure
they remain appropriate. During the year ended 30 June 2018 the residual values of the aircraft were reassessed and depreciation
expense was reduced by $6 million (30 June 2017: increased by $4 million).
17
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
10. Intangible Assets
Computer software acquired, which is not an integral part of a related hardware item, is recognised as an intangible asset. The costs
incurred internally in developing computer software are also recognised as intangible assets where the Group has a legal right to use
the software and the ability to obtain future economic benefits from that software. Acquired software licences are capitalised on the
basis of the costs incurred to acquire and bring to use the specific software. These assets have a finite life and are amortised on a
straight-line basis over their estimated useful lives of three to six years.
I NTE R N A LLY
DEVELOPED
SOFTWARE
$M
E X TE R N A LLY
PURCHASED
SOFTWARE
$M
CAPITAL
WORK IN
PROGRESS
$M
OTHER
$M
TOTAL
$M
2018
Carrying value as at 1 July 2017
119 4
25 1
14 9
Additions
Acquisitions from business combinations
Amortisation
Impairment
Transfers
-
-
(37)
-
69
-
-
(2)
-
-
60
-
-
-
(69)
-
1
-
(1)
-
60
1
(39)
(1)
-
Carrying value as at 30 June 2018
Represented by:
Cost
Accumulated depreciation
Provision for impairment
151
391
(240)
-
2
152
(150 )
-
16
16
-
-
1
2
-
(1)
170
561
(390)
(1)
Carrying value as at 30 June 2018
1512161170
2017
Cost
Accumulated depreciation
273
(179 )
158
(153 )
27
-
1
-
459
(332)
Carrying value as at 1 July 2016
Additions
Amortisation
Transfers
94
-
(30)
55
5
-
(2)
1
27
54
-
(56)
1
-
-
-
127
54
(32)
-
Carrying value as at 30 June 2017
Represented by:
Cost
Accumulated depreciation
119
326
(207)
4
158
(154)
25
25
-
1
1
-
14 9
510
(361)
Carrying value as at 30 June 2017
119425114 9
18
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
11. Investment in Other Entities
2018
$M
2017
$M
Investments in associates
Investments in joint ventures
Investments in other entities
117
-
1
92
2
1
11895
Subsidiaries
Significant subsidiaries comprise:
NAME PRINCIPAL ACTIVITY COUNTRY OF INCORPORATION
Air Nelson Limited Aviation New Zealand
Air New Zealand Aircraft Holdings Limited Aircraft leasing and financing New Zealand
Air New Zealand Associated Companies Limited Investment New Zealand
Air New Zealand Regional Maintenance Limited Engineering services New Zealand
Mount Cook Airline Limited Aviation New Zealand
TEAL Insurance Limited Captive insurer New Zealand
All subsidiary entities above have a balance date of 30 June and are 100 percent owned.
Associates and Joint Ventures
Significant associates and joint ventures comprise:
NAME RELATIONSHIP % OWNED PRINCIPAL ACTIVITY COUNTRY OF BALANCE DATE
INCORPORATION
Christchurch Engine Centre (CEC) Associate 49 Engineering services New Zealand 31 December
ANZGT Field Services LLC Joint Venture 51 Engineering services United States 30 June
Prior to 29 September 2017, the Group accounted for the investment in 11Ants Analytics Group Limited as a joint venture. On this date the
Group acquired the remaining 50% interest for $85k and accounted for the entity as a wholly owned subsidiary.
Investments in associates and joint ventures are accounted for using the equity method and are measured in the Statement of
Financial Position at cost plus post-acquisition changes in the Group’s share of net assets, less dividends. Goodwill relating to
associates and joint ventures is included in the carrying amount of the investment.
If the carrying amount of the equity accounted investment exceeds its recoverable amount, it is written down to the latter. When
the Group’s share of accumulated losses in an associate or joint venture equals or exceeds its carrying value, the Group does not
recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture.
19
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year to and as at 30 June 2018
11. Investment in Other Entities (continued)
Summary financial information of associates
2018
$M
2017
$M
Assets and liabilities of associates are as follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
353
44
(132)
(26)
268
40
(97)
(24)
Net identifiable assets
239187
Group share of net identifiable assets11792
Carrying value of investment in associates
11792
Results of associates
Revenue
Earnings after taxation
935
68
687
54
Total comprehensive income
6854
Group share of net earnings after taxation
33 26
Group share of total comprehensive income
3326
20
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
12. Revenue in Advance
Transportation sales in advance includes consideration received in respect of passenger and cargo sales for which the actual
carriage has not yet been performed.
Loyalty programme revenue in advance includes revenues associated with both the award of Airpoints Dollars to Airpoints
members as part of the initial sales transaction and with sales of Airpoints Dollars to third parties, net of estimated expiry
(non-redeemed Airpoints Dollars), in respect of which the Airpoints member has not yet redeemed their points.
Other revenue in advance includes membership subscriptions and contract related services revenue which relate to future periods.
2018
$M
2017
$M
Current
Transportation sales in advance
Loyalty programme
Other
1,137
163
22
1,021
136
20
1,322 1,177
Non-current
Loyalty programme
Other
180
5
180
4
185184
13. Interest-Bearing Liabilities
Borrowings, bonds and finance lease obligations are initially recognised at fair value, net of transaction costs incurred. They are
subsequently stated at amortised cost using the effective interest rate method, where appropriate. Borrowings, bonds and finance
lease obligations are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability
for more than 12 months after the balance date.
2018
$M
2017
$M
Current
Secured borrowings
Finance lease liabilities
165
266
132
185
431 317
Non-current
Secured borrowings
Unsecured bonds
Finance lease liabilities
1,398
50
855
1,111
50
1,036
2,3032,197
Interest rates basis:
Fixed rate
Floating rate
711
2,023
720
1,794
At amortised cost
2,7342 , 514
At fair value
2,7092,458
Non-cash movements in interest-bearing liabilities during the year ended 30 June 2018 included foreign exchange losses of $197 million
(30 June 2017: gains of $87 million) and capitalised interest of $5 million (30 June 2017: $7 million).
The fair value of interest-bearing liabilities for disclosure purposes is calculated based on the present value of future principal and interest
cash flows, discounted at the market rate of interest for similar liabilities at reporting date.
Secured borrowings are secured over aircraft and are subject to both fixed and floating interest rates. Fixed interest rates were 1.0 percent
(30 June 2017: 1.0 percent).
The unsecured, unsubordinated fixed rate bonds have a maturity date of 28 October 2022 and an interest rate of 4.25% payable semi-annually.
21
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
13. Interest-Bearing Liabilities (continued)
Finance lease liabilities
Payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability.
The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the
remaining balance of the liability.
2018
$M
2017
$M
Repayable as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
291
657
278
206
711
411
Less future finance costs
1,226
(105)
1,328
(107)
Present value of future rentals
1,1211,221
Repayable as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
266
596
259
185
650
386
1,1211,221
Finance lease liabilities are secured over aircraft and are subject to both fixed and floating interest rates. Fixed interest rates ranged from
0.7 percent to 3.4 percent (30 June 2017: 0.7 percent to 3.4 percent). Purchase options are available on expiry or, if applicable under the
lease agreement, on early termination of the finance leases.
14. Provisions
A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable
that an outflow of economic benefits will be required to settle the obligation, and the provision can be reliably measured.
AIRCRAFT
LEASE
RETURN COSTS
$M
RESTRUCTURING
$M
OTHER
$M
TOTAL
$M
Balance as at 1 July 2017
Amount provided
Amount utilised and released
Foreign exchange differences
266
86
(97)
10
2
2
(3)
-
2
4
(4)
-
270
92
(104)
10
Balance as at 30 June 2018
26512268
Represented by:
Current
Non-current
114
151
1
-
2
-
117
151
Balance as at 30 June 2018
26512268
22
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
14. Provisions (continued)
Nature and purpose of provisions
Aircraft lease return costs
Where a commitment exists to maintain aircraft held under operating lease arrangements, a provision is made during the lease
term for the lease return obligations specified within those lease agreements. The provision is calculated taking into account a
number of variables and assumptions including the number of future hours or cycles expected to be operated, the expected cost
of maintenance and the lifespan of limited life parts. It is based upon historical experience, manufacturers’ advice and, where
appropriate, contractual obligations in determining the present value of the estimated future costs of major airframe inspections
and engine overhauls by making appropriate charges to the Statement of Financial Performance, calculated by reference to the
number of hours or cycles operated during the year. The provision is expected to be utilised at the next inspection or overhaul.
Restructuring
Restructuring provisions are recognised when the Group is demonstrably committed, without realistic possibility of withdrawal,
to a formal detailed plan to terminate employment before the normal retirement date. Costs relating to ongoing activities are not
provided for.
Other
Other provisions include insurance and warranty provisions. Insurance provisions are expected to be utilised within 12 months and
are based on historical claim experience. Warranty provisions represent an estimate of potential liability for future rectification
work in respect of past engineering services performed.
15. Other Liabilities
Employee entitlements
Liabilities in respect of employee entitlements are recognised in exchange for services rendered during the accounting period, but
which have not yet been compensated as at reporting date. These include annual leave, long service leave, retirement leave and
accrued compensation.
Defined pension
Air New Zealand’s net obligation in respect of defined benefit pension plans is calculated by an independent actuary, by estimating
the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting
the fair value of the plan’s assets. The discount rate reflects the yield on government bonds that have maturity dates approximating
the terms of Air New Zealand’s obligations.
When the calculation results in an asset, the value of the asset is limited to the present value of economic benefits available in the
form of any future refunds from the plan or reductions in future contributions from the plan.
2018
$M
2017
$M
Current
Employee entitlements
Amounts owing to associates
Other liabilities (including defined benefit liabilities)
236
22
5
234
23
4
263261
Non-current
Employee entitlements
Other liabilities
12
15
14
9
2723
The Group operates two defined benefit plans for qualifying employees in New Zealand and overseas. A net liability was recognised of
$1 million (30 June 2017: nil) in respect of the New Zealand plan and nil in respect of the overseas plan (30 June 2017: net liability of
$1 million). The New Zealand plan is now closed to new members. The plans provide a benefit on retirement or resignation based upon
the employee’s length of membership and final average salary. Each year an actuarial calculation is undertaken using the Projected Unit
Credit Method to calculate the present value of the defined benefit obligation and the related current service cost. The current service cost
recognised through earnings was $2 million (30 June 2017: $2 million).
23
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
16. Distributions to Owners
2018
$M
2017
$M
Distributions recognised
Final dividend on Ordinary Shares
Special dividend on Ordinary Shares
Interim dividend on Ordinary Shares
124
-
124
112
281
112
248505
Distributions paid
Final dividend on Ordinary Shares
Special dividend on Ordinary Shares
Interim dividend on Ordinary Shares
130
-
130
118
294
118
260530
On 22 August 2018, the Board of Directors declared a final dividend for the 2018 financial year of 11.0 cents per Ordinary Share, payable
on 19 September 2018 to registered shareholders at 7 September 2018. The total dividend payable will be $124 million. Imputation credits
will be attached and supplementary dividends paid to non-resident shareholders. The dividend has not been recognised in the June 2018
financial statements.
A 2018 interim dividend of 11.0 cents per Ordinary Share was paid on 16 March 2018 (2017 interim dividend: 10.0 cents per Ordinary Share
paid on 17 March 2017). Imputation credits were attached and supplementary dividends paid to non-resident shareholders.
A final dividend in respect of the 2017 financial year of 11.0 cents per Ordinary Share was paid on 18 September 2017 (2016 financial year
10.0 cents per Ordinary Share final dividend and 25.0 cents per Ordinary Share special dividend was paid on 19 September 2016). Imputation
credits were attached and supplementary dividends paid to non-resident shareholders.
The dividend reinvestment plan is currently suspended.
17. Share Capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares, rights or options are
shown in equity as a deduction, net of taxation, from the proceeds.
When shares are acquired by a member of the Group, the amount of consideration paid is recognised directly in equity. Acquired
shares are classified as treasury stock and presented as a deduction from share capital. When treasury stock is subsequently
sold or reissued pursuant to equity compensation plans, the cost of treasury stock is reversed and the realised gain or loss on
sale or reissue, net of any directly attributable incremental transaction costs, is recognised within Share Capital.
Where the Group funds the on-market purchase of shares to settle obligations under long-term incentive plans the total cost of
the purchase (including transaction costs) is deducted from Share Capital.
2018
$M
2017
$M
Share capital comprises:
Authorised, issued and fully paid in capital
Equity-settled share-based payments
2,216
10
2,228
10
2,2262,238
Balance at the beginning of the year
Equity settlements of long-term incentive obligations*
Equity-settled share-based payments
2,238
(17)
5
2,252
(19)
5
Balance at the end of the year
2,2262,238
* During the year ended 30 June 2018 the Group funded the purchase on-market of 4,932,709 shares (30 June 2017: 8,297,311). The shares
were used to settle obligations under employee share-based compensation plans.
Number of Ordinary Shares authorised, fully paid and on issue
Balance at the beginning of the year
2018
1,122,844,227
2017
1,122,844,227
Balance at the end of the year**
1,122,844,2271,122,844,227
** Includes treasury stock of 34,183 shares (30 June 2017: 34,183 shares).
24
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
17. Share Capital (continued)
Kiwi Share
One fully paid special rights convertible share (the Kiwi Share) is held by the Crown. While the Kiwi Share does not carry any general Voting Rights,
the consent of the Crown as holder is required for certain prescribed actions of the Company as specified in the Constitution.
Non New Zealand nationals are restricted from holding or having an interest in 10 percent or more of voting shares unless the prior written consent
of the Kiwi Shareholder is obtained. In addition, any person that owns or operates an airline business is restricted from holding any shares in the
Company without the Kiwi Shareholder’s prior written consent.
Voting rights
On a show of hands or by a vote of voices, each holder of Ordinary Shares has one vote. On a poll, each holder of Ordinary Shares has one vote for
each fully paid share.
All Ordinary Shares carry equal rights to dividends and equal distribution rights on wind up.
Application of treasury stock method
Share repurchase
The Group utilises treasury stock acquired under a buy-back programme to fulfil obligations under employee share-based compensation plans.
No treasury stock was utilised in the 2018 financial year (30 June 2017: Nil). Total treasury stock held as at 30 June 2018 is 34,090 shares
(30 June 2017: 34,090 shares).
Staff Share Scheme
Unallocated shares of the Air New Zealand Staff Share Schemes are accounted for under the Treasury Stock method, and deducted from Ordinary
Share capital on consolidation. The number of unallocated shares as at 30 June 2018 was 93 (30 June 2017: 93).
Equity-Settled Share-Based Payments
The fair value (at grant date) of share rights and options granted to employees is recognised as an expense, within the Statement of
Financial Performance, over the vesting period of the rights and options, with a corresponding entry to ‘Share Capital’. The amount
recognised as an expense is adjusted at each reporting date to reflect the extent to which the vesting period has expired and
management’s best estimate of the number of rights and share options that will ultimately vest.
Share rights and options over ordinary shares
Performance share rights have been offered to a number of senior executives on attainment of predetermined performance objectives, and
restricted share rights have been offered to the CEO subject to remaining in employment over the vesting period. Prior to the 2015 financial year,
share options were granted to a number of senior executives on attainment of predetermined performance objectives.
The total expense recognised in the year ended 30 June 2018 in respect of equity-settled share-based payment transactions was $5 million
(30 June 2017: $5 million).
PERFORMANCE
SHARE
RIGHTS
2018
LONG-TERM
INCENTIVE
PLAN
2018
CEO
RESTRICTED
SHARE RIGHTS
2018
PERFORMANCE
SHARE
RIGHTS
2017
LONG-TERM
INCENTIVE
PLAN
2017
CEO
RESTRICTED
SHARE RIGHTS
2017
CFO
OPTION
PLAN*
2017
Number outstanding
Outstanding at beginning of the year
Granted during year
Exercised during year
Forfeited during year
13,807,858
3,096,055
(4,257,053)
(410 , 479 )
900,764
-
(485,029)
-
659,715
216,954
(365,861)
-
9,269,896
5,961,948
-
(1,423, 986 )
19 ,741,14 6
-
(18 , 840, 382)
-
292,398
367,317
-
-
1,256,281
-
(1,256,281)
-
Outstanding at the end of the year**
12, 236 , 381 415 ,73 5 510 , 8 0 8 13,807,858 900,764 659,715 -
Exercisable as at end of the year
Weighted average exercise price:
-
exercisable as at the end of the year ($)
- exercised during the year ($)
Weighted average:
- Share price at the date options
exercised ($)
- Remaining period of options to
contractual maturity (years)
Fair value of rights granted in year ($M)
Unamortised grant date fair value ($M)
-
-
-
-
-
5.3
6 .1
415 ,73 5
1.23
1.23
3 . 41
0.2
-
-
-
-
-
-
-
0.7
0.5
-
-
-
-
-
5.4
5.8
900,764
1.23
1.28
2.18
1.2
-
-
-
-
-
-
-
0.6
0.5
-
-
1.18
2.13
-
-
-
* The CFO Option Plan was part of the former Chief Financial Officer’s total remuneration.
** The People Remuneration and Diversity Committee of the Board will adjust share-based arrangement terms, if necessary, to ensure that the
impact of share issues, share offers or share structure changes is value neutral as between participants and shareholders.
25
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
17. Share Capital (continued)
Key inputs and assumptions
The general principles underlying the Black Scholes pricing model have been used to value these rights and options using a Monte Carlo simulation
approach, with the exception of the CEO Restricted Share Rights Plan for which a simplified approach was applied given the exercise price was
fixed at issue date. The key inputs for rights and options granted in the relevant year were as follows:
Performance share rights
WEIGHTED
AVERAGE
SHARE PRICE
(CENTS)
EXPECTED
VOLATILITY OF
SHARE PRICE
(%)
EXPECTED
VOLATILITY OF
PERFORMANCE
BENCHMARK
INDEX
(%)
CORRELATION
OF VOLATILITY
INDICES
CONTRACTUAL
LIFE
(YEARS)
RISK FREE
R ATE
(%)
EXPECTED
DIVIDEND
YIELD
(%)
201834830130.533.52.025.8
2 01720030150.533.51.959.0
201623928130.403.52.537.1
201520526140.343.54.005.3
CEO Restricted Share Rights Plan
WEIGHTED
AVERAGE
SHARE PRICE
(CENTS)EQUIT Y BETA
MARKET RISK
PREMIUM
(%)
COST OF
EQUITY
(%)
CONTRACTUAL
LIFE
(YEARS)
RISK FREE
R ATE
(%)
EXPECTED
DIVIDEND
YIELD
(%)
2018 Tranche 1
2018 Tranche 2
348
348
1.10
1.10
7. 5 0
7. 5 0
9.6
9.6
1.3
2.3
1.84
1.94
5.9
5.4
2017 Tranche 1
2017 Tranche 2
194
194
1.30
1.30
7. 5 0
7. 5 0
11.1
11.1
1.3
2.3
1.90
1.90
6.7
7. 2
2016 239 1.25 7. 5 0 11.1 2.3 2.50 6.3
Options
WEIGHTED
AVERAGE
SHARE
PRICE
(CENTS)
EXPECTED
VOLATILITY OF
SHARE PRICE
(%)
EXPECTED
VOLATILITY OF
PERFORMANCE
BENCHMARK
INDEX
(%)
CORRELATION
OF VOLATILITY
INDICES
CONTRACTUAL
LIFE
(YEARS)
RISK FREE
R ATE
(%)
EXPECTED
DIVIDEND
YIELD
(%)
DISCOUNT
TO REFLECT
NEGOTIABILITY
RESTRICTIONS
(%)
Long-Term Incentive Plan
1
2 014
2013 (1)
139
112
27
30
15
15
0.25
0.20
5.0
5.0
4.40
3 .10
5.8
4.9
25
25
CFO Option Plan
2
2013 Tranche 2
112 30 20 0.20 6.0 3.30 4.9 25
1
Volatility and correlation estimates were derived using historical data over past 3-5 years; Risk free rate was based on the 5 year zero coupon bond yield.
2
Volatility and correlation estimates were derived using historical data over past 4 years; Risk free rate was based on 6 year zero coupon bond yields.
26
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
17. Share Capital (continued)
SHARE RIGHTS SCHEMES
(a) Performance Share Rights
The Group has undertaken a stock settled share rights scheme. Performance share rights for a specified value are granted at no cost to the holder.
For each performance share right that vests, one share will be issued. The number granted is determined by an independent valuation of the fair
value at the date of issue. Vesting of performance share rights is subject to the holder remaining an employee and vesting conditions relating to the
Air New Zealand share price being achieved. If vesting is not achieved on the third anniversary of the issue date, 50 percent of performance rights
will lapse. For the remaining 50 percent, there will be a further 6 month opportunity for the performance rights to vest. If they have not vested at the
end of this period they will lapse.
In order to vest the Air New Zealand share price adjusted for distributions made over the period must outperform a comparison index over a period
of three years (or up to a maximum of three and a half years) after the issue date. The index is made up of 50:50 of the NZX All Gross Index and the
Bloomberg World Airline Total Return Index (adjusted for dividends).
(b) CEO Restricted Share Rights Plan
The Group has undertaken a stock settled share rights scheme. Restricted share rights for a specified value are granted at no cost to the holder.
For each restricted share right that vests, one share will be issued. The number granted is determined by an independent valuation of the fair value
at the date of issue. Vesting of restricted share rights is subject to the holder remaining an employee. The restricted share rights vest between 31
December 2018 and 31 December 2019 and if they have not vested on a specified date they will lapse.
OPTIONS
The Group previously undertook a stock settled share appreciation rights scheme whereby shares are issued equating to the delta between the
market price and the exercise price. The exercise price has been modelled as a stochastic variable, using the volatility, correlation, dividend yield and
risk free rate assumptions provided.
The volatility and correlation estimates were derived from measuring these parameters using historical data. The risk free rate was based on the
zero coupon bond yield implied from short to medium term yields for government bonds.
The expected life used in calculating the value of options was determined by analysis of the attrition rates and early exercise behaviour of staff in
long-term incentive programmes in similar large corporates.
(a) Long-Term Incentive Plan (LTIP)
The options may be exercised at any time between three and five years after the date of issue (subject to compliance with insider trading restrictions
and the rules of the scheme). The exercise price was set three years after issue, and was based on Air New Zealand’s share price at the issue date
increased or decreased by the percentage movement in a specified index over the three years, and decreased by any distributions made over the
same period. The specified index comprised the total shareholder return for the NZX All Gross Index and the Bloomberg World Airline Total Return
Index (adjusted for dividends) in 50:50 proportions.
(b) CFO Option Plan
The Group undertook a stock settled share appreciation rights scheme approach whereby shares are issued equating to the delta between the
market price and the exercise price. The options were exercisable at any time between four to six years after the date of issue for the CFO Option
Plan (subject to compliance with insider trading restrictions and the rules of the scheme). All options under the plan have been exercised. The
exercise price was set four years after issue, and was based on Air New Zealand’s share price at the issue date increased or decreased by the
percentage movement in a specified index over the vesting period, and decreased by any distributions made over the same period. The specified
index comprised the total shareholder return for the NZX All Gross Index and the Bloomberg World Airline Total Return Index (adjusted for
dividends) in 50:50 proportions.
27
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year to and as at 30 June 2018
18. Reserves
The Group’s reserves, together with the equity accounted share of associates’ reserves as at the reporting date are set out below:
2018
$M
2017
$M
Cash flow hedge reserve
Costs of hedging reserve
70
(4)
22
(13 )
Hedge reserves
Foreign currency translation reserve
General reserves
66
(13 )
(103)
9
(16 )
(245)
Total Reserves
(50)(252)
The nature and purpose of reserves is set out below:
HEDGE RESERVES
Cash flow hedge reserve
The cash flow hedge reserve contains the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related
to hedged transactions that have not yet occurred.
Costs of hedging reserve
The costs of hedging reserve contains the cumulative net change in the fair value of time value on fuel options which are excluded from hedge
designations of fuel price risk.
Foreign currency translation reserve
The foreign currency translation reserve contains foreign exchange differences arising on consolidation of foreign operations together with the
translation of foreign currency borrowings designated as a hedge of net investments in those foreign operations.
General reserves
General reserves include the retained deficit net of dividends recognised, remeasurements in respect of the net defined benefit assets and liabilities
and the Group’s share of equity accounted associates’ reserves.
19. Operating Leases
Leases under which a significant proportion of the risks and rewards of ownership are retained by the lessor are classified
as operating leases. Payments made under operating leases (net of any incentives received) are recognised as an expense in the
Statement of Financial Performance on a straight-line basis over the term of the lease.
2018
$M
2017
$M
Rental and lease expenses recognised in earnings
Aircraft
Property
170
57
178
52
227230
Future operating lease commitments
Aircraft leases payable*
Not later than 1 year**
Later than 1 year and not later than 5 years
Later than 5 years
194
489
224
160
433
192
907785
Property leases payable
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
50
144
100
43
109
70
294222
* Includes lease commitments for five Airbus A320/321 NEO aircraft due to be delivered in the 2019 and 2020 financial years and two
Boeing 787-9 aircraft due to be delivered in the 2019 and 2020 financial years.
** Aircraft leases payable less than 1 year includes $18 million of commitments for short-term leases which provide cover for Boeing
787-9 engine issues.
Subject to negotiation, certain aircraft operating leases give the Group the right to renew the lease.
28
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
20. Capital Commitments
Commitments shown are for those asset purchases authorised and contracted for as at reporting date but not provided for in the
financial statements, converted at the year end exchange rate.
2018
$M
2017
$M
Aircraft and engines
Other property, plant and equipment and intangible assets
1,526
4
1,637
10
1,5301,647
Commitments as at reporting date include one Boeing 787-9 aircraft (delivery in the 2019 financial year), eleven Airbus A321 NEOs and four
Airbus A320 NEOs (delivery from 2019 to 2024 financial years) and ten ATR72-600s (delivery from 2019 to 2020 financial years). In August
2018 the Group agreed to convert two Airbus A320 NEOs to A321 NEOs and also convert two purchase rights to A321 NEO firm orders
which are reflected in the above table.
21. Contingent Liabilities
Contingent liabilities are subject to uncertainty or cannot be reliably measured and are not provided for. Disclosures as to the
nature of any contingent liabilities are set out below. Judgements and estimates are applied to determine the probability that an
outflow of resources will be required to settle an obligation. These are made based on a review of the facts and circumstances
surrounding the event and advice from both internal and external parties.
2018
$M
2017
$M
Letters of credit and performance bonds3232
All significant legal disputes involving probable loss that can be reliably estimated have been provided for in the financial statements. There are
no contingent liabilities for which it is practicable to estimate the financial effect.
Allegations of anti-competitive conduct in the air cargo business in Hong Kong and Singapore were the subject of proceedings by the
Australian Competition and Consumer Commission (ACCC). Following two appeals of an initial judgment finding in favour of Air New Zealand,
the High Court released its judgment on 14 June 2017 finding in favour of the ACCC. The level of penalty was referred to the Federal Court
for determination, which on 27 June 2018 approved an in principle settlement agreed between the ACCC and Air New Zealand of a A$15m
penalty and A$2m contribution to the ACCC’s costs. This amount was paid by Air New Zealand on 23 July 2018. The amount was fully provided
for within the financial statements.
No other significant contingent liability claims are outstanding at balance date.
The Group has a partnership agreement with Pratt and Whitney in relation to the Christchurch Engine Centre (CEC) (Note 11). By the nature of
the agreement, joint and several liability exists between the two parties. Total liabilities of the CEC are $158 million (30 June 2017: $121 million).
22. Financial Risk Management
Air New Zealand is subject to credit, foreign currency, interest rate and fuel price risks. These risks are managed with various financial instruments,
using a set of policies approved by the Board of Directors. Compliance with these policies is reviewed and reported monthly to the Board and is
included as part of the internal audit programme. Group policy is not to enter, issue or hold financial instruments for speculative purposes.
CREDIT RISK
Credit risk is the potential loss from a transaction in the event of default by a counterparty during the term of the transaction or on settlement
of the transaction. Air New Zealand incurs credit risk in respect of trade receivable transactions and other financial instruments in the normal
course of business. The maximum exposure to credit risk is represented by the carrying value of financial assets.
Air New Zealand places cash, short-term deposits and derivative financial instruments with good credit quality counterparties, having a minimum
Standard and Poors’ credit rating of A- or minimum Moodys’ credit rating of A3. Limits are placed on the exposure to any one financial institution.
Credit evaluations are performed on all customers requiring direct credit. Air New Zealand is not exposed to any concentrations of credit risk
within receivables, other assets and derivatives. Air New Zealand does not require collateral or other security to support financial instruments
with credit risk. A significant proportion of receivables are settled through the International Air Transport Association (IATA) clearing mechanism
which undertakes its own credit review of members. Over 91% of trade and other receivables are current, with less than 1% falling due after
more than 90 days.
29
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
MARKET RISK
Foreign Currency Risk
Foreign currency risk is the risk of loss to Air New Zealand arising from adverse fluctuations in exchange rates.
Air New Zealand has exposure to foreign exchange risk as a result of transactions denominated in foreign currencies, arising from normal trading
activities, foreign currency borrowings and foreign currency capital commitments, purchases and sales. The documented risk management approach
(as approved by the Board of Directors) is to manage both forecast foreign currency operating revenues and expenditure and foreign currency
denominated balance sheet items. Hedges of foreign currency capital transactions are only undertaken if there is a large volume of forecast capital
transactions over a short period of time.
Air New Zealand enters into foreign exchange contracts to manage the economic exposure arising due to fluctuations in foreign exchange rates
affecting both highly probable forecast operating cash flows and foreign currency denominated liabilities. Any exposure to gains or losses on these
contracts is offset by a related loss or gain on the item being hedged.
Forecast operating transactions
Foreign currency operating cash inflows are primarily denominated in Australian Dollars, European Community Euro, Japanese Yen, Chinese
Renminbi, United Kingdom Pounds and United States Dollars. Foreign currency operating cash outflows are primarily denominated in United States
Dollars. The Group’s treasury risk management policy is to hedge between 60% and 90% of forecast net operating cash flows for the first 6
months, with progressive reductions in percentages hedged over the next 6 to 12 months. Forward points are excluded from the hedge designation
in respect of operating revenue and expenditure transactions and are marked to market through earnings. The underlying forecast revenue and
expenditure transactions in respect of foreign currency cash flow hedges in place at reporting date, are expected to occur over the next 12 months.
Japanese Yen and Euro denominated interest-bearing liabilities are designated as the hedging instrument in qualifying cash flow hedges of highly
probable forecast Japanese Yen and Euro revenues, respectively.
Balance sheet exposures
Certain United States Dollar denominated interest-bearing liabilities are designated as the hedging instrument in fair value hedges of underlying
United States Dollar aircraft values. A further proportion of United States Dollar denominated interest-bearing liabilities remains unhedged to provide
an offset to foreign currency movements within depreciation expense, resulting from revisions made to aircraft residual values during the year.
The Group has investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising on
the net assets of certain Group foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies.
Where changes in the fair value of a derivative provide an offset to the underlying hedged item as it impacts earnings, hedge accounting is not
applied. Foreign currency translation gains or losses on lease return provisions and the remaining non-hedge accounted United States Dollar,
Japanese Yen and Euro denominated interest-bearing liabilities are recognised in the Statement of Financial Performance within ‘Foreign exchange
losses’. Marked to market gains or losses on non-hedge accounted foreign currency derivatives provide an offset to these foreign exchange
movements, and are also recognised within ‘Foreign exchange losses’.
With the exception of foreign currency denominated working capital balances, which together are immaterial to foreign currency fluctuations,
Air New Zealand’s exposure to foreign exchange risk arising on items recognised in the Statement of Financial Position at reporting date is
summarised below. This risk is translation risk before hedging activities, which is then managed through a number of different hedging strategies in
which the items identified below may be designated either as the hedged item or the hedging instrument depending on the most efficient and cost
effective strategy.
Derivative financial instruments are excluded from this table as they are specifically used to manage risk and do not create an initial exposure.
The impact of derivative financial instruments in terms of managing identified risks is detailed over the following pages.
Forecast foreign currency revenue and expenditure transactions occur in the future and are not included below. The effect of foreign currency risk
arising on forecast transactions and how this is managed is detailed over the following pages.
30
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
Foreign currency exposure of items recognised at reporting date, before hedging
NZD
$M
USD
$M
AUD
$M
EUR
$M
JPY
$M
TOTAL
$M
As at 30 June 2018
Investments in other entities
Interest-bearing assets
Interest-bearing liabilities
Provisions
-
147
(173 )
(59)
118
-
(1,608)
(209)
-
35
-
-
-
-
(163)
-
-
-
(790)
-
118
182
(2,734)
(268)
(85)(1,699)35(163)(790)(2,702)
As at 30 June 2017
Investments in other entities
Interest-bearing assets
Interest-bearing liabilities
Provisions
2
130
(248)
(55)
93
-
(1,625)
(215)
-
34
-
-
-
-
(167)
-
-
-
(474 )
-
95
164
( 2 , 514 )
(270)
(171)(1,747 )34(167)(474 )(2,525)
Hedging foreign currency risk
Derivative financial instruments
Derivative financial instruments, other than those designated as hedging instruments in a qualifying cash flow hedge, are classified
as held for trading. Subsequent to initial recognition, derivative financial instruments in this category are stated at fair value.
The gain or loss on remeasurement to fair value is recognised immediately in the Statement of Financial Performance.
Hedge accounted financial instruments
Where financial instruments qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the
hedging relationship, as follows:
Cash flow hedges
Changes in the fair value of hedging instruments designated as cash flow hedges are recognised within Other Comprehensive
Income and accumulated within equity to the extent that the hedges are deemed effective in accordance with NZ IFRS 9 -
Financial Instruments. To the extent that the hedges are ineffective for accounting, changes in fair value are recognised in the
Statement of Financial Performance.
If a hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge
accounting is discontinued. The cumulative gain or loss previously recognised in the cash flow hedge reserve remains there until
the forecast transaction occurs. If the underlying hedged transaction is no longer expected to occur, the cumulative, unrealised
gain or loss recognised in the cash flow hedge reserve with respect to the hedging instrument is recognised immediately in the
Statement of Financial Performance.
Where the hedge relationship continues throughout its designated term, the amount recognised in the cash flow hedge reserve
is transferred to the Statement of Financial Performance in the same period that the hedged item is recorded in the Statement of
Financial Performance, or, when the hedged item is a non-financial asset, the amount recognised in the cash flow hedge reserve
is transferred to the carrying amount of the asset when it is recognised.
Fair value hedges
Changes in the fair value of hedging instruments designated as fair value hedges are recognised in the Statement of Financial
Performance. The hedged item is adjusted to reflect changes in its fair value in respect of the risk being hedged. The resulting gain
or loss is also recognised in the Statement of Financial Performance with an adjustment to the carrying amount of the hedged item.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is recognised in Other Comprehensive Income and accumulated in the
foreign currency translation reserve within equity. The gain or loss relating to the ineffective portion of the hedge is recognised
immediately in the Statement of Financial Performance.
31
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
Impact of hedging foreign currency risk
The impact of the foreign currency hedging strategies (both hedge accounted and non-hedge accounted) on the financial statements during the
year is set out below, by type of hedge.
CASH FLOW HEDGES OF FOREIGN CURRENCY RISK
Forecast operating revenue and expenditure transactions are not recognised in the financial statements until the transactions occur. The amounts
designated as the hedged item in qualifying cash flow hedges mirror the amounts designated as hedging instruments as set out below. All hedges
are of spot foreign exchange risk.
The following foreign currency derivatives were recognised within ‘Derivative financial instruments’ on the Statement of Financial Position as at
reporting date and were designated as the hedging instrument in qualifying cash flow hedges of highly probable forecast operating revenue and
expenditure transactions. All derivatives mature within 12 months (30 June 2017: 12 months).
2018
NZ$M
2017
NZ$M
Hedging instruments used
Derivative financial instruments
NZD
USD
AUD
EUR
JPY
CNH
GBP
Other
(385)
1,127
(287)
(65)
(68)
(61)
(106)
(102)
(399)
847
(193)
(44)
(49)
(43)
(64)
(73)
Hedge accounted foreign currency derivatives
53(18)
The following interest-bearing liabilities were recognised within ‘Interest-bearing liabilities’ on the Statement of Financial Position as at reporting date
and were designated as the hedging instrument in qualifying cash flow hedges of highly probable forecast JPY and EUR operating revenue expected
to occur in the time periods shown.
< 1 YEAR
NZ$M
1-2 YEARS
NZ$M
2-5 YEARS
NZ$M
5+ YEARS
NZ$M
TOTAL
NZ$M
Interest-bearing liabilities
As at 30 June 2018
EUR
JPY
(6)
(48)
(6)
(52)
(20)
(158)
(20)
(256)
(52)
(514)
As at 30 June 2017
EUR
JPY
(6)
(43)
(6)
(41)
(18)
(133)
(24)
(257)
(54)
(474)
32
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
The effective portion of changes in the fair value of foreign currency hedging instruments which were deferred to the cash flow hedge reserve
(within hedge reserves) during the year are set out below, together with transfers to either earnings or the asset carrying value, as appropriate,
when the underlying hedged item occurs.
2018
$M
2017
$M
Recognised in Statement of Changes in Equity
Hedge reserves
Balance at the beginning of the year
Change in fair value*
Transfers to foreign exchange losses
Taxation on reserve movements
17
1
11
(3)
(30)
57
9
(19)
Balance at the end of the year
Represented by:
Forecast operating revenue/expense
Tax effect
26
38
(12)
17
26
(9)
Balance at the end of the year2617
* The change in fair value of the hedging instrument is that used for the purpose of assessing hedge effectiveness. No ineffectiveness arose on
cash flow hedges of foreign currency transactions during the year (30 June 2017: Nil). Forward points excluded from the hedge designation of
$1 million were recognised in ‘Finance costs’ during the year (30 June 2017: $6 million).
The weighted average contract rates of hedge accounted foreign currency derivatives outstanding as at reporting date are set out below:
20182017
USD
AUD
EUR
JPY
CNH
GBP
0.7148
0.9217
0.5937
78.25
4.60
0.5241
0.7163
0.9480
0.6548
78.80
4.89
0.5678
NET INVESTMENT HEDGE
Investments designated in a net investment hedge are included within ‘Investments in other entities’ on the Statement of Financial Position.
The hedging instrument is included within ‘Interest-bearing liabilities’.
2018
NZ$M
2017
NZ$M
Hedged amount of United States Dollar investment
Hedged by: United States Dollar interest-bearing liabilities
99
(99)
77
(77)
The effective portion of changes in fair value of both the hedged item and the hedging instrument are recognised in the foreign currency
translation reserve, as set out below.
Foreign currency translation reserve
Balance at the beginning of the year
Translation gains/(losses) on hedged investment**
Translation (losses)/gains on hedging instrument**
Translation gains on unhedged investments
Taxation on reserve movements
(16)
6
(6)
2
1
(15)
(2)
2
-
(1)
Balance at the end of the year(13 )(16 )
** Translation gains/losses are those used for the purpose of assessing hedge effectiveness. No ineffectiveness arose on net investment hedges
during the year (30 June 2017: Nil).
FAIR VALUE HEDGES
Underlying currency movements on aircraft designated in a fair value hedge are included within ‘Property, plant and equipment’ on the Statement of
Financial Position. The hedging instrument is included within ‘Interest-bearing liabilities’.
33
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
2018
NZ$M
2017
NZ$M
Underlying United States Dollar aircraft fair values
Hedged by: United States Dollar interest-bearing liabilities
721
(721)
732
(732)
The effective portion of changes in the fair value of both the hedged item and the hedging instrument are offset within ‘Foreign exchange
losses’ within the Statement of Financial Performance, as set out below:
Changes in fair value*** on hedged item
Changes in fair value*** on hedging instrument
57
(57)
(20)
20
--
*** The change in fair value is that used for the purpose of assessing hedge effectiveness. No ineffectiveness arose on fair value hedges during the
year (30 June 2017: Nil).
HEDGED, BUT NOT HEDGE ACCOUNTED
Where changes in the fair value of a derivative provide an offset to the underlying hedged item as it impacts earnings, hedge accounting is not
applied. The following items recognised within the line item shown in the Statement of Financial Position are denominated in a foreign currency
and give rise to foreign exchange risk.
2018
NZ$M
2017
NZ$M
Interest-bearing liabilities
Interest-bearing liabilities
Interest-bearing liabilities
Provisions
Interest-bearing assets
USD
JPY
EUR
USD
AUD
(788)
(276)
(111)
(209)
35
(816 )
-
(113 )
(215)
34
The following foreign currency derivatives were recognised within ‘Derivative financial instruments’ on the Statement of Financial Position as
at reporting date.
Hedging instruments
Derivative financial instruments
NZD
USD
AUD
EUR
JPY
Other
(1, 232)
917
(20)
111
272
7
(1,136 )
997
(24)
115
-
6
Not hedge accounted foreign currency derivatives
55(42)
The changes in fair value of hedged items and hedging instruments during the year offset within ‘Foreign exchange losses’ within the Statement
of Financial Performance, as set out below:
Foreign currency gains/(losses) on:
Interest-bearing liabilities
Provisions
Interest-bearing assets
Derivative financial instruments
(88)
(10 )
1
98
8
5
-
(13 )
1-
Forward points on non-hedge accounted foreign currency derivatives of $12 million were recognised in ‘Finance costs’ during the year
(30 June 2017: $17 million).
Sensitivity analysis
The sensitivity analyses which follow are hypothetical and should not be considered predictive of future performance. They only include financial
instruments (derivative and non-derivative) and do not include the future forecast hedged transactions or the underlying fair value of hedged
non-financial assets. As the sensitivities are only on financial instruments, the sensitivities ignore the offsetting impact on future forecast
transactions which many of the derivatives are hedging and the offsetting impact on underlying United States Dollar non-financial asset values,
which are hedged by debt instruments. Changes in fair value can generally not be extrapolated because the relationship of change in assumption
to change in fair value may not be linear. In addition, for the purposes of the below analyses, the effect of a variation in a particular assumption is
calculated independently of any change in another assumption. In reality, changes in one factor may contribute to changes in another, which may
magnify or counteract the sensitivities. Furthermore, sensitivities to specific events or circumstances will be counteracted as far as possible through
strategic management actions. The estimated fair values as disclosed should not be considered indicative of future earnings on these contracts.
34
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
Foreign currency sensitivity on financial instruments
The following table demonstrates the sensitivity of financial instruments at reporting date to a reasonably possible appreciation/depreciation in the
United States Dollar against the New Zealand Dollar. Other currencies are evaluated by converting first to United States Dollars and then applying
the above change against the New Zealand Dollar. All other variables are held constant. This analysis does not include future forecast hedged
operating or capital transactions.
Appreciation/depreciation (US cents):
2018
NZ$M
+5c
2018
NZ$M
-5c
2017
NZ$M
+5c
2017
NZ$M
-5c
Impact on profit before taxation:
USD
AUD
55
(1)
(63)
1
49
(1)
(56)
1
The above would be offset in earnings through either the fair value hedge mechanism or through the impact of foreign currency on depreciation.
Impact on equity:
USD
AUD
EUR
JPY
CNH
GBP
Other
(85)
20
8
40
4
8
7
99
(23)
(9)
(47)
(5)
(9)
(8)
(57)
12
6
34
3
4
5
65
(14)
(7)
(39)
(3)
(5)
(5)
The above would be deferred within equity and then offset by the foreign currency impact of the hedged item when it occurs.
20182017
Significant foreign exchange rates used at balance date for one New Zealand Dollar are:
USD
AUD
CNY
EUR
JPY
GBP
0.6750
0. 9180
4.48
0.5840
74 . 6 0
0 . 516 0
0.7300
0 . 9 510
4.96
0.6380
81.80
0.5620
FUEL PRICE RISK
Fuel price risk is the risk of loss to Air New Zealand arising from adverse fluctuations in fuel prices.
Air New Zealand enters into fuel swap and option agreements to reduce the impact of price changes on fuel costs in accordance with the policy
approved by the Board of Directors. Uplift in the first four months is hedged between 50% and 80% with the maximum falling to 20% in the
twelfth month.
The price risk of jet fuel purchases includes a crude oil price risk component, despite crude oil not being specified in any contractual
arrangement. Based on an evaluation of the market structure and refining process, this risk component is separately identifiable and
reliably measurable even though it is not contractually specified. The relationship of the crude oil component to jet fuel as a whole
varies in line with the published crude oil and jet fuel price indices. Crude oil hedging instruments are designated as a hedge of the
price risk in the crude oil component of highly probable jet fuel purchases. There is a 1:1 hedging ratio of the hedging instrument to
the crude oil component identified as the hedged item.
Some components of hedge accounted derivatives are excluded from the designated risk. Cash flow hedges in respect of fuel
derivatives include only the intrinsic value of fuel options. Time value on fuel options is excluded from the hedge designation and
is marked to market through Other Comprehensive Income and accumulated within a separate component of equity (the ‘Costs of
Hedging Reserve’ within ‘Hedge Reserves’), until such time as the related hedge accounted cash flows affect profit or loss. At this
stage the cumulative amount is reclassified to profit or loss within ‘Fuel’.
Ineffectiveness is only expected to arise where the index of the hedging instrument differs to that of the underlying hedged item.
35
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
Impact of hedging fuel price risk
Weighted average strike prices of fuel derivatives
2018
Brent
USD
2017
Brent
USD
Weighted average collar ceiling (adjusted for call spreads)
Weighted average collar floor
Swap strike price
Barrels hedged (millions of barrels)
70
55
N/A
5.3
51
44
49
6.6
CASH FLOW HEDGES OF FUEL PRICE RISK
Forecast fuel purchase transactions are not recognised in the financial statements until the transactions occur. The number of barrels hedged is set
out in the previous table. All fuel derivative contracts mature within 12 months of reporting date.
Fuel derivatives were recognised within ‘Derivative financial instruments’ on the Statement of Financial Position as at reporting date and were
designated as the hedging instrument in qualifying cash flow hedges.
Statement of Financial Position
2018
$M
2017
$M
Derivative financial assets 7714
The effective portion of changes in the fair value of fuel hedging instruments which were deferred to the cash flow hedge reserve (within hedge
reserves) during the year are set out below, together with transfers to earnings, when the underlying hedged item occurs.
Hedge reserves
Balance at the beginning of the year
Change in fair value*
Transfers to fuel
Changes in cost of hedging reserve
Taxation on reserve movements
(8)
155
(103)
12
(18)
25
4
(42)
(8)
13
Balance at the end of the year
38(8)
* The change in fair value recognised in the cash flow hedge reserve excludes ineffectiveness which is recognised through earnings. No ineffectiveness
arose on cash flow hedges of fuel price risk during the year (30 June 2017: Nil)
Fuel price sensitivity on financial instruments
The sensitivity of the fair value of these derivatives as at reporting date to a reasonably possible change in the price per barrel of crude oil is shown
below. This analysis assumes that all other variables remain constant and the respective impacts on profit before taxation and equity are dictated
by the proportion of effective/ineffective hedges. In practice, these elements would vary independently. This analysis does not include the future
forecast hedged fuel transactions.
Price movement per barrel:
2018
$M
+USD 20
2018
$M
-USD 20
2017
$M
+USD 20
2017
$M
-USD 20
Impact on cash flow hedge reserve (within equity) 126 (85) 147 (136 )
The above would be deferred within equity and then offset by the fuel price impact of the hedged item when it occurs.
36
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
INTEREST RATE RISK
Interest rate risk is the risk of loss to Air New Zealand arising from adverse fluctuations in interest rates.
Air New Zealand has exposure to interest rate risk as a result of the long-term borrowing activities which are used to fund ongoing activities. It is the
Group’s policy to ensure the interest rate exposure is maintained to minimise the impact of changes in interest rates on its net floating rate long-term
borrowings. The Group’s policy is to fix between 70% to 100% of its exposure to interest rates, including fixed interest operating leases, in the next
12 months. Interest rate swaps are used to achieve an appropriate mix of fixed and floating rate exposure if the volume of fixed rate loans or fixed
rate operating leases is insufficient.
Impact of hedging interest rate risk
20182017
Interest rate derivatives
Volume (USD M)
Weighted average contract rate (%)
Weighted average contract maturities (years)
150
1.7
1.4
150
1.7
2.4
CASH FLOW HEDGES OF INTEREST RATE RISK
The impact of changes in floating interest rates is recognised in the financial statements when the transactions occur. The volume of the floating
rate interest-bearing liabilities hedged, together with contract rates and maturities are set out above.
Interest rate derivatives were recognised within ‘Derivative financial instruments’ on the Statement of Financial Position as at reporting date and
were designated as the hedging instrument in qualifying cash flow hedges.
2018
$M
2017
$M
Statement of Financial Position
Derivative financial liabilities
3 -
The effective portion of changes in the fair value of interest rate hedging instruments which were deferred to the cash flow hedge reserve
(within hedge reserves) during the year are set out below, together with transfers to earnings, when the underlying hedged item occurred.
Hedge reserves
Balance at the beginning of the year
Change in fair value*
Transfers to finance costs
Taxation on reserve movements
-
3
-
(1)
(4)
4
1
(1)
Balance at the end of the year2-
*The change in fair value recognised in the cash flow hedge reserve is the effective portion. No ineffectiveness arose on cash flow hedges of
interest rates during the year (30 June 2017: Nil).
Interest rate sensitivity on financial instruments
Earnings are sensitive to changes in interest rates on the floating rate element of borrowings and finance lease obligations and the fair value of
interest rate swaps. Their sensitivity to a reasonably possible change in interest rates with all other variables held constant, is set out over the page.
This analysis assumes that the amount and mix of fixed and floating rate debt, including finance lease obligations, remains unchanged from that
in place at reporting date, and that the change in interest rates is effective from the beginning of the year. In reality, the fixed/floating rate mix will
fluctuate over the year and interest rates will change continually.
Interest rate change:
2018
$M
+50 bp*
2018
$M
-50 bp*
2017
$M
+50 bp*
2017
$M
-50 bp*
Impact on profit before taxation
Impact on cash flow hedge reserve (within equity)
(10 )
(1)
10
1
(9)
(1)
9
1
*bp = basis points
The impact on equity as shown above would be offset by the hedged floating interest rate exposure as it occurs.
37
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
Liquidity risk
Liquidity risk is the risk that the Group will be unable to meet its obligations as they fall due. Air New Zealand manages the risk by targeting a
minimum liquidity level, ensuring long-term commitments are managed with respect to forecast available cash inflow and managing maturity
profiles. Air New Zealand holds significant cash reserves to enable it to meet its liabilities as they fall due and to sustain operations in the event of
unanticipated external factors or events.
The following table sets out the contractual, undiscounted cash flows for non-derivative financial liabilities and derivative financial instruments:
STATEMENT
OF FINANCIAL
POSITION
$M
CONTRACTUAL
CASH FLOWS
$M
< 1 YEAR
$M
1-2 YEARS
$M
2-5 YEARS
$M
5+ YEARS
$M
As at 30 June 2018
Trade and other payables
Secured borrowings
Unsecured bonds
Finance lease obligations
Amounts owing to associates
562
1,563
50
1,121
22
562
1,720
60
1,226
22
562
196
2
291
22
-
169
2
168
-
-
554
56
489
-
-
801
-
278
-
Total non-derivative financial liabilities
3, 318 3,590 1,073 339 1,099 1,079
Foreign exchange derivatives
– Inflow
– Outflow
2,635
(2,527)
2,635
(2,527)
-
-
-
-
-
-
Fuel derivatives
Interest rate derivatives
108
77
3
108
64
5
108
64
2
-
-
2
-
-
1
-
-
-
Total derivative financial instruments
188 177 174 2 1 -
STATEMENT
OF FINANCIAL
POSITION
$M
CONTRACTUAL
CASH FLOWS
$M
< 1 YEAR
$M
1-2 YEARS
$M
2-5 YEARS
$M
5+ YEARS
$M
As at 30 June 2017
Trade and other payables
Secured borrowings
Unsecured bonds
Finance lease obligations
Amounts owing to associates
462
1,243
50
1,221
23
462
1,362
62
1,328
23
462
154
2
206
23
-
14 4
2
268
-
-
384
6
443
-
-
680
52
411
-
Total non-derivative financial liabilities
2,999 3,237 847 414 833 1,14 3
Foreign exchange derivatives
– Inflow
– Outflow
2,10 3
(2,165)
2,10 3
(2,165)
-
-
-
-
-
-
Fuel derivatives
(60)
14
(62)
5
(62)
5
-
-
-
-
-
-
Total derivative financial instruments
(46) (57) (57) - - -
FAIR VALUE ESTIMATION
All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy as described
below. All financial instruments are either carried at fair value or amounts approximating fair value, with the exception of interest-
bearing liabilities, for which the fair value is disclosed in Note 13 Interest-bearing liabilities. This equates to “Level 2” of the fair value
hierarchy defined within NZ IFRS 13 - Fair Value Measurement. The fair value of derivative financial instruments is based on published
market prices for similar assets or liabilities or market observable inputs to valuation at balance date (“Level 2” of the fair value
hierarchy). The fair value of foreign currency forward contracts is determined using forward exchange rates at reporting date. The
fair value of fuel swap and option agreements is determined using forward fuel prices at reporting date. The fair value of interest rate
swaps is determined using forward interest rates as at reporting date.
38
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
As at 30 June 2018
22. Financial Risk Management (continued)
Capital risk management
The Group’s objectives when managing capital are to safeguard the company’s ability to continue as a going concern and to continue to generate
shareholder value and benefits for other stakeholders, and to provide an acceptable return for shareholders by removing complexity, reducing costs
and pricing our services commensurately with the level of risk. The Group is not subject to any externally imposed capital requirements.
The Group’s capital structure is managed in the light of economic conditions, future capital expenditure profiles and the risk characteristics of the
underlying assets. The Group’s capital structure may be modified by adjusting the amount of dividends paid to shareholders, initiating dividend
reinvestment opportunities, returning capital to shareholders, issuing new shares or selling assets to reduce debt. The capital management policies
and guidelines are regularly reviewed by the Board of Directors.
The Group monitors capital on the basis of gearing ratios. These ratios are calculated as net debt including capitalised aircraft operating leases
over net debt plus equity. Net debt is calculated as total borrowings, bonds and finance lease obligations (including net open derivatives on these
instruments) less cash and cash equivalents and interest-bearing assets. Capital comprises all components of equity. These ratios and their
calculation are disclosed in the Five Year Statistical Review.
23. Offsetting Financial Assets and Financial Liabilities
Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position when there is
a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and
settle the liability simultaneously.
Amounts subject to potential offset
For financial instruments subject to enforceable master netting arrangements, each agreement allows the parties to elect net settlement of the
relevant financial assets and liabilities. In the absence of such election, settlement occurs on a gross basis, however each party will have the option
to settle on a net basis in the event of default of the other party.
The following table shows the gross amounts of financial assets and financial liabilities which are subject to enforceable master netting arrangements
and similar agreements, as recognised in the Statement of Financial Position. It also shows the potential net amounts if offset were to occur.
STATEMENT
OF FINANCIAL
POSITION
2018
$M
AMOUNTS
NOT OFFSET
2018
$M
NET
AMOUNTS
IF OFFSET
2018
$M
STATEMENT
OF FINANCIAL
POSITION
2017
$M
AMOUNTS
NOT OFFSET
2017
$M
NET
AMOUNTS
IF OFFSET
2017
$M
Financial assets
Bank and short-term deposits
Derivative financial assets
1,343
189
-
(1)
1,343
188
1,369
19
(41)
(6)
1,328
13
Financial liabilities
Derivative financial liabilities
(1) 1 -(65) 47 (18)
Letters of credit and performance bonds are also subject to master netting arrangements. The amounts are disclosed in Note 21
Contingent Liabilities.
39
AIR NEW ZEALAND GROUP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
For the year to and as at 30 June 2018
24. Related Parties
Crown
The Crown, the major shareholder of the Company, owns 52 percent of the issued capital of the Company (30 June 2017: 52 percent). The balance
is owned by the public.
Air New Zealand enters into numerous transactions with Government Departments, Crown Agencies and State Owned Enterprises on an arm’s
length basis. All transactions are entered into in the normal course of business.
Key management personnel
Compensation of key management personnel (including directors) was as follows:
2018
$M
2017
$M
Short-term employee costs
Directors’ fees
Share-based payments
16
1
3
16
1
3
20 20
Certain key management personnel (including directors) have relevant interests in a number of companies (including non-executive directorships)
to which Air New Zealand provides aircraft related services in the normal course of business, on standard commercial terms.
Staff share purchase schemes and Executive share option and performance rights plans
Shares held by the Staff Share Purchase scheme and Executive share option and performance rights plans are detailed in Note 17.
Bank set-off arrangements
The Group has a set-off arrangement on certain Bank of New Zealand balances, allowing the offset of overdraft amounts against in-fund amounts.
The following entities are included in the set-off arrangement:
Air Nelson Limited
Air New Zealand Limited
Air New Zealand Regional Maintenance Limited
Mount Cook Airlines Limited
Associated companies
Transactions between the Group and associated companies are conducted on normal terms and conditions.
The Christchurch Engine Centre (CEC) provides maintenance services to the Group on certain V2500 engines. The Group receives revenue for
contract and administration services performed for the CEC.
2018
$M
2017
$M
During the year, there have been transactions between Air New Zealand and its associated companies as follows:
Operating revenue
Operating expenditure
4
(65)
3
(57)
Balances outstanding at the end of the year are unsecured and on normal trading terms:
Amounts owing from associates
Amounts owing to associates
1
22
1
23
During the year CEC paid total distributions to the Group of $16 million (30 June 2017: $8 million).
Other related party disclosures
Other balances and transactions with related parties are not considered material to Air New Zealand and are entered into in the normal course of
business on standard commercial terms. There have been no related party debts forgiven during the year.
INDEPENDENT AUDITOR’S REPORT
TO THE SHAREHOLDERS OF AIR NEW ZEALAND LIMITED
Report on the Audit of the Group Financial Statements
Auditor-General
The Auditor-General is the auditor of Air New Zealand Limited and its subsidiaries (the
Group). The Auditor-General has appointed me, Peter Gulliver, using the staff and resources
of Deloitte Limited, to carry out the audit of the consolidated financial statements of the
Group on his behalf.
Opinion
We have audited the consolidated financial statements of the Group on pages 2 to 39, that
comprise the Statement of Financial Position as at 30 June 2018, the Statement of Financial
Performance, Statement of Comprehensive Income, Statement of Changes in Equity and
Statement of Cash Flows for the year ended on that date and the notes to the financial
statements that include accounting policies and other explanatory information.
In our opinion the consolidated financial statements present fairly, in all material respects the
financial position of the Group as at 30 June 2018, and its financial performance and its cash
flows for the year then ended in accordance with New Zealand Equivalents to International
Financial Reporting Standards and International Financial Reporting Standards.
Our audit was completed on 23 August 2018. This is the date at which our opinion is expressed.
The basis for our opinion is explained below. In addition, we outline the responsibilities of the
Board of Directors and our responsibilities relating to the consolidated financial statements,
we comment on other information, and we explain our independence.
Basis for opinion
We conducted our audit in accordance with the Auditor-General’s Auditing Standards, which
incorporate the Professional and Ethical Standards and the International Standards on
Auditing (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board.
Our responsibilities under those standards are further described in the Responsibilities of the
auditor for the audit of the consolidated financial statements section of our report.
We have fulfilled our responsibilities in accordance with the Auditor-General’s
Auditing Standards.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Audit materiality
We consider materiality primarily in terms of the magnitude of misstatement in the
consolidated financial statements of the Group that in our judgement would make it probable
that the economic decisions of a reasonably knowledgeable person would be changed or
influenced (the ‘quantitative’ materiality). In addition, we also assess whether other matters
that come to our attention during the audit would in our judgement change or influence the
decisions of such a person (the ‘qualitative’ materiality). We use materiality both in planning
the scope of our audit work and in evaluating the results of our work.
We determined materiality for the consolidated financial statements as a whole to be $30m
which was determined with reference to a number of factors and taking into account the
cyclical nature of the airline industry. $30m represents 6% of profit before tax, 1% of total
equity and 1% of operating revenue.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most
significance in our audit of the consolidated financial statements for the current period.
These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
40
INDEPENDENT AUDITOR’S REPORT
(CONTINUED)
41
Key audit matter How our audit addressed the key audit matter
and the results of our work
Revenue recognition
The Group’s revenue primarily consists of passenger revenue which
totalled $4,679 million in the year to 30 June 2018.
Passenger revenue is complex due to the various fare rules that may
apply to a transaction, and as tickets are typically sold prior to the day
of flight. Complex IT systems and processes are required to correctly
record these sales as transportation sales in advance and then as
revenue when flights occur.
We have included revenue recognition as a key audit matter due to
the significance of revenue to the consolidated financial statements
and the substantial dependence on complex IT systems.
In performing our procedures we:
• evaluated the systems, processes and controls in place over
passenger revenue in advance and key account reconciliation
processes;
• tested the IT environment in which passenger sales occur and
interfaces with other relevant systems;
• assessed the quality of information produced by these systems
and tested the accuracy and completeness of reports generated by
these systems and used to recognise or defer passenger revenue;
and
• performed an analysis of passenger revenue and passenger
revenue in advance and created expectations of revenue based
on our knowledge of the Group, the industry and key performance
measures, including airline capacity and revenue per available
seat kilometre. We have compared this to the Group’s revenue and
obtained appropriate explanations for significant differences.
We are satisfied revenue has been appropriately recognised.
Aircraft lease return costs
Certain aircraft under operating leases are required to be returned
to the lessor at the expiry of the lease term in a specified condition.
The Group estimates the cost of returning the aircraft to the
specified condition and has made provision for this in the current
period of $265 million as explained further in note 14.
This is a key audit matter due to the size of the balance and the level
of judgement required by the Group in determining the estimate.
The provision is calculated taking into account a number of
variables and assumptions including the number of future hours or
cycles expected to be operated, the expected cost of maintenance
and the lifespan of life-limited parts. It is based on the Group’s
historical experience, manufacturers’ advice and contractual
obligations in determining the present value of the estimated future
costs of major airframe inspections and engine overhauls required
under the lease conditions.
In performing our procedures we:
• assessed the terms and conditions of new or updated lease
agreements to understand the return conditions and ensuring that
the calculation had been updated for changes in contractual terms;
• assessed the key assumptions and challenged the Group as to
their reasonableness by reviewing internal and external source
documentation such as operating cycle history, supplier costs for
various components, consumables and labour, maintenance plans
and market data such as exchange rates;
• challenged changes in assumptions from prior periods and
reviewed the history of provisions made against actual costs
incurred on the return of aircraft under lease agreements and
when an overhaul occurs; and
• tested the arithmetical accuracy of the calculation and evaluated
the sensitivity of the calculation to changes in the key variables
and assumptions.
We found the assumptions and resulting estimates to be reasonable.
Aircraft – residual values and useful lives
Group aircraft and related assets total $4,549 million at 30 June
2018 as outlined in note 9.
The useful lives and residual values of aircraft may be influenced
by external changes to economic conditions, demand, competition
and new technology. The Group considers these changes when
reassessing the useful lives and residual values of aircraft to
determine the appropriate depreciation rates. Residual values are
denominated in US$ and are sensitive to exchange rate fluctuations
as well as projected values.
This is a key audit matter due to the level of judgement required by
the Group in determining fleet lives and residual values which impacts
carrying values and the depreciation charge.
In performing our procedures we:
• challenged the Group’s assumptions underpinning the calculation
of residual values by making a comparison to external information
such as third party sales prices, industry data and period end
exchange rates;
• updated our assessment of the historical accuracy of assumptions
around residual values when aircraft are disposed of;
• evaluated the controls in place over the calculation of depreciation,
in particular around the initial input of, or changes to, residual
values and useful life information; and
• undertook analytical procedures to test the depreciation calculation.
We consider the Group’s assessment of the residual values and useful
lives of aircraft for use in calculating depreciation to be reasonable.
42
Responsibilities of the Board of
Directors for the consolidated
financial statements
The Board of Directors is responsible on behalf of the Group for preparing consolidated
financial statements that are fairly presented in accordance with New Zealand
Equivalents to International Financial Reporting Standards and International Financial
Reporting Standards.
The Board of Directors is responsible on behalf of the Group for such internal control as it
determines is necessary to enable it to prepare consolidated financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible on
behalf of the Group for assessing the Group’s ability to continue as a going concern. The
Board of Directors is also responsible for disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless there is an intention to
liquidate the Group or to cease operations, or there is no realistic alternative but to do so.
The Board of Director’s responsibilities arise from the Financial Markets Conduct Act 2013.
Responsibilities of the auditor
for the audit of the consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements as a whole, are free from material misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
carried out in accordance with the Auditor-General’s Auditing Standards will always detect
a material misstatement when it exists. Misstatements are differences or omissions of
amounts or disclosures, and can arise from fraud or error. Misstatements are considered
material if, individually or in the aggregate, they could reasonably be expected to influence
the decisions of shareholders taken on the basis of these consolidated financial statements.
We did not evaluate the security and controls over the electronic publication of the
consolidated financial statements.
As part of an audit in accordance with the Auditor-General’s Auditing Standards, we exercise
professional judgement and maintain professional scepticism throughout the audit. Also:
• We identify and assess the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
• We obtain an understanding of internal control relevant to the audit in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s internal control.
• We evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the Board of Directors.
• We conclude on the appropriateness of the use of the going concern basis of accounting
by the Board of Directors and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on the
Group’s ability to continue as a going concern. If we conclude that a material uncertainty
exists, we are required to draw attention in our auditor’s report to the related disclosures
in the consolidated financial statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of
our auditor’s report. However, future events or conditions may cause the Group to cease
to continue as a going concern.
• We evaluate the overall presentation, structure and content of the consolidated
financial statements, including the disclosures, and whether the consolidated financial
statements represent the underlying transactions and events in a manner that achieves
fair presentation.
• We obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the Group to express an opinion on the consolidated
financial statements. We are responsible for the direction, supervision and performance of
the Group audit. We remain solely responsible for our audit opinion.
INDEPENDENT AUDITOR’S REPORT
(CONTINUED)
43
Responsibilities of the auditor
for the audit of the consolidated
financial statements (continued)
We communicate with the Board of Directors regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical
requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
From the matters communicated with the Board of Directors, we determine those matters
that were of most significance in the audit of the consolidated financial statements of
the current period and are therefore the key audit matters. We describe these matters
in our auditor’s report unless law or regulation precludes public disclosure about the
matter or when, in extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
Our responsibility arises from section 15 of the Public Audit Act 2001.
Other information
The Board of Directors is responsible on behalf of the Group for all other information. The
other information includes the Annual Shareholder Review and the information included with
the consolidated financial statements and audit report in the Annual Financial Results. Our
opinion on the consolidated financial statements does not cover the other information and
we do not express any form of audit opinion or assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility
is to read the other information. In doing so, we consider whether the other information is
materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit, or otherwise appears to be materially misstated. If, based on our work, we
conclude that there is a material misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.
Independence
We are independent of the Group in accordance with the independence requirements of the
Auditor-General’s Auditing Standards which incorporate the independence requirements of
Professional and Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners
issued by the New Zealand Auditing and Assurance Standards Board and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
In addition to the audit we have carried out engagements in the areas of review of the interim
financial statements and other assurance and non-assurance services, which are compatible
with those independence requirements. In addition to these engagements, principals and
employees of our firm deal with the Group on normal terms within the ordinary course of
trading activities of the Group. These engagements and trading activities have not impaired
our independence as auditor of the Group. Other than the audit and these engagements and
trading activities, we have no relationship with, or interests in the Group.
Peter Gulliver
for Deloitte Limited
On behalf of the Auditor-General
Auckland, New Zealand
INDEPENDENT AUDITOR’S REPORT
(CONTINUED)
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
44
2018
$M
2017
$M
2016
$M
2015
$M
2014
$M
Operating Revenue
Passenger revenue
Cargo
Contract services
Other revenue
4,679
370
193
243
4,376
335
164
234
4,481
349
172
229
4 ,113
317
258
237
3 , 8 51
287
277
237
Operating Expenditure
Labour
Fuel
Maintenance
Aircraft operations
Passenger services
Sales and marketing
Foreign exchange (losses)/gains
Other expenses
5,485
(1, 294)
(987)
(352)
( 6 11)
(295)
(357)
(19)
(278)
5 ,10 9
(1, 261)
(827)
(321)
(556)
(266)
(352)
(6)
(252)
5,231
(1,225)
(846)
(350)
(531)
(246)
(348)
112
(398)
4,925
(1,193 )
(1,089)
(320)
(466)
(220)
(303)
79
(252)
4,652
(1,151)
(1,120 )
(285)
(424)
(212)
(280)
45
(222)
(4 ,193 ) ( 3 , 8 41) (3,832) (3,764) (3,649)
Operating Earnings (excluding items below)
Depreciation and amortisation
Rental and lease expenses
1,292
(525)
(227)
1,268
(493)
(230)
1,399
(465)
(244)
1,161
(402)
( 2 11)
1,003
(436)
(174 )
Earnings Before Finance Costs, Associates and Taxation
Finance income
Finance costs
Share of earnings of associates (net of taxation)
540
40
(73)
33
545
43
(87)
26
690
53
(100 )
20
548
56
(108)
(22)
393
44
(90)
11
Earnings Before Taxation
Taxation expense
540
(150 )
527
(145)
663
(200)
474
(147)
358
(95)
Net Profit Attributable to Shareholders of Parent Company
390 382 463 327 263
Certain comparatives within the five year statistical review have been reclassified for comparative purposes, to ensure consistency with the current
year. Comparatives previously held within ‘Other significant items’ of $3 million and $143 million have been reclassified to ‘Other expenses’ for
the 2017 and 2016 financial years respectively. The Group adopted NZ IFRS 9 (2010) - Financial Instruments and NZ IFRS 9 (2013) - Hedge
Accounting and amendments to NZ IFRS 9, NZ IFRS 7 and NZ IAS 39 on 1 July 2014. Comparatives have been restated for the 2014 financial
year in respect of the adopted standards.
HISTORICAL SUMMARY OF FINANCIAL PERFORMANCE
Five Year Statistical Review
For the year to 30 June
AIR NEW ZEALAND GROUP
45
2018
$M
2017
$M
2016
$M
2015
$M
2014
$M
Current Assets
Bank and short-term deposits
Other current assets
1,343
910
1,369
518
1,594
74 5
1,321
661
1,234
593
Total Current Assets
2,253 1,887 2,339 1,982 1,827
Non-Current Assets
Property, plant and equipment
Other non-current assets
5,035
558
4 ,74 5
539
4,485
427
4,061
732
3,279
74 4
Total Non-Current Assets
5,593 5,284 4 , 912 4,793 4,023
Total Assets
7, 8 4 6 7,171 7, 251 6,775 5,850
Current Liabilities
Debt
1
Other current liabilities
431
2,265
317
2,088
464
2,007
253
1,875
190
1,682
Total Current Liabilities
2,696 2,405 2,471 2,128 1,872
Non-Current Liabilities
Debt
1
Other non-current liabilities
2,303
671
2,197
583
2,10 3
569
2,069
613
1,543
563
Total Non-Current Liabilities
2 , 9 74 2,780 2,672 2,682 2,10 6
Total Liabilities
5,670 5 ,18 5 5 ,14 3 4,810 3,978
Net Assets
2,176 1,986 2,10 8 1,965 1,872
Total Equity
2,176 1,986 2,10 8 1,965 1,872
1. Debt is comprised of secured borrowings, bonds and finance lease liabilities.
2018
$M
2017
$M
2016
$M
2015
$M
2014
$M
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
1,031
(778)
(279)
904
(616 )
( 513 )
1, 0 74
(797)
(4)
1,10 0
(1,066 )
53
730
(727)
81
(Decrease)/increase in cash holding
(26) (225) 273 87 84
Total cash and cash equivalents
1,343 1,369 1,594 1,321 1,234
Certain comparatives within the five year statistical review have been reclassified for comparative purposes, to ensure consistency with the current
year. The Group adopted NZ IFRS 9 (2010) - Financial Instruments and NZ IFRS 9 (2013) - Hedge Accounting and amendments to NZ IFRS 9,
NZ IFRS 7 and NZ IAS 39 on 1 July 2014. Comparatives have been restated for the 2014 financial year in respect of the adopted standards.
HISTORICAL SUMMARY OF FINANCIAL POSITION
Five Year Statistical Review
As at 30 June
HISTORICAL SUMMARY OF CASH FLOWS
Five Year Statistical Review
For the year to 30 June
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
46
20182017201620152014
Profitability and Capital Management
EBIT
1
/Operating Revenue
EBITDRA
2
/Operating Revenue
Passenger Revenue per Revenue Passenger Kilometre (Yield)
Passenger Revenue per Available Seat Kilometre (RASK)
Cost per Available Seat Kilometre (CASK)
3
Return on Invested Capital Pre-tax (ROIC)
4
Liquidity ratio
5
Gearing (incl. net capitalised aircraft operating leases)
6
%
%
cents
cents
cents
%
%
%
9.8
23.6
12. 8
10.6
9.5
14 . 5
24.5
52.4
10.6
24.8
12.6
10.4
9.1
15 . 3
26.8
51. 8
15 . 9
29.5
13.5
11 . 3
9.3
18 . 8
3 3 .1
48.6
11 .1
23.6
13 .7
11 . 6
10.6
15 .6
26.8
52.4
8.4
21.6
13 .7
11 . 5
10. 9
14 . 3
26.5
42.9
Shareholder Value
Basic Earnings per Share
7
Operating Cash Flow per Share
7
Ordinary Dividends Declared per Share
7
Special Dividends Declared per Share
7
Net Tangible Assets per Share
7
Closing Share Price 30 June
Weighted Average Number of Ordinary Shares
Total Number of Ordinary Shares
Total Market Capitalisation
Total Shareholder Returns
8
cps
cps
cps
cps
$
$
m
m
$m
%
34.7
91.8
22.0
-
1.79
3 .18
1,123
1,123
3,565
26.7
34.0
80.5
21.0
-
1.64
3.26
1,123
1,123
3,660
41. 5
41. 3
95.6
20.0
25.0
1.76
2.10
1,122
1,123
2,352
20.0
29.2
98 .1
16 .0
-
1.66
2.55
1 ,118
1,122
2,861
25.6
23.9
65.5
10.0
10.0
1.60
2.08
1,101
1 ,114
2, 318
24.0
1. Earnings before interest and taxation (EBIT) excluding share of earnings of associates (net of taxation) and other significant items (refer footnote
under Historical Summary of Financial Performance)
2. EBITDRA excludes share of earnings of associates (net of taxation) and other significant items (refer footnote under Historical Summary of
Financial Performance)
3. Operating expenditure (excluding other significant items) per ASK (refer footnote under Historical Summary of Financial Performance)
4. (EBIT plus interest component of aircraft operating leases)/average capital employed (Net Debt plus Equity) over the period
5. (Bank and short-term deposits and interest-bearing assets (excluding restricted cash))/Operating Revenue
6. Net Debt (including capitalised aircraft operating leases)/(Net Debt plus Equity)
7. Per-share measures based upon Ordinary Shares
8. Return over five years including the change in share price and dividends received (assuming dividends are reinvested in shares on ex dividend date)
Certain comparatives within the five year statistical review have been reclassified for comparative purposes, to ensure consistency with the current
year. The Group adopted NZ IFRS 9 (2010) - Financial Instruments and NZ IFRS 9 (2013) - Hedge Accounting and amendments to NZ IFRS 9,
NZ IFRS 7 and NZ IAS 39 on 1 July 2014. Comparatives have been restated for the 2014 financial year in respect of the adopted standards.
2018
$M
2017
$M
2016
$M
2015
$M
2014
$M
Debt
Secured borrowings
Unsecured bonds
Finance lease liabilities
1,563
50
1,121
1,243
50
1,221
930
150
1,487
512
150
1,660
213
150
1,370
Bank and short-term deposits
Net open derivatives held in relation to interest-bearing liabilities
1
Interest-bearing assets (included within Other assets)
2,734
1,343
42
182
2 , 514
1,369
(32)
164
2,567
1,594
(17)
288
2,322
1,321
24
141
1,733
1,234
(10 )
125
Net Debt
1,167 1,013 702 836 384
Net aircraft operating lease commitments
2
1,232 1,120 1,288 1,323 1,022
Net Debt (including off Balance Sheet)
2,399 2,13 3 1,990 2,159 1,406
1. Unrealised gains/losses on open debt derivatives
2. Net aircraft operating lease commitments for the next twelve months, multiplied by a factor of seven (excluding short-term leases in 2018, which
provide cover for Boeing 787-9 engine issues)
KEY FINANCIAL METRICS
Five Year Statistical Review
HISTORICAL SUMMARY OF DEBT
Five Year Statistical Review
As at 30 June
AIR NEW ZEALAND GROUP
47
20182017201620152014
Passengers Carried (000)
Domestic
11 , 0 8 9 10,379 9,725 9,246 8,920
International
Australia and Pacific Islands
Asia
America and Europe
3,798
837
1,242
3,561
814
1,198
3,507
791
1,138
3,388
642
1,021
3,277
517
1,005
Tot al 5,877 5,573 5,436 5 , 0 51 4,799
Tot al Group 16 , 966 15, 952 15 ,161 14 , 2 97 13 ,719
Available Seat Kilometres (M)
Domestic
6,905 6,597 6,065 5,592 5,385
International
Australia and Pacific Islands
Asia
America and Europe
12, 96 3
9,16 9
15, 237
12,039
8 , 918
14 , 615
11 , 4 3 8
8,349
13 , 8 32
10,888
7,022
12,0 9 9
10,622
5,656
11 , 7 3 3
Tot al 37, 36 9 35,572 33,619 30,009 2 8 , 011
Tot al Group 44,274 42,16 9 39,684 35,601 33,396
Revenue Passenger Kilometres (M)
Domestic
5,719 5 , 311 4,887 4,561 4,370
International
Australia and Pacific Islands
Asia
America and Europe
10,584
7,4 67
12,892
9,784
7,270
12,449
9,532
7,070
11,734
9,18 4
5,784
10,405
8,858
4,630
10,220
Tot al 30,943 29,503 28,336 25,373 23,708
Tot al Group 36,662 34,814 33,223 29,934 28,078
Passenger Load Factor (%)
Domestic
82.8 80.5 80.6 81.6 81.1
International
Australia and Pacific Islands
Asia
America and Europe
81.6
81.4
84.6
81.3
81.5
85.2
83.3
84.7
84.8
84.4
82.4
86.0
83.4
81.9
87.1
Tot al 83.4 83.8 84.3 84.6 84.7
Tot al Group 82.8 82.6 83.7 8 4 .1 8 4 .1
GROUP EMPLOYEE NUMBERS (Full Time Equivalents)
11,074 10,890 10,527 10 ,19 6 10,546
New Zealand, Australia and Pacific Islands represent short-haul operations. Asia, America and Europe represent long-haul operations.
KEY OPERATING STATISTICS
Five Year Statistical Review
For the year to 30 June
48
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
The Board of Air New Zealand considers strong corporate governance to be a critical component of the overall performance of the Company,
and a contributor to superior performance and achieving best outcomes for its shareholders, customers, employees and the wider community.
Accordingly, policies and processes are in place to establish, shape and maintain appropriate governance standards and behaviours throughout
the Company, consistent with this philosophy.
The Board has had regard to a number of corporate governance statements, including the Institute of Directors’ Code of Practice and the
New Zealand Corporate Governance Forum’s Guidelines. While Air New Zealand no longer has a requirement to report against the ASX’s Corporate
Governance Principles and Recommendations, these continue to inform the Board’s approach to governance. The NZX Listing Rules require the
Company to report against the NZX Corporate Governance Code.
This Corporate Governance Statement follows the structure of the NZX Corporate Governance Code and addresses its Recommendations.
The Board considers its governance practices to be consistent with the Code’s Principles.
This Corporate Governance Statement was approved by the Board on 22 August 2018 and is current as at that date.
Code of Ethical Behaviour
“Directors should set high standards of ethical behaviour, model this behaviour and hold
management accountable for these standards being followed throughout the organisation.”
Air New Zealand is committed to the highest standards of social and environmental responsibility and ethical conduct. This is good for our
customers, our shareholders, our wider community and our Company. The Board acknowledges it as a whole, and each director individually,
has a role to play in guiding and modelling the high ethical standards that we want to pervade the whole organisation. It is recognised that
codification of ethical principles, whether in a Code of Conduct, policies or elsewhere, is only a baseline, and tools like the brand values and
leadership behaviours help to create an ingrained ethical culture.
Code of Conduct
Air New Zealand has published a Code of Conduct, as a statement of our guiding principles of ethical and legal conduct. The Code of Conduct
applies to everyone working at or for Air New Zealand – directors, executives, employees, contractors and agents.
The Code of Conduct forms part of the induction process for all new employees, and is available online. Employees must provide
acknowledgement that they have read and understood the content. On an annual basis, employees are required to re-confirm their understanding
of the Code of Conduct through an online course.
The Code of Conduct is high-level in nature, and provides clear guidance, supported by practical examples, across a range of ethical and legal
matters, including:
• Health, safety and well-being
• People, diversity and inclusion
• Airline security and business
disruption management
• Gifts and entertainment
• External communications
• Use of business resources
• Personal information and privacy
• Sustainability and sponsorship
• Conflicts of interest
• Inducements and bribes
• Continuous disclosure
• Insider trading
Mechanisms are provided for the safe reporting of breaches of the Code or other policies or laws, and the consequences of non-compliance
are made explicit.
Related Documents
The Code of Conduct is supplemented by a number of other documents, including the Board Charter and specific policies on key matters.
As a whole these documents address all the matters specified in the NZX Corporate Governance Code.
In addition to the high-level guidance in the Code of Conduct, specific policies provide a further layer of management, particularly in more
technical areas. For example, Air New Zealand has a Securities Trading Policy, which identifies behaviours that are illegal, unacceptable or
risky in relation to dealings in Air New Zealand’s securities by directors, employees or their associated persons. Without taking away ultimate
responsibility of the individuals for their trading activities, the policy provides a framework that reduces the potential for insider trading.
Training is provided to staff on the policy, and no policy breaches have been identified during the 2018 reporting period.
The ethical approach adopted within the Group is complemented by a Supplier Code of Conduct, outlining the minimum standards and
expectations applicable to all suppliers of goods and services to Air New Zealand. The Supplier Code addresses labour and human rights,
health and safety, environmental sustainability, ethical business, security, information security, risk management and commercial sustainability.
Initiatives and metrics on a range of sustainability matters relating to social, environmental and economic factors are reported in
Air New Zealand’s Sustainability Report.
CORPORATE GOVERNANCE STATEMENT
49
AIR NEW ZEALAND GROUP
Air New Zealand makes these documents, and other significant governance documents tabulated below, available on its website.
Constitution/ChartersPolicies
• Constitution
• Board Charter
• Audit Committee Charter
• Funding Committee Charter
• Health, Safety and Security Committee Charter
• People Remuneration and Diversity Committee Charter
• Anti-bribery and corruption policy
• Audit independence policy
• Continuous disclosure policy
• Distribution policy
• Equality, diversity and inclusion policy
• Group compliance policy
• Risk management policy
• Securities trading policy
Codes of ConductOther Documents
• Employee Code of Conduct
• Supplier Code of Conduct
• Sustainability Report
• Palm oil position statement
• Slavery and human trafficking statement
Board Composition and Performance
“To ensure an effective Board, there should be a balance of
independence, skills, knowledge, experience and perspectives.”
Responsibilities of the Board
The Board has responsibility for taking appropriate steps to protect and enhance the value
of the assets of Air New Zealand in the best interests of the Company and its shareholders.
The Board has adopted a formal Board Charter detailing its authority, responsibilities,
membership and operation which is published on Air New Zealand’s website.
Management Delegation
The business and affairs of Air New Zealand are managed under the direction of the Board.
The Board is responsible for guiding the corporate strategy and direction of Air New Zealand
and has overall responsibility for decision making. The Board delegates to the Chief Executive
Officer responsibility for implementing the Board’s strategy and for managing the operations
of Air New Zealand. The Chief Executive Officer has Board approved levels of authority and
the Chief Executive Officer in turn sub-delegates authority to the Chief Financial Officer, the
Executive management team and senior management. These delegated authorisation levels are
subject to Board approval, internal and external audit.
Chairman
Tony Carter has been Chairman of Air New Zealand since 27 September 2013. Jan Dawson
was appointed Deputy Chairman on 27 September 2013. The Chairman’s role includes ensuring
the Board is well informed and effective, acting as the link between the Board and the Chief
Executive Officer and ensuring effective communication with shareholders.
The Board Charter makes explicit that the Chairman and the Chief Executive Officer roles
are separate.
Tony Carter will be resigning as Chairman after the 2019 Annual Shareholder Meeting.
Dame Therese Walsh has been elected by the Board to succeed him.
Company Secretary
Under the Board Charter, the General Counsel and Company Secretary is secretary to the Board and accountable directly to the Board,
through the Chairman, on all matters to do with the proper functioning of the Board.
Director Independence
The Board has identified criteria in its Charter, against which it evaluates the independence of directors. These are designed to ensure directors
are not unduly influenced in their decisions and activities by any personal, family or business interests.
All directors have been determined to be Independent Directors under these criteria, and for the purposes of the NZX Listing Rules. Directors
are required to inform the Board of all relevant information which may affect their independence and the Board reconfirms the independence
status of its members annually.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Board Cadence
7 physical Board meetings
4 teleconference meetings
15 committee meetings
1 offshore market visit
1 regional visit
4 strategy/deep dive sessions
1 evaluation exercise
Recent Focus Areas
• Sustainability/Carbon Pricing
• Airport Pricing/Regulation
• Megatrends
• Strategic Alliances and Routes
• Future fleet
• Long-haul products/cabin experience
• Digital vision
• Fuel price/continuity of supply
• Boeing 787 Engine
• Risk Management Framework
50
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
Board Structure, Skills and Composition
The role of the Board in the governance of Air New Zealand requires its members to bring a range of skills and experience to the table, to be
able to challenge, support, monitor, mentor, guide and inspire management, and to ensure Air New Zealand is and continues to be a business
that its owners, customers, employees and the wider public, can be proud of.
The skills and experience represented on the Board are summarised in the diagram below:
Executive Leadership
Financial
Tourism
Engineering/Safety
Digital/Technology
Governance
International Business
Government & Stakeholder
Customer Experience
Details of each director’s experience, independence, and interests are published on the Air New Zealand website.
Strategic Competencies
The Board has reviewed and restated the competencies and attributes it considers appropriate to support the Company’s strategic direction, and
assessed the extent to which these exist across the current membership. The Board evaluation process, undertaken with an external consultant,
assisted in this exercise. The competencies form an important part of the criteria used in the review and development of existing directors, and in
the recruitment of new directors. As the Company itself develops, the specific strategic competencies will change and be addressed as the Board
refreshes itself, and some gap between the identified strategic competencies and a snapshot of current capability is usually to be expected.
The Board works to ensure these competencies are adequately addressed in its membership, and notes it is generally not necessary or practical
for every director to individually demonstrate these: competency depth may be as relevant as breadth.
The specific qualifications, skills and experience of current directors are separately discussed in the biographies of each director.
Diversity and Inclusion
The Board is committed to a culture that values diversity and inclusion throughout the Group. It recognises the importance of fostering a diverse
workforce which leads to better innovation, stronger customer connections and better business outcomes.
Air New Zealand is making strides in delivering the diversity and inclusion objectives defined in the Diversity & Inclusion Strategy to 2020.
The four strategic Diversity & Inclusion objectives are:
• Attract and recruit diverse talent
• Develop our diverse workforce
• Create a culture where everybody thrives
• Future-proof (retention and transition)
Attract and recruit diverse talent
In the 2018 financial year the talent attraction and selection processes were refined to attract diverse talent and ensure they were more inclusive by:
• No longer asking candidates for current salary to minimise bias and risk of inheriting the gender pay gap from other organisations, as well as
no longer sharing historical salary data with hiring managers
• Ensuring at least one female on every Senior Leadership Team role shortlist
• Encouraging gender balanced interview panels
• A guide for recruiters and managers to create a fair, consistent and inclusive recruitment process
Air New Zealand continued to be a principal sponsor of Champions for Change: “TupuToa Ma
-
ori and Pasifika Corporate Pathways Programme”
(an internship programme to promote and encourage young Ma
-
ori and Pasifika into corporate careers). The intake of interns from the previous
financial year was tripled, welcoming 10 interns into corporate roles within Air New Zealand.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
51
AIR NEW ZEALAND GROUP
Develop our diverse workforce
The focus continues to be on gender equality and gaining greater female representation on the Senior Leadership Team level, and within groups
such as Pilots, Engineering and Maintenance and Digital. The previous 40% target has been increased to 50% representation of women in
the Senior Leadership Team by 2020. As illustrated in the graph below, as of 30 June 2018, the SLT female representation is 39% , which
demonstrates a sustained result throughout the year.
Board
45%
40%
35%
30%
25%
20%
15 %
10 %
5%
0
OtherSenior Leadership Team
(including Officers)
Workforce Gender Representation (% female)
F Y2016
F Y2015
F Y2 014
F Y2013
F Y2 017
22
26
33
30
14
25
29
4343
37
38
40
41
42
39
43
42
39
F Y2018
Developing women is an area that has had significant gains in the 2018 financial year, and in August 2017 Air New Zealand won the Diversity
Works NZ Empowerment Award recognising our work in developing and empowering women. Since the start of the Women in Leadership
programme in 2014, 34 women have completed this development initiative. In the 2018 financial year, 7 of the 15 SLT appointments were
women, with 67% of all internal promotions being female.
Additionally, we have sustained 43% female representation on the Board for three consecutive years.
AS AT 30 JUNE201320142015201620172018
No. of Board (female:male)1: 62:62:53:43:43:4
No. of Executive Team (female:male)1:71:71:71: 81: 91: 9*
No. of Senior Leadership Team (female:male)15 : 5218 : 5126:5424: 5734:5334:53
No. of Other (female:male)4 ,075 : 6 , 9124,299: 6,9794 , 4 3 3 : 6 ,7424,656:6,6354,879:6,8104, 913 : 6 , 8 38
* Announced changes to the Executive Team since 30 June 2018 will result in a female:male ratio of 2:8 by the end of September 2018.
There has also been significant progress with the cultural fluency initiatives and advancing the Ma
-
ori employee strategy. This has included
Ma
-
ori and Pasifika appointments to SLT, and embedding inclusivity and cultural fluency as a key part of all leadership touchpoints through the
following initiatives:
• Weaving Ma
-
ori cultural competency through leadership programmes
• Providing coaching on cultural protocols and Te Reo for senior leaders
• Running a deep immersion residential Ma
-
ori fluency wananga for key leaders in partnership with Department of Conservation at Te Papa Atawhai
• Setting the expectation that cultural fluency in our brand and the Koru is a core capability for all Air New Zealanders through our
induction programme
We will continue to focus on cultural initiatives and collect ethnicity data to create a baseline and identify where we have underrepresented
groups such as Ma
-
ori, Pasifika and Asian.
Definitions:
Executive Team: The Chief Executive Officer and direct reports. The members of the Executive Team are defined as Officers of the Company.
Senior Leadership Team (SLT): Executive Team, direct reports to the Executive Team and other selected senior managers.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
52
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
50-59 : 4
Male : 4
Create a culture where everybody thrives
Air New Zealand has a wide range of employees from diverse backgrounds. The employee networks play a pivotal role in creating an inclusive
culture. The Company supports five employee networks: Women’s Network, Young Professionals (Yopro), Ma
-
ori and Pasifika (Manu), Pride
(LGBTQI) and the Kiwi Asia (KASIA) employee network launched in March 2018. Alongside these networks, to address the under representation
of women in male dominated teams, we have supported groups such as Women Inspiring the Next Generation of Female Pilots (WINGS),
Women in Engineering and Maintenance and Women in Digital.
In the 2018 financial year, the networks hosted 39 employee network events attended by over 2,000 people.
Air New Zealand is committed to ensuring that our leaders and key decision makers have the tools to mitigate the effects of unconscious
knowledge and bias and we are putting programmes in place for 2019.
The impact of diversity and inclusion activity is measured through an engagement survey. There has been an increase against all three Diversity
& Inclusion questions in the 2018 financial year.
• Overall perceptions increased by 14 percentage points. 80% say Air New Zealand is open to and accepts differences – up 22% .
• 77% of people say their direct manager has an inclusive leadership style and values diverse cultures, backgrounds and ideas of
employees – up 9% .
• 76% of people say that Air New Zealand values and makes the most of their unique differences – up 11% .
Future-proof (retention and transition)
Air New Zealand is looking ahead at the future of work, and we are committed to creating an empowering and engaging environment for
a multi-generational workforce.
We are investing in a comprehensive needs analysis and investigation process to gain a deeper understanding of the needs of the ageing
workforce. We will develop a detailed strategy in the 2019 financial year.
Board Evaluation
The Board Charter provides for regular performance reviews of the Board as a whole and its Committees. Individual director views and
the views of some members of the Executive Team are sought on Board process, efficiency, and effectiveness, and are discussed by the
Board as a whole. In conjunction with this process, those directors retiring annually by rotation who are standing for re-election have their
performance evaluated by their fellow directors in a process co-ordinated by the Chairman, (or by the Deputy Chairman to review the
Chairman) with individual feedback to each director as their evaluation is completed. This performance evaluation process has been applied
in respect of the 2018 financial year.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Diversity on the Board
The Board’s ability to contribute
is enhanced by the diversity of its
members. This diversity may be
demonstrated through a number
of criteria, such as those discussed
or depicted below. The range of
experience of directors, recorded in
the biographies on pages 61-62, is
another important source of diversity.
Achieving gender balance has
been a strong diversity focus,
but the Board is also interested
in other dimensions of its diversity
including structural factors of
tenure and age. The size of the
Board is a constraining factor in
formulating meaningful numeric
targets for Board diversity, but
the Board is diligent in recognising
and encouraging an expansive
approach to diversity in its own
membership as well as in the
wider Company, and in the ongoing
consideration of measures or targets.
GENDERRESIDENCE
AGETENURE
Female
43%
Average
57. 7
Average
4.5yrs
Female : 3
Auckland : 4
Regional : 1
Other main
centre : 1
Offshore : 1
40-49 : 1
60-69 : 23-6 : 3
0-3 : 2
6-9 : 2
53
AIR NEW ZEALAND GROUP
Director Appointments and Induction
The Board as a whole considers the requirement for additional or replacement directors, subject to the Constitutional limitation of the number
of directors. In so doing, it has regard to the skills, experience and diversity on the Board, and the skills that are necessary or desirable for the
Board to fulfil its governance role and contribute to the long-term strategic direction of the Company. The Board may engage consultants to
assist in the identification, recruitment and appointment of suitable candidates.
When appointing new directors, the Board ensures that the Constitutional requirements in respect of directors will continue to be satisfied. There
must be between five and eight directors, at least three of whom are resident in New Zealand. The majority of directors must be New Zealand
citizens and, for a Board of seven members as is currently the case, at least two must be independent.
The Constitution provides that all Non-Executive Directors are elected by Shareholders. Directors may be appointed by the Board to fill vacancies,
but they are then subject to re-election at the next annual Shareholder meeting. In addition to directors retiring by rotation, and eligible for
re-election, nominations may be made by Shareholders.
Each Non-Executive Director receives a letter formalising their appointment. That letter outlines the key terms and conditions of their appointment
and is required to be countersigned confirming agreement.
The Board introduces new directors to Senior Executives and the business through specifically tailored induction programmes. The programme
includes one-on-one meetings with members of the Executive Team together with visits to key operational business areas.
Director Development
All directors are regularly updated on current industry and company issues by presentations and briefings from Senior Executives. The Board
expects all directors to undertake continuous education so that they can effectively perform their duties and progress on this forms part of the
Board evaluation process.
Training highlights in the past year include a study tour to China, and participation in the New Zealand Institute of Directors’ Leadership Conference.
Board Committees
“The Board should use committees where this will enhance its effectiveness in key areas,
while still retaining board responsibility.”
The Board has established committees where these can assist in the efficient performance of the Board’s functions, and the achievement
of appropriate governance outcomes. All committees operate under written Charters, which define the role, authority and operations of the
committee. Committee Charters are available on the Air New Zealand website.
Current standing committees are outlined below.
CommitteeComposition and RolesMembers
Audit3-7 non-executive directors. A majority, including the Chairman, must be
independent. A majority of the members should be financially literate and
at least 1 member must have an accounting or financial background.
The Chair may not be the Chairman of the Board.
Advises and assists the Board in discharging its responsibilities with
respect to financial reporting, compliance and risk management practices
of Air New Zealand.
Jan Dawson (Chair)
Tony Carter
Jonathan Mason
Dame Therese Walsh
People Remuneration and
Diversity (“PRDC”)
2-7 non-executive directors. A majority, including the Chairman, must
be independent.
Advises and assists the Board in discharging its responsibilities with
respect to oversight of the People Strategy of Air New Zealand.
Jonathan Mason (Chair)
Tony Carter
Jan Dawson
Sir John Key
Health, Safety and Security
(“HSSC”)
At least 3 non-executive directors. A majority, including the Chairman,
must be independent.
Advises and assists the Board in discharging its responsibilities with
respect to health, safety and security matters arising out of activities within
and by Air New Zealand.
Rob Jager (Chair)
Tony Carter
Linda Jenkinson
Funding3-4 directors. The Chairman of the Board will be the Chairman.
Advises and assists the Board in discharging its responsibilities with respect
to funding transactions and associated matters.
Tony Carter (Chair)
Jan Dawson
Rob Jager
Attendance at meetings of employees or other persons is at the invitation and discretion of the respective Committee, through its Chair.
As noted above, the Board as a whole considers the requirement for additional or replacement directors, and has not established a nomination
committee or similar for this purpose.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
54
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
The table below reports attendance of members at Board and Board Committee meetings during the 2018 reporting period.
Board/Committee Meetings 1 July 2017 – 30 June 2018
BoardAudit CommitteePeople Remuneration and
Diversity Committee
Health, Safety and
Security Committee
Meetings
1
AttendedMeetings
1
AttendedMeetings
1
AttendedMeetings
1
Attended
Tony Carter1111447744
Jan Dawson11114477
Paul Bingham
2
3311
Rob Jager111144
Linda Jenkinson111144
Sir John Key
3
99
Jonathan Mason11114477
Dame Therese Walsh111143
1. The number of meetings for which the director was a member.
2. Paul Bingham resigned from the Board on 28 September 2017.
3. The Rt Hon Sir John Key was appointed to the Board on 1 September 2017, and to the People Remuneration and Diversity Committee on
28 June 2018.
The Funding Committee generally satisfies its responsibilities through electronic communication and written resolution, to ensure efficient
processing of funding and related transactions. No physical meetings of this Committee were held in the year, and no additional fees are paid
in respect of this Committee.
Reporting and Disclosure
“The Board should demand integrity in financial and non-financial reporting, and in the timeliness
and balance of corporate disclosures.”
The Board is committed to timely, accurate and meaningful reporting of financial and non-financial information.
As a listed company there is an imperative to ensure the market is informed, and the listed securities are being fairly valued by the market. In
addition to statutory disclosures, the Company provides ongoing updates of its operations, as well as presentations to the investment community.
This material is made publicly available through releases to the NZX and ASX, in accordance with the Listing Rules.
Initiatives are pursued to inform all stakeholders of the Company’s performance against broader objectives, including responsibilities to our
communities, people, environment and economy. The Company’s Sustainability Report reports on activities and achievements in these areas.
Air New Zealand has a Continuous Disclosure Policy, available on the Air New Zealand website. The purpose of this policy is to:
• Ensure that Air New Zealand complies with its continuous disclosure obligations;
• Ensure timely, accurate and complete information is provided to all shareholders and market participants; and
• Outline mandatory requirements and responsibilities in relation to the identification, reporting, review and disclosure of Material Information
relevant to Air New Zealand.
This policy establishes a Disclosure Committee to facilitate the provision of timely and appropriate market disclosure.
The Board receives assurances from the Chief Executive Officer and Chief Financial Officer that the financial statements are prepared in
accordance with International Financial Reporting Standards (IFRS) and NZ IFRS, based on a sound system of risk management and internal
control that is operating effectively in all material respects in relation to financial reporting risks.
In addition to the published financial statements, Air New Zealand’s Sustainability Report provides information and insight into the Company’s
approach and performance on a number of non-financial matters, including social, environmental and economic measures.
Remuneration
“The remuneration of directors and executives should be transparent, fair and reasonable.”
In accordance with the Constitution, shareholder approval is sought for any increase in the pool available to pay directors’ fees. Approval was last
sought in 2015, when the pool limit was set at $1,100,000 per annum.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
55
AIR NEW ZEALAND GROUP
Where the pool permits, the Board may amend the actual fees paid to reflect market conditions or other relevant factors.
The Board has determined the following allocation of the pool.
PositionFees (Per Annum)
To 30 June 2018From 1 July 2018
Board of DirectorsChairman
1
$270,000$270,000
Deputy Chairman$ 111 , 0 0 0$114,000
Member$ 97, 5 0 0$100,000
Audit CommitteeChair$40,000$40,000
Member$20,000$20,000
Health Safety and Security CommitteeChair$40,000$40,000
Member$20,000$20,000
People Remuneration and Diversity CommitteeChair$20,000$20,000
Member$10,000$10,000
1. The Chairman receives no additional committee fees.
The Board approved an increase in base director fees for the Deputy Chairman of $3,000 per annum and directors of $2,500 per annum, with
effect from 1 July 2018. This is accommodated within the shareholder-approved pool for director remuneration.
Air New Zealand’s Independent Non-Executive Directors do not participate in any executive remuneration scheme or employee share schemes;
nor do they receive options, bonus payments or any incentive-based remuneration. Directors are entitled to be reimbursed by Air New Zealand for
reasonable travelling, accommodation and other expenses they may incur whilst travelling to and from meetings of the directors or committees.
Remuneration of directors in the reporting period is tabulated below.
Board
Fees
Audit
Committee
HSSCPRDCTotal
Fees
Value
of Travel
Entitlement
1
Tony Carter (Chairman)
2
$270,000---$270,000$56,082
Jan Dawson (Deputy Chairman)$ 111 , 0 0 0$40,000
(Chair)
-$10,000$161,000$ 2 8 , 414
Paul Bingham
3
$24,375-$5,000-$29,375$22,620
Rob Jager$ 97, 5 0 0-$40,000
(Chair)
-$137, 5 0 0$40,500
Linda Jenkinson$ 97, 5 0 0-$20,000-$ 117, 5 0 0$ 5 0 ,74 6
Sir John Key
4
$ 81,250---$ 81,250$64,545
Jonathan Mason$ 97, 5 0 0$20,000-$20,000
(Chair)
$137, 5 0 0$ 67,732
Dame Therese Walsh$ 97, 5 0 0$20,000--$ 117, 5 0 0$ 49,19 0
Total$ 876,625$80,000$65,000$30,000$1,051,625$379,829
Amounts stated as GST exclusive where applicable.
1. Includes value of travel benefits for related parties and benefits accrued in prior years utilised in current year.
2. No committee fees are paid to the Chairman.
3. Paul Bingham resigned from the Board on 28 September 2017.
4. The Rt Hon Sir John Key was appointed to the Board on 1 September 2017, and to the People Remuneration and Diversity Committee
on 28 June 2018.
In addition to the director remuneration provisions above, Air New Zealand’s employee remuneration policy, including the components of
remuneration, is reflected in the philosophies and principles discussed in the remuneration report.
The remuneration of the Chief Executive Officer is disclosed in the remuneration report.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
56
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Risk Management
“Directors should have a sound understanding of the material risks faced by the issuer and
how to manage them. The Board should regularly verify that the issuer has appropriate
processes that identify and manage potential and material risks.”
Risk to Air New Zealand is any threat, lost opportunity or circumstance that could compromise safety and security of our customers and staff,
or affect the financial stability of the Group or the strength of our Brand. The Board recognises that risk is inherent in our business environment.
Risks need to be systematically identified and managed to meet legal, regulatory and governance obligations, while still allowing the Company to
operate sustainably as a commercial airline.
Risk management is an important part of our corporate governance. The Board, supported by the Audit Committee has overall responsibility
for oversight of risk and for maintaining a robust risk management and internal controls system. Under its Charter, the Board is responsible for
ensuring that effective risk management and compliance systems are in place to protect the Company’s assets and that the Company does not
operate beyond its risk appetite.
The Board ensures that it as a whole, and each director individually, receives appropriate information on key risks and the management of these.
To achieve this, the Board receives a Group Risk Profile representing the most significant organisational risks as identified by management on a
six-monthly basis in accordance with the Group Risk Management Policy. The reports enable the Board to gain assurance that it has undertaken
a robust assessment of key risks facing the Company and to form an overall assessment of the effectiveness of Air New Zealand’s system of
internal controls for managing risk.
The Board’s Health, Safety and Security Committee provides oversight of Air New Zealand’s health, safety and security risk management
framework including processes, policies and performance, and monitoring the effectiveness of internal control assurance. This process includes
site visits to observe treatment of operational and safety risks, as well as presentations on risk management practices and targeted deep dives
to obtain assurance that risks receive the right focus from management.
The Executive Team, under the leadership of the Chief Executive Officer, implements the strategy, culture, people, processes and structures that
encompass the Enterprise Risk Management Framework.
Enterprise Risk Management Framework
In the 2018 financial year, the Board, led by the Audit Committee, has worked with management to develop and implement a comprehensive
Enterprise Risk Management Framework (ERMF) designed to provide a consistent approach to risk identification, management and reporting.
The scope of the ERMF includes a consideration of Strategic, Operational, Financial and Legal/Regulatory risks, both short-term and long-term,
across all critical business functions across the Air New Zealand Group. It is built on a set of interdependent elements including principles,
organisational design, governance, and process, methodology and tools.
As the Framework becomes more embedded, it will provide better information on risks and enhance the management of these.
ESTABLISH CONTEXT
What are we trying
to achieve?
1
IDENTIFY RISK
What could threaten
our ability to achieve
our objective?
2
ANALYSE AND
ASSESS RISKS
How likely are these
outcomes and what are
the consequences given
existing controls?
4
TREAT RISKS
What is our action plan
to better manage these
outcomes?
5
MONITOR,
REVIEW
AND REPORT
What has
changed and
who should
be informed?
6
IDENTIFY
AND ASSESS
EXISTING
CONTROLS
What do we rely
on to manage
these outcomes
and how
effective are
these controls?
3
C
O
M
M
U
N
I
C
A
T
E
A
N
D
C
O
N
S
U
L
T
W
H
O
S
H
O
U
L
D
B
E
I
N
V
O
L
V
E
D
/
I
N
F
O
R
M
E
D
?
Minor
CONSEQUENCE
Critical
Very likely
LIKELIHOOD
Very unlikely
57
AIR NEW ZEALAND GROUP
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
Enterprise Risk Management Process
This includes a simple, seven-step risk management process, aligned to the ISO 31000 standard, that is progressively being embedded in
the business.
Individual risks are assessed and prioritised against a risk matrix of likelihood and consequence. Particular attention is paid to any Medium,
High or Very High risks, with mitigation measures generally required to reduce these risks to an acceptable level.
A taxonomy of risk types is maintained to assist in the identification of risks, and facilitate a comprehensive consistent approach.
Risks identified at a business unit level are rolled up to divisional and group levels, with ownership clearly assigned to senior managers.
Accountability – Three Lines of Defence
Air New Zealand’s risk management structure aims to align with the Three Lines of Defence model, involving the Executive, Audit Committee
and Board oversight of risk management and assurance. Each Line has a set of core accountabilities:
Third Line: Independent Assurance
Internal Audit is a key component of our assurance framework, underpinning the risk management programme by providing an independent
appraisal of the adequacy and effectiveness of internal controls.
• Independent challenge, verification and review of business management of risk; and
• Identify opportunities for improved business performance.
Second Line: Risk Management Governance
• Develop, maintain and oversee implementation of the ERMF, including Risk Management Policy and supporting tools;
• Provide regular aggregated risk information to the Audit Committee; and
• Provide support, training and advice to the business to promote risk awareness and culture and facilitate risk management activities.
First Line: Risk Ownership
Risk management is primarily a line management responsibility since risk is inextricably linked with operational activity and the achievement
of business objectives.
• Identify, own, monitor and manage risks within their areas of operation; and
• Comply with risk management policies.
BUSINESS UNITS
3
2
1
RISK AND COMPLIANCE
AUDIT
Executive
Audit Committee
and Board
Line 3
Line 2
Line 1
58
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
Risk Themes
The initial benefit for the Board from the refreshed ERMF has been the capture of individual risks into Risk Themes. Risk Themes recognise
common or systemic threads between risks identified to drive more collaborative analysis and action by business areas that are most impacted.
Examples of these Risk Themes are given below.
Risk ThemeRepresentative RisksInsights
Operational Safety & Integrity:
Operational Safety of flight implications
associated with aircraft operation.
• Malicious intent
• Safety culture
• Fragile infrastructure
• Supply chain failures
• Geopolitical uncertainty
• Operational safety incident
Ongoing attention is needed in key areas of emerging
safety risk, such as drones in controlled airspace
and carriage of lithium batteries. This may require
appropriate engagement with regulators to ensure that
such threats to safety are addressed.
People Safety & Wellbeing:
Risks that have implications on the
safety and wellbeing of staff, contractors
and customers.
• Ageing workforce
• Safety culture
• Fragile infrastructure
• Stress and fatigue
Our people are essential to our success and the
strength of our brand. The impact of significant and
ongoing events, such as the Boeing 787 engine
issues, the regional schedule changes and the
growing frequency and severity of weather-related
disrupts, overlaid against the significant pace of
business change, place significant pressure on our
workforce requiring focus to be maintained on people
safety and wellbeing.
Constrained Growth:
Growth pressures that may impact
achievement of the strategic objective
related to profitable growth and returns
to shareholders, which may include
factors within the macro-environment in
which the airline operates.
• Changing demographics
• Economic volatility
• Regulatory change
• Skilled labour shortage
• Competitive pressures
Growth without strategic investment in resource and
infrastructure, requires careful management to ensure
that the customer experience, brand health, and
staff engagement are not adversely impacted. Focus
is required on advancing all three aspects of the
commercial/customer/culture model that is key to our
success in advancing from “good to great”.
Business Resilience:
Threats to our ability to quickly adapt to
disruptions while continuing to maintain
business operations and safeguarding
people, assets and overall brand equity.
• Climate change
• Supply chain failures
• Fragile infrastructure
• Natural disasters
Effectively anticipating the unexpected is key to
ensuring that our business is prepared for adverse
events, and to improving the quality of business
continuity planning with greater focus on end-to-end
processes and cross-functional scenarios.
Digital Challenges/Disruption:
Disruption to our business in an
environment of rapid automation and
increasing digital activity as our pace of
technological innovation and adoption
increases. It includes challenges relating
to ageing technology infrastructure.
• Digital constraints
• Fragile infrastructure
• Regulatory change
Reliance on an ageing digital infrastructure has
the potential to have an impact on realising growth
aspirations and delivering on customer experience
goals. A balance is required between allocating scarce
resources to the maintenance of ageing systems, many
of which remain operationally critical, and investing in
innovative new technology.
Degradation of Customer Experience:
Threats to our ability to embed and
deliver an unparalleled value proposition
and superior customer experience.
• Operational delivery capability
• Workforce constraints
• Digital transformation
• Supply chain failure
Management of the delivery of an outstanding customer
experience on a consistent basis, and across the entire
end-to-end customer interaction, is critical to brand
strength and reputation. There is ongoing potential,
including through effective collaboration, to enhance
the long-term health of the brand and improve the
consistency of the customer experience.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
59
AIR NEW ZEALAND GROUP
The other Risk Themes are:
Information Governance: Risks to our ability to balance the use and security of corporate and personal information while achieving compliance,
operational transparency and cost control.
Delivering Sustainability: Risks that can jeopardise our commitment to help supercharge New Zealand’s success socially, environmentally and
economically in accordance with our Sustainability Framework and aspirations.
Fleet Risk: Long-term complexities and uncertainties pertaining to our fleet choices which relate to optimising financial and operational outcomes.
Organisational Culture: Factors that impede our ability to embed a high performance, high engagement corporate culture, in particular those
relating to organisational model, lack of cross-functional alignment/collaboration and non-conformance to standard operating procedures.
People Risk: Human resource constraints such as labour shortage, training limitations, ageing workforce and industrial relations that hinder our
ability to compete, innovate or grow.
Regulatory Landscape: Risks to our ability to meet the demands of a complex and dynamic regulatory landscape both domestically and globally.
Business Partner Dependency: Risk of interruptions in the availability of products and services, which could adversely affect our
operational performance.
Ethical Misconduct: Cultural factors that threaten our ability to safeguard our brand equity.
Climate Change
To some extent, climate related risks are considered and captured within one or more of the risk themes. However it is explicitly recognised
that the Company has specific exposures in this area as an emerging risk; as a contributor due to the nature of its operations, and as both
a user of goods and services, and reliant on customers, that may be impacted by the effects of climate change.
Examples of the types of impact on our business include the effect of rising sea levels on airport infrastructure and access; the effect of
rising temperature on efficiency and operations, including congestion and scheduling impacts; changes to the jet stream characteristics
affecting flight times, range and comfort; increased costs of fuel, and regulatory measures; and extreme weather events creating more
frequent disruptions to travel.
Air New Zealand notes the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) for disclosing clear,
comparable and consistent information about the risks and opportunities presented by climate change. Work is underway to identify,
measure and model the significant climate-related effects on the Company at a more detailed level, as well as at a more general sector
level where additional guidance on relevant reporting metrics is anticipated. The Board will continue to monitor these developments and
incorporate appropriate additional reporting metrics into its future public reports.
Auditors
“The Board should ensure the quality and independence of the external audit process.”
External Audit
As a Public Entity, Air New Zealand is subject to the Public Audit Act 2001. The Auditor-General is the auditor, but may appoint an independent
auditor to conduct the audit process. Deloitte has been appointed in this respect.
The Audit Committee liaises with the Auditor-General on the appointment and re-appointment of the external auditors, to ensure the
independence of the external auditor is maintained, and to approve the performance of any non-audit services in accordance with the Audit
Independence Policy.
Air New Zealand requires the external auditor to rotate its lead audit partner at least every five years, with suitable succession planning to
ensure consistency.
On a regular basis the Audit Committee meets with the external auditor to discuss any matters that either party believes should be discussed
confidentially. The Chair of the Audit Committee will call a meeting of that Committee if so requested by the external auditor.
The appointed external auditor, Deloitte, has historically attended the Annual Shareholders’ Meeting, and the lead audit partner is available to
answer relevant questions from shareholders at that meeting.
Internal Audit
Internal Auditing is an independent and objective assurance and consulting activity that is guided by a philosophy of adding value to improve the
operations of Air New Zealand. The Company’s Head of Internal Audit reports functionally to the Audit Committee and administratively to the
Chief Financial Officer. The internal auditors’ responsibilities are defined by the Audit Committee as part of their oversight role, and the Head of
Internal Audit has unfettered access to the Audit Committee or its Chair.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
60
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
Shareholder Rights and Relations
“The Board should respect the rights of shareholders and foster constructive relationships with
shareholders that encourage them to engage with the issuer.”
The Board recognises the rights of shareholders and is committed to engaging with them positively on significant matters.
Air New Zealand’s shareholder relations programme is designed to ensure effective, two-way communication between shareholders and
Air New Zealand. Relevant information is provided to the investment community as quickly and efficiently as possible as part of Air New Zealand’s
compliance with continuous disclosure.
In addition to providing disclosures to the market, Air New Zealand engages with shareholders in a number of ways, including:
• Investor Centre Website
Air New Zealand maintains a dedicated investor website airnewzealand.co.nz/investor-centre. This website contains financial information,
current and historical annual reports and investor presentations, dividend history, notices of shareholder meetings, frequently asked questions
and other relevant information pertaining to Air New Zealand. The website is freely accessible to the public.
• Electronic Communications
Air New Zealand provides an Investor Relations email address whereby shareholders are welcome to communicate electronically with
Air New Zealand on any matters relating to their investment or other dealings with the Company. All shareholder-related enquiries are
provided with a response within a reasonable timeframe.
• Hybrid Annual Shareholder Meetings
Beginning in 2016, Air New Zealand has offered shareholders the ability to attend the Annual Shareholders’ Meeting in either a physical or
digital capacity. For shareholders who are unable to travel, the online option of participating in the Annual Shareholders’ Meeting allows all
shareholders the ability to engage with the Board of Directors and Executive. In 2017, Air New Zealand had more than 140 online participants
who asked 15 questions using the virtual tool. Resolutions at shareholder meetings are usually by way of a poll, where each shareholder has
one vote per share. Air New Zealand encourages shareholders to ask questions in advance of the meeting, to encourage further engagement
with the Company and provide management with a view of the concerns of the Company’s shareholders.
• Investor Day Briefings
On a periodic basis, Air New Zealand holds investor briefings to provide an update on the Company’s strategy and financial framework, as
well as provide shareholders with an in-depth discussion on a particular topic. To ensure all shareholders and prospective investors have the
opportunity to view the content of Investor Day briefing, Air New Zealand also provides webcast access and transcripts of the event on the
Air New Zealand website.
• Webcasting Interim and Annual Results Presentations
Air New Zealand webcasts its earnings announcements on a semi-annual basis over its website to provide investors with timely information
pertaining to the business, strategy and financial performance. A replay of the webcast and transcript of the event are made available on the
Air New Zealand website.
In accordance with the Companies Act, Constitution and Listing Rules, Air New Zealand refers any significant matters to shareholders for
approval at a shareholder meeting.
Air New Zealand posts any Notices of Shareholder Meetings on its website as soon as these are available. The general practice is to make
these available not less than four weeks prior to the shareholder meeting.
Differences in Practice to NZX Code
The Board has not established protocols setting out procedures to be followed in the event of a takeover offer. This is because the Board
considers receipt of a takeover offer to be an extremely unlikely event in light of the Crown’s majority shareholding in the Company and the other
shareholding restrictions that apply to Air New Zealand. In addition, Air New Zealand would have adequate time to implement such protocols
and procedures, and communicate those to shareholders, should circumstances change. Accordingly, and having regard to the supporting
commentary in the NZX Corporate Governance Code, the Board considers that it is reasonable and appropriate for Air New Zealand not to
follow Recommendation 3.6 of the Code at this time. Notwithstanding this, the Board agrees with the principles behind this recommendation,
being good communication with shareholders and independent directors leading matters that require appropriate independence.
CORPORATE GOVERNANCE STATEMENT (CONTINUED)
61
AIR NEW ZEALAND GROUP
The following directors held office as at 30 June 2018:
Antony (Tony) Carter BE (Hons), ME, MPhil
Chairman
Independent Non-Executive Director – Appointed 1 December 2010
Mr Carter is Chairman of Fisher & Paykel Healthcare Limited, a director of Fletcher Building Limited and ANZ Bank New Zealand Limited and
Independent Chairman of Blues LLP.
He attended the University of Canterbury where he studied chemical engineering, graduating with a Bachelor in Engineering with honours and
a Masters in Engineering in 1980. He then went on to study at Loughborough University of Technology in the United Kingdom and graduated
in 1982 with a Master of Philosophy degree.
Mr Carter worked for his family company, Carter Group Limited, in Christchurch until 1986 when he purchased a Mitre 10 hardware store, also
eventually serving as a director of Mitre 10 New Zealand Limited and becoming Chairman of Mitre 10 New Zealand Limited in 1993.
In 1994 Mr Carter was appointed General Manager and Chief Executive designate of Foodstuffs (South Island) Limited. In 1995 he was
appointed Chief Executive of Foodstuffs (South Island) Limited and in 2001 was appointed Managing Director of Foodstuffs (Auckland) Limited
and Managing Director of Foodstuffs (New Zealand) Limited, until he retired in December 2010. The Foodstuffs Group is New Zealand’s largest
retail organisation.
Janice (Jan) Dawson CNZM, BCom, FCA
Deputy Chairman
Independent Non-Executive Director – Appointed 1 April 2011
Ms Dawson is Chairman of Westpac New Zealand Limited and a director of AIG Insurance New Zealand Limited, Beca Group Limited, Fulbright
New Zealand, Meridian Energy Limited and World Sailing. Ms Dawson is Pro-Chancellor and a member of the University of Auckland Council
and the Capital Investment Committee of the National Health Board.
Ms Dawson was a partner of KPMG for 30 years, specialising in audit and risk advisory, and the Chair and Chief Executive of KPMG New Zealand
from 2006 until 2011.
Ms Dawson holds a Bachelor of Commerce from the University of Auckland. She is a Fellow of the New Zealand Institute of Chartered
Accountants, a Fellow of the Institute of Directors in New Zealand, a Paul Harris Fellow and a North Shore Business Hall of Fame Laureate
(2010). Ms Dawson was named Chartered Accountant of the Year in 2011 by the New Zealand Institute of Chartered Accountants.
Robert (Rob) Jager ONZM, BE (Hons), MBA
Independent Non-Executive Director – Appointed 1 April 2013
Mr Jager is Chairman of the Shell Companies in New Zealand and VPNZ and General Manager of Shell Taranaki Limited.
Mr Jager’s career in Shell spans more than 40 years, both in New Zealand and overseas, and in roles ranging from engineering, governance
to project and general management. He joined Shell in New Zealand in 1978 as an engineering cadet, completing his Bachelor of Engineering
degree with 1st Class Honours and later gaining an MBA with Distinction. He has held his current roles in New Zealand since October 2005.
Mr Jager is well known for his health and safety leadership in New Zealand and chairs the New Zealand Business Leaders’ Health and Safety
Forum. He was recognised for his commitment to safety nationally when he chaired an independent Government taskforce on workplace health
and safety in 2012.
Mr Jager is a director and past chair of the Petroleum Exploration and Production Association of New Zealand (PEPANZ), and an advisor to a
major conservation project working towards the ecological restoration of New Zealand’s iconic Mount Taranaki. In addition, he is on the board of
Sustainable Seas which is responsible for approving large scale research and business planning as part of the National Science Challenge.
In 2013, Mr Jager received the Energy Executive of the Year Award at the New Zealand Deloitte Energy Excellence Awards for his “standout
performance in the New Zealand energy sector”. He was elected a fellow of the Institute of Professional Engineers in 2015 for his contribution
to the advancement of engineering practice and leadership in the profession, and recognised with a Safeguard Life-time Achievement Award in
2017. Mr Jager was appointed an Officer of New Zealand Order of Merit (ONZM) in 2018 for his services to Business and Health and Safety.
DIRECTORS’ PROFILES
62
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
DIRECTORS’ PROFILES (CONTINUED)
Linda Jenkinson MBA, BBS
Independent Non-Executive Director – Appointed 1 June 2014
Ms Jenkinson is a proven global entrepreneur who has started three multi-national companies, one of which listed on the NASDAQ. Most
recently she was the co-founder of John Paul, a global concierge services and digital solutions company that services some of the world’s
leading customer facing businesses.
Ms Jenkinson is currently a director of Guild Group Holdings and the Eclipz Group (ECX) in Australia, a director of Harbour Asset Management
and the director and secretary of the Massey Foundation in New Zealand and the United States.
Previously Ms Jenkinson was a partner at A.T. Kearney in their Global Financial Services Practice and was a leader in A.T. Kearney Global
Sourcing Practice. Ms Jenkinson holds a Master of Business Administration from The Wharton School, University of Pennsylvania and a Bachelor
of Business Studies from Massey University.
In 2016, Ms Jenkinson was named a World Class New Zealander by Kea and was named as one of the most influential women in the Bay Area for
2014 by the San Francisco Business Times. In 2014 Ms Jenkinson was a recipient of Massey University’s Sir Geoffrey Peren Award, which recognises
a graduate who has reached the highest level of achievement or who has been of significant service to the university, community or nation.
Rt Hon Sir John Key GNZM, AC
Independent Non-Executive Director – Appointed 1 September 2017
Sir John was Prime Minister of New Zealand from 2008 to 2016. He successfully led the country through the aftermath of the global
financial crisis and a series of devastating earthquakes in New Zealand’s second-biggest city, Christchurch. Among his portfolios, Sir John
was Minister for Tourism. In this role he promoted New Zealand offshore and oversaw substantial growth in New Zealand’s tourism industry.
He retains a strong interest in the best that our country has to offer both local and international tourists.
Sir John is well respected in international affairs. He chaired the International Democrat Union between November 2014 and February 2018
and chaired the United Nations Security Council in 2016. Sir John, who was knighted in the 2017 Queen’s Birthday Honours, has also been
appointed an Honorary Companion of the Order of Australia.
Sir John’s current business activities include a role advising a $200 billion United States corporation on its investments in China as well as an
advisory role with a New York fund manager.
Sir John worked in investment banking for 20 years primarily for Bankers Trust in New Zealand and Merrill Lynch in Singapore, London and
Sydney. His positions included heading Merrill Lynch’s global foreign exchange business along with responsibility for European derivative trading
and E. Commerce. He was a member of the Foreign Exchange Committee of the Federal Reserve Bank of New York (1999-2001).
Jonathan Mason BA, MA, MBA
Independent Non-Executive Director – Appointed 1 March 2014
Mr Mason has more than 30 years’ experience in the financial sector, with an emphasis on emerging markets.
Prior to joining Air New Zealand’s Board in March 2014, he was Fonterra Co-operative Group’s Chief Financial Officer.
He joined Fonterra in 2009 from US-based chemicals company Cabot Corporation where he was Executive Vice-President and Chief Financial
Officer. Prior to this he was employed as the Chief Financial Officer at forest products company Carter Holt Harvey Limited and also served in
senior financial management positions at US based International Paper Company.
Mr Mason has had governance experience for organisations in both New Zealand and the US. His current directorships include Vector Limited,
Westpac New Zealand Limited and Zespri Group Limited. Mr. Mason also serves as an Adjunct Professor of Management at the University of
Auckland, specialising in international finance.
Dame Therese Walsh DNZM, BCA, FCA
Independent Non-Executive Director – Appointed 1 May 2016
Chairman-elect
Dame Therese is currently Chairman of TVNZ Limited, a director of ASB Bank Limited and Contact Energy Limited, a Trustee of Wellington
Regional Stadium and Pro Chancellor at Victoria University.
Previously she was the Head of New Zealand for ICC Cricket World Cup 2015 Limited, and the Chief Operating Officer for Rugby New Zealand
2011 Limited. She has also been a director of NZX Limited, NZ Cricket and Save the Children NZ, Chief Financial Officer at the New Zealand
Rugby Union and part of the team that worked on the winning bid to host RWC 2011. Prior to this she was an auditor with KPMG.
Dame Therese is a Fellow of the New Zealand Institute of Chartered Accountants and a commerce graduate from Victoria University. In 2013,
she was named the inaugural supreme winner of the Women of Influence Awards and was awarded a Sir Peter Blake Trust Leadership Award
in 2014. She became a Dame Companion of the New Zealand Order of Merit in June 2015.
Dame Therese will succeed Mr Carter as Chairman of Air New Zealand following the 2019 Annual Shareholder Meeting.
Changes to Board Membership
The Rt Hon Sir John Key was appointed to the Board on 1 September 2017, as an Independent, Non-Executive Director. Mr Paul Bingham
retired from the Board at the conclusion of the 2017 Annual Shareholders’ Meeting on 28 September 2017.
63
AIR NEW ZEALAND GROUP
INTERESTS REGISTER
No disclosures were made of interests in transactions under s140(1) of the Companies Act 1993.
Directors have made general disclosures of interests in accordance with s140(2) of the Companies Act. Current interests, and those which
ceased during the year, are tabulated below. New disclosures advised since 1 July 2017 are italicised.
Tony CarterANZ Bank New Zealand Limited
Blues LLP
Capital Training Limited
Fisher & Paykel Healthcare Corporation Limited
Fletcher Building Limited
Fonterra Independent Director Selection Panel
Foodstuffs Auckland Protection Trust
Maurice Carter Charitable Trust
Director
Chairman
Advisory Board Member
Chairman
Director
Member
Trustee
Trustee
Jan DawsonAIG Insurance New Zealand Limited
Beca Group Limited
Fulbright New Zealand
Jan Dawson Limited
Meridian Energy Limited
National Health Board Capital Investment Committee
New Zealand Maritime Museum – resignation advised 24 April 2018
University of Auckland Council
Westpac New Zealand Limited
World Sailing
Director
Director
Director
Director
Director
Member
Trustee
Pro Chancellor
Chairman
Director
Rob JagerMaui Development Limited
Petroleum Exploration & Production Associate New Zealand (PEPANZ)
Shell Energy Asia Limited
Shell Exploration NZ Limited
Shell Investments NZ Limited
Shell New Zealand (2011) Limited
Sustainable Seas National Science Challenge
Director
Director
Chairman
Chairman
Chairman
Chairman
Director
Linda Jenkinson
Eclipx Group Limited
Guild Group Holdings Limited
Guild Insurance Limited
Guild Superannuation Services Limited
Guild Trustee Services Limited
Harbour Asset Management Limited
John Paul Inc – resignation advised 23 May 2018
Les Concierges (Australia) – resignation advised 23 May 2018
Les Concierges (Canada)
Les Concierges (US)
Massey University Foundation
Massey University US Foundation
Te Auaha Limited
Director
Director
Director
Director
Director
Director
Officer
Director
Director
Director
Trustee
Director and Secretary
Director
Sir John Key
ANZ Banking New Zealand Limited
Australia & New Zealand Banking Group Limited (Australia)
BP International Advisory Board
Caxton (Hedge Fund)
Comcast Corporation
Handa Foundation
Thirty Eight JK Limited
Chairman
Director
Member
Consultant/Advisory Board Member
Consultant
Consultant
Director
Jonathan MasonBeloit College (USA) Board of Trustees
New Zealand Assets Management Limited
University of Auckland Endowment Fund
Vector Limited
Westpac New Zealand Limited
Zespri Group Limited
Trustee
Director
Trustee
Director
Director
Director
64
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
INTERESTS REGISTER (CONTINUED)
Dame Therese Walsh
Antarctica NZ
ASB Bank Limited
DPMC Strategic Risk and Resilience Panel – resignation advised 23 November 2017
Freeview Television Limited – ceased 29 March 2018
MBIE Major Events Investment Panel
NZOOM Limited – ceased 29 March 2018
NZX Limited – ceased 13 April 2018
On Being Bold Limited
Television New Zealand Limited
Therese Walsh Consulting Limited
TVNZ International Limited – ceased 29 March 2018
TVNZ Investments Limited – ceased 29 March 2018
Victoria University
Wellington Homeless Women’s Trust
Wellington Regional Stadium Trust
Director
Director
Member
Director
Member
Director
Director
Director
Chairman
Director
Director
Director
Pro-Chancellor
Ambassador
Trustee
There have been no interest register entries in respect of use of company information by directors.
DIRECTORS’ INTERESTS IN
AIR NEW ZEALAND SECURITIES
Directors had relevant interests in shares as at 30 June 2018 as below:
InterestShares
Tony CarterBeneficial
1
2 07,18 9
2
Jan DawsonBeneficial20,000
Rob JagerBeneficial24,500
Linda JenkinsonBeneficial22,000
Sir John KeyBeneficial20,000
Jonathan MasonBeneficial29,000
Dame Therese WalshBeneficial45,000
1. Held by Loughborough Investments Limited, an associated person of Tony Carter.
2. Tony Carter also has a beneficial interest (through Loughborough Investments Limited) in 30,000 Bonds.
There was no trading activity in shares of the Company by directors during the year. Sir John Key disclosed an interest in 20,000 shares
held at the date of his appointment as a director.
INDEMNITIES AND INSURANCE
Pursuant to section 162 of the Companies Act 1993 and the Constitution, Air New Zealand has entered into deeds of access, insurance and
indemnity with the directors of the Group to indemnify them to the maximum extent permitted by law, against all liabilities which they may
incur in the performance of their duties as directors of any company within the Group. Insurance cover extends to directors and officers for
the expenses of defending legal proceedings and the cost of damages incurred. Specifically excluded are proven criminal liability and fines
and penalties other than those pecuniary penalties which are legally insurable. In accordance with commercial practice, the insurance contract
prohibits further disclosure of the terms of the policy. All directors who voted in favour of authorising the insurance certified that in their opinion,
the cost of the insurance is fair to the Company.
65
AIR NEW ZEALAND GROUP
EMPLOYEE REMUNERATION
Remuneration paid in FY18 including base for FY18, and incentive payments including performance
rights issued under the LTI scheme that relate to FY17 performance and paid in FY18
New Zealand managementAircrew, engineering, overseas and others
100,000 - 110,000 160 497
110,000 - 120,000 161 357
120,000 - 130,000 157 297
130,000 - 140,000 14 0 225
140,000 - 150,000 88 202
150,000 - 160,000 59 206
160,000 - 170,000 41 176
170,000 - 180,000 62 153
180,000 - 190,000 55 113
190,000 - 200,000 38 65
200,000 - 210,000 26 69
210,000 - 220,000 34 58
220,000 - 230,000 32 52
230,000 - 240,000 19 31
240,000 - 250,000 13 22
250,000 - 260,000 10 44
260,000 - 270,000 5 72
270,000 - 280,000 9 45
280,000 - 290,000 9 31
290,000 - 300,000 4 37
300,000 - 310,000 4 29
310,000 - 320,000 4 16
320,000 - 330,000 1 9
330,000 - 340,000 3 24
340,000 - 350,000 2 23
350,000 - 360,000 2 20
360,000 - 370,000 2 16
370,000 - 380,000 2 7
380,000 - 390,000 2 8
390,000 - 400,000 2 9
400,000 - 410,000 3 13
410,000 - 420,000 1 15
420,000 - 430,000 3 17
430,000 - 440,000 2 32
440,000 - 450,000 2 13
450,000 - 460,000 4 6
460,000 - 470,000 1 4
470,000 - 480,000 3 6
480,000 - 490,000 1 8
490,000 - 500,000 1 7
500,000 - 510,000 - 5
510,000 - 520,000 1 3
520,000 - 530,000 - 2
530,000 - 540,000 1 2
540,000 - 550,000 - 1
550,000 - 560,000 2 1
600,000 - 610,000 2 -
620,000 - 630,000 1 -
630,000 - 640,000 1 -
640,000 - 650,000 2 -
730,000 - 740,000 1 -
740,000 - 750,000 1 -
780,000 - 790,000 - 1
790,000 - 800,000 1 1
810,000 - 820,000 1 -
840,000 - 850,000 1 -
850,000 - 860,000 1 -
890,000 - 900,000 - 1
970,000 - 980,000 1 -
1,220,000 - 1,230,000 1 -
1,230,000 - 1,240,000 1 -
1,290,000 - 1,300,000 1 -
1,420,000 - 1,430,000 1 -
1,620,000 - 1,630,000 1 -
1,800,000 - 1,810,000 1 -
1,980,000 - 1,990,000 1 -
2,800,000 - 2,810,000 1 -
4,780,000 - 4,790,000 1 -
Total 1,193 3,051
66
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
EMPLOYEE REMUNERATION (CONTINUED)
Remuneration philosophy
In order to attract and retain talented individuals, Air New Zealand’s performance and reward strategy is aligned with both the recruitment
philosophy – to source talented people, and the Company’s capability development agenda – to develop future leaders and provide succession
pipelines into key roles. The key objectives of the strategy are attracting high performing individuals, providing rich developmental opportunities
and recognising achievement through targeted performance and reward initiatives.
Air New Zealand’s remuneration strategy is underpinned by a pay for performance philosophy and uses annual performance incentives to create
opportunities for everyone to achieve market competitive remuneration levels and in the case of superior performance, total remuneration in
excess of market.
Executive remuneration
The CEO and Executive remuneration packages are made up of three components:
• Fixed Remuneration;
• Annual performance incentive; and
• Long term incentive.
Air New Zealand’s People Remuneration and Diversity Committee is kept appraised of relevant market information and best practice, obtaining
advice from external advisors when necessary. Remuneration levels are reviewed annually for market competitiveness and alignment with
strategic and performance priorities.
The People Remuneration and Diversity Committee commissioned EY to provide remuneration benchmark data for the CEO and other Executive
roles during the 2017 financial year. EY benchmarked a selection of the Executive positions against New Zealand/Australian comparator groups
with the primary comparator group comprising companies within 50% and 200% of Air New Zealand’s revenue for functional roles and an
industry comparator group comprising companies within the Industrial or Materials GICS Sector for operational positions. The analysis showed
Air New Zealand Executive remuneration broadly remains aligned with market pay levels.
Fixed remuneration
Air New Zealand’s philosophy is to set fixed remuneration at 90 percent of the market median for Executives who are fully competent in their role.
Short-term performance incentives
The annual performance incentive component is delivered through the Air New Zealand Short Term Incentive Scheme (STI). The measures used
in determining the quantum of the STI are set annually. Targets relate to both Company financial performance and individual targets. For the
CEO the STI is set at 55% of annual fixed salary at target (Achieving) performance and the weighting is based 60% on Company financial
performance and 40% on individual performance against specific targets. For all other employees the weighting is 50% Company financial
performance and 50% individual performance. Participation in the plan is by annual invitation at the discretion of the company.
Company Component
At the start of the 2018 financial year the Board confirmed a financial target for the Company for incentive payments which was set 10% above
the average Earnings before Taxation achieved by the Company over the previous five year period.
The Company must achieve greater than 50% of the financial target before any company component is paid out. The maximum company
component is 200% , achieved when the Company reaches and exceeds 150% of the financial target.
The Board has discretion to eliminate significant positive or negative one-off adjustments to profit.
Individual Component
The main factors for the assessment of individual performance for the 2018 financial year were:
Performance DescriptionPerformance Measures
Business performance• Delivery of business plan
• Brand profile and trust
Strategy development and delivery• Progress against key strategic initiatives and plan as set by the Board
• Key external relationships
Leadership• Customer experience
• Health and safety performance
People and culture• Employee engagement
• Compliance with regulatory environment
Payments for the individual component are made according to an overall performance rating taking into account the employee’s
performance across the range of individual measures and demonstration of Air New Zealand’s leadership behaviours.
Performance RatingIndividual STI Percentage
Unsatisfactory0%
Developing60%
Achieving100 %
High130 %
Outstanding200%
Payments for the individual component are made according to an overall performance rating taking into account the employee’s performance
across the range of individual measures and demonstration of Air New Zealand’s leadership behaviours.
67
AIR NEW ZEALAND GROUP
EMPLOYEE REMUNERATION (CONTINUED)
Long-term performance incentives
Air New Zealand’s long-term incentive plan arrangements are designed to align the interests of the CEO and Executives with those of our
shareholders and to incentivise participants in the plan to enhance long term shareholder value. In the 2018 financial year the plan available to
Executives was the Air New Zealand Long-Term Incentive Performance Rights Plan (LTIP). Participation in any year is by annual invitation at the
discretion of the Board.
In addition, the CEO has access to the Air New Zealand CEO Restricted Share Rights Plan (CRSRP). The CRSRP was established as a further
incentive in recognition of the commercial importance of retaining the services of the CEO for an extended period.
Long-Term Incentive Plan (LTIP)
There are two main elements to the LTIP:
Performance Rights
LTIP participants are eligible to receive a grant of performance rights. Any grant of performance rights is at the discretion of the People
Remuneration and Diversity Committee of the Board of Directors but, in the normal course of events, is expected to equate to a value of 55%
of fixed remuneration for the CEO, and between 20% and 40% of fixed remuneration for Executives depending on their seniority. The number
of performance rights to be allocated will be determined by an independent valuation of the performance rights carried out each year at the
time of issue.
In three years’ time, if the Air New Zealand share price has outperformed the performance hurdle, a proportion of the performance rights will
convert to shares. The performance hurdle comprises of an index made up of the NZSX All Gross Index and the Bloomberg World Airline Total
Return Index in equal proportions.
The proportion of performance rights that convert to shares will depend on to what extent the Air New Zealand share price has outperformed
the index. In particular:
Performance against indexPercent of Rights Vesting
<100 %nil
100 %50%
101% – 119%Addition 2.5% vesting per 1% increment
120 %100% (maximum)
If vesting is not achieved on the third anniversary of the issue date, 50 percent of performance rights will lapse. For the remaining 50 percent
there will be a further 6 month opportunity for the performance rights to vest.
Unless Air New Zealand’s share price outperforms the index as outlined above, no value will accrue to the participating Executive.
Mandatory Shareholding
Participants are required to commit to investing a specified amount to purchase shares in the Company. The amount is set at a value of 55% of
fixed remuneration for the CEO, and between 20% and 40% of fixed remuneration for Executives depending on their seniority.
Until participants have attained this target, any shares issued to them from vested performance rights must be retained as part of the mandatory
shareholding. This holding must be maintained while continuing to participate in the LTIP.
CEO Restricted Share Rights Plan (CRSRP)
The CRSRP scheme commenced in the 2016 financial year and the issue of rights will cease in the 2021 financial year. Each year, at the
absolute discretion of the Board, and on condition of the CEO achieving the performance hurdles set for the previous financial year, restricted
share rights can be issued to the CEO based on 50% of the CEO’s fixed remuneration.
Share rights issued under this scheme are not earned nor do they vest unless the CEO remains employed by Air New Zealand at vesting
milestones across the period from 2017 to 2021. If this condition is met a proportion of the rights will immediately vest to the CEO on this date.
Chief Executive Officer Remuneration
CEO Target Remuneration Summary
Financial
Year
Salary
$
Benefits
1
$
STI
2
$
LTIP
3
$
CRSRP
4
$
Summary
$
181,550,00016 6 ,171852,500852,500755,0004 ,176 ,171
171,510,000147, 9 3 0830,500830,500735,0004,053,930
Based on remuneration components outlined earlier, CEO target remuneration is as follows:
1. Benefits include superannuation (KoruSaver scheme) and travel. The CEO is a member of Air New Zealand’s group superannuation scheme,
KoruSaver. As a member of the scheme the CEO is eligible to contribute and receive a matching Company contribution up to 4% of gross taxable
earnings (including STI). The CEO and eligible beneficiaries are entitled to a number of trips for personal purposes at no cost to the individual.
2. STI target entitlement is 55% of Salary.
3. The Long-Term Incentive Plan remains at risk. In three years’ time, if the Air New Zealand share price has outperformed the performance
hurdle, a proportion of the performance rights will convert to shares. The performance hurdle comprises of an index made up of the NZSX
All Gross Index and the Bloomberg World Airline Total Return Index in equal proportions. Should Air New Zealand’s share price not perform
better than a comparison index the granted share rights will lapse.
68
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
EMPLOYEE REMUNERATION (CONTINUED)
4. The CEO will receive restricted share rights conditional upon reaching service milestones. Share rights are issued annually with each issue
being split into two tranches with different vesting dates. For FY18, 40% of rights granted will vest during December 2018 and the balance
of 60% in December 2019. Share rights will only vest if the CEO remains employed by the company on the relevant vesting date.
CEO Realised Remuneration 2018 Financial Year
Rights Vested
Salary
1
$
Benefits
2
$
STI
3
$
LTIP
4
#
CRSRP
5
#
1,550,00016 6 ,1711, 2 74 ,72 6749,027365,861
Comments to the table:
1. Salary includes all cash paid to, or received by, the CEO in respect of the financial period.
2. Benefits include superannuation (KoruSaver scheme) and travel. The CEO is a member of Air New Zealand’s group superannuation scheme,
KoruSaver. As a member of the scheme the CEO is eligible to contribute and receive a matching Company contribution up to 4% of gross taxable
earnings (including STI). The CEO and eligible beneficiaries are entitled to a number of trips for personal purposes at no cost to the individual.
3. STI in the reporting period reflects the cash value of amounts received where entitlement is determined by the achievement of performance
measures, both Company and Individual, that relate to the current period and is not the result of an award made in a previous period.
4. LTIP includes the number of shares issued to the CEO on conversion of the Performance Share Rights, where the Air New Zealand share
price has outperformed the performance hurdle. The performance hurdle comprises of an index made up of the NZSX All Gross Index and
the Bloomberg World Airline Total Return Index in equal proportions.
5. CRSRP includes the number of restricted shares rights that have been converted to shares as a result of the achievement of service milestones.
CEO Share Rights Granted 2018 Financial Year
Share Rights Granted
LTIP
1
#
CRSRP
2
#
494,203216,954
Comments to the table:
1. LTIP includes the number of Performance Share Rights granted in September 2017 (FY18) based on an above target achievement of
over 120% . The Long-Term Incentive Plan remains at risk. In three years’ time, if the Air New Zealand share price has outperformed the
performance hurdle, a proportion of the performance rights will convert to shares. The performance hurdle comprises of an index made up of
the NZSX All Gross Index and the Bloomberg World Airline Total Return Index in equal proportions. Should Air New Zealand’s share price not
perform better than a comparison index the granted share rights will lapse.
2. CRSRP includes the number of restricted shares rights granted in September 2017 that will vest in December 2018 and December 2019
respectively, based on the achievement of service milestones. The share rights are issued annually with each issue being split into two tranches
with different vesting dates. For FY18, 40% of rights granted will vest during December 2018 and the balance of 60% in December 2019.
Share rights will only vest if the CEO remains employed by the company on the relevant vesting date.
CEO Pay for Performance Calculation
SchemeDescriptionPerformance measuresPercentage/
Rating achieved
STISTI is set at 55% of fixed remuneration and is
based on a combination of Company performance
and Individual performance measures.
60% on Company financial performance
(earnings before taxation). The Company must
achieve at least 50% above the financial target
before any STI for company performance is
payable, and the maximum contribution of
200% is achieved when the Company achieves
150% or more of the financial target.
116 %
40% on individual performance.200%
LTIPAward of share rights under the Long-Term
Incentive Performance Rights Plan is set at 55%
of fixed remuneration.
Performance rights vest based on an index made
of the NZSX All Gross Index and the Bloomberg
World Airline Total Return Index in equal proportions.
100 %
CRSRPAward of shares under the CEO Restricted Share
Rights Plan is set at 50% of the preceding
year’s fixed remuneration, dependent on the CEO
achieving a performance rating of ‘Achieving’ or
above with respect to all the individual objectives
set for that financial year.
Restricted rights vest upon the CEO achieving
service milestones.
100 %
69
AIR NEW ZEALAND GROUP
SUBSIDIARY AND JOINT VENTURE COMPANIES
The following people were directors of Air New Zealand’s subsidiary and joint venture companies in the financial year to 30 June 2018. Those
who resigned during the year are signified by (R). These companies are New Zealand incorporated companies except where otherwise indicated.
No director of any subsidiary received beneficially any director’s fees or other benefits except as an employee.
11Ants Analytics Group Limited
Glen Bond
Mark Street
Marc Allsop (R)
Joshua Chandler (R)
Jeffrey McDowall (R)
Richard Peake (R)
Hamish Rumbold (R)
Paul Smitton (R)
ADP (New Zealand) Limited
Karen Clayton
Sarah Williamson
Brian Wilson
Air Nelson Limited
Glen Bond
Kelvin Duff
John Whittaker
Michael Williams
Carrie Hurihanganui (R)
Jeffrey McDowall (R)
Bruce Parton (R)
Air New Zealand Aircraft
Holdings Limited
Karen Clayton
Stephan Deschamps
Jeffrey McDowall
Rob McDonald (R)
Air New Zealand Associated
Companies Limited
Karen Clayton
Stephan Deschamps
Jeffrey McDowall
Rob McDonald (R)
Air New Zealand Associated
Companies (Australia) Limited
Karen Clayton
Jeffrey McDowall
Rob McDonald (R)
Air New Zealand Express Limited
Karen Clayton
Jeffrey McDowall
Rob McDonald (R)
Air New Zealand Regional
Maintenance Limited
Adam McMillan
Bruce Parton
Shehan Sinnaduray
Craig Tolley (R)
Air New Zealand Travel
Business Limited
Karen Clayton
Jeffrey McDowall
Rob McDonald (R)
ANNZES Engines Christchurch Limited
Karen Clayton
Jeffrey McDowall
Rob McDonald (R)
Ansett Australia & Air New Zealand
Engineering Services Limited
Karen Clayton
Jeffrey McDowall
Rob McDonald (R)
Eagle Airways Limited
Glen Bond
Karen Clayton
Michael Williams
Jeffrey McDowall (R)
Mount Cook Airline Limited
Glen Bond
Kelvin Duff
John Whittaker
Michael Williams
Carrie Hurihanganui (R)
Jeffrey McDowall (R)
Bruce Parton (R)
TEAL Insurance Limited
Michelle Redington
Hannah Ringland
Rob McDonald (R)
Air New Zealand (Australia) Pty Limited
(incorporated in Australia)
Karen Clayton
Kathryn Robertson
ANZGT Field Services LLC
(Joint Venture, incorporated in Del., USA)
Greg Bobrow
Trevor Hughes
Adam McMillan
Todd Witwer
70
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
OTHER DISCLOSURES
Donations
The Air New Zealand Group has made donations totalling $114,405 in the financial year to 30 June 2018. No donations were made to any
political party. It is Air New Zealand’s policy not to make donations, in cash or in kind, or to provide free of charge travel to political parties.
Substantial product holders
The following information is provided in compliance with Section 293 of the Financial Markets Conduct Act 2013 and is stated as at
30 June 2018. The total number of listed Ordinary shares of Air New Zealand Limited at that date was 1,122,844,227.
Substantial Product Holder Quoted voting products in the Company in which a relevant interest is held
Her Majesty the Queen in Right of New Zealand588,887,282* ordinary shares
In 1989, the Crown issued a Notice that arises through its holding of special rights Convertible Share, the “Kiwi Share” and the power of the
Kiwi Shareholder under the Constitution. Full details of the rights pertaining to these shares are set out in the Company’s Constitution. The Kiwi
Share does not confer any right on its holder to vote at a shareholders’ meeting unless the Kiwi Share has been converted into an Ordinary
Share by its holder. The Kiwi Share is not listed on any stock exchange.
*Relevant interests held as follows:
As reported in its most recent Substantial Security Holder notice dated 6 July 2015, held by Her Majesty the Queen in Right of New Zealand
acting by and through her Minister of Finance (582,854,593 Ordinary shares) and New Zealand Superannuation Fund (6,032,689 Ordinary
shares) being property of Her Majesty the Queen in Right of New Zealand and managed by the Guardians of New Zealand Superannuation.
71
AIR NEW ZEALAND GROUP
SECURITIES STATISTICS
Top Twenty Shareholders – as at 1 August 2018
Investor NameNumber of Ordinary Shares% of Ordinary Shares
Her Majesty The Queen In Right Of New Zealand acting
by and through her Minister of Finance
582,854,593 51. 91
HSBC Nominees (New Zealand) Limited 10 9 , 597, 018 9.76
JPMORGAN Chase Bank 90,030,384 8.02
HSBC Nominees (New Zealand) Limited 80,294,200 7.15
Citibank Nominees (NZ) Ltd 51, 6 42 , 2 8 8 4.60
Accident Compensation Corporation 20,790,938 1.85
Citicorp Nominees Pty Limited 10,493,832 0.93
National Nominees New Zealand Limited 7, 3 31, 6 0 3 0.65
New Zealand Superannuation Fund Nominees Limited 6 , 915 ,167 0.62
HSBC Custody Nominees (Australia) Limited 5,656,470 0.50
TEA Custodians Limited 5, 571,703 0.50
New Zealand Depository Nominee Limited 5 ,191, 8 6 3 0.46
Cogent Nominees Limited 5,031,322 0.45
BNP Paribas Nominees NZ Limited 4,896,343 0.44
Premier Nominees Limited 4,328,858 0.39
Christopher Luxon 3,896,966 0.35
BNP Paribas Nominees NZ Limited 3,570,622 0.32
J P Morgan Nominees Australia Limited 3,206,005 0.29
Garth Barfoot 2,250,000 0.20
FNZ Custodians Limited 2,131, 936 0 .19
Total 1, 0 0 5 , 6 8 2 ,111 89.58
Shareholder Statistics – as at 1 August 2018
Size of HoldingInvestors% InvestorsShares% Issued
1-1,000 14 , 6 6 8 5 7.11 5,960,066 0.53
1,001-5,000 7, 36 0 28.65 18,207,377 1.62
5,001-10,000 1,943 7. 57 14 , 818 ,112 1.32
10,001-100,000 1,596 6.21 4 0 ,142, 9 3 4 3.58
100,001 and Over 118 0.46 1,043,715,738 92.95
Total 25,685 100.00 1,122,844,227 100.00
Bondholder Statistics – as at 1 August 2018
Size of HoldingHolders% HoldersBonds% Issued
1-1,000 - - - -
1,001-5,000 43 6.96 215,000 0.43
5,001-10,000 14 8 23.95 1,453,000 2.91
10,001-100,000 398 64.40 13,293,000 26.58
100,001 and Over 29 4.69 35,039,000 70.08
Total618100.00 50,000,000 100.00
Current on-market share buybacks
There is no current share buyback in the market.
72
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
OPERATING FLEET STATISTICS
As at 30 June 2018*
Boeing 777-300ER
Number: 7
Average Age: 6.2 years
Maximum Passengers: 342
Cruising Speed: 910 km/hr
Average Daily Utilisation: 14:52
Boeing 777-200ER
Number: 8
Average Age: 12.2 years
Maximum Passengers: 312
Cruising Speed: 910 km/hr
Average Daily Utilisation: 13:11
Boeing 787-9 Dreamliner
Number: 11
Average Age: 2.4 years
Maximum Passengers: 302 or 275
Cruising Speed: 910 km/hr
Average Daily Utilisation: 13:30
Airbus A320-200
Number: 30
Average Age: 13.9 years short-haul, or
4.4 years domestic
Maximum Passengers: 168 short-haul, or
171 domestic
Cruising Speed: 850 km/hr
Average Daily Utilisation: 9:28 short-haul, or
8:12 domestic
ATR 72-500 / ATR 72-600
Number: 27
Average Age: 17.2 years ATR 72-500, or
2.7 years ATR 72-600
Maximum Passengers: 68
Cruising Speed: 518 km/hr
Average Daily Utilisation: 5:49 ATR 72-500, or
6:52 ATR 72-600
Bombardier Q300
Number: 23
Average Age: 11.4 years
Maximum Passengers: 50
Cruising Speed: 520 km/hr
Average Daily Utilisation: 6:26
*The fleet statistics do not include short-term leased capacity to cover Boeing 787-9 engine issues.
73
AIR NEW ZEALAND GROUP
GENERAL INFORMATION
Stock exchange listings
Air New Zealand’s Ordinary Shares have been listed on the NZX Main Board (ticker code AIR) since 24 October 1989. It also has bonds listed
on the NZX Debt Market (ticker code AIR020).
Air New Zealand’s Ordinary Shares are listed on ASX (ticker code AIZ) as a Foreign Exempt Listing. The Foreign Exempt Listing means that
Air New Zealand is expected to comply primarily with the Listing Rules of the NZX Main Board (being the rules of its home exchange) and is
exempt from complying with most of ASX’s Listing Rules.
Neither NZX nor ASX has taken any disciplinary action against the Company during the financial year ended 30 June 2018. In particular there
was no exercise of powers by NZX under NZX Listing Rule 5.4.2, (relating to powers to cancel, suspend or censure an issuer) with respect to
Air New Zealand during the reporting period.
On 20 July 2017, Air New Zealand launched a sponsored Level 1 American Depositary Receipt (ADR) programme. Air New Zealand’s American
Depositary Shares, each representing five Ordinary Air New Zealand shares and evidenced by ADRs, are traded over-the-counter in the United
States (ticker code ANZLY).
Place of incorporation
New Zealand
In New Zealand, the Company’s Ordinary Shares are listed with a “non-standard” (NS) designation. This is due to particular provisions of the
Company’s Constitution, including the rights attaching to the Kiwi Share
1
held by the Crown and requirements regulating ownership and transfer
of Ordinary Shares.
New Zealand Exchange
Waivers:
An ongoing waiver granted to all companies dual listed on the NZX and the ASX from Listing Rules 11.1.1 and 11.1.4 to enable dual listed
issuers to comply with the ASX Listing Rules relating to the restrictions on transfer of restricted (vendor) securities during an escrow period.
The following waivers from the NZX Main Board Listing Rules were granted to the Company or relied upon by the Company during the financial
year ended 30 June 2018:
1. A waiver from NZX Listing Rule 8.1.7(b) to enable the issue of Long-Term Incentive Scheme Options to be adjusted following a capital
restructure such as a rights issue, in accordance with an approach suggested by PricewaterhouseCoopers.
The decision by NZXR of 3 December 2007 noted that an independent expert’s opinion had confirmed that the approach suggested by
PricewaterhouseCoopers would create economic neutrality for the option holders and all other Air New Zealand shareholders.
2. A waiver from NZX Listing Rule 8.1.7 to allow Air New Zealand to amend the terms of the Long-Term Incentive Plan and Chief Executive
Officer Option Incentive Plan to provide that instead of purchasing/issuing a share for each option exercised, Air New Zealand would only
purchase/issue a number of shares with a value (based on current market prices) equal to the delta between the aggregate of the market
share price and the exercise price of the options exercised.
The decision by NZXMS of 31 August 2012 noted that the amendment will not affect the economic position of either the participant or
Air New Zealand and will reduce the dilutionary effect on shareholders of the exercise of options.
3. Air New Zealand and the Crown (acting through the Ministry of Business, Innovation and Employment) have agreed terms under which
Air New Zealand will provide government agencies with discounted fares. This agreement is likely to be a “Material Transaction” under the
rule 9.2.2(e) of the NZX Listing Rules. Given the Crown is a 51.91% shareholder of Air New Zealand, Air New Zealand sought (and was
provided with) a waiver to enter into the transaction without the requirement to obtain shareholder approval. This waiver was granted subject
to two independent directors of the board certifying that: (i) the agreement has been negotiated on arm’s length commercial terms; (ii) entry
into the agreement is in the best interests of all shareholders (other than the Crown); and (iii) the Crown, as the majority shareholder in
Air New Zealand, has not influenced the board of directors of Air New Zealand, to enter into the agreement. Two independent directors must
confirm those same matters listed above, in any extension or renewal of the agreement.
Compliance with Listing Rules:
For the purposes of ASX Listing Rule 1.15.3, Air New Zealand Limited confirms the Company continues to comply with the NZX Listing Rules.
1. In 1989, the Crown issued a Notice that arises through its holding of special rights Convertible Share, the “Kiwi Share” and the power of the Kiwi Shareholder
under the Constitution. Full details of the rights pertaining to these shares are set out in the Company’s Constitution. The Kiwi Share does not confer any right
on its holder to vote at a shareholder’s meeting unless the Kiwi Share has been converted into an Ordinary Share by its holder. The Kiwi Share is not listed on
any stock exchange.
74
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
Australian Stock Exchange
When Air New Zealand fully listed on the ASX in July 2002, it undertook to include the following information in its Annual Report.
Limitations on the Acquisition of Securities
Constitution
The limitations on the acquisition of securities imposed by the Company’s Constitution are summarised below (capitalised terms are defined
either in the Constitution or the Takeovers Code
2
):
1. Under clause 3.3 of the Constitution any person that owns or operates an airline business and any of its Associated Persons may not hold
or have an Interest in any Equity Security unless the prior written consent of the Kiwi Shareholder has been obtained.
2. Under clause 3.4 of the Constitution any non-New Zealand National must obtain the prior written consent of the Kiwi Shareholder to hold
or have an interest in 10 percent or more of the total Voting Rights in the Company.
3. The Board must decline to register a transfer of Equity Securities if it is aware that the Equity Securities have been transferred in
contravention of the provisions referred to in (1) or (2) above.
4. The Board has other powers to decline to register a transfer of Shares, including in cases where the Board is of the opinion that the Shares
would become, or be capable of being treated as, Affected Equity Securities.
5. Section 10 of the Company’s Constitution confers powers on the Board (and the Kiwi Shareholder) to treat Equity Securities as Affected Equity
Securities in certain circumstances. In general terms those powers arise if the Board considers that it is necessary to treat any Equity Securities
as Affected Equity Securities to protect the Company’s international airline operating rights. Where Equity Securities are treated as Affected
Equity Securities the Voting Rights attaching to them may be suspended and the registered holder may be required to dispose of them.
The Takeovers Code
The powers of the Board outlined above in relation to limiting acquisitions of its securities are in addition to the requirements of the New Zealand
Takeovers Code. The Takeovers Code contains the following rules regulating acquisitions of substantial holdings.
The Takeovers Code creates a general rule under which the acquisition of more than 20 percent of the voting rights in the Company or the
increase of an existing holding of 20 percent or more of the voting rights in the Company can only occur in certain permitted ways. These
include a full takeover offer in accordance with the Takeovers Code, a partial takeover offer in accordance with the Takeovers Code, an
acquisition approved by an ordinary resolution, an allotment approved by an ordinary resolution, a creeping acquisition (in certain circumstances)
or compulsory acquisition if a shareholder holds 90% or more of the voting rights in the Company.
Corporations Act 2001 (Australia)
The Company is not subject to Chapters 6, 6A, 6B and 6C of the Corporations Act dealing with the acquisition of shares (such as substantial
holdings and takeovers).
GENERAL INFORMATION (CONTINUED)
2. The Takeovers Code approved by the Takeovers Code Approval Order 2000 (SR2000/210).
75
AIR NEW ZEALAND GROUP
SHAREHOLDER DIRECTORY
New Zealand
Link Market Services Limited
Level 11, Deloitte Centre
80 Queen Street, Auckland 1010
PO Box 91976, Auckland 1142
New Zealand
Investor Enquiries:
Phone: (64 9) 375 5998
Fax: (64 9) 375 5990
Email: enquiries@linkmarketservices.co.nz
Australia
Link Market Services Limited
Level 12, 680 George Street
Sydney 2000, Australia
Locked Bag A14, Sydney South
NSW 1235, Australia
Investor Enquiries:
Phone: (61) 1300 554 474
Fax: (61 2) 9287 0303
Investor Relations
Investor Relations Office
Private Bag 92007, Auckland 1142
New Zealand
Phone: 0800 22 22 18 (New Zealand)
(64 9) 336 2607 (Overseas)
Fax: (64 9) 336 2664
Email: investor@airnz.co.nz
Website: airnzinvestor.com
Annual Meeting
Date: 26 September 2018
Time: 2:00 pm
Venue: The Piano
156 Armagh Street
Christchurch
Current Credit Rating
Moody’s rate Air New Zealand Baa2
Auditor
Deloitte Limited (on behalf of the Auditor-General)
Deloitte Centre
80 Queen Street, Auckland Central
PO Box 115033, Shortland Street
Auckland 1140, New Zealand
Registered Office
New Zealand
Air New Zealand Limited
Air New Zealand House
185 Fanshawe Street
Auckland 1010
Postal: Private Bag 92007
Auckland 1142, New Zealand
Phone: (64 9) 336 2400
Fax: (64 9) 336 2401
NZBN 9429040402543
Australia
Level 12
7 Macquarie Place
Sydney
Postal: GPO 3923, Sydney
NSW 2000, Australia
Phone: (61 2) 8235 9999
Fax: (61 2) 8235 9946
ABN 70 000 312 685
Board of Directors
Tony Carter – Chairman
Jan Dawson – Deputy Chairman
Rob Jager
Linda Jenkinson
Sir John Key
Jonathan Mason
Dame Therese Walsh
Chief Executive Officer
Christopher Luxon
Chief Financial Officer
Jeff McDowall
General Counsel and Company Secretary
Karen Clayton
76
AIR NEW ZEALAND ANNUAL FINANCIAL RESULTS 2018
AIR NEW ZEALAND GROUP
77
---
Name of Listed Issuer:AIR NEW ZEALAND LIMITED
Reporting Period12 months to 30 June 2018
Previous Reporting Period12 months to 30 June 2017
Revenue from ordinary activities (including finance income)5,525 7%
Profit from ordinary activities after tax attributable to security holders390 2%
Net profit attributable to security holders390 2%
Dividends
(NZ cents)
Interim dividend11.0 4.28
Final dividend*11.0 4.28
Details of final dividend
Record Date for Final Dividend7-Sep-18
Pa
yment Date for Final Dividend19-Sep-18
Comments:
* The final dividend was declared on 22 August 2018
Results for announcement to the market
Amount per
security
Imputed amount
per security
Amount $NZ'm Percentage change
Air New Zealand Limited
Preliminary Full Year Results
23 August 2018
NZX Appendix 7
CONTENTS
NZX Appendix 1, pursuant to NZX Listing Rule 10.3.2
Air New Zealand Limited
NZX Preliminary Final Report
PRELIMINARY FULL YEAR REPORT ANNOUNCEMENT
AIR NEW ZEALAND LIMITED
Full Year Ended 30 June 2018 (referred to in this report as the "current full year")
1.1 Details of the reporting period and the previous reporting period
1.2 Information prescribed by NZX
Refer to Results for announcement to the market.
(a) A Statement of Financial Performance
Refer to the Financial Statements.
(b) A Statement of Financial Position
Refer to the Financial Statements.
(c) A Statement of Cash Flows
Refer to the Financial Statements.
$NZ'm*
NZ Cents Per
Share
Distributions recognised
Final dividend for 2017 financial year on Ordinary Shares12411.0
Interim dividend for 2018 financial year on Ordinary Shares12411.0
Distributions paid
Final dividend for 2017 financial year on Ordinary Shares13011.0
Interim dividend for 2018 financial year on Ordinary Shares13011.0
*The difference between distributions recognised and paid relates to supplementary dividends.
(f) A Statement of Movements in Equity
Refer to the Financial Statements.
The reporting period is for the year ended 30 June 2018 with the comparative period being for the year ended 30 June 2017.
(d) Details of individual and total dividends or distributions and dividend or distribution payments. The details must include the date
on which each dividend or distribution is payable and (if known) the amount per security of foreign sourced dividends or
distributions.
1.3 The following information, which may be presented in whatever way the Issuer considers is the most clear and helpful to users
e.g. combined with notes to the financial statements or set out separately.
The dividend reinvestment plan is currently suspended.
(e) Details of any dividend or distribution reinvestment plans in operation and the last date for the receipt of an election notice for
participation in any dividend or distribution reinvestment plan.
A final dividend in respect of the 2017 financial year of 11.0 cents per Ordinary Share was paid on 18 September 2017. Imputation credits
were attached and supplementary dividends paid to non-resident shareholders.
An interim dividend of 11.0 cents per Ordinary Share was paid on 16 March 2018. Imputation credits were attached and supplementary
dividends paid to non-resident shareholders.
On 22 August 2018, the Board of Directors declared a final dividend for the 2018 financial year of 11.0 cents per Ordinary Share, payable on
19 September 2018 to registered shareholders at 7 September 2018. The total dividend payable will be $124 million. Imputation credits will be
attached and supplementary dividends paid to non-resident shareholders. The dividend has not been recognised in the June 2018 financial
statements.
Page 1
Air New Zealand Limited
NZX Preliminary Final Report
PRELIMINARY FULL YEAR REPORT ANNOUNCEMENT
AIR NEW ZEALAND LIMITED
Full Year Ended 30 June 2018 (referred to in this report as the "current full year")
Ordinary Shares179164
(h) Details of entities over which control has been gained or lost during the period
Parts (i) to (iii)
Entities over which control has been gained
Date of control
11Ants Analytics Group Limited29-Sep-17
(i) Details of associates and joint ventures:
Parts (i) to (iii)
Name
% Held
Current Year
% Held
Previous Year
$NZ'm$NZ'm
Associate
Christchurch Engine Centre (CEC)*49%49%33 26
* CEC is operated in partnership with Pratt and Whitney.
Name
Joint Venture
ANZGT Field Services LLC51%51%
11Ants Analytics Group Limited* N/A50%
MeasurementCurrent YearPrevious Year% Change
Passengers Carried00016,966 15,952 6.4%
Revenue Passenger Kilometresm36,662 34,814 5.3%
Available Seat Kilometres m44,274 42,169 5.0%
Passenger Load Factor %82.8 82.6 0.2% pts
(j) Any other significant information needed by an investor to make an informed assessment of the entity's financial performance
and financial position
Contribution to
Net Profit Current
Year
Contribution to
Net Profit
Previous Year
(g) Net tangible assets per security with the comparative figure for the previous corresponding period
(NZ Cents Per Share)Previous YearCurrent Year
% Held
Current Year
% Held
Previous Year
Entity Name
* The Group gained control of 11Ants Analytics Group Limited on 29 September 2017 and accounted for the entity as a wholly owned
subsidiary from that date.
Page 2
Air New Zealand Limited
NZX Preliminary Final Report
PRELIMINARY FULL YEAR REPORT ANNOUNCEMENT
AIR NEW ZEALAND LIMITED
Full Year Ended 30 June 2018 (referred to in this report as the "current full year")
(k) Commentary on the results
MeasurementCurrent Year Previous Year
(i)
Basic earnings per shareNZ cents per share34.7 34.0
Diluted earnings per shareNZ cents per share34.4 33.5
(ii)
Returns to shareholders (see also section (d) above)
Final dividend on Ordinary Shares*$NZ'm124 112
Special dividend on Ordinary Shares*$NZ'm- 281
Interim dividend on Ordinary Shares$NZ'm124 112
(iii) Significant features of operating performance:
(iv) Segmental results:
Industry segment
Geographical segment
Current YearPrevious Year
$NZ'm$NZ'm
New Zealand3,267 3,041
Australia and Pacific Islands695 621
United Kingdom and Europe274 278
Asia476 440
America773 729
Total operating revenue5,485 5,109
(v) Discussion of trends in performance:
(vi)
(l) Audit of financial statements
(m) Major changes in trends in the business subsequent to the end of the financial year
* Reflects the final dividends for the 2016 and 2017 financial years and the special dividend for the 2016 financial year. Details on the
final dividend for the 2018 financial year is provided in the first paragraph of section (d) above.
Air New Zealand operates predominantly in one segment, its primary business being the transportation of passengers and cargo on an
integrated network of scheduled airline services to, from and within New Zealand. Resource allocation decisions across the network are
made to optimise the consolidated Group's financial result.
The principal non-current assets of the Group are the aircraft fleet which is registered in New Zealand and employed across the
worldwide network. Accordingly, there is no reasonable basis for allocating the assets to geographical segments.
Analysis of revenue by geographical region
of original sale
Any other factors which have or are likely to affect the results, including those where the effect could not be
quantified:
Refer to the media release.
Refer to the media release.
This report is based on accounts which have been audited. The audit opinion has been attached to the back of the financial statements and
contains no qualifications.
Refer to the media release.
An analysis of revenue by geographic region of original sale is provided below.
Refer to the media release.
Page 3
Air New Zealand Limited
NZX Preliminary Final Report
PRELIMINARY FULL YEAR REPORT ANNOUNCEMENT
AIR NEW ZEALAND LIMITED
Full Year Ended 30 June 2018 (referred to in this report as the "current full year")
Nil
3.1 Basis of preparation
3.2 Accounting policies
Refer to the Statement of Accounting Policies and Notes in the financial statements.
3.3 Changes in accounting policies
3.4 Audit Report
A copy of the audit report is attached at the back of the financial statements.
3.5 Additional information
Not applicable.
This full year report was approved by the Board of Directors on 23 August 2018.
Tony Carter
Chairman
(n) Unrealised gains resulting from the revaluation of assets of the parent, any subsidiaries or any associated
company
This report is compiled in accordance with New Zealand Generally Accepted Accounting Practice (“NZ GAAP”). NZ GAAP consists of New
Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) and other applicable financial reporting standards as
appropriate to profit-oriented entities.
There have not been any accounting policy changes during the year.
Page 4
Air New Zealand Limited
NZX Preliminary Final Report
APPENDIX 7 – NZSX Listing Rules
Number of pages including this one
(Please provide any other relevant
NZSX Listing Rule 7.12.2. For rights, NZSX Listing Rules 7.10.9 and 7.10.10.details on additional pages)
For change to allotment, NZSX Listing Rule 7.12.1, a separate advice is required.
Full name
of Issue
r
Name of officer authorised to
Authority for event,
make this notice
e.g. Directors' resolution
Contact phone
Contact fax
numbernumberDate
Nature of event
BonusIf ticked,Rights Issue
Tick as appropriateIssuestate whether:Taxable/ Non TaxableConversionInterestRenouncable
Rights IssueCapitalCallDividend
If ticked, stateFull
non-renouncable
change
X
whether:
InterimYear
X
SpecialDRP Applies
EXISTING securities affected by this
If more than one security is affected by the event, use a separate form.
Description of theISIN
class of securities
If unknown, contact NZX
Details of securities issued pursuant to this eventIf more than one class of security is to be issued, use a separate form for each class.
Description of theISIN
class of securities
If unknown, contact NZX
Number of Securities toMinimum
Ratio, e.g
be issued following eventEntitlement
1 for 2 for
Conversion, Maturity, Call
Treatment of Fractions
Payable or Exercise Date
Tick if
provide an
pari passu
ORexplanation
Strike price per security for any issue in lieu or date
of the
Strike Price available.
ranking
Monies Associated with Event
Dividend payable, Call payable, Exercise price, Conversion price, Redemption price, Application money.
Source of
Amount per securityPayment
(does not include any excluded income
Excluded income per security
(only applicable to listed PIEs)
SupplementaryAmount per security
Currencydividendin dollars and cents
details -
NZSX Listing Rule 7.12.7
Total monies
TaxationAmount per Security in Dollars and cents to six decimal places
In the case of a taxable bonusResident
Imputation Credit
issue state strike priceWithholdin
g Tax(Give details)
Foreign
FDP Credits
Withholdin
g Tax(Give details)
Timing
(Refer Appendix 8 in the NZSX Listing Rules)
Record Date 5pmApplication Date
For calculation of entitlements -Also, Call Payable, Dividend /
Interest Payable, Exercise Date,
Conversion Date.
Notice DateAllotment Date
Entitlement letters, call notices,For the issue of new securities.
conversion notices mailedMust be within 5 business days
of application closing date.
OFFICE USE ONLY
Ex Date:
Commence Quoting RightsSecurity Code:
Cease Quoting Rights 5pm:
Commence Quoting New Securities:Security Code:
Cease Quoting Old Security 5pm:
EMAIL: announce@nzx.com
Notice of event affecting securities
Air New Zealand Limited
Karen ClaytonDirectors' Resolution
64 21 046 846964 9 336 266722 082018
Ordinary SharesNZAIRE0001S2
In dollars and cents
$0.110
Enter N/A if not
applicable
N/A$0.007639$0.042778
NZ Dollars$0.019412
$123.5 million
Date Payable
19 September 2018
7 September 201819 September 2018
N/AN/A
=== IR PAGE TRANSCRIPT: 2018 Annual results Analyst Call Transcript ===
Annual Results Investor Briefing
23 August 2018
Page 1 of 19
Start of Transcript
Operator: Thank you for standing by, and welcome to the Air New Zealand 2018 annual
results call. All participants are in a listen only mode. There will be a presentation followed
by a question and answer session. If you wish to ask a question you will need to press the
star key followed the number one your telephone keypad.
I would now like to hand the conference over to Air New Zealand's Head of Investor
Relations, Leila Peters. Please go ahead.
Leila Peters: Thank you, and good morning, everyone. Today's call is being recorded and
will be accessible for future playback on our investor centre website, which you can find at
www.airnewzealand.co.nz\investorcentre. Also on the website you can find our annual
results presentation, shareholder review, financial report, media release and relevant
Stock Exchange disclosures.
Speaking on the call today will be Chief Executive Officer, Christopher Luxon, and Chief
Financial Officer, Jeff McDowall. I would like to remind you that our comments today will
include certain forward-looking statements regarding our future expectations which may
differ from actual results. We ask that you read through the forward-looking cautionary
statement provided on slide 2 of the presentation.
This morning Christopher will provide a business update on the 2018 financial year, then
Jeff will provide more details into the financial results, fleet plan and hedging profile.
Christopher will then provide some insights on expectations for 2019 before we open up
the call for questions.
In the appendix of the presentation are a number of slide that we will not be specifically
speaking to which provide key financial and operational details. We recommend that you
take the time to review that information.
With that, I will turn the call over to Christopher.
Christopher Luxon: Thank you, Leila. [Inaudible – Microphone Inaccessible] and good
morning, everyone, and thanks so much for joining us on this call.
Before I go into the financial highlights of 2018, which were, once again, incredibly strong,
I do want to acknowledge the operational challenges that we have faced this year. While
there hasn’t been a material financial impact from this in our 2018 results, we do know
that these operational disruptions have had an impact on some of our customers, and I
Annual Results Investor Briefing
23 August 2018
Page 2 of 19
would like to personally thank them for their patience and for their loyalty as we work
through these issues.
I also want to thank our people at Air New Zealand here for their resiliency (sic) and their
dedication as they’ve put in tremendous effort to get our schedule on track and to keep
our customers moving throughout it all.
This is another example of how important our culture is to our organisation because when
you have people who are focussed on delivering the bet customer experience possible in a
variety of situations, that is what drives customer loyalty and a sustainable business that
then can absorb challenges in the market like those that we've seen this year.
As we look forward we continue to see good demand across our key markets. Despite the
higher fuel price, that growth is expected to be profitable and it is aligned with our
philosophy that all routes have to perform on their own merits. We have some great
opportunities to execute on this year in launching new destinations such as Chicago and
Taipei, as well as new fuel efficient aircraft that will be arriving very shortly.
Beyond our fleet we will continue to invest in the customer proposition with enhancements
to our in-flight and ground experience, as well as digital channels. It is those investments
that we have made historically that have helped us maintain a strong position as we
compete against larger global airlines, even now, as we experience the impact of increased
fuel and the operating costs on the business.
We continue to work closely with Rolls Royce to limit the impact of the global Trent 1000
engine issues, but we do recognise that we need to deliver greater schedule certainty for
our customers going forward. Therefore, we are proactively making adjustments to our
schedule which will limit the impact of this issue on our overall network. I'll go into some
detail on how that will work later on.
As always we continue to be laser focussed on our operating costs, and you will see that in
the results this morning.
Finally, our strong balance sheet has helped us to deliver sustainable ordinary dividends to
our shareholders.
Moving to slide 6, I'll briefly touch on the headline financial results before Jeff goes a bit
deeper into the details. Our operating revenues were $5.5 billion, which was a record for
the airline. Driven by that strength we delivered the second highest profit in Air New
Zealand's history, with earnings before taxation of $540 million, up 2.5% from the prior
Annual Results Investor Briefing
23 August 2018
Page 3 of 19
year.
Net profit after tax grew 2.1% to $390 million, and operating cash flow growth was very
strong at 14% to deliver $1 billion. The $540 million profit is in line with guidance that
we've provided going all the way back to last August where we said we were expecting this
year's earnings to exceed the $527 million level from 2017.
What makes me especially proud is that we were able to achieve this despite a $135
million impact from increased fuel prices in the year. That $135 million was driven by $198
million, or a 25% increase, in the average price of jet fuel in the year, from $60 to $75 per
barrel, which was then partially offset by $63 million in gains from our fuel hedging
program. If we were to look at our 2018 versus 2017 earnings on a comparable fuel basis
we'd actually delivered a 38% increase, which was driven by very strong revenue
performance.
Finally, as we stated at our interim result in February, the unscheduled engine
maintenance for some of our Boeing 787-9 aircraft has not had a material impact on
earnings in the year.
To briefly wrap up my observation about this year's performance, 2018 was most certainly
a challenging year with regard to operational disruptions and our efforts to mitigate these
issues for our customers. However, these types of issues can arise in an airline, and we
know it can be a tough business and that things can happen. It is how we go about
managing and absorbing the unexpected issues when they arise that is fundamentally
important. There is no doubt that our ability to respond quickly and effectively allowed us
to persevere and to deliver our second highest result.
I'll now hand it over to Jeff to discuss the details of the result.
Jeff McDowall: Thanks, Christopher, and kia ora to everyone on the call. If we take a look
at the key drivers of the result passenger revenue increased 6.7%, reflecting growth and
strong demand, as well the stabilisation of competition in some of our key markets.
Demand was up 5.3% on capacity growth of 5%, and RASK grew strongly by 1.6%. Our
cargo business also delivered very strong yields and volume growth, resulting in a 9.6%
increase in revenues.
Supporting the positive growth in our revenue base was another solid unit cost
performance. While reported unit costs grew 4% in the year underlying unit costs
improved 0.5%. Once again, efficiencies driven by various cost initiatives and economies of
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23 August 2018
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scale more than offset the impact of price increase and contributed $104 million overall.
Now I'll briefly touch on some of the key movements which affected our performance
during the year. To better understand the dynamics of each component we've isolated the
impact of foreign exchange. I won't go into the details of every line item, but a detailed
profitability waterfall and commentary can be found in the annual shareholder review on
the investor centre website.
I've already discussed the strong passenger and cargo revenue performance, but also
included in the $362 million revenue growth is $38 million in other revenue, largely from
third party maintenance work on US Navy gas turbine engines, some of which is expected
to carry over into 2019 as well.
Labour costs continue to show productivity benefits, increasing by only 2.5%, and head
count increasing by only 1.7%, which are both much lower than the rate of capacity
growth, which is an excellent result.
Christopher has already touched on the movements in fuel costs, and there's a detailed
waterfall in the appendix that shows the breakdown of each component contributing to the
overall $165 million net impact. It's worth noting that our investment in fleet continues to
demonstrate good fuel efficiency, with volume consumption up 3.6% compared to 5% ASK
growth.
Maintenance, aircraft operations and passenger services costs increased by $113 million.
Increased capacity, passenger numbers and price increases drove the additional costs in
our aircraft operations and passenger services. Maintenance expenditure increases were
driven by approximately $16 million and third party maintenance activity, as well as higher
jet fleet engine costs and growth in the fleet.
Sales and marketing and other expenses increased by $30 million due to higher loyalty
activity, commissions and higher property and digital spend, which was partially offset by
lower advertising costs.
The net impact of all these movements is an incremental increase in earnings before
taxation of $13 million.
Our passenger revenue performance is very strong for the year, with overall positive
[unclear] despite the increase in capacity growth to 6.6% in the second half of the year.
As you can see in the table on the right side of the slide, demand in Domestic was
particularly strong, exceeding our earlier expectations of performance, with revenue
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growth of 8% and RASK growth of 3.5%. This was driven by robust business traffic and
continued leisure demand across the network.
The Tasman was another market that saw substantial revenue improvement, which was
driven by the exit of a competitor from the Auckland market as well as strong underlying
growth with point-to-point traffic. Revenue grew 10%, and RASK grew in the mid to high
single digits.
We discussed back in February our plan to increase capacity to the Pacific Islands,
specifically in the fourth quarter, with overall capacity growth of almost 20%, driven by
increased utilisation of aircraft during our low season. That high rate of growth led to a low
single digit decline in RASK for that market, but the longer sector flying to destination such
as Honolulu and Bali also drove efficiencies on the cost side.
Moving to Asia, both Shanghai and Singapore saw moderate RASK improvement, thanks to
an improving competitive environment from the prior year. Our capacity was slightly
reduced in the year, which is largely the result of less double-daily flying to Shanghai
during Chinese New Year. Hong Kong RASK remained under pressure, declining in the low
single digits due to a significant increase in competitor capacity over the peak season.
As discussed in the interim result, we grew our Japan capacity by 13% in the year, which
was driven by obtaining access to flights at Haneda Airport in Tokyo in addition to our
Narita service. As expected, the new service drove a decline in RASK for the year, which
was primarily seen during the low season, while the peak months were stable.
As Christopher will mention later on, we've seen good forward bookings for Japan for both
inbound and outbound traffic into the coming peak season, and will continue working on
growing demand into this important market over the next 12 months.
Lastly, our North America RASK result met our expectations this year, driven by both
strong demand and a stabilised competitive environment with our competitor adjusting to
a seasonal service. Houston in particular saw really good momentum, as new demand
continues to come from strong connecting traffic to the Mid-West, South, and Eastern
parts of the US.
Turning to Cargo, which delivered another strong revenue improvement this year. Cargo
revenue increased 9.6% driven by very strong volume growth of 6.3% as well as yield
growth of 3.3%. The volume growth was driven by increased capacity to North America
and the Pacific Islands, improved runway conditions at Los Angeles Airport which had an
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adverse impact in the prior year, and strong yields driven by higher density cargo.
I would also add that we're continuing to see value from our Alliance partnerships in the
cargo space, with increasing connectivity to more destinations, allowing exporters to send
their products beyond our traditional network.
Turning now to our operating costs; CASK adjusted for the impact of fuel price, FX and
third-party maintenance improved by 0.5%. $104 million of cost efficiencies related to the
benefits of fleet simplification, economies of scale and other cost-saving initiatives more
than offset the impact of price increases.
As we mentioned at our interim result, we incurred about $5 million of cost from the fuel
pipeline disruption in September last year, but we haven't isolated those for the purposes
of this chart. Reported CASK increased 4% which was driven by average fuel price
increases of 16%.
To provide better clarity on the underlying business we've broken out the increase in third
party maintenance costs which are not driven by ASKs and are more than offset by
revenue growth.
We've starting getting more questions from investors regarding the Christchurch Engine
Centre, which is the only business reflected in the share of earnings from associates in our
P&L. This joint venture was formed with Pratt & Whitney back in 2001, and it's a fantastic
collaboration. We own 49% of the business, which handles maintenance, repair and
overhauls for V2500 engines, which power the majority of Airbus's narrow-body aircraft,
including our own.
That business has steadily grown, which is reflected in our share of earnings over recent
years. What drives that growth is essentially volume, with the facility currently set up to
handle approximately 120 engines in a year. The significant growth you see this year has
primarily come from more engines.
Looking ahead to this year, we would expect to see a moderate growth from the
Christchurch Engine Centre, albeit it at a lower rate than the 27% we saw last year. That
slower rate of growth is due to the facility being near its capacity, although we're currently
reviewing options to increase that capacity going forward.
We generated significant operating cash flows of $1 billion in the period, which is an
increase of 14%. The increase reflects strong cash operating earnings and in increase in
working capital cashflow. Additionally, we had lower cash tax payments related to a
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transition tax timing change on the treatment of engine maintenance. The reduction in
cash taxes reflects a catch-up as the legislative tax rule went into effect. We entered the
period with net cash on hand of $1.3 billion.
As I mentioned in the interim results earnings call, we've updated our liquidity target to be
in the range of $700 million to $1 billion, and we'll transition to that level over time. Our
plan to start reducing the cash level will be primarily through the purchasing of narrow-
body aircraft, some of which will occur this year.
Our gearing at the end of the period was 52.4%, a small increase of 0.6 percentage points
from last June, which is well within our target range of 45% to 55%. The increase was
largely due to foreign exchange movements in the purchase of new aircraft, partially offset
by strong operating earnings.
We continue to maintain a credit rating of Baa2 from Moody's, with a stable outlook.
As the result of a positive medium-term outlook, the airline's financial strengths and
capital commitments over the next few years, as well as the current trading environment,
the Board was pleased to announce a fully imputed final dividend of $0.11 per share,
which brings the total fully imputed dividend declared for the year to $0.22 per share, an
increase of 4.8%.
If I move now to our fleet; this month we entered into a commitment with Airbus to
purchase A321 NEO aircraft for our domestic network. This is separate from the existing
order of NEOs that will be arriving shortly for deployment on the Trans-Tasman and Pacific
Island networks. As I discussed at our recent investor day this past June, we've been
growing our domestic business very strongly over the past five years. We currently have
17 aircraft operating on our larger domestic routes, consisting of A320 CEOs that were
delivered between 2011 and 2016.
Since 2016, we've grown the network almost 20% driven by increased utilisation of our
aircraft. To grow further though, we'll be using a phased approach that efficiently and
moderately increases the network capacity.
As the new A321 and A320 NEO aircrafts come into our short haul international fleet over
the next two years, we'll take some of the freed-up aircraft and deploy them on domestic
routes. From 2020 these older leased aircrafts will be replaced on a one-for-one swap with
the large A321 NEOs, which will provide efficient grace to up gauging and deliver cost
efficiencies as well.
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23 August 2018
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As you can see illustrated on slide 17, this fleet plan will initially grow our domestic jet
fleet to 20 aircraft, and then remain at that level but with considerably more seat growth
into the network as the proportion of A321s increases. Ultimately through this phased
replacement plan, our domestic fleet of 20 aircraft will include seven A321 NEOs by 2024.
In the chart on slide 18, you can see the phasing of our updated aircraft capital
expenditures through to 2022, which total approximately $1.5 billion based on exchange
rate of $0.66. This figure includes new commitments for the domestic A321 NEOs, but
does not include any assumptions on CapEx related to the Boeing 777-200 replacement
program, as the aircraft selection is currently in progress and won't be decided until some
time in the first half of the next calendar year.
One additional change from the previous forecast disclosed last February is a delivery date
for one of the Trans-Tasman NEOs, which has been pushed out now from the 2020
financial year to 2022, reflecting opportunities to increase utilisation of the existing fleet.
Finally turning to the fuel outlook; assuming jet fuel at US $85, the higher price of fuel will
be a headwind of approximately $220 million over last year, net of hedging, with a fuel
cost of approximately $1.35 billion. To be helpful, we've provided an outlook of estimated
fuel costs based on an assumption of jet fuel price in US dollars per barrel. The dotted line
represents the unhedged impact of rising or decreasing fuel costs. Based on the make-up
of our hedges, we've also provided an approximation of how movement up or down of fuel
price would impact our fuel cost to NZ dollars. I would note that while this estimate
assumes an FX rate of $0.66, movements in the exchange rate would have a relatively
small impact on our bottom line as those movements are offset by FX hedging.
Our largest currency exposure is the US dollar, and we currently have approximately 80%
of our 2019 exposure hedged at a rate of 0.7105.
Now, let me turn the call back to Christopher to discuss the outlook for the rest of the
year.
Christopher Luxon: Well thanks Jeff, and turning to Slide 21, I'll briefly provide some
perspective on the dynamics we're currently seeing across our major market.
While our July operating statistics reflected a tough comparator with the benefits from last
year's Lions tour, our forward booking for the rest of the first quarter and certainly leading
up to the summer peak season, are developing very well, particularly from the US market.
Now, looking at Domestic first, we're targeting growth to be in line with demand, which is
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supported by a strong economic climate which includes robust business traffic as well as
domestic leisure travel. Offshore demand for domestic travel has also been growing
strongly as we continue to benefit from inbound tourists moving throughout the network.
Moving to the Pacific Islands, after a year of incredibly strong expansion we will see the
annualisation impact from last year's capacity growth in the first half, which will then
actually moderate to a more typical level in the second half of the year. We're still seeing
good outbound demand from New Zealand to these markets, but we note that overall
market capacity is expected to increase approximately 10%.
Shifting to the Trans-Tasman market, which has seen significant change last year as the
result of a competitor exit, we continue to see strong point-to-point traffic, specifically
leisure travel. It is too early to gauge the impact of market capacity growth that will
commence in November, but we remain very confident in our strong customer proposition
on the Tasman, and we are excited about the growth opportunities including new routes to
Brisbane from Wellington and Queenstown.
Then looking to our long-haul network, I'll first touch on Asia where the forward bookings
for our new service to Taipei are shaping up well. We will also be launching a second daily
service to Singapore, which we'll operate beginning in April, into our fourth quarter.
While our Hong Kong service experienced a strong competitive environment last year, we
see stabilising market capacity going into the summer peak.
As Jeff mentioned earlier, Japan, which is our second-largest long-haul market after the
US, is performing very well with good inbound and outbound demand.
Touching briefly on Europe, our Los Angeles to London service was under pressure last
year from strong Trans-Atlantic competition, and we expect this to continue this year and
against the backdrop of Brexit, we would expect some of the softness to continue.
As always, our strategy for this route is based on strong point-to-point traffic between the
US and London, but we can utilise indirect flows to and from New Zealand to support
demand if needed. This service is also extremely efficient from an aircraft utilisation
perspective.
Now in South America, we are seeing some impact on inbound demand from Buenos Aires,
due to the weaker peso as the US dollar has strengthened. However, there is still good
connected traffic from Brazil, and the outbound demand from both Australia and New
Zealand remain strong.
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Lastly, turning to North America, we are seeing strong early demand trends going into the
summer peak season. Bookings for our new Chicago route are performing really well, and
this new destination will provide great stimulation of both point-to-point and connecting
traffic between the US and New Zealand.
Vancouver also continues to perform well, following on from last year's strong
performance.
Overall, looking across all of our markets, the demand dynamics in most of our key
markets appear robust, the competitive environment generally has stabilised, and we are
optimistic about the revenue performance this coming year.
Now many of you will be familiar with the issues we've faced since December last year with
the Rolls-Royce Trent 1000 engines on some of our Boeing 787-9 aircraft. Over the past
nine months we've been working closely with Rolls-Royce as some of these engines have
needed to undergo preventative maintenance. To cover for the impacted aircraft, we
deployed wet least aircraft over the past summer peak season, as well as in May and June,
as we were determined to keep our customers moving.
Now, going forward, we're introducing three dry leased aircraft as a temporary measure to
support our network, while we continue to work through the engine maintenance schedule.
However, we were recently notified that there is likely to be a delay in getting some of our
engines back. Just to be clear, the delay is not in relation to any new technical issues,
rather it is because the timing of the engine maintenance program has shifted. We have
therefore taken proactive steps to modify our schedule to give greater schedule reliability
to our customers.
Our customers have already experienced a series of delays, rescheduled flights and
cancellations, largely attributable to the impact of aircraft availability across the wider
network. These disruptions do not meet the high standards we set for ourselves and we
have determined that going forward we will free up the equivalent of two wide bodied
aircraft in order to provide more resilience and certainty to our schedule and for our
customers, in addition to the three dry leased aircraft. The schedule adjustments will
include frequency reductions on our Taipei and Buenos Aires services, as well as seeking to
retime some of our flights to Haneda. There will also be resulting flow on impacts on some
of our short haul routes and we estimate these actions will impact our 2019 profit by about
$30 million to 40 million.
Now on Slide 23 we have provided our current capacity plans for the year which are fairly
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23 August 2018
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self-explanatory. We have provided some commentary explaining the key capacity drives
in each major market and overall growth is expected to be between 4% and 6% for the
year, which will be predominantly driven by growth in the Tasman and international long
haul networks.
Turning now to the outlook for the year. Based upon current market conditions and
assuming an average jet fuel price of $85 per barrel, 2019 underlying earnings before
taxation is expected to be in the range of $425 million to $525 million. This excludes an
estimated $30 million to $40 million impact from scheduled changes prompted by the
global Rolls-Royce engine issues.
So thank you for listening and now operator, please open up the line for any questions.
Operator: Thank you. If you wish to ask a question, please press star one on your
telephone and wait for your name to be announced. If you wish to cancel your request
please press star two. If you are on a speaker phone please pick up the handset to ask
your question. Your first question comes from Andy Bowley with Forsyth Barr. Please go
ahead.
Andy Bowley: (Forsyth Barr, Analyst) Thanks moderator and good morning Christopher,
Jeff and Leila. I have got a couple of questions, the first of which relates to some of your
comments around demand Christopher. You referred demand dynamics are robust across
the portfolio. More specifically the New Zealand consumer is where I am interested and
there has been a lot said and written about the health and future health of the New
Zealand consumer in recent times. What are your forward bookings telling you about New
Zealand consumer, particularly outbound long haul across the network which I guess
where the lead time is bigger? Then more specifically within the domestic business to the
regional components of the network.
Christopher Luxon: Morning Andy, good to hear from you. Look, the bottom line is that we
are seeing really good underlying demand dynamics in the business and so whether I look
at New Zealand outbound which was up 7%, whether I look at what's happening in
regional New Zealand which is going tremendously quickly, probably double GDP growth,
the bottom line as we look out in the next six months we have got a really strong booking
profile across all our network to be honest, so that's domestic New Zealand, short haul and
long haul. I appreciate there's lots of commentary in the market around business
confidence. We see it often early and fast but we are not seeing it.
Andy Bowley: (Forsyth Barr, Analyst) Is there any - in terms of the next six months is
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23 August 2018
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there any difference to the last six months or just very much the same?
Christopher Luxon: No, no, it's just continued strength really, so we haven't seen any
change.
Andy Bowley: (Forsyth Barr, Analyst) Great. A second question then. Thanks for that. A
second question around the cargo business. So [unclear] numbers show freight has
slowed through 2018 year to date and I recognise your revenues have been pretty strong
in cargo in both first and second half, albeit volumes have come off a little bit in the
second half. What are you seeing on a month by month basis in the cargo business? Can
you give us a little bit more input in terms of the changes between volume and yield in
particular?
Jeff McDowall: Yes, hi Andy, it's Jeff. As you said we have seen really strong growth in
cargo in the past year as well, close to 10% and that was - the biggest single factor there
was Pacific long haul where we have seen both volume growth, but we have also been able
to tap into markets that we didn't previously access that much including higher density
cargo going between Asia and the US, transiting through Auckland, which kind of gets to
the point that we can tap into pockets which allow us to grow in a way that's not purely
dependent on the underlying kind of level of demand growth.
As we look forward, as I look at August for example, it's a similar picture. The cargo
revenue is looking pretty strong. I mean if we think of FY19 as a total we would expect
cargo to continue to grow. Whether you would see 10% again is another question but we
would expect to continue to see solid growth and our forward profile is showing that.
Andy Bowley: (Forsyth Barr, Analyst) Great. Thanks Jeff, thanks Christopher.
Christopher Luxon: Thanks Andy.
Operator: Your next question comes from Andrew Steele with First NZ Capital.
Andrew Steele: (First NZ Capital, Analyst) Good morning. I guess just the first one is a
point of clarification following on from Andy's question. You commented on the demand
profile being strong. How does the forward pricing or yield environment look?
Jeff McDowall: Hi Andrew, Jeff again. Yes, good, is the short answer. If you look at
domestic in particular, for example, we increased fares there in May and we are seeing
both a strong booking profile but also seeing positive yield momentum as well look
forward. We are also seeing that across the reset of our short haul business, Tasman in
particular, so yes, a positive picture there.
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23 August 2018
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Andrew Steele: (First NZ Capital, Analyst) How does that look in long haul as well?
Jeff McDowall: Yes, so also good. I mean it's a more mixed set of points of sale, so it's a
demand picture as well as a yield picture, but yield is looking stable and demand is looking
really strong. Actually if I think about our peak season, it is early in the booking curve for
that, but the bookings we are seeing, if anything, a little better than we expected and the
forward revenue as well, looking at the bookings multiplied by the yield. That's a little bit
better than we expected. I mean it's early in the period, like I say, so you can't really
bank that yet but we are very positive and optimistic about that period.
Andrew Steele: (First NZ Capital, Analyst) That's great, thank you.
Christopher Luxon: The only thing I would add Andrew is that we have seen a much more
stabilised competitive environment and whether that has been some of our competitors
from North America only operating over the summer peak, we are starting to see some of
the Asian Chinese carriers moderate capacity as well and certainly on the Tasman and
even in domestic New Zealand a little bit with our competitor there. So I think the upshot
is that as we go forward and across all those sells in all those markets we are actually
feeling that we are in a good position.
Andrew Steele: (First NZ Capital, Analyst) That's great, thank you. Just on Rolls-Royce
issues, I mean you have had to take on new leasing and there has been I guess
maintenance disruption. How should we think about the evolution of lease costs going into
FY19 and maintenance on a unit cost basis? I guess also more broadly, if you can tell us,
are there sort of any offsets you have with Rolls-Royce for compensation?
Jeff McDowall: Yes, hi Andrew. The relationship with Rolls-Royce, as we have sort of said
before is very positive and very supportive. We are not in the position, as I have kind of
talked about before, to give you any commercial details of that but the consequence that
you saw in FY18 was that there was no material impact. As you look forward there has
been some, as you say, we have got three dry leased aircraft in our fleet, or about to be in
our fleet, so the cost of that we don't expect to be material. There is a small component of
that in the guidance range that we have given for the period to $40 million impact but that
is a relatively small component. There is also, as you kind of alluded to, a 777-200 dry
lease, for example, has got a higher operating cost base than a 787, so you will see that
flow through, but again it is relatively minor.
Andrew Steele: (First NZ Capital, Analyst) That's excellent. That's all from me. Thank you
very much.
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23 August 2018
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Operator: Your next question comes from Marcus Curley with UBS Investment Bank.
Marcus Curley: (UBS Investment Bank, Analyst) Good morning team. Just a few from me.
Could you just talk to what drives the range in the FY19 earnings? I suppose the only
thing I picked up Christopher was your comments around the uncertainty around Tasman
yields, but anything else that you would highlight which creates the $100 million range
outside of normal business volatility.
Jeff McDowall: Yes, you're right Marcus, it's Jeff. It is - revenue by far is the most volatile,
well I hesitate to use the word volatile, variable proportion of our P&L, so it's really
revenue performance that would drive that range. If we see strong continued demand we
would be aiming to be towards the top end of that range but that is really the variable.
Marcus Curley: (UBS Investment Bank, Analyst) On the downside, is Tasman the only
thing you would highlight as a key risk at this stage?
Christopher Luxon: Well the other piece is probably Pacific Islands where we have had
competition. But otherwise I mean the Tasman, yes, we have got post the Virgin alliance,
we have got more capacity going in. A lot of the Tasman growth actually is really around
our A321 Neos coming in. There is about two points out of the seven to nine in the
Tasman PI sell and we have got some extra growth coming in for Brisbane from
Wellington, Queenstown, et cetera. But the bottom line really is when we look at all those
sells really it's PI and the level of competition, but the demand is strong in general across
our sells.
Marcus Curley: (UBS Investment Bank, Analyst) Okay and then just on the Rolls-Royce
estimated costs. It sounds like the majority of the $30 million to $40 million is lost
revenue by default.
Jeff McDowall: Yes, that's right. So essentially what we have done is we have designed a
series of schedule changes which collectively will free up essentially two aircraft, two lines
of flying and we have valued each of those. As you alluded the bulk of the cost there is
revenue, so for the flights where, the sectors where we are reducing frequency, it's the
revenue that we lose less the cost production from not doing the flying. Then there's a
combination of gauge changes as well, particularly on the short haul network, which have
both a cost and a revenue implication.
Marcus Curley: (UBS Investment Bank, Analyst) What confidence do you have that this
would only be isolated to FY19?
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23 August 2018
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Christopher Luxon: I think based on what we know today Marcus, we expect that we will
be able to get our engines through the shops in the next 12 months.
Marcus Curley: (UBS Investment Bank, Analyst) Okay. Then just moving on to the CapEx.
I know you are still to make a decision on the 777-200 replacement. Could you just talk a
little bit about when the first of those aircraft are likely to turn up? Specifically when you
have obviously put your first CapEx guidance out for 2022 one would assume that that's
going to be subject to some of those aircraft arriving in that year or potentially earlier.
Jeff McDowall: In the financial year, so Andy it will 2023, the plan at the moment has the
first - sorry Marcus - has the first aircraft arriving in late calendar 2022, so FY23. We
haven't signed the contract yet, we haven't made a decision yet, but normally there would
be some pre-delivery payments so you would expect those to start to flow through
between now and then.
Marcus Curley: (UBS Investment Bank, Analyst) Great and then lastly, are you willing and
able to provide any comments on dividends for 2019 if you hit the midpoint of your
earnings guidance?
Jeff McDowall: Well we are not really in a position to provide dividend guidance. I mean
we would sort of reiterate our policy of providing our consistent and sustainable dividends.
As you know we are getting towards a period, or getting closer to the period, where we
have got a lower level of CapEx and an elevated level of free cashflow, so we continue to
see that the Board will have an opportunity there to consider further distributions.
Marcus Curley: (UBS Investment Bank, Analyst) Great, thank you.
Operator: Your next question comes from with Joseph Horbec Goldman Sachs.
Joseph Horbec: (Goldman Sachs, Analyst) Thanks moderator. Just two quick questions.
The first one, the team mentioned that there would be no material impact of the Rolls-
Royce engine issue in FY18. Could you specify why that's the case and potentially how
much it was?
Christopher Luxon: The short answer is no. They are commercial terms and considerations
that we have with Rolls-Royce and I think we have been quite consistent around that.
Jeff McDowall: [Unclear], exactly right.
Joseph Horbec: (Goldman Sachs, Analyst) Sure, but the issue has been around for a while
so have those costs been taken into FY19 instead of FY18?
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23 August 2018
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Jeff McDowall: I mean what we are providing in terms of the guidance that relates to Rolls-
Royce specifically is purely about the impact that we expect to see for FY19. There is
nothing in there that relates to the prior year.
Joseph Horbec: (Goldman Sachs, Analyst) Okay. Just the second question, I've been
looking at the short-haul and long-haul monthly RASK that the company produces in its
operating statistics, it looks like the short-haul is turning negative year-on-year, while the
long-haul is turning positive in terms of growth year-on-year. What would be the reasons
behind that?
Jeff McDowall: The real reason, to be honest Joseph, is that we had a travelling rugby
team with us last year from Britain, the Lions, which was a wonderful rugby series and
match, and we don't actually have that in this comparative for July that’s just completed.
So we’re actually lapping the Lions’ traffic that came through New Zealand in July last
year, and wasn’t present this year.
Joseph Horbec: (Goldman Sachs, Analyst) In terms of the positive long-haul growth?
Jeff McDowall: Oh just strong underlying demand, as we’ve talked about before.
Leila Peters: Yes, hi Joseph, it’s Leila. Also yes, it’s the lapping of improved competitive
environment from last year as well. What I would point out on the short-haul that’s
important to note, Christopher touched on the Lions, so that really impacted, we saw that
very strongly in the first half of July, the year-on-year [is tough to] compare, but then as
we moved into the second half we were right back into the strong RASK growth in that
10% range. So right back to where we were in May, June, and looking forward still a
consistent dynamic, so it really is a one-off, but yes, it definitely skewed the short-haul
numbers for July.
Joseph Horbec: (Goldman Sachs, Analyst) Okay, thanks a lot, guys.
Operator: Once again, if you wish to ask a question, please press star one on your
telephone and wait for your name to be announced. Your next question comes from Nick
Mar, with Macquarie Group.
Nick Mar: (Macquarie, Analyst) Morning guys. Just within the guidance, are you able to
elaborate on what your assumptions are around CASK improvement? You previously
signalled a low single-digit for FY19.
Jeff McDowall: Yes, that’s right. So we’re still seeing positive CASK opportunities in FY19.
We’ve got the economies of scales will come from the growth, which is actually a little
Annual Results Investor Briefing
23 August 2018
Page 17 of 19
higher than in FY18. We’ve also got the A320 and A321 NEOs coming in, which will provide
a CASK improvement.
Nick Mar: (Macquarie, Analyst) Is there any offset with the disruption and the changes to
the schedule that you’re having to put through, that may drag on some of that
improvement?
Jeff McDowall: The replacement, for example, of a line of flying down by a 777-200 leased
aircraft versus a 787, will have some cost impact, but when you see that roll up into a
CASK number at the end of the year, it will be relatively small.
Jeff McDowall: Yes, the underlying trend continues from what we’ve talked about, Nick, in
the last few years, to be honest.
Nick Mar: (Macquarie, Analyst) Yes, that’s great. Thanks, guys.
Jeff McDowall: Thanks, Nick.
Operator: Your next question comes from Wade Gardiner, with Craigs Investment
Partners.
Wade Gardiner: (Craigs Investment Partners, Analyst) Hi guys. A lot of what I was going
to ask has been asked, but just a couple of questions. On slide 17, when you talk about
the CapEx, can you just clarify what the change is relative to what you disclosed at the
June Investor Day? Or is there is no change from that? The other questions were the Rolls-
Royce issues, you seemed to imply just before that you had an update around where you
were in the slot for the maintenance, can you give an update on timing of when you expect
that to all be resolved?
Finally, you mentioned earlier some revenue from I think it was US Navy contract that was
in FY18, and moving into FY19, can you put some numbers around that, what are we going
to see in FY18 versus FY19?
Jeff McDowall: Hi Wade. So your first question about slide 17, which is the one that
describes the domestic growth from A321, that is the picture as we presented it at the
Investor Day in June. We’ve just made it a bit more explicit, but it’s exactly the same
decision, it’s the same number of aircraft.
[Inaudible – Multiple Speakers]
Wade Gardiner: (Craigs Investment Partners, Analyst) Yes, so the CapEx forecast hasn't
changed.
Annual Results Investor Briefing
23 August 2018
Page 18 of 19
Christopher Luxon: Missed that, sorry.
Wade Gardiner: (Craigs Investment Partners, Analyst) So the CapEx forecast really hasn’t
changed from what we had in June?
Christopher Luxon: That’s right. Well, two changes. One is that we’ve gone out an extra
year, so we’re showing 2022 now. Previously we’ve shown up until 2021. The other is
there’s a little change because of the currency assumption.
Wade Gardiner: (Craigs Investment Partners, Analyst) Okay.
Christopher Luxon: Then just on the Rolls-Royce piece, essentially what’s happening is that
you’ve got a global production and parts backlog as obviously this is [unclear] affecting a
global fleet, and as Rolls-Royce deal with that through their production facilities, they’ve
got a throughput issue and challenge, and so when we send the engines up there for their
maintenance checks and servicing, it’s taking longer for them to get through the shop.
That’s ultimately what’s leading us to reset now to say, right, we’ve got three dry leased
aircraft coming in, and we’re going to free up two wide-bodies of flying, through making
some schedule changes. That’s an order to actually acknowledge the fact that it has been
operationally incredibly challenging this last nine months for our customers, and we want
to get back to a really strong schedule as a result.
So we still come back to the idea that based on everything that we know today, and the
guidance that we’re giving, we expect to be able to get those engines through those shops
in the next 12 months.
Jeff McDowall: Sorry, just on your third question, Wade, about the US Navy contract, I
can't tell you specific commercial details of that arrangement, but it’s a reasonably
significant step up from the past year, from FY17, and as we said in the presentation, it
delivered a positive margin. So there’s more than the cost [unclear] offset by the revenue.
As we look forward to ’19, it’ll be a similar thing, if anything a little bit more, so you’ll see
a little bit more cost, a little bit more revenue.
Wade Gardiner: (Craigs Investment Partners, Analyst) Okay.
Operator: Your next question comes from Jason Familton, with Accident Compensation
Corporation.
Jason Familton: (Accident Compensation Corporation, Analyst) Morning guys. Just a couple
for me, and related - I've just got off the NZR call and they’re talking about a return to the
Annual Results Investor Briefing
23 August 2018
Page 19 of 19
golden age of refining, just wondering about your chart set to be showing exposure to jet
fuel price, and how that reflects the changes that may or may not happen to crack spread.
Christopher Luxon: Hi Jason. Yes, so we do still hedge in crude rather than in the refined
product, so there isn’t exposure there. It’s been pretty stable over the past several years.
It is something though that we are actively looking at, particularly as you think about the
IMO regulation coming in from early 2020, so that is a topic that we’re actively engaged in
at the moment.
Jason Familton: (Accident Compensation Corporation, Analyst) The other one is clearly we
had the pipeline outage in the last 12 months, and there’s been a bit of investment at the
refinery around jet fuel, tankage and some of the jet fuel suppliers have been talking
about trying to recoup some of those costs from airlines. So how is that being reflected, I
guess the in-plane costs of putting jet fuel into the planes, and the guidance as well?
Christopher Luxon: Yes, there’s impact to that in the guidance. We’ve got really strong
relationships with the oil companies, and we’ve been working constructively with them. So
yes, there’s not a story there really.
Jason Familton: (Accident Compensation Corporation, Analyst) Okay cool, thank you.
Christopher Luxon: Thanks, Jason.
Operator: There are no further questions at this time. I’ll now hand back to Mr Luxon.
Christopher Luxon: Well listen guys, can I just say thanks again for listening to us on the
call. Thanks for your time and also actually just thank you also for your patience with us
over the last nine months as we’ve dealt with some of these operational challenges. We
are working really hard at it.
I am really proud of the result, it’s a great financial performance to power through the fuel
as we’ve done, it’s certainly been a big challenge operationally as we’ve dealt with the
Rolls-Royce issue, and I'm pleased and very proud of how the team handled that.
What I’d say is if you’ve got any further questions, or any more detailed questions in
particular, please don't hesitate to pick up the phone and reach out to Leila and Kim in our
Investor Relations team. Thanks again for your time, have a great day.
End of Transcript
=== IR PAGE TRANSCRIPT: 2019 Investor Day transcript ===
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EDITED TRANSCRIPT
AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
EVENT DATE/TIME: MAY 27, 2019 / 1:30AM GMT
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CORPORATE PARTICIPANTS
Cam Wallace Air New Zealand Limited - Chief Revenue Officer
Carrie Hurihanganui Air New Zealand Limited - Chief Ground Operations Officer
Christopher Mark Luxon Air New Zealand Limited - CEO
Jeff McDowall Air New Zealand Limited - CFO
Leila Peters Air New Zealand Limited - Head of IR & Financial Planning
Nick Judd Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
CONFERENCE CALL PARTICIPANTS
Andrew James Bowley Forsyth Barr Group Ltd., Research Division - Head of Research
Anthony Moulder CLSA Limited, Research Division - Analyst
Craig Brown ANZ New Zealand Investments Limited - Portfolio Manager of Australasian Equities
John Middleton
Marcus Curley UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
Nick Mar Macquarie Research - Analyst
Shane Solly Harbour Asset Management Limited - Director & Portfolio Manager
Stuart Williams Nikko Asset Management New Zealand Limited - Head of Equities
Wade Gardiner Craigs Investment Partners Limited, Research Division - Senior Research Analyst
PRESENTATION
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Good afternoon, everyone. Welcome to Air New Zealand's 2019 Investor Day. Thank you for those of you joining us here in Auckland, and a very
big thank you to those of you joining us online on our live webcast. So my name is Leila Peters, and I'm the Head of Investor Relations and Financial
Planning here at Air New Zealand.
Before we get started, safety first. Emergency exits are located to my left, your right as well as behind you down the hallway over there, and
bathrooms can also be found down the back. As we're always trying to improve our sustainability, this year, we do not have presentation packs
printed out. However, you can download today's content on Air New Zealand's Investor centre website right now. You can also find it on the NZX
and the ASX website.
As always, I would like to remind you that our comments today will include forward-looking statements regarding our future expectations, which
may differ from actual results. This afternoon, you're going to hear from 5 members of our executive team. You will be able to find more information
on them in the biography section towards the back of the slide deck.
Okay. So the way we've structured this afternoon is as follows: Christopher will provide a business update, and then you'll hear about our network
and revenue growth opportunities from Nick Judd and Cam Wallace. Following that, we will have a brief Q&A section -- session for those speakers
before taking a short break for refreshments. Afterwards, we'll come back, and we'll hear about the opportunities on driving sustainable cost
improvement as well as our financial framework from -- and we'll hear from Carrie Hurihanganui and Jeff McDowall. Then we'll have a final Q&A
session with those speakers as well as Christopher joining us back on the stage.
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As always, we'll be taking questions from the audience in both sessions as well as through our online tool called Slido, where you can use your
smartphones and submit questions throughout the session. At each of your tables is information on the website and the meeting number, so that
you can log in and submit your question. There's also WiFi information for logging in on the table as well. We do hope that some of you are brave
enough to ask questions in person, otherwise, it will not be a fun afternoon. And we will conclude the event with some refreshments and some of
our fine Air New Zealand wines for those of you that are able to stay.
So before I invite our Chief Executive Officer, Christopher Luxon, to the stage, I'd like to play a brief video.
(presentation)
Christopher Mark Luxon - Air New Zealand Limited - CEO
Okay. Well, good afternoon, everyone, and thank you so much for joining us here this afternoon. As you can imagine, already, it's been quite an
exciting morning for us because we've ended up announcing that we're going Boeing 787-10 and GE GEnx engines. I think it might've been one
of the worst-kept secrets in the history of mankind or aviation, I suspect, over the last week or so, but awesome to have it confirmed and a really
great set up and a great configuration as we'll talk about later on into our future growth as we go forward.
We really do, however, look forward to these Investor Days. These are really important days in our calendar because it's a chance for us just to go
that little bit deeper with you to unpack some of the thinking that we have around how we manage this business, which is incredibly exciting but
incredibly complex, and you get some big deeper, richer insights around that, and obviously than we can do in our one-on-one sessions. It's
awesome today alongside Jeff later and myself to have Cam, Nick and Carrie with us, who'll be able to unpack some of these things a little bit more
as well.
However, the 4 big things I really want you to take away are these: The first is that I think we have built an incredibly agile and adaptable business.
When we think about what we have achieved and built over the time, we have demonstrated even again in the last 12 to 18 months that we can
adjust to changing circumstances incredibly well and incredibly quickly. The second big thing is that our team is really focused on regaining earnings
growth, and you're going to hear a lot more about that and get a sense of that through the course of the afternoon. But we've already implemented
some of those key metrics or measures or actions, whether that's been deferring some of our CapEx, freeing up $750 million worth of cash flow,
or whether it's some of the cost programs that we've got going on and revenue-enhancing initiatives, we think we're on a great track pathway to
be able to upgrade and improve on our earnings growth.
And thirdly, we really are, despite doing all of that, we want to make sure that we are doing or achieving results in a really high-quality way, and
that's why you'll continue to hear us talk about the importance of customer, cultural and commercial excellence, not just one of those 3 but all 3
together. We want to achieve great results, but we want to do it in a high-quality way, not just doing whatever it takes to crash and burn and
maximize our profit and loss. We want to build a really great world-class business here in New Zealand.
And then lastly, you'll hear from Jeff a little bit around how we build on the strong financial foundation that we've got. How do we fundamentally
withstand the changes and the challenge that we've got within our environment. But importantly, how do we work on our revenue and cost
initiatives to drive that strong free cash flow that we want to see continue to emerge in the business going forward. So they're the big 4 messages,
the big 4 takeaways that I hope that you will get out of this session this afternoon, and with that, I'll carry on.
The thing I'll say is that the business now after 79 years in existence, in April next year, it'll be 80 years that we've been going strong, has really built
itself into a very strong business. And it doesn't matter which dimension you look through. I think we should be incredibly proud of those results.
When you think about it now, it's a business that goes to 52 destinations in New Zealand and all around the world. We have 12,500 employees. We
have been the #1 corporate reputation now in New Zealand for 5 years. We've been the #1 corporate reputation company in Australia now for 3
years. I still love that. It still doesn't get old. It's just awesome, as I've said before, rocking into those Australian politicians and giving them a dirty,
great, big model of an Air New Zealand plane. And I'll continue to do that for as long as we possibly can.
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And then we're being delivering consistently good commercial results. For a small airline from this part of the world, we have some really awesome
structural competitive advantages that have enabled us to build out, I think, a really enviable track record of commercial success now over a long,
long period of time.
In terms of our Go Beyond strategy, that is still unchanged. That has been the mantra. It has been the organizing force that has helped us link our
stakeholders and our people together and unify them around a common mission and understanding of what this company is all about.
There are the 3 components to it: Firstly, what we call our purpose. That is all about how we supercharge New Zealand's success economically,
socially and environmentally. It's not just a bumper sticker. It's the reality of our business. We need New Zealand to be strong, and New Zealand
actually needs a very prosperous and successful Air New Zealand to support it as well. And so our 2 futures are inextricably linked. If we do that
job well, Air New Zealand will be just fine at the end of the day.
Our promise, which is about how we connect New Zealanders to the world and bring the world to us. We are 5 million people on 2 rocks in the
South Pacific Ocean, trying to link into 195 countries and 7.6 billion other people. And so the airline is the bloodstream of New Zealand and how
we connect to the world and bring the world to us.
And then finally, the objective is that we're not interested in being a world-famous give-it-a-go, Kiwi-battling company. We have an ambition to
be world-class New Zealand, and that means that we want to build cultural excellence, commercial excellence and customer excellence along the
way.
So that's why we get involved in a range of things. That's why we've got involved with things like the QR -- Queenstown Resort College, and where
we're trying to build talent that comes into the tourism industry straight out of high school amongst multi-Pacific students. That's why we get
involved in the Dryland Carbon initiative that we've got involved with, which has involved Z and Genesis and other companies as we think about
how we can manage our carbon emissions. But that's what leads us into those decisions is really very much our mission and our future.
And what I'd say about that is I know you've heard it all before, but we keep talking about it inside our business because every year, we have new
employees join us, and we want people to understand the mission and purpose and to get it into their DNA as well. And when eventually I go to
my retiree function at the ASB showgrounds in 30 years' time, I want to hear the then future of Air New -- CEO of Air New Zealand stand up, he or
she, and actually express that the mission and purpose of this company has remained unchanged as it has for the last 79 years, as it will for the
next 79 years.
So if I can take each of the 3 components. As I said, we really want equality of result. That's why we talk about the 3 Cs inside our business of
customer, commercial, culture. I know all of you sort of understand this, but these 3 aspects are often a tension within a business. You can hit your
commercial results by digging up your customer experience and saving money there, not investing on your people. But equally if we don't -- and
we can invest in the people and not face up to legacy commercial challenges that we've got as well. And so we have learned that our finances
enable us to invest in our customer and cultural experience. Investing in our people leads to customer experience and often, the commercial results
as well.
So if I can just take the customer component of it, what I'd say is that my observation from my past life has been that businesses that are in turnaround
mode have lost the voice of the customer, and that businesses always get into trouble when they lose the voice of the customer, particularly at
the top of management and with the top team. So for us, everything starts with the customer, and we're measuring our customer satisfaction
constantly. Mike Tod and his team probably talk to 4,000 customers a month in some form or another, and we can -- we have got everything
dashboard. We've got a powerful set of data analytics that can tell us right down to our lounge in a regional port what that level of customer
satisfaction looks like right through to the quality of a seat on a narrow-body plane flying to Kallaroo. So there's a dearth of information we get
around customer satisfaction. And that's useful because as we try and invest in that customer proposition, we're able to see what's working and
what's not working, what's a good investment, what's a good return on our money.
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Over the last 12 months, despite all the challenges that we've had operationally over that period of time, what's been amazing to see is that our
customer satisfaction has remained at record-high levels. Importantly, as I said, we've become the #1 company still in Australia and New Zealand
and be able to maintain that in what has been a challenging operational year has been really fantastic.
And importantly, our Net Promoter Score, which is a measure of customer satisfaction, an externally benchmarked industry comparator, has been
really exceptionally high and has continued to grow. And just to put it into a little bit of context, Air New Zealand's Net Promoter Score is probably
6x the global industry average. It's 3x the average for the average Star Alliance airline across the 28 airlines that are within the Star Alliance network.
So we know we have probably the highest Net Promoter Score of any airline on earth, and with that comes tremendous satisfaction, obviously, for
our customers, but with it also comes tremendous expectations. And that is that thing that actually propels us forward because our customers are
incredibly demanding of what they expect of Air New Zealand in the standard that they actually hold us to.
If I can think about our people, if I move to the cultural piece, we have 12,500 Air New Zealanders. It is, as we've said before, a business that's all
about flying people, not planes. And therefore, we know we have to have fired up and engaged people. We do that by investing in leaders. If we
invest in our leaders, we believe we build a better culture, we get high levels of engagement, and then we get differential effort. And if you want
to see an example of that over the last 12 to 18 months, the differential effort that's come in from Air New Zealanders across the whole of our
system has been profound, and that only happens because of the culture that we have built over subsequent years, and that people are actually
so attached to the organization, they want to go above and beyond than the same person doing the same job at one of our competitors. And so
with that differential effort comes really great levels of customer satisfaction. With that, in turn, comes really incredible levels of commercial
performance. And so for us, we will keep investing in our culture. It's not something that we do qualitatively. It's not something that we think of as
a nice-to-do on a Friday afternoon. It's actually a must-do for us, as important as the other 2 aspects of the 3 Cs, as we call them. And I know Jodie
spoke a lot more about that last year, to give you a little bit of a sense of how we build great leaders and great culture from within the organization.
But it's a good place to be. Air New Zealand is New Zealand's most attractive employer. It's a lovely named designation. I'm not quite sure. I think
that just means people like working here. But since 2011, it's been New Zealand's most attractive employer. We had 45,000 people apply for 3,000
jobs in the last year, and 60% of Kiwis say they want to work here. So we have a huge responsibility to make it a really special place, and clearly,
that's happening by evidence of the low levels of staff turnover that we actually have within the company as well.
So there's a lot more for us to do. We want to keep building this culture. We want to keep improving it and perfecting it over the coming years
together. And if I just think about 2 things, the first is we made a very big commitment this year to make sure that our parental leave policy was
the best that we could possibly build and probably the best in New Zealand. And we've been able to launch that out into our staff, into our market.
Even on a tough year, it's the right thing to do by our people, and we won't shy away from doing that.
The second thing is that the focus on the future of work is something that we're really starting to get our heads around. We are facing this fourth
industrial revolution and this big technological revolution, and with that comes tremendous amounts of change, great opportunity for New Zealand
and Air New Zealand, but great challenges as well around that. And we want to make sure that our people are set up to manage their transition
to a world of greater levels of automation. And so we have committed to what we call the future of work reskilling pledge, which is that by 2025,
we will have doubled the number of hours that we spend reskilling and retraining our people, so that they can make those adjustments as we
bring automation into the business and we can retrain our employees.
Why do we do that? It's because it's much easier for us. It's 2.5x cheaper for us to take an existing employee and retrain them for a new skill that
emerges within the business than actually to exit that employee, go out and hire a new one and bring the new employee with those skills into the
business. And so that's the sort of thing that we're committed to doing in order to build the culture.
I talked about this before but -- and I've talked about it in past years as well, but many times people will say Air New Zealand and global aviation
-- and I'll go to IATA in Seoul at the end of the week, and I'll meet with 150 airline CEOs that are represented there. And many of them often say,
"It's amazing how your airline does so well coming from your part of the world. You have a low level of commercial customers. You don't fly through
New Zealand to go to many places. You can fly for 4 or 5 hours and maybe hit some Australians on a good day." And the upshot is that we have
built really powerful, compelling and incredibly strong competitive advantages. When you look at our brand, our service, our culture we know that,
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that is so important to us. We have to know New Zealand. Air New Zealand is better than anyone else on earth, and we're going to keep improving
on that.
We have a great customer Loyalty Programme, which Cam and his team are leading, and we're getting people into the ecosystem of New Zealand,
Air New Zealand within New Zealand. We've got an alliance-driven network, which has given us huge access and derisked a lot of our growth over
the recent years. And finally, we've got this simplified, efficient fleet that we've talked about and reinforced again today with the decision that
we've made around fleet.
And our job, as I've said before, is we're just putting armor plate on top of armor plate on top of armor plate on those 4 dimensions. And we're
going to keep improving them, reinventing them, improving them, reinventing them because they are really strong differentiators and very strong
competitive advantages for us.
Importantly, for you guys and for our investors, those competitive advantages are really translating into very strong commercial success. And it
doesn't matter, they serve us well in a range of different environments and through different phases of the aviation cycle. And you can see here in
terms of total shareholder return, how being an airline, we've actually outperformed many of the indices across our region but certainly, other Asia
Pacific airline results. We're very, very proud of what we've achieved now for over 10 years, and we're going to remain very, very focused on making
sure we build strong, sustainable shareholder returns for our shareholders going forward.
Now having said that, no doubt about it, we've had some real challenges over the course of the last year. There's 2 big components to that. The
first is really the Rolls-Royce engine issue, which I know we've spoken at length about through the half year and at the reset in the beginning of
the year. But it has had a huge impact on our customers over the last 12, 18 months. And many of you will have been impacted and affected by
that yourselves.
Secondarily, it's had a huge impact on our staff because all the people involved in load planning and rostering and scheduling of aircraft. When
we have 3,600 aircraft flights a week, often each week, we've had to replan quite dynamically as we've dealt with up to 5 aircraft on the ground in
the first half of this year. The good news is that, that situation is improving. We've gone from 5 on the ground to 2 to 1 on the ground. Eventually,
we hope to come out the other side of it and through the -- as we head into FY '20.
And then the second piece is, as we talked about at the beginning of the year, is that we've seen a slowdown in the moderation of growth, and
that's really due to the slowing inbound tourism market that we're starting to see, which has gone from 8% growth over the last 5 years now down
to about 2% to 3% growth. And of course, every international visitor takes up to 2 flights domestically on our network as well. So that would be
the 2 big challenges that we've been dealing with, but our mission and our purpose has still served us well through those in-the-year challenges.
And more importantly, when I look at the 2019 outlook, our outlook has not substantially changed over our expectations that we talked to you
about back on March 28 when we did our business review announcement. At that time, we had assumed a range of $340 million to $400 million
based on an expectation of fuel being at $75 per barrel for the second half of the year. That fuel price has come up a little higher, and that's resulted
in a $25 million headwind. And despite that impact, we are updating our outlook for 2019 for earnings before taxation, which we now expect to
exceed $340 million.
I think what I'd say is we are still, however, not clearly very pleased with this level of earnings, and we have, I think, shown tremendous agility. We've
been very quick to respond to the changing environment that we've seen, and we've talked a lot about certainly over the January, February, March
period. And I appreciate that for many of you in the room, you thought that we were being overly pessimistic with our view -- our forward outlook
and our view. But I have to say since January, February, March, April, May, that view has been validated, and it certainly has held over that period
of time. And I think for some of you covering other organizations, you will have sensed that others are now starting to talk about the slowdown
and see the slowdown that we were referencing and talking about.
What's important to me is that we actually face up to our reality in the year, and we make the adjustments we need to make. And we do that
intelligently to rightsize our business to the growth that we've got going forward. Otherwise, what happens, and many of you who cover airlines
will understand this, you get cumulative challenges that just build up and not addressed and not dealt with, and they just build up over time until
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more fundamental restructuring and change is needed. And that's not the way that Air New Zealand rolls. We deal with what we have to face with
in year whether they're operational, revenue or cost challenges. We'll make the adjustments in year, deal with what we've got to deal with and
make sure the business is always on point and is in as good a shape as it possibly can be. And Carrie will talk a little bit more about some of that
drive around our efficiency base later on.
So if you remember back in March, we took 4 sort of decisive actions around our network, our fleet, our cost base and our customers. And I wanted
to touch base, touch quickly on each of those 4 components. And the first was really around our network. We've talked about moving from an
environment that was 5% to 7% growth over the next 3 years to one that narrows about 3% to 5% growth. And as you look at our projection going
into 2020, we expect capacity growth in the order of about 5%. Now it's quite important to strip it out because there is quite a big message in here
that I really want you to understand.
The first is that what we have done here is, if you look at our existing long-haul routes, you'll see that there is very little capacity growth at all, if any
at all. And really, all of our growth in our long-haul network comes from the new markets of Chicago and Taipei, which we originally launched as
3-times-a-week frequencies that will build at times in the year up to 5 times as we expand that. We are finding that there is profitable, new sources
of growth from these new markets and that they can be very attractive even over existing markets. And so we'll continue to grow Taipei, Chicago,
the third bank to Singapore, that's the driving of the new long-haul route growth that we're talking about. Otherwise, rest of the long-haul network,
essentially flat.
If you move to the blue bar, the Tasman & Pacific Islands. The Tasman has some growth but a function of sort of growth coming out of Brisbane to
Wellington, Brisbane to Queenstown. But importantly, the A321neo aircraft, being larger units, are coming into that network. Very little growth on
the Pacific Islands and in fact, a pullback of capacity out of Honolulu, so that helps keep that pretty flat, but most of it's Tasman-related growth.
And the key thing really is that our domestic capacity will be slightly down around 1% in the coming year as we make frequency adjustments into
Queenstown, Christchurch and Wellington. And the reason for that is that we've had phenomenal growth into those markets over recent years,
and it's really important that we actually now digest that growth incredibly well and actually -- and adjust to that. We'll have some growth, obviously,
with our jet services going from Auckland to Invercargill, but net-net, our total domestic network, we expect capacity to be down about 1%.
And so the focus is really on existing markets, will be about RASK improvement and strengthening in what will be a constrained capacity environment.
And that's the key message that I wanted you to understand and take away from our capacity growth assumptions as we go forward.
The second big challenge was really around our network. As we've talked about, we have deferred up to 6 aircraft in our narrow-body and our
wide-body fleets, resulting in about $750 million worth of CapEx deferral. And I think we have now got our -- the CapEx proposal and our fleet
plans incredibly well aligned for this lower level of 3% to 5% growth, and I absolutely stand by that decision. I think we made a good call. And again,
the growth is tracking in line with what we talked about when we made the call to defer the aircraft.
We are expecting tourism to be continuing to grow but maybe at a slower rate. As I alluded to before, the previous 5 years, tourism's averaged
about 8% growth. Currently, it's somewhere between around about 2% for the 12 months ending last month, but it will be somewhere in the 2%
to 3% and be themselves sort of -- project that it'll be around about 4% growth and a down tourism as they go forward.
But regardless of all of that, what's most important is that Air New Zealand builds in tremendous amounts of flexibility and agility. That's the reason
we have been able to survive. If the market takes off, we've got a great ability with the growth options that we put into the deal with Boeing and
GE today to be able to participate in upside growth. And equally with an ability to substitute those aircraft for smaller -9s, our ability to go to early
termination. And the fact that we have a lot of unencumbered aircraft with low ownership costs means that in a down -- if there is a slowing -- a
further slowing, we can adjust just as quickly and just as well. And that's been a hallmark of Air New Zealand's success over the last 7 or 8 years. We
want to have that maximum amounts of flexibility to be able to get to our business as quickly as possible and certainly quicker than our competitors.
The last bit or one of the big bits has been really around cost, and I want to spend a little bit unpacking this because I just want to be clear about
what we're talking about. So it's that every year, we focus on generating around about $50 million worth of cost savings, and we do that because
we've had an ambition for the last 5 years to offset the inflation price increases we see across the business. We know that's a pretty ambitious
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challenge, and I have to say that Carrie and her team largely have to deal with that challenge in the supply chain and throughout our operations.
It's a really tough challenge each and every year, but as we've demonstrated hopefully over the last 5 years, we are really good at cost control. And
we've built that discipline as daily religion and practice into our business.
We talked about the Rolls-Royce inefficiencies. We really want to get as much of those into the FY '20 year as possible. There is an emerging issue
on these TEN engine issues. It's not the same magnitude of what we've been dealing with on the Package C engines. And we think we've got good
visibility over -- and with a lot of time and a lot of experience over the last 12 to 18 months, we think we can handle that pretty effectively. But it
may be that some of those inefficiencies recovery actually spill over into 2021 as well.
The third bucket around the operations review is still very much work in progress, and so we won't be talking about that today per se, but we will
definitely do so into the future. But the second area around this 5% overhead cost reduction is the area that I wanted to focus on a little bit here.
Because the sum of these 3 things, we want to generate an additional $60 million over 2 years in addition to the regular annual $50 million cost
out to offset inflation piece.
And what we're doing here on this overhead reduction is this isn't going to be a classic sort of brutal cost out program that I've observed happen
across many New Zealand-based companies in the last 2 or 3 years. We want this to be a really intelligent piece of work that actually helps us
reimagine what's the right processes, removing of duplication that we need in our business to set it up for the next 5, 10, 15 years.
And with that in mind, we've brought onboard Oliver Wyman, who are a great global consultancy. They can help us benchmark our cost. We've
got a good visibility over it, but we want some more visibility relative to other airlines and certainly relative to other industries outside of airlines
as well. And together, we want to sort of intelligently go through identifying better ways of working, smarter ways of working, remove the duplication
and find operating efficiencies in a really clever, sharp way.
It's not an organizational-wide review because we're not in that kind of situation, but we are looking to be able to generate about $40 million of
savings over the next 2 -- over that 2-year period or about 5% of our overheads. So that work's just kicked off in recent weeks, and we'll keep you
informed as to how that's progressing. But hopefully, you get a sense of the 3 big pieces that we're driving around the cost, particularly the overhead
cost reduction piece.
Finally, as I said, we are not going to do -- we don't have an -- we're not going nickel and dime and trash the customer experience. We fundamentally
believe a lot of our success in the last 5 to 7 years has been making sure that we have a big investment in customer experience, whether it be a
modern, efficient fleet, whether it be a big investment in lounges, whether it be continued investment in our digital tools and processes. And the
reason we do that is because it all builds to justify the revenue premium that Cam and his team can extract from the market. And so we're going
to stay really invested in our digital app. We're going to stay very invested around refreshing and building out our lounges. I think in the next 2 to
3 years, we've got 9 more lounges to refresh and refurbish. WiFi, we've talked about that being rolled out onto our aircraft over the next coming
years, but being free and available to all our customers. And we certainly talked about a range of aircraft interior refreshes that start at the end of
this year and obviously go through to 2022 when we bring in a whole reinvention of all the cabins associated with the entry of the 787-10. So it's
really important that we continue to stay super, super invested in our customer experience, which drives such a good revenue premium for us.
And then today, as I talked about earlier this morning with media, a lot of what we've been doing is that commitment to purchase 8 787-10
Dreamliners with GEnx GE engines. We think we've made a really good decision there around our fleet again. We think it's the perfect aircraft and
perfect combination for where we want to go, and Nick will talk about some of our network growth opportunities as we go forward.
But these aircraft had been -- we think it's just setting us up really well for the next 20 years or so. And I want to say a big thank you to Baden Smith
in particular, and Jeff McDowall, who have led their business and the Board and the executive team through a big decision like this. It's not every
day you get to make -- spend billions of dollars on -- and sort of shaping the business out to 2030 and beyond by virtue of a decision like this. But
we think we've made the right call around mission performance. We think the operating economics are really outstanding. Certainly, the sustainability
benefits are fantastic. 25% more fuel-efficient than a 777-200, 190,000 tonnes of carbon avoided each and every year on this fleet versus the one
that it's replacing. It gives us huge flexibility across crew, parts and maintenance. You think about pilots that can operate -9s and -10s. If you think
about 95% of the components being common between our -9 and our -10 fleet, it's pretty special in terms of that. And finally, it also just gives us
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some supplier diversity, particularly given the growth in our fleet that we can now -- we've got critical mass and scale benefits out of our subfleets,
but it just also gives us the right level of diversity as we go forward.
So I hope that sort of helps sort of have a little bit of context for what you're going to hear from the rest of the day. There's -- with Nick here, we're
going to talk a little bit more about network growth. With Cam, we'll talk about some of the initiatives that we've got to power up our revenue and
to optimize and maximize our revenue. With Carrie, we've obviously got quite a lot of levers to pull around maximizing and optimizing operational
performance but certainly controls. Carrie controls a lot of the cost base of the business. And then finally, Jeff will talk about how we want to
maintain a really disciplined approach to capital deployment and obviously make sure we continue to invest and make sure we deliver you strong
shareholder returns.
So with that, I'll pass off to Nick. Thank you very much.
Nick Judd - Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
Thank you. Great to be back in front of you again. I'm going to talk about 4 main areas in my presentation today. I'm going to start by touching on
the competitive dynamic and the changes that we've seen over the last 12 months. I want to reiterate how we evaluate our network, and how we
review that, and the action plans we put in place in regards to that. And then I want to touch on in a bit of detail the 3 principles that will underpin
our network management in the medium term and over the next 3 years. Finally, I just want to briefly touch on obviously our alliance partnerships,
the strength we have in those and on the Tasman post the Virgin Australia breakup.
So the map that you see ahead of you is a very familiar map, I'm sure. I think in every network presentation we probably done for the last 10 years,
it has been there. But it's a very familiar slide, and it shows how we've built out our network over the last 10 years. What it shows is our network as
it stands today and going into FY '20, and so there has been some changes in the last 12 months, and there's obviously a few new additions coming
on during the year.
Our network has evolved significantly over the last 8 years, particularly as we've put in place our alliance structures to help support our long-haul
growth. But we're still incredibly focused on the Pacific Rim and building out our network in both the domestic sense, Tasman & Pacific Islands,
and on a long-haul basis, and that was actually solidified when we went through the business review process most recently, in which Christopher
announced the results over a couple of months ago. We still see significant opportunities for profitable growth, and we'll be looking to enact those
in the next 3 years.
I think this time last year or maybe a couple of months earlier, I sat and talked to you about how when we see fuel prices rise, we see this natural
tipping point in competition leaving New Zealand, and that's exactly what we've seen play out over the last 12 months. So not only have fuel prices
stayed at a relatively high level, we've seen global macro uncertainty out in the global stage, and we've also seen a strengthening U.S. dollar that
has kind of caused issues for the airline industry in general. And so globally, we've seen a number of airlines go into redundancy. We've seen the
airline landscape change, and that's actually played out in New Zealand as well, where in addition to that and connected to that, we've seen a
slowing of inbound tourism, as Christopher talked about.
So what we know is that when we see these dynamics play out, we see a changing landscape in the competitive environment in New Zealand, and
so those competitive -- competitors of ours with the wrong strategy, the wrong product offering or the wrong cost structure leave the market.
We've seen in the last 12 months some signs of real rationality out of Asia. So we saw Hong Kong Airlines leave this month. We've seen AirAsia
come off the Tasman with their wide-body that they had on Coolangatta to Auckland. And in the last 2 weeks, we've seen China Southern announce
that they're cutting services from 10 per week down to 7 starting in July through to October.
So some really positive signs out of Asia in terms of how the capacity's changing, and that's actually flowed into the Tasman as well. So Virgin
Australia has just announced some cuts to both their Auckland and Christchurch services, and we've seen LATAM drop down from flying 7 times
per week to 4 times per week later this year. And that obviously has a dual benefit for us on our South American services as well as across the
Tasman as well.
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We have seen Air Canada into the market, and I'll touch a little bit more in detail on this under our alliance and code-share partnerships, but they're
coming in at 3 per week in the middle of peak season. We know there's strong demand there. They're a good home market carrier and a Star Alliance
partner and certainly, they've come into the market in a very rational way.
What this slide underpins is that to succeed in that New Zealand market, you absolutely have to have the right tools, and we're really confident in
our ability to defend our own home turf. We think that that's playing out. And while it hasn't been a surprise to us what we've seen in the competition
dynamic over the last 12 months, it's definitely been incredibly pleasing, and we hope to see more signs of this come through.
Again, this will be a very familiar slide to you, and I spent some time talking through this model 12 months ago. But I just want to reiterate that we
are ruthlessly focused on driving profitable outcomes from all of our routes and making sure that we get the best commercial return from our fleet.
In addition to our monthly network reporting, we regularly evaluate our routes on a quarterly basis with both the Board and the executive doing
deep dives on that. For routes that are not performing, we have action plans in place, and this is a process that we make fundamental decisions
on how we drive the best commercial outcomes from the fleet that we have at our disposal.
In addition to that process, we also have strong fleet utilization reporting, and we target to make sure that for all of our fleet types, we're at the top
end of the range of utilization versus our peers in the industry. So both of them run in parallel with one another. Both are very strong focuses for
the executive and the Board as well.
As I mentioned, the bottom left-hand quadrant is the review quadrant. And when we have routes that sit in that space, both our revenue management,
our commercial, our market development teams spend a lot of time working through how we get them back into a better quadrant on the grid.
And a good example of this is the Vietnam route that we exited earlier this year. We tried for 3 seasons to get that to where we wanted it to be. We
had really strong targets for that route, that we wanted it to continue to grow in profitability. We tried a number of tactics, including increasing
our marketing spend, working with the trade on new and innovative ways to sell the product. We put a different aircraft type on that. But when
that action plan ran out of time and the time line was expired, we made the tough call to pull out of that route. Not something we wanted to do.
We don't like taking network spots off the map, but it was something that was actually had to be done in order to get a better return from that
aircraft. So we're well up for making those decisions when we have to.
The other element that I want to leave with you from this slide today is it's not actually only about profitability that drives our focus and our
decision-making. A key focus for us is the relative profitability compared to other parts of the network. And so one of things that we do, and I think
we do really well is that we have a look at routes that are performing really well, and we try to understand the dynamics that make that perform
well, and then we look to copy those tactics and tell us the routes that aren't performing as well.
And a good example of this is actually Japan. Japan doesn't sit in that review quadrant, but we knew that we could drive better profitability from
that route. And so our [RN] team have done a great job in the last 12 months of actually cutting down the number of sales that we have in that
market. They've dropped the lead-in fare and as a result, we've seen a big stimulation of traffic from New Zealand end and an overall much stronger
commercial and revenue result.
The second example that I want to touch on is Buenos Aires. Completely different market, completely different dynamics, and it has been a bit of
a challenge for us, particularly with the economic environment that we've seen over there in the last 9 months: a lot of political uncertainty, the
peso has significantly devalued against the U.S. dollar, there's elections coming up later this year with Macri seeking reelection. That means the
whole environment is quite uncertain there. We've also had to fly our 777-200 there when we want to fly 787 because of some of the Rolls-Royce
issues we've had. And so that market has been challenging over the last 12 months, but our teams have worked together on that. We've made the
capacity adjustment we've had to by trimming some schedules and shortening the peak season. And we've actually built our sales in markets like
Brazil and Australia to help counter some of the slowdown that we've seen out of Argentina. So a good example of a route that we're managing
on a real day-to-day basis at the moment to try and improve performance.
When we announced our business review results a couple of months ago, one of the big changes that we made was moving Hong Kong from an
overnight service out of Auckland to a daytime service. And you might sort of say, "Why does that matter? It doesn't sound like a big deal." But it's
a good example of how we've driven much better utilization through that business review process and how it continues to be a focus for us.
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And so I just want to jump into a little bit of detail as an example to give you the context around this. So it previously operated as an overnight
flight out of Auckland. It flew up to Hong Kong. The plane sat on the tarmac for around 11 hours, and then it would turn around and come back to
New Zealand. By retiming that flight to a daytime flight, it now means that we have that aircraft only sitting on the tarmac for 2 hours a day, and
it's actually enabled us to go launch a whole new route in Seoul or to add more reliability into our schedule without the capital investment that
comes with buying a whole new plane. So it gives us better crew efficiency. It gives us more flexibility and adaptability in our network. Yes, there's
some customer challenges in terms of moving from a nighttime flight to a daytime flight. But actually, we hit different banks in Hong Kong, which
means that the customer mix changes slightly. And we're confident that within 12 months, we'll be back to the same connectivity traffic that we
had previously.
I use this as an example because I think it highlights the confidence that you should have in us to continue to be flexible and adept as we face a
lower-growth environment and a changing global economic environment. We are prepared to chop and change as we need to. We won't stick to
the current network plans. And probably the only certainty is that with uncertainty, we will continue to look to change our network and make sure
we deliver the best customer and commercial returns over the next 36 months.
Christopher touched on the fact that over the next 3 years, we're looking to grow between 3% to 5%. And that compares with what we talked
about last year, which is originally, we were going to grow between 5% and 7%. When we spoke about that last year, we talked about the fact that
we were going to grow a lot of our existing routes in addition to launching new routes, and that's probably the biggest change that we're standing
up here to talk to you about today. We are not looking to grow a whole lot of frequency into existing destinations. Some of the new markets, we
will certainly try to get to daily. But actually, a lot of our growth as we go forward over the next 3 years and certainly in the next 12 months will
come from us launching new markets.
It's important to remember within that context that we are actually going to be growing. So it's not a complete slowdown. We're not going
backwards. The overall network will continue to grow, and there's 3 principles that will underpin that growth.
The first is that we're aiming to stimulate new markets, and you would have seen the announcement around Seoul, which we brought forward,
and I'll touch on in a bit more detail. But in addition, we've also launched Chicago, Taipei. We have Christchurch, Singapore launching later this
year, Seoul obviously later this year, and we've landed the third bank of services with Singapore, which started in Northern Summer.
The second element is that we're going to obviously continue to upgauging our aircraft, which is the introduction of the new A321s and the cost
reductions we see with the A320s. And then thirdly, and just as important, but this is where the change has come, is that elsewhere within the
network, we're actually looking to maintain or constrain capacity to make sure that we improve our RASK in line with some of the CASK increases
we've seen as fuel prices have escalated.
As I mentioned, we expect to continue to be nimble and flexible over that 36 months, and we're certainly going to focus on making sure that we're
delivering both customer and commercial outcomes through that period. So just to unpack those principles a little bit more, I want to start with
our new growth.
As Christopher showed in his graph, the majority of our capacity growth, around 4.5% next year, comes from long-haul new route growth. We're
entering Seoul in November, and we think that, that will be a highly profitable market for us. We've landed a bunch of new capacity with Singapore,
and we've annualized our Chicago and Taipei services, which were launched in November last year.
For the first time in a long time, we're launching a new jet route with Auckland, Invercargill and there's already a really well-established market on
that route. We're trimming our capacity on Christchurch to Invercargill to make sure that, that route lands successfully. But based on the demand
we see, we think that, that will go really well. And it's a good example, when you link back to that fleet utilization piece, where we have used some
off-peak flying to provide a customer benefit and that the customers down there can get a full day of business done up in Auckland, along with
the commercial benefit, because it will drive really strong returns for us.
We heard Christopher talk about a 3% to 5% growth rate over the next 3 years. You can expect obviously to be at the upper end of that next year.
And then for the following 2 years, we're more likely to sit at around that 3% mark, particularly if market conditions persist as they are today.
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So why Seoul? And why now? Seoul is a really interesting market for us and one that we've had on the radar for quite a while with our network
planning team. As a result of the business review, we actually brought this forward by a year in terms of our network plans to launch. But what we
know about this market is that it's a really strong, existing market that actually has really strong links to New Zealand already. We have a GSA based
up there that's been selling a large number of passengers on our Japan services. There's over 90,000 visitors a year that travel down from Korea to
New Zealand already. And actually, if you step back to before the Asia bubble -- dot-com crisis, this market used to be around 150,000 to 180,000
visitors a year. So it's had a history of being in the top 2 of New Zealand visitor arrivals.
It's the third-largest Asian market currently, and over 50% of those 90,000 people come via one-stop options today. So there's a captive market
there for us to go into in addition to the stimulation that we expect to be able to drive.
There's really good yields on this market. There is a competitor there that's already -- that has been constraining that route for a number of years,
and we are really confident that we can go head-to-head with them, and both of us will sustainably succeed.
One of the things that was most pleasing to me was that when I down at TRENZ 2 weeks ago and just walking the floors, the number of people
that came up to me from the industry and said they were just absolutely overjoyed that we've gone back into Korea. And they said that they've
been up investing obviously in their sales teams and their sales presence in that market, they were really confident that there was much more
demand to be built out of that market, and they were also really confident then -- or they were telling me that they are actually planning on investing
more into that market this year to help make sure our services were a success and that, that market grew from where it was today. And so in
conjunction with Tourism New Zealand and the tourism industry, we're really confident that, that market will go very, very well for us and continue
to build.
I think this slide is very straightforward in terms of in relation to the benefits that the neos give to us in the coming year and years to come. A321,
27% more seats, small marginal cost increase on the plane, obviously lowers our CASK, lowers our cost per seat and as importantly, lowers our
carbon footprint. A321, considerably lower cost per seat and cost per trip -- sorry, the A320neo. And so we will see the full benefits of this coming
through in FY '20. We only saw a part-year benefit come through because obviously they were delayed during FY '19 and the rollouts come through,
and so we'll get a full year benefit of this that will come through with another delivery to come.
Cam will talk a little bit more to our domestic network and revenue management philosophy in his presentation. But I did want to touch on the
domestic network and the changes we've made there because I'm sure that stood out to you in Christopher's graph. We've seen really good
stimulation from the low fares that we put out there 3 or 4 months ago. We've seen good demand, but we've also balancing this with a slowing
inbound tourism market, and so that has led to us trimming domestic capacity.
We've made some targeted changes to our network, and we've actually taken out flights which were at the lower end of the profitability spectrum.
And we expect that, that will drive increased RASK across our network and particularly our domestic network. We've had success with this in the
last 12 months, and we've been using this in the PI and some long-haul routes. A good example, which Christopher has already alluded to, is in
Honolulu, where we've trimmed some capacity over the last 12 months. We've pulled back our growth ambitions for future years, and we're driving
better RASK results out of that market. So a good example where we've given this -- or used this tool to effect, and we believe that this will be a
really good tool for us to continue to match our RASK with our CASK expectations for FY '20.
Airline structure, as I mentioned, has helped underpin our long-haul growth, and I might be biased because I look after alliances, but I can certainly
say they are in great shape at the moment. The Singapore relationship is one that we continue to grow. And as I've touched on a couple of times,
we're launching the Christchurch, Singapore service in November. We have the third Auckland, Singapore service, which we're sharing, which is
pretty much unheard of in JV relationships around the world. So Singapore flew the Northern Winter season. That went really well. We're flying the
Northern Summer season, and we couldn't be happier with how bookings are going. So a really strong focus in that alliance on growth, and we're
landing that growth really successfully.
And then aligned with that with our United partnership, we obviously launched Chicago last year. We took some very minimal cuts to other
destinations in America to enable that to happen, and that's obviously gone successfully for us with the partnership as well. So that whole market
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strength of 2 carriers at either end helping support JV services has worked really well and, hence, why we feel confident in adding capacity to that
service later this year.
I want to touch on a couple of our code share partners that are represented up there, and the first being Air Canada. So as I mentioned, they're
coming to New Zealand later this year in November in a 3-per-week service just seasonally. We've had some really positive joint venture discussions
with them, and they're progressing well. We certainly believe that there's good customer benefits that will materialize if we can enter a joint venture
relationship with them. We obviously have to convince the regulators of that, which we'll be attempting to do later this year.
And then the other one, which -- since we caught up, which might have surprised a few of you hopefully, it's not often you get in a surprise in the
industry, but I think we managed to get that one through, was the Qantas partnership. And we had an exec-to-exec catch-up a few weeks ago.
That relationship is working very well. We're extremely happy with the customer side of things in terms of the way that their customer journey is
linked between Qantas and Air New Zealand, and we're looking at ways in noncompetitive areas that don't require regulatory approval that we
can continue to build synergies between those companies. And so an example of this is in the sustainability field. We're looking at biofuel areas
we can work together. We're looking through plastic and waste initiatives, et cetera, that the 2 companies can work together and either further
the agenda for the industry or actually bring better benefits to bear for both companies and the environment.
This time last year, we had just announced pulling out of the Virgin Australia alliance, and I think what we would say, without a doubt, is that we're
very happy with the way that, that has played out. It has played out the way we expected. Post the original flurry of capacity that was announced
when we pulled out of that alliance, we've actually seen very rational behavior from all competitors. As I touched on, there's been some recent
changes from Virgin to their structure. We've seen our market share and our capacity share grow through that alliance. And when we look at publicly
available data, we see that both Qantas and ourselves have very similar load factors to what we've had last year from the November to February
period, which is available. What we have seen is that Virgin's struggling in terms of -- so their February performance was a 66% load factor on the
Tasman.
And so we -- it didn't come as too much as a surprise to us again that they made those changes to Auckland and Christchurch. They have announced
that they are undertaking a network review, and we would expect that there would be some potential Tasman schedule changes that are likely to
come out of whatever announcements come from there. But there will be a bit of a wait-and-see for us.
So just to wrap up and in summary. What you can expect from us over the next 3 years is market -- or capacity growth in that range of 3% to 5%,
weighted slightly higher to the front end and dropping down closer to the 3% for FY '21 and '22. We will focus on these 3 principles of network
management, which -- that we're going to launch new markets to stimulate growth and we'll land the markets that we've announced in FY '20.
We'll continue to upgauge our aircraft obviously where we can to drive better CASK benefits and make sure that, that delivers a bit of a margin
return for us. We will be looking to maintain or constrain routes to make sure that RASK is increasing in line with some of the CASK increases we've
seen.
But overall I think, as I said previously, the one thing that you can take from this today is that we'll continue to be very nimble and flexible in our
approach to the network, and we will respond to conditions as they play out and as they have done over the last 12 months. Thank you.
I'd like to invite Cam Wallace, Chief Revenue Officer, to the stage.
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Thanks, Nick. Okay. I'm third cap off the ranks, so that's always a bit challenging. A gap after me. Well done, Nick, thank you.
Now following on from Nick's presentation, I hope you have observed how well the network is configured for the next 12 months to give my team,
the revenue team, the best possible opportunity to deploy the tactics to get the maximum profitable revenue growth. And as you'd expect, we
have tremendous collaboration and communication between the networks team and the revenue team.
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So what I want to talk to you about today is some of the strategies and some of the tactics and some of the tools that we use to maintain our
market-leading position. And I want to talk to you about the future and some of the potential new opportunities for us to drive even greater revenue
performance. And I want to dig deeper into our domestic business, which is a source of huge value for us.
So firstly, our domestic business. Nick talked a bit about this. 82% is a great number, it's a really, really compelling and commanding number. But
actually the numbers that we are more focused on is our share of the revenue pool. Now share of the revenue pool is close to 90% in New Zealand,
and then even greater important to us is the share of the profit pool. And Air New Zealand's share of the industry profit pool in domestic New
Zealand is 100%. So that's a very, very compelling number and it's something that we are very, very proud of.
Now as we scan the world and look at other network carriers in Europe, in the U.S.A. and in Australasia and even in Asia, we can't find another airline
that has 90% revenue share. So it's a huge source of competitive advantage for us and it underpins our business, the domestic market. Quite clearly,
we have considerable resources deployed in this market, so it's incredibly important that we convert and extract the revenue premium from all of
our customers.
Now I'm going to dig a lot deeper into the domestic market. And the way we look at the domestic market is in 3 segments. Firstly, the domestic
business market, and I'll talk about that a little bit later. But we spend a lot of time, effort and resources in maintaining our market-leading position
there. Second is inbound tourism. And to give you some sense of scale, half of the tourists that come to New Zealand end up connecting on to an
Air New Zealand plane. But doesn't matter if it's a Star Alliance or JV partner, it can be American Airlines or China Southern, we still connect them
to Invercargill in the future or Dunedin or Queenstown.
Our domestic tourism is another big part of what we call local traffic. And local traffic is the likes of yourselves traveling from Auckland to Dunedin
or Auckland to Queenstown. It's New Zealanders traveling for visiting friends and relatives or for events or for tourism activities. That's a big part
of what we do at the moment.
So if you look at the relative growth of all those sectors, business travel still growing at about 6.5%, so pretty robust. And then inbound tourism
and domestic tourism growing just over 4%. And obviously we've seen a bit of a slowdown in the last 3 or 4 months in those 2 segments, and that's
why we reorganized the domestic fee structure to restimulate that elastic travel at the bottom end. And that's been really, really successful for us.
So I haven't spent much time talking to you -- or Leila doesn't really let me talk to you. But talking to you about domestic business traffic. This is
about half of our market, so the market is about $1.5 billion, and half -- around half of it's business. And the way we think about business travel is
we have 3 sub-segments. So obviously, SMEs in the New Zealand context make up about 90% of businesses. And for us, we have about 87% share
of the SME business in New Zealand. And we facilitate SMEs through 2 products. One is Airpoints for Business and one is Above Beyond and what
those are is business-linked Airpoints schemes so we can reinvest in products and services for our customers. And that's a really, really successful
way to manage that part of the business. We also have account managers, phone account managers, who facilitate the relationship.
In our corporate segment, this is about 250 customers who spend over $150,000 a year on corporate travel up to $12 million, so between $150,000
up to $12 million, and those are facilitated by dedicated account managers. So we have people who tailor a solution for an individual corporate
account. There will be discounts, there will be soft benefits like koru memberships. There will be market share targets, there will be revenue targets.
So we spend an awful lot of time, money and effort tailoring a solution to an individual corporate customer, and the length and term of those
contracts are anything up to 5 years. So we try and establish a long-term partnership with corporate New Zealand, the big end of town, right up
to a very, very, very small number of the CEOs of the largest-spending organizations get a personal invitation from Christopher to join Elite Priority
One.
Our third segment is government, and government is facilitated through MBIE in what's called our all of government contract. That's a big part of
what we do. It's a very profitable part of our business. And whilst the AoG is an important contract, the overarching deal, the most important part
of that relationship is what we call service supplements. So our government team based in Wellington have service supplements for 50 of the
largest-spending government organizations. That will be government departments like education, like MBIE themselves, like economic development;
but importantly, organizations like defense and New Zealand police.
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These organizations have unique requirements that only Air New Zealand can deliver them. So whether it's a special tactics unit, whether it's the
dogs, whether it's, say, the dive squad needing to get to events and issues around the country, we have a number of contracts right across the
government segment which means our moving average market share as part of government New Zealand and government expenditure is 97%.
We also facilitate and offer booking channels for all these different segments of the business travel services market. So for the SME market, they
can book online, on Grabaseat or via a travel agent, same for the corporate market. But in the corporate market and in the government market, we
also participate in the travel services market by owning a company called Tandem Travel. Tandem Travel is a wholly owned subsidiary of Air New
Zealand; it represents 21% of the travel distribution services market. So we carry the customers onboard, we service them in the lounges, but we
also book their travel. So that acts as another -- as what Christopher would say, another armor plate around our business travel.
And we've spent a lot of time, a lot of effort and a lot of focus, because we're in the middle of it, looking at the way Virgin attempted to integrate
themselves up that hierarchy of value in the Australian domestic market. Spent a lot of time on that analyzing what Qantas did and what Virgin
did. So we're absolutely fixated on ensuring that no one moves up the value chain in New Zealand.
If I pivot now a bit to our international market, and Nick talked about market development offshore. And Air New Zealand is a really unique carrier
in the global scenes. One is we're small and two is we carry a disproportionate amount of inbound leisure tourists. So when we open up a new
market, there's a couple of things which are different to an organization like United or American. One is we do a small amount of new market entry,
so usually 1 a year. Secondly, we don't have a mass amount of business or corporate traffic. So when United started a new market, a lot of their
traffic will come from existing large corporates. We don't have a lot of -- or hardly any multinational organizations based in New Zealand, so we
don't have a lot of corporate traffic.
So what we need to do is participate up the funnel. So we participate with Tourism New Zealand and our alliance partners at the dreaming phase.
So the first thing we do is stimulate the demand, not for Air New Zealand, but for New Zealand as a country because we're competing with Canada
and with Europe. So we try and bring to life the proposition of New Zealand, then we try to convert our customers to travel on Air New Zealand.
So we're using our alliance partners, we use regional tourism organizations but obviously we work in a really collaborative way with Tourism New
Zealand. That's been a deeply successful thing for us because we now have, when we go to Korea, we had it when we went to Houston and we
certainly had it when we went to Chicago, our transferable model. So the model was set in place and we just deploy it.
So this is an example, a case study of Chicago. So few of you might have lived in Chicago, but there's not a great awareness of Air New Zealand or
New Zealand in Chicago. So we ran a series of events. We drilled into the data which airlines partner United gave us in terms of the frequent flyers
and what we call the active considerers, people who have Googled New Zealand or had been on Facebook and were researching New Zealand.
What they call in Tourism New Zealand active considerers: Who has the propensity or need or will to travel to New Zealand? We had trade events
with our travel agency partners, we had consumer events with United.
So we spent a tremendous amount of energy and effort making sure we built to life the proposition of New Zealand. And then we started up our
services in Chicago, they have been exceptionally successful. And in fact, when we did the analysis in terms of where the traffic would come from,
we thought it would be about 35% from the local Chicago area, it's actually up to 70%. And that's a by-product of really great stimulation of demand.
So like most organizations, we're spending a lot of effort, a lot of time on our market segmentation. And the market segmentation for my part of
the business is really fixated on doing 2 things; one is stimulating demand and the other really important thing is selling the right-priced seats to
the right passengers. So over time, we want to make sure that we're targeting the right customers, and if you look at on the top right, the way-of-lifers.
Those individuals are a small percentage of our customers but they present a large percentage of our EBIT because they participate on the ground
buying Air New Zealand products and services, participating in our Airpoints scheme, but also flying in premium cabins. So we're dealing with
them in a very, very different way.
And you'll see in the future, you'll get less communication from Air New Zealand because it will be more targeted, and this is our first step towards
what we call hyper-personalization. We've been trialing it for the last 6 months, and it's working. We are communicating in a much more strategic
way.
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
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So I want to talk about products and how we see the market. So the Tasman is an incredibly important market for Air New Zealand. Nick talks about
the relative performance of participants on the Tasman, about 21% of our seats from the Tasman. And we've had a high-profile event today with
seeing the new aircraft. We will talk about Hangar 22 and the new seats. But in the last decade, one of the best -- or in my belief, the best product
innovation in our business has been Seats to Suit. Because Seats to Suit has been transformational in terms of making sure that Tasman is secure
and is profitable. And if you look at our market share on the Tasman post Seats to Suit, it's gone up. If you look at the percentage of customers who
are buying the seat and seat and bag product, it's 44%. So customers are telling us through their purchasing habits that they want a hybrid product.
Now if I give you some reference points, the Trans-Tasman about 2 to 4 hours in terms of the stage length, the journey length. That is a market ripe
for low-cost carriers. In the U.S.A., that would be about 30% of a journey of that length with your low-cost carrier. In Europe, it would be about 50%
of the seats on a journey between 2 or 3 hours. On the Trans-Tasman, because of a high taxation as well as our product, only 10% of the seats are
captured by low-cost carriers, and that's because Seats to Suit. So we've -- since we launched Seats to Suit, Jetstar have not increased their capacity.
It hasn't gone up at all. So the market dynamics are different, but we believe that, that product has been quite transformational for our business.
So we talk about disaggregation of our product in economy class. And we say, "Okay, what kind of innovation could we, should we bring to our
long-haul economy product?" Because at the moment, other than Skycouch, economy is the same product.
And we looked at it through the lens firstly of, there was a growing trend emerging a couple of years ago about long-haul, low-cost carriers. And
fundamentally for us, we think there's a low probability or likelihood of any low-cost carrier coming long haul -- coming to New Zealand on long-haul
routes. And that's because we're on a unity ticket with United Airlines in this. Nick and I believe the business model for long-haul, low-cost is flawed.
It doesn't work. The aircraft are really, really expensive to buy, as we've seen this morning. Widebody is a very expensive to purchase. And without
the premium seats to offset the yield, the business model is flawed, it doesn't work.
So our view is we don't actually face an imminent threat from ultra low haul -- long-haul, low-cost carriers. But what we wanted to do was look at
our model and say could we make it more flexible? Could we take into advantage this growing premium desire for customers? So we will be
launching a product and we will start selling it in the first quarter of next year. I don't have a name for the product, but I've named it economy plus
or economy comfort or economy something else. Anyway, it will be in the front of our economy cabin. You will have more personal space and
there will be soft products. And we believe there's going to be a significant market for that. We think it's the right way to go in terms of how it fits
into our brand. So we're very excited about that product innovation we'll bring to the market next year.
And I'll talk to you about premium traffic. And we are seeing this move towards premium. The move is happening, I suppose, because people are
living longer through health benefits, they've got more discretionary income and they're traveling longer and travel experiences are becoming
more and more part of everyday life. So that's shaping our thinking as we look at the layout of passenger amenities, for one, our existing planes,
but obviously in the future for the 787-10, the new planes as well.
And when we think about hard product, we think about 2 things. Firstly is making some incremental changes to our business seat at the moment.
So we're making some small changes to enable our customers to see they have more personal space and more storage. And then in the medium
to long term, what we're seeing is this integration between digital and the physical environment. So we believe we have the best sleep in the sky
and what we want to do is to retain the best sleep in the sky but then focus on personalization, creativity, making sure as you approach the seat,
your phone triggers a digital enactment and making sure all your preferences from your Airpoints actually connect to your seat. So there's a lot of
work going on at Hangar 22 to transform the business class experience of the future.
Okay. I want to talk a little bit about a real source of competitive advantage that exists. Now I talked a little bit about our domestic business, and
this is our loyalty business. So as Christopher and I travel around a bit, quite a few people, as he said, talk about how does Air New Zealand succeed.
How does it thrive? Why you win business? And they ask us, what is the recipe, or what is the ingredient for our ongoing commercial success.
And if you're looking for a special sauce that exists at Air New Zealand, that is it. It's our Airpoints loyalty scheme. This is a fantastic scheme, an
unbelievable product in terms of driving extraordinary attachment to the brand and our products and services. A lot of big decisions are made at
Air New Zealand which have long-lasting impacts. Once again, the one we've made today is a big impact that Jeff and the team have made.
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But 15 years ago, a small team of people talked to literally thousands of customers about our loyalty program, in those days, our Airpoints program.
And they talked about what was good about it and what was bad about it. And ultimately, what Jeff and that small team of individuals went for is
they each chose transparency over confusion and they went for Airpoints Dollars.
And Airpoints Dollars is the source of competitive advantage of this loyalty program. It is driving tremendous attachment. We've got 3.2 members,
90% of all the Airpoints Dollars are actually used on the flight's purchases. And it is driving great engagement. Our customers love the product.
And for us, it's about the 4 Fs. It's about fuel, it's about financial services, it's about food. But some of you today, some of you today, would have
left your house and that house would have been purchased or sold by a real estate organization where you could accrue Airpoints Dollars. You
would have jumped in a car which could have been purchased from a car dealer and accrued Airpoints Dollars. You would have stopped at Z Energy
and filled up that car and accrued Airpoints Dollars. You would have then got to work, done a couple of hours of work, gone to the optometrist,
accrued Airpoints Dollars. Had a couple more hours of work, flexible working at Air New Zealand, we're big into it. 2 hours at work and then gone
to the dentist, accrued points on your fillings. Gone home, stopped at a New World, accrued Airpoints Dollars. And when you got home, booked
a trip away with your partner using either Grabaseat or airnewzealand.co.nz, and you would have been able to gain any seat on any flight at any
time. And that is a really compelling offer, of which our customers love.
So we have been issuing more and more Airpoints Dollars in the marketplace. We have market-leading partners with us in terms of food, in terms
of fuel and financial services and we believe there's tremendous potential for growth in this project -- program.
So lastly, what I'll say about Airpoints is it's also, as you'd expect, driving our premium cabins as well. So as people are moving up the hierarchy
from silver to gold to gold elite, as you expect, they're actually flowing into the premier cabins of our aircraft. So all components of this proposition
really excite us, and it means that we've got some great opportunities in the future.
This is a less high-profile part of our business but really super important. Direct ancillary flows straight to our bottom line. We do over $100 million
of direct ancillary. And obviously the cost to produce that product is very, very low. So fare families, our seat select, more and more airlines we
focusing on ancillary revenue and you can see the growth there. But we think there's further growth to come. Some of that will be enable direct
with our websites, but in the future, there's an IATA-based digital program rolling out called new distribution technology. And that would give us
the capability to sell more and more ancillary products, not only through our own websites and our own digital channels, but also through the
third-party travel agents.
And this is my last slide, and it's one I get quite excited about, actually. Now this is our revenue management. So revenue management is the engine
that supports the airline. It's the way we price the 500 flights we have every single day.
And revenue management has been facilitated historically through algorithms and software, global programs which look at historic demand
patents and then forecast forward what we believe the market will do. Now in the future, this is ripe for a disruption, and we've been working with
a company called Fusion RM based in the states. And they will take all that historic data, but they will also look at polling data from the GDSs which
travel agencies use, our websites and all other websites to actually give us a much greater understanding of future demand. So there's some really,
really exciting pieces of work which are going to drive our thinking in terms of revenue management and how we can extract better returns using
the capital and the assets that we have.
And this will mean real dynamic pricing. So instead of our fares being layered and laddered using letters in the alphabet, we will have a different
price point for every different customer, for our Airpoints members for our golds, for our gold elites. So that's a tremendous opportunity for us and
something that we will start a proof of concept on a couple of city pairs by the end of this calendar year.
So hopefully, that's given you a bit of clarity on some of the structural advantages that Air New Zealand has, particularly in our home market, and
also given you a bit of an opportunity to understand what opportunities exist for us to enhance our revenue performance in the medium to long
term and how confident we are about the future, the digital tools and the competitive advantages we have in the New Zealand market.
Okay. Questions, is it? Goes downstage.
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Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Thank you so much, Cam. If I can invite Christopher and Nick to join Cam on the stage. Now is the time for the first set of Q&A from you all. So just
as a reminder, because we are webcasting live, if you could please wait for a microphone to come to you. And before you ask your question, if you
could please state your name and organization before you ask the question. Thank you. And of course, the first question goes to Andy Bowley.
QUESTIONS AND ANSWERS
Andrew James Bowley - Forsyth Barr Group Ltd., Research Division - Head of Research
The first question here is for you, Cam.
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Oh, great.
Andrew James Bowley - Forsyth Barr Group Ltd., Research Division - Head of Research
You mentioned that you are absolutely fixated that nobody moves up the value chain in New Zealand. Can you kind of talk around how you see
the broader competitive backdrop and the potential for anyone to do so?
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Yes. It's really a great question. I mean, if you look at our domestic competitor, their capacity has been rolling back over the last 12 months, so they
have what we would refer to as lazy aircraft. So their utilization is down. And actually, they attempted to move up the value chain by configuring
their network would start aircraft around Wellington. That was an attempt to get into the corporate and government market which is based in
Wellington. They've pulled back from that strategy, so they reduced the capacity of their network and their frequency, and most of the aircraft now
have start operations from Auckland, which is more the leisure travel. And they travel or fly at times of the day which are more relevant to leisure
passengers rather than business.
Obviously for us, koru is a huge level of investment. We've got a great attachment to that program as well, over 60,000 people in that program. So
we keep a really, really close eye on the operating performance, what they're doing with their schedule in the network and what they're doing
around the marketplace. But our fixation is always to have long-term agreements with our corporate and government customers and to make sure
we're not leaking passengers to our competitors. So through -- whether it's SME, whether it's corporate, whether it's government, we are all over
it. Christopher is involved in it, we're all involved in it. And I -- what I was trying to get across is we have our large team who are working across all
the different segments to ensure that we have it solid.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Any other questions? Hold on one second. Marcus?
Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
Marcus Curley from UBS. I got 2 questions, one's sort of long. With the aircraft decision today, just wondered if you can give a little more color on
where you thought you got a good deal on the price, just under $2 billion, I think if added this up right, for 8 aircraft, given the issues that Boeing
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have had. Yes. Secondly, can you give us a little bit of feel in terms of where you can take those aircraft, to what countries in the future? And then
finally, what sort of growth -- network growth does it provide you from a long-haul perspective, stretching out that sort of 2023 to 2026 time
horizon?
Christopher Mark Luxon - Air New Zealand Limited - CEO
Marcus, why don't I answer the first 2 and then I'll get Nick to answer the last one. From our perspective, we're relatively a small airline globally but
I think one of our real sources of competitive advantage over the last 10, 15 years, certainly with Jeff and Rob before him, is I think we've negotiated
at really exceptional deals. And I think our strong financial position, the strong investment-grade rating, just our position in the market and the
way that a lot of these partners want to work with us has been really important.
The last 2 years has been all about creating maximum contestability between Airbus, Rolls, GE and Boeing. And for us making sure that in that
process, we can work our way through to get a good deal. So personally, from what we do around benchmarking and getting a sense of what we
think others are paying for it, we think we've done exceptionally well in getting this deal signed up and across the line. I do want to give a big
thanks to Baden, as I've said publicly, because he and his team, we've got some real rocket scientists on that because it's a bit -- you have to digest
a lot of information from all suppliers and actually then determine what we want to do with the aircraft in a mission sense and an operating economic
sense and really form our own views around that.
And so, one, as I think we're buying well; two, it gives us tremendous flexibility obviously to get into Asia. But we also believe that we can fly the
missions that we can fly with the 777-200 with that aircraft as well. And so that therefore enables us to get into the West Coast as well.
As to Nick, what it means for long-haul capacity growth and how we're thinking about that.
Nick Judd - Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
Yes. So the majority of the order, obviously straight replacements for the 777-200. So it's an 8-for-8 basis. But we do have flexibility in that order to
be able to bring more aircraft in. And so that is the great thing about that order, is not only does it give us flexibility in the number of aircraft that
we can buy, it gives us flexibility in the type as well. So we can buy -9s or -10s. Obviously, the bulk of the order, as we detailed today, will be -10s
which we're mainly phasing into Asia. Good aircraft, perfectly placed for slot-constrained airports in Asia. But we have enormous flexibility with
that. So if the world goes through the same sort of growth period like it has over the last 6 years, we're incredibly well placed actually to get new
orders, buy a new aircraft and actually build out our long-haul network off that basis.
So if you look back I guess 10 years ago and what our long-haul network looks like now, it's a big call to say what it will look like in 10 years' time.
And so that's why we need that flexibility in that order because we know things can change quite dramatically. And we're really well set up now
with a really good aircraft type that's the most fuel-efficient aircraft type in its range, that opens up ultra long-haul destinations if it's a -9 or mid-haul
-- mid-to long-haul destinations if it's -10 in slot-constrained airports. So perfect order for that.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Jeff will get into some preliminary CapEx projections related to the program -- the new program when he comes up on the stage.
Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
Does that mean you've sort of moved away from South America and more focused on Asia when it comes to new destinations, long haul?
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
Client Id: 77
Nick Judd - Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
No. So we continue to look at the Pacific Rim in terms of -- and so we've made no secret that in the longer-term horizon, we would love to have
Sao Paulo on the map. But there is some challenges getting there, into a market that has both technical challenges in terms of the runway and
how it works, and it's obviously got some of the same economic challenges that we see at varying times from Argentina. So there's no commitment
in terms of going towards South America, but we haven't ruled it out as a destination. And we will continue. My team and the network strategy
team have anywhere from 8 to 10 destinations that they're constantly monitoring. Some will never launch, some will launch in the next few years
and some will launch in 7 or 8 years time. But we're constantly monitoring them and they are collected through South America, North America and
Asia.
Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
Second question. When you look at...
Nick Judd - Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
Fourth question, mate. But that's fine.
Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
When you look at the capacity withdrawals from your competitors, how does that feature into next year's sort of view around growing profit? Is
there a reasonable component to think that long haul or international yields are going to start heating up again for yourselves?
Nick Judd - Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
We certainly hope so. Andy (sic) [Marcus], look, I think that there's been some speculation in the Australian media over the last week to that effect
in terms of lev. It's not just a New Zealand thing we're seeing. It is an Australasian change. And actually, there's a global change going on. And so
you saw a high watermark probably in terms of around 2017, when you look through industry data, about the level of growth that was coming in.
With increased fuel prices, with the U.S. dollar where you see it now, it's not surprising that you're seeing the competitive tide come back. We've
had -- all as an airline industry, we've had a significant increase in CASK, and so all airlines will be trying to increase RASK to offset that. And they
haven't done it through -- so much for FY '19, and so it will continue to be a focus for the industry through FY '20, I'm sure.
Christopher Mark Luxon - Air New Zealand Limited - CEO
I think what you got -- what do you got a sense from Nick around was that we are seeing much more rational competition. So we're seeing, if you
think about the different theaters of war that we're engaged in, whether it be in Asia, China, Middle East, Australasia, the Americas, we're seeing
increasingly rational behavior, and that's a good thing for the industry, it's a good thing for Air New Zealand obviously.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
I'd like to move to a question that we received online. This one, I'm going to...
Christopher Mark Luxon - Air New Zealand Limited - CEO
Marcus says we've got a sixth question.
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
Client Id: 77
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Well, he can -- we can absolutely come back to Marcus. We'd like everyone to have all their questions answered, Christopher.
So for Cam. I'm going to direct this to you, Cam. What's does moving from GDS to new distribution system mean? And when is this likely to be
implemented? I think it's a really fair question for those of you that are not necessarily living and breathing airlines every day.
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Yes. So the GDSs are what -- there's 3 large GDSs generally around...
Christopher Mark Luxon - Air New Zealand Limited - CEO
Global distribution...
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Global distribution systems. And they drive the engine that travel agencies use, whether it's an online travel agency, a travel management company
or just a retail travel agent.
And they have set prices for airlines. So we put our inventory into a GDS and then they distribute it to literally tens of thousands of travel agents.
And that's been quite frustrating in terms of being able to get the right price of GDSs over time but also to get the quality of product distributed.
Because actually, if you walk into a travel agency in San Francisco and they're putting an availability display to Air New Zealand, you don't see what
you see on the Air New Zealand website. You see a whole bunch of leaders and a whole bunch of numbers and they actually extract out a price.
And what more airlines are wanting to do is actually show ancillary products like Skycouch or economy comfort or economy plus or our Business
Premier product. So in the future, we'll be able to direct connect between ourselves and the travel agent through API links which will mean they
will get rich content.
Now some of that will be done through GDSs and some of that will be done direct. But ultimately in the next 18 months to 24 months, you'll see
a world where Air New Zealand will negotiate what we call override payments to travel agency groups, we'll have some commissions in the
marketplace, we'll have some net fares in the marketplace. But the biggest single thing that will change is we'll be our negotiating on content. So
we have some content that we have via our APIs via travel agents, some content that goes to our travel agency partners through GDS and some
content that we have directly on our own websites. And this will be the single-biggest structural change in travel distribution services market in
decades.
It's taking some time because there's a level of resistance from GDSs because as you'd expect, there's been this tripartite relationship where airlines
have paid GDSs for access, GDSs have been paid travel agencies, and so have airlines. So it'll take a while to structurally break that down but this
is a transformation which is happening. And we are participating, at one, through differential pricing; but two, through creating API links with
ultimately the end users which are, for us, an offshore markets travel agent. So a lot of work to go, but quite an exciting opportunity to increase
our ancillary products and reduce our costs.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
One more question from online. And if any of you have any questions that you'd like to give in person, please think about them now before we
move to a break.
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
Client Id: 77
Once you make a decision to leave a route, how quickly can you reallocate resources?
I'm going to give that to Nick, but I think Christopher and Cam, if you want to jump in, because it is an executive decision overarching, so please
feel free.
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Well, certainly in the case of Vietnam, it was immediately because we had a small 787 issue that meant we were looking for as many planes as we
could get. But actually, it is pretty much immediately because we work on 2 seasons, Northern Summer and Northern Winter. And so you don't
normally pull out of a route in the middle of a season. Depending on how it operates, when we fly seasonal routes, they're normally there for a
reason because they're profitable seasonally. And so normally, you tie it into the start of a Northern Summer, Northern Winter changeover or vice
versa. And so that means not only have you been tracking the performance of that route, but you're working out -- worked out what your options
are so that when you come out with the announcement that you're pulling it and you make that decision, then you pretty much have it lined up
for the next season coming off the back of it, that you'll reallocate that resource.
In the industry, we get a bit of time because you don't -- and while it's very, very rare, anyway, that you announce that you're coming out and 1
month later you're out of that route because of the lead time for sales and everything else that goes on. So normally, we announce up to 6 months
before we're coming out of a route that it's going to happen, which gives us the ability to reallocate that asset.
Christopher Mark Luxon - Air New Zealand Limited - CEO
I'd say that's one of the things I think we've got really good at over the last 7 years. I mean, I've seen airlines sit there with market conditions that
have changed in Japan, whether it was someone watching the yen fall and rising fuel prices and nobody changed their configuration to Japan at
all. And you'll hear of cumulated losses for years, decades where people have stayed in a market, just carrying on doing the same thing. And we
are just going to be ruthless commercial animals and have been because we'll take those aircraft and that mobile capital asset and we're going to
deploy it to where we can make the most amount of money.
And so for us as Nick said, we do a quarterly review. He and his team provoke us; he and Kate would sort of challenge us around that network and
then we can sit there as an executive team representing all the different functions across the business and we all hold hands and we say, "Right,
let's go do it." And we'll take that aircraft and point it to somewhere we can make more money.
And that would be the thing I think Nick was alluding to a little bit as we go through this part of the next 3 years, is that you should expect to see
us try new things. And if it's not working, we're going to bug out at a moment's notice and ho do something else, and likewise. So just expect there
will be a little bit more trying to find new sources of growth and us moving that network around in order to do that as we go forward.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
One question from the floor. Wade?
Wade Gardiner - Craigs Investment Partners Limited, Research Division - Senior Research Analyst
Yes. Just elaborate on Andy's question. Given you've got 100% of the domestic profitability, what do you...
Christopher Mark Luxon - Air New Zealand Limited - CEO
Slightly more than that.
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
Client Id: 77
Wade Gardiner - Craigs Investment Partners Limited, Research Division - Senior Research Analyst
Slightly more than that. Well, what's your sense of their sort of desire to stay in this market, then, given -- particularly given your deal with Qantas?
Christopher Mark Luxon - Air New Zealand Limited - CEO
I mean, Cam, you can talk about it, too. But I mean, my sense is that they are committed to this market. I think it plays an important role for their
brand presence in this market. You've got to remember in the context of their total result, I suspect it's something that they can live with and are
living with. But I think it feeds into the Trans-Tasman proposition, the Australasian proposition in general. So I think our working assumption is that
they will be in the market in some form, albeit with capacity adjustments. But we don't get a sense that there's a desire to leave the market. Would
that be our view? I don't know. What would you say, Cam?
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Yes. I mean, I think because it's an adjacent market, given their scale and competitiveness with Virgin's boosting on the Tasman, I think they perceive
it as a good part of their overall value proposition. And if you look at the markets they are participating in, those are the larger markets. So they're
probably -- if you look at their network, they're configured around those markets where there's a level of density and traffic that they can get an
amount of business. So we haven't seen anything that would lead us to believe they want to double down on the business, but the reality is we
haven't seen anything conversely say they're getting out of it either.
Nick Judd - Air New Zealand Limited - Chief Strategy, Networks & Alliances Officer
And sorry, the other point I'd add to that is that they obviously have a network mentality, as you'd expect, in regards to this. So when we talk about
domestic, we talk about it in isolation. It's incredibly important for us, but they will see network value in having Jetstar and the Qantas brand here
and what that feeds into their long-haul network onto Asia and to other places as well. So different -- not different measures, but just in terms of
different ways of looking at it, and when it's our home market, we need to make sure that domestic stands on its own 2 legs. I've got a slightly
different metric and measurement for what success potentially looks like.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Any other questions? Anthony.
Anthony Moulder - CLSA Limited, Research Division - Analyst
Anthony Moulder from CLSA. How's the customer changing? Because we've seen adjustments to your capacity, Virgin, I think last week or the week
before. Is the customer becoming harder to read as far as their desire to travel?
Christopher Mark Luxon - Air New Zealand Limited - CEO
No, I don't think so. I mean, I think we're seeing still tremendous consumption of air travel all around the world. It's been a great democratizer of
-- we've had 800 million people reach the middle class in the last 10 years. I mean, it's been a phenomenal thing, and I think we still see that. Certainly
in our case, we see a more discerning customer with higher expectations for sure than what we saw 7 years ago. I think there is a rising consciousness
around sustainability, which is why our drive into more fuel-efficient fleets and starting to think about how we will ultimately address the 2% to
4% of global greenhouse gas emissions. And that's a difficult thing to wrestle with, and we don't have any obvious solutions, but we are wrestling
with it. We are engaged with it. We are supportive of net 0 carbon legislation coming through and have been for a number of years. So we got to
keep working with that. But fundamentally, no, I think the customer is still this huge demand for what we're saying. What would you say?
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
Client Id: 77
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Yes, and we're -- I mean seasonality is a big part of our business, inbound, outbound. And we -- it's been great to embrace things like flexible work
not only in our business but in other business because that ultimately gives people more personal freedom and time to take more trips. So big
changes for us over the last decade. There have been things like 4 terms in terms of the school years, which gives us more opportunity. If you have
a 4-day working week, some people taking more trips more often.
I think there is a move to our people wanting to purchase segmented products. So they're actually asking us for disaggregated product, which is
leading us to the disaggregation of our long-haul economy products. So we are seeing people pick and choose more often and they're becoming
more sophisticated in terms of Airpoints and loyalty, understanding what unlocks the value, where they should purchase, what credit cards they
should use on their everyday travel to get either Status Points and/or enough dollars to go somewhere. So a lot of our Airpoints members, as an
example, are accruing a lot of Airpoints but then buying the lowest possible fare as well. Which we're happy with because that feeds this kind of
unbelievable ecosystem.
So yes, we're just seeing customers ultimately getting a lot smarter about their purchase happens -- habits, where they use travel agents vs. where
they use our online tool. So yes, it's becoming more and more sophisticated in terms of purchasing habits.
Anthony Moulder - CLSA Limited, Research Division - Analyst
[And we get a lot of you] you're capturing a lot of that data through Airpoints. Is that the key distribution channel that you're getting that data set
from?
Christopher Mark Luxon - Air New Zealand Limited - CEO
35%.
Cam Wallace - Air New Zealand Limited - Chief Revenue Officer
Yes, a combination of our coalition partners. So the coalition of the willing. And as well as our credit card partners, our retail partners as well as our
core Airpoints. So we have -- own a data analytics company. And more and more, we are diving deeper into that data which feeds our customer
segmentation, which then feeds the way we hyper-personalize and market to people in the future. So you'll see us get more active in that space.
We probably had too much data historically, now we've seen that, yes, this is how we operationalize the data, this is how we get a bit of sales. So
we'll be communicating more frequently with a smaller number of passengers with very, very bespoke offers. So we've made giant strides in the
last 6 months because we've had the labor focused on it. So you'll see a lot of different things coming out from Air New Zealand.
Christopher Mark Luxon - Air New Zealand Limited - CEO
I think I'll just say Jennifer Sepull, who's joined our team. It's week 4 for Jennifer. Do put your hand up, Jennifer. Joined us from the states as our
Chief Digital Officer. And under Jennifer, one of her major direct report teams is the data and analytics team. And we've got a great data scientist
and it's been transformational even in the last 12 months. Because if you go back 5 years ago, we didn't actually know you as a person, as a whole
person. We knew you as a series of transactions that have taken place. And now we can actually thread you together as an individual and actually
have one view of you as a customer. And so that data, again to that point, has been a major achievement with a bunch of legacy systems underneath
supporting all of that. But it's actually the insights that we're getting out of it that actually help us on the customer revenue side. But actually more
importantly also help to simplify our operations. And so we're trying to use the data analytics piece to really get into streamlining our operations,
removing duplication, improving processes, which gets back to some of the cost challenges that we've got going forward as well. So I think that
is -- that's the way of the future. If you think 5, 10 years out from now, digitally transforming this business so that we can maximize revenue and
outcome, simplify the operations and improve the commercial outcomes, I think it's critical in terms of how we can do it.
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
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Anthony Moulder - CLSA Limited, Research Division - Analyst
Last one around fleet, the 787-10s. How do you think about those relative to an ultra-long-range aircraft, obviously that Project Sunrise, within that
sort of time frame of fuel delivery for these. But obviously not waiting for an ultra-long-range product.
Christopher Mark Luxon - Air New Zealand Limited - CEO
Yes, I think -- I mean, Jeff can talk more about that decision and reach out to him and Baden over the break. But I mean for us -- and Cam alluded
to it. It's really we feel we've made the perfect fleet decision. And now it's all about getting that configured perfectly and then it's also about
optimizing the route and network choices that we use it for.
As you think about something like New York, which we want to do, from Auckland to New York, we can do that with an existing 787-9 today. It just
has to be reconfigured. And that's where this drive to premium is really important because the weight of the fuel, the weight of the cargo, the
weight of the passengers and the sheer number of passengers that drive that weight is actually what limits our ability to make that destination or
not make that destination.
Our segmentation and our sales and marketing excellence, so then when we get to New York, as we have in Chicago and Houston and Buenos
Aires, is to unearth wealthy high-value customers. We don't just want anybody on that seat, we want a high-value customer on that seat. Because
when we bring them here, we bring 45% of the visitors in and out of the country. With our partners, we need to be able to make sure we're then
creating that value downstream for the rest of the tourism industry.
So to be honest, yes, a lot of airlines have gotten aircraft fleet decisions wrong, and that's been a real problem for 10 to 15 to 20 years. I think we've
got this decision perfect, and it's a really good one that will set us up well. The challenge now is to get the configuration right, get the premium
mix right, and have confidence that we can get the high-value customer that we want out of those longer-haul destinations. So it sort of becomes
less of an issue, we can work with the fleet that we've got currently and what we've signed up for today, I think, really well.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Great. So with that, we're going to take a 10-minute break. There's refreshments in the back. We are also really lucky today, we have quite a number
of senior leaders from Air New Zealand here, so feel free to mingle with them and chat with them. They come from all different aspects of the
organization. And we'll come back here in about 10 minutes. Thank you.
(Break)
PRESENTATION
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Okay. We're back. Thank you. I'm glad there was so much good conversation going on during the break.
Next up, we'll hear from our Chief Ground Operations Officer, Carrie Hurihanganui. But before she comes to the stage, we wouldn't be Air New
Zealand if we didn't play a short video for you.
(presentation)
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MAY 27, 2019 / 1:30AM, AIR.NZ - Air New Zealand Ltd Corporate Analyst Meeting
Client Id: 77
Carrie Hurihanganui - Air New Zealand Limited - Chief Ground Operations Officer
(foreign language) It's great to be with you this afternoon. In particular, this is the first opportunity I've had since joining in the role of Chief Ground
Operations Officer to present to you, so I thought I'd start with giving a very brief overview of my background.
So I know the cliché's overused that time flies by, but next month for me is actually 20 years with Air New Zealand, so a very apt description of that
time. And I actually joined Air New Zealand as international cabin crew in the very beginning while I was in university study. And so after spending
time in the front line, I had the opportunity to go through a number of roles across Air New Zealand and ultimately to a lead through a majority of
our operational areas across the business, including global airport operations, our international cabin crew here in Auckland and offshore, our 3
regional airline businesses and also have the opportunity to work alongside Mike Tod as part of the customer experience transformation agenda.
So operational excellence and customer excellence are ingrained in my experience, what I do and very much ingrained in Air New Zealand.
So what I want to do today is talk about that link between operational excellence and customer excellence and how that plays through to strong
unit cost performance. So as we look at this, there's 3 key elements that have historically and will continue to drive CASK improvement that fits in
the realm of efficiencies, economies of scale and productivity.
But first I want to touch on cost control. And over the past few years, we've been very focused in regards to our unit cost performance. That 5%
when you look at that, that's directly. That underlying savings goes directly to our CASK -- sorry, the underlying CASK then that goes directly to our
bottom line. And so getting and keeping those efficiencies is key for us in regards to the impact it has on our profit.
Now ways that we've achieved that over recent years has been the efficiencies that we've gained through exiting our older and smaller fleet. So if
you think back to the 767 and the Beech 1900 and replacing that with larger, more modern aircraft. And we've seen substantial improvement come
across in regards to fuel burn and cost per trip.
From scale economies. As you've seen our network grown over that period by 30% through increasing our breadth across key Pacific Rim markets,
by entering into new markets in Asia and Americas as well increasing or building the depth that we have by increasing the number of weekly
services.
And finally in productivity. What we have seen by virtue, we've leveraged the upside of that by being really vigilant in regards to our support cost
as we've seen that growth. And that continues very much on a day-to-day basis. Just recently or earlier this year, we were able to agree with our
unionized workforces in airports around making some changes to their rosters and hours of work because they have that demand within the
airports. We were finding that we were driving significant overtime. By getting that agreement -- or variation to that agreement, that meant we
had facilitated over 9,500 hours at ordinary time rather than overtime. So those are the key things that we will continue to track down and create
those opportunities.
Now looking forward, we see a good pathway in our underlying unit cost performance. Now given the slightly lower network growth in the medium
term that we've talked about, we will see a slightly flatter indicative curve to what we've seen in previous years as well as 2 headwinds that we're
currently working through.
Those headwinds, the first being labor agreements. So no surprise to many of you that, that's a heightened environment that we're currently
operating in. And we still have very strong relationships with our unionized workforce and our partners. We still believe in HPE, or high-performance
engagement. And very much, that roster and hours of work that I was just talk to about, that was off the back of an HPE project that we did together.
But we are cognizant of it, we recognize that as we go forward.
The second area is around price increases. And what we are seeing is that our suppliers are facing rising cost environments of their own. Now
whether that be through the pass-through of minimum wage, changing regulations. And we're also seeing some key changes in the areas that we
would normally sit outside our addressable spend bucket. So that sets some things like AVSEC charges, or aviation security charges, and also landing
charges. So we have an environment in the Airports Authorities Act that allow airports to price as they see fit.
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So while we're cognizant of these headwinds, we're also very confident. We know how to drive cost improvement in difficult environments. And
if I think about my time in Air New Zealand in operational leadership roles, there is a strong discipline in regards to that daily diet of ongoing cost
and annual improvements that we continue to look at.
Now historically, we have focused on incremental cost improvements. And by no means am I saying incremental cost improvements are a bad
thing; we will continue to unabashedly chase those. Every cent counts, and we know that. But we are looking to step-change by virtue of thinking
the model and how we want to operate and do better business going forward. And as Christopher mentioned earlier, we will be bringing in external
consultants to support with that as we go forward.
So there's 3 -- the 3 main components I've talked about driving CASK improvement before, which is efficiencies, economies of scale and productivity,
I just want to call out that, actually, the contribution of these aren't necessarily going to be equal or consistent from one year to another and it's
very much because they are influenced by the environment we are operating in. So you'll see that come to life as we go through this presentation.
But first, I want to talk about efficiencies. As you can imagine, every year, we have numerous projects underway within the business to drive out
inefficiencies from the business, very much what I would call bread-and-butter of operational excellence or even a ticket to the game, some might
say. But with that, we have strategic multiyear projects that my team is working on to say how do we continue to build on that momentum that
we've had to date. And so what I want to talk to you about, in particular, right now, is the work that we're doing in supply chain and in fuel
optimization.
So overall, our supply chain organization has proven that it can deliver against our performance goals and do so against high-risk exposure and
also against the back of complex global logistics. With a $1.3 billion addressable spend bucket each year, supply chain is wide and varied and
touches all facets of our operation. It is literally pens to planes in regard to what sits in that space.
Now with 4,200 suppliers, interesting enough, that's dropped down just a couple of years. We were well in excess of 6,000 suppliers, so there's
been some good simplification and consolidation over that time. But we believe there is plenty more that we need to pursue across that supply
chain going forward.
So that $1.3 billion in addressable spend that I talked about, that's significant. And I've said, supply chain has delivered well, but we are looking to
step change how we run that business by virtue of ensuring that we have end-to-end integration.
We -- look, we know that we have some silo activities across the value chain, so we're moving to a center of excellence, which we did earlier this
year, provides us to ensure that we can make more rapid decision-making and that we are getting that end-to-end integration that I am talking
about in real time. And along with it, we're looking and we've really focused in on leveraging the strategic partnerships we have with our suppliers.
We think there's opportunity for not only improved efficiencies, but also better sustainability. And interestingly enough, and Nick, I know, has these
conversations a lot, they're often positioned as mutually exclusive topics. Now our view is that's not necessarily the case, but we do need to structure
ourselves, so that we can maximize the performance in those together.
If we talk about the supply relationships, obviously, there's all sorts of good reasons that we build those strategic partnerships with our suppliers.
But in particular of interest is innovation, and the reason I say that is if we have the right relationships and the depths on it, we can pursue innovation
that provides better outcomes for our customers and it also provides the opportunity to drive efficiencies. And a piece that I'm really excited about
at the moment is we're working alongside ST Engineering Aerospace in Singapore. So they currently undertake the heavy checks on our wide-body
aircraft, and we're trialing drone technology. So as part of those heavy maintenance checks, we have a specially designed drone. It has a particular
path that's been mapped out, the circuit that it needs to follow. It has high-definition video in it and takes and sends through to the engineer who's
analyzing that in real time.
Now there's all sorts of benefits that actually that drone technology can provide us. You think about things like health and safety and that our
engineers are in a position when they have go up higher to do that. It takes care of that. But a particular interest for me is also the time saving. So
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we're looking at those inspections are being done in 1 to 2 hours as opposed to up to 6 hours depending on the aircraft type for that same inspection
under traditional means. And so really exciting space there and something we will continue to pursue.
The other element in regards to working with our suppliers and the role of supply chain obviously is to mitigate risk. Now that's not only supply
risk. It's also in terms of our sustainability goals and our positioning on key objectives that we have in that space. So if we think about waste, one
of our key goals is to reduce waste. We kicked off a project in 2017 called Project Green. And what that enabled, and some very exciting stuff that
we could reclassify, 35 in-flight products to non-biosecurity risk. And at face value, you think 35 items, wow, that's exciting. That's actually equated
since the launch of that to 20 million items that we've been able to recover and reuse. So we are now looking to roll that out across Wellington,
Christchurch and Queenstown. And we expect in the next 12 months that we'll see another 2.5 million to 3 million units that we can recover and
reuse. That equates to 57,000 kilograms being diverted away from immediate disposal and 50 ton of glass bottles being recycled. So some great
stuff in that space. So if we look at supply chain, we will be continuing to push through that end-to-end integration that I'm talking about, alongside
the opportunity to leverage more strategic relationships with our suppliers.
Efficiency. So we've been talking about efficiencies within the supply chain. As we move into a fuel perspective, clearly, a key focus for us is we
have invested in more modern and fuel-efficient fleet over the years that's clearly demonstrated results. As you can see here, as fuel efficiency, as
estimated by virtue of ASKs per barrel on jet fuel, there's been a 13% improvement over that 9-year period, which is a great result. And as we look
to continue to have the NEO continue to roll out into 2020, we will continue to see those efficiencies. Although we will see, over time, a slightly
lower rate as opposed to the period when we transitioned from the 767s to the 787s over that previous period.
But I really want to call out that, whilst we love multibillion-dollar investments in fleets, as announced this morning, there are other ways that we
will absolutely be tracking and hunting down opportunities for fuel burn optimization. And the first phase comes in regards to flight planning. So
we've initiated -- recently initiated a project to replace our flight planning tools and platform that we use, and that's very clearly in regards to
planning our flight routes with reduced fuel burn in mind. And not only are we confident that we'll get further fuel savings from that, we also think
there's upside in regards to productivity as we'll decentralize all of our flight planning across all of our fleet. That means we're taking time out of
the cockpit and, ultimately, the ability to reduce duty time.
Another area is around weight reduction, and we are constantly looking for opportunities to take weight off the aircraft by virtue of the impact it
has on fuel burn and our sustainability agenda. A couple of areas that we've looked at, obviously, as we're transitioning from paper-based manual
systems in the cockpit through to electronic versions, we will continue to see the efficiencies of that come through, but also virtually continuous
improvement mindset. Captain Dave Morgan and his team are working alongside my operations team as we look at opportunities to reduce across
the network. And in December last year, we looked at, again, another very exciting topic, potable water. But actually, you'd be amazed across
Tasman, when we looked at the amount of water we're carrying, what we needed to carry and the data we had, we had the ability to reduce that
by 25%. That goes straight to fuel burn. So we will continue to track and hunt these opportunities out.
And the final is ground power unit, if we think GPU as opposed to the APU. The aircraft has the auxiliary power unit which, in essence, keeps the
lights on when it's not plugged in. By simple SOP, change for us by virtue of saying, actually, at the soonest possible opportunity you plug in and
at the last possible opportunity you unplug has seen, over the last 12 months, 2,500 ton of fuel savings and 7,900 ton of CO2 emissions reduction.
So that's in Auckland alone. So we will continue to revise and refine those processes in Auckland, but look to also roll it out to Australian ports,
starting with Sydney and then also looking to use that in Chicago.
So we move from efficiencies into economies of scale, and there's been lots of conversation that we've had on that already in regards to what's
been a significant driver for us in the past few years is that network has grown considerably. Now during that time, we've been really focused to
ensure that our support costs remained flat. Now if you look at the chart on the right, what that's saying is if you actually assess and adjust it in
inflation terms, it's actually a 25% reduction in costs. Now for us, that contribution benefit we get from economies of scale is obviously directly
relevant in any given year in regards to how much growth that we have. Now next year, we're looking to grow at around 5% and much of that in
the longer sectors. So as we move forward into 2021 and 2022, that's likely to reduce off the back of, obviously, Nick talking earlier. But going
forward, we're likely to be closer to moderating to about 3%.
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So as I said before, these 3 levers are not equal or consistent every year. We have made the most of those economies of scale. We will continue to
do so where possible, but it means also our focus in regards those opportunities will tip to efficiencies and productivity as we go forward.
And finally, as we talk about productivity, there's some really exciting things happening in the space as -- if you think about -- and they were talking
in the question-and-answer session around data and analytics. If you think about our ability of how we can use that going forward, if you think
about things like mobility tools, automation in regards to RPA and artificial intelligence, we've got tremendous opportunity to not only enhance
the customer experience, but also look to shift the dial and release opportunities in the productivity space.
So I'll start by talking about the customer-facing element, and we know that technology is a key enabler for us to not only enhance that experience,
but it's something we've invested considerable time and resource to continue to build out at Air New Zealand. Anyone here I don't know, just by
chance, ever had a disruption or a canceled flight? I'm thinking you're going to say, "No way." So as you know, the process when that happens from
a customer's perspective is, a, draw out that anxiety that you get since the customer gets concerned saying, "Hey, am I going to get to my meeting?
What's happening? What is my alternative flight?" They lose control by virtue that they are waiting for the outcomes. And what we're trying, actually
behind the scenes, and what you wouldn't necessarily see or know, that it also drives increased manual processes and manual interventions for us
to be able to get that network back on track. So we introduced a tool that provides an algorithm in the cases of mass disruption or cancellations.
And what that meant is it goes around, looks at all the possible combinations, spits out the preferred options you would have in that rebooking
process. What that has allowed us to do is reduce that anxiety by letting our customers know sooner where they're going, what their alternative
option is. But unfortunately, it hasn't reduced the manual process behind the scene. So a step in the right direction, but we still have more work
to do. And what we have seen, although it is a step in the right direction, is that we have reduced staff hours by 12,500 hours since we commenced
using that tool. And we, also since the 1st of July last year, had over 90,000 passengers that we've rebooked using that.
So that's today, improving, on the right track, but quite frankly, I'm more interested in tomorrow. And tomorrow, as we look at the next phase, is
to say that we're using -- we're planning to use artificial intelligence to not only take those options, and let's take that disrupt example as one
example, that will come up with the flight options that it will have. It will serve it up to the customer directly in regards to fast, easy and personalized
options. What does that do from a customer's perspective? It goes back and says, "You reduce my anxiety. You put the control back into my hands
by giving me choice." Now the additional benefit of that is by driving that decision channel for the customers through the app, that also reduces
manual interventions, manual processes, ultimately freeing up call center and airport staff.
So this is a multiyear journey. So sorry to say it's not going to be done in 2 months, but we do have a roadmap by virtue over the next 2 to 3 years
of what that will look like, starting with digital front-end development, obviously, in regards to our customers, but really critical and we recognize
the holistic solution as saying that we have a cohesive, integrated solution behind the scenes for our customer-facing and operational staff.
Good segue as we move into that integrated solution, which is to say we want to link that customer strategy that we've been talking about into
an operations mobility strategy. That will allow our crew, our airport staff and engineering and maintenance to have real-time, relevant and
contextual information. That means an integrated and proactive operational delivery becomes a reality, which is better for our customers and
better for our people. And also having a conversation with a couple of you before we started today around the importance of culture and that's a
key piece, our tools -- our customers -- our staff, sorry, having the right tools to do the job.
And I want to talk to you by mobilizing staff, and actually, if we think future state allows them to largely undertake their roles wherever they are.
If they've got the right information, they can make better decisions. What does that mean? That means reduced training costs, reduced labor costs,
reduced paper-based systems and all the related costs that go with that.
And the example I'll talk you through would be the hangar. So take an engineer that has to come into work and has a chip they need to do that
evening. Yes, all the paperwork is done in advance. They've got their work package. They go to undertake that work. The reality is, hangar 2 in
Auckland is in excess of 10,000 square meters. So even the most organized paper-based system is saying they're still going to have to go to the
dock office. They're still going to have to move forward to look at manuals and processes. They're going to have to go to the central-based computer
system to do that work. You think about the view that we put an iPad in the hands of all of our maintenance engineers that have update -- updated
information in regards to manuals, processes, they can submit their reports and close that work card, the time and distance in the hangar alone of
what that will provide.
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So similar here, we had a journey over the next 2 to 3 years that we will line that up, and it's one that we're really confident will not only deliver
across airports, crew and engineering and enhance customer experience, it will also drive sustainable productivity benefits.
So in summary, we have a great track record of cost improvement and we will continue to do so. We see a number of great opportunities across
the airline that we cannot only continue to improve that cost performance through operational excellence, but also continue to enhance the
customer experience through customer excellence.
So thank you. Really appreciate your time today, and I look forward to catching up with a number of you are at the end of the event today. But in
the meantime, I would like to hand over to our Chief Financial Officer, Jeff McDowall.
Jeff McDowall - Air New Zealand Limited - CFO
Thank you, Carrie. And as you've heard from Carrie, but also one of my other colleague today, we're all really super focused on returning to sustainable
earnings growth. But I'm going to change the subject a little bit from that and talk about capital management, how we think about our capital
management framework. And although a bunch of this stuff will be somewhat familiar to you, we have, over the past few months, reviews --
reviewed and refreshed our capital management, primarily, for a couple of reasons.
Firstly, I've been the CFO 18 months or so now. And during that time, I spent a lot of time talking to investors, including many of you in the room
here, but also investors overseas. And pretty much, every time I get a question about how we think about capital management and, particularly,
actually, as we contemplate the period where our CapEx will be lower over the next 3 years or so.
So we thought, well, again, while the questions would be good to make a bit more clear, a bit more explicit and set it out in a framework that is a
bit more open. So we're doing that. The other motivation actually is that, as you know, IFRS 16, the new accounting standard, is taking effect for
us in FY '20 and that will have an impact on our gearing. And the way that will work is that when we work out gearing at the moment, we put our
aircraft on there at 7x the annual lease rate. With IFRS 16, they'll go on at a lower rate, so our gearing will come back a bit. So we needed to think
about how we would change the framework, if we did change the framework knowing that was coming.
So with those 2 thoughts in mind, when we think about -- just take a step back, when you think about how we communicate capital management
today, we do 2 things. We talk about gearing. And for a long time, we've talked about 45% to 55% being our target gearing range. And secondly,
we publish a distribution policy on our website, which communicates our commitment to paying consistent and sustainable dividend. So those
are the 2 ways in which we communicate it formally today.
So what we're sharing now is a somewhat more explicit framework, which reaffirms those elements, but takes it a little bit further and has these 3
components: firstly, ensuring long-term resilience; secondly, investing wisely; and thirdly, returning excess cash. And you can take about -- you
can think about those as a hierarchy. So the foundation of it all, as you can imagine, is ensuring resilience and the other 2 sit on top of that. Where
this will end up is that we will publish a capital management framework incorporating these elements and that will replace and supersede the
distribution policy that's on the website today.
So just touch a little bit on each of these 3 uses of structure for the comment I'll make this afternoon. So firstly, resilience, the most important part.
This -- I guess, 2 things I want to call out here that we're changing. Although one is we're now explicitly recognizing in our framework our focus on
maintaining an investment grade credit rating. And in support of that, we are articulating a debt ratio, which supports that investment-grade credit
rating. So you could kind of reasonably argue that the way our balance sheet is funded doesn't rely heavily on unsecured debt. So you could say,
"Well, why are you focused on having an investment-grade credit rating?" And if you look on the chart on the right there, a bunch of our peers,
high-quality businesses don't have an investment grade credit rating.
But for us, it's important for 2 reasons. One is it gives us diversity of access to funding sources. So if we want to access unsecured credit, we can.
And secondly, given the criticality of resilience, and that being the foundation of our framework, an investment grade credit rating provides a really
good independent metric to demonstrate resilience.
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The other component of our resilience is the gearing range. And as I see it, that is about what we've communicated in the past and that's been the
sort of foundation of how we've talked about our balance sheet strength. We talked about 45% to 55% as a target, known as a straitjacket, and
we've talked about how, at the peak of our CapEx cycle, with the tail end of the peak of our CapEx cycle, we'd be happy to be a bit above that. And
actually -- and that's what you see there with 56% at the end of December. That's a little bit above the range, actually a little bit above it by a smaller
amount than we had expected. So that -- we're completely comfortable with that as we look forward, and you'll see in the shaded graph there, it
does come down quite a bit.
So the question is, though, what do you do with IFRS 16. So IFRS 16 will reduce our gearing by around 3 points initially. The amount will vary a bit
as time carries on, but initially about 3 points. So what do you do about that? Well, so we sort of went back to first principles and said, "So what
should our gearing level be?" And you can make actually quite a good argument that if our gearing level was 60%, we would still have an investment
grade credit rating and we'd have a lot of cost of capital. So you could say, "Well, maybe it should be 60%." But where we got to is while we did
have gearing at 60% and you have some kind of internal shock, I know, yes, a classic example would be a unilateral reduction on the New Zealand
dollar value or an increase in the U.S. dollar strength. That would drive up the value of our debt in New Zealand dollars and push us above the
range. And when you're above 60 -- 60 is fine, but when you get far beyond 60, that investment grade credit rating, or the metrics that support it,
get a bit stretched. So if you want to have a target that has a bit of -- that's a target on a straitjacket, then it needs to be a bit lower. And focus --
our focus on resilience and prudency is it should be a bit lower, so they got us to sticking to the 45% to 55%.
But having gone through that thought process and knowing that IFRS is coming along and it's going to reduce the reported gearing a bit, we
thought actually be very comfortable explicitly not changing the gearing ratio. So in other words, allowing IFRS 16 to give us a de facto increase
in gearing by 3 points or so initially. It reduces over time. And we're very comfortable with that given our capital management framework.
So moving on to the composition of our data, I mean, the only point I want to make here really is that we have a really low cost of debt, and that's
supported by a highly competitive and diverse portfolio of lenders and the longstanding presence that we have in offshore financial markets.
As you well -- the first things I did when I took on the role as group GM, corporate finance back in 2017 was to meet a bunch of our lenders,
particularly in Japan, actually, where they have an enormous attraction to Air New Zealand's credit. So you sit down with a bunch of bankers in
Japan and it's just immediately apparent how drawn they are to our credit. And I think there's a number of reasons for that. The brand itself is
attractive to them. The investment grade credit rating is attractive to them, particularly since if you're in the aircraft financing market, there's not
that many airlines that have that.
And thirdly, our strategic position is really resilient. I mean Cam talked a lot about our domestic business. And yes, you have to go a long way. I'm
not sure that there is any way you go where you find an airline with a stronger domestic market position than we have, which gives you a level of
strategic resilience that's attractive to a lender, I think, in the same way as it's attractive to an equity investor.
So the consequence of all of that, we get some very, very good credit margins. And as many of you were at the INFINZ Awards last week, you would
have seen us being nominated for a -- the best deal of the year, didn't win it unfortunately, but nominated nonetheless. And that, yes, we're getting
some super good deals at the moment. And yes, the same we did last year was an example of that and we have opportunities to do that again.
So moving on to cash flow. At the interims last year, so a little over a year ago, we did a conversation around our liquidity level. And back then, I
think we had about $1.4 billion in cash. And we've done some work to say, well, what is the right amount of cash to have and communicated that
we were targeting a range of $700 million to $1 billion. And we talked about that in a bit more detail at this event last year. We've since been
transitioning to that, and that's been going well. We're just a fraction above $1 billion today. And the way in which we've been doing that is paying
cash for the narrow-body aircraft that we've been receiving. And that's been going really well. We are taking a balanced approach to this. However,
in that almost INFINZ winning deal that I talked about a second ago gives us an opportunity to fund the next couple of narrow-bodies that come
in and say given the super low cost of that debt, that just seems like a sensible, balanced thing to do. So we've got 2 coming in, in the next few
months and we'll be debt financing those.
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So the other point to note that I just -- I would point out is that as the guys have been talking about earlier today, yes, we are in a changing demand
environment. And so in the interest of resilience, we will be targeting the -- something closer to the upper end of that range than the lower end
of that range.
So the final element of resilience is hedging. And the main thing I'm saying here is, actually, I'm not really saying anything, which is that our position
isn't changing. Yes, we are focused on buying ourselves time to adjust. We're not focusing on speculating on the price of oil. So we are following
our policy, which provides an immediate level of hedging and a decline as you go into the future as we expect the business can respond to a
different environment. So we're quite fully hedged for the next quarter and then it tapers off to -- until you get to about 42% hedged in the third
quarter.
The thing we have changed and we lived this previously is that we are now hedging, for a period of time at least, our budgeted jet fuel itself rather
than crude through our Singapore jet hedges and crack spreads. And that's because with IMO 2020 coming in at the end of this calendar year, that
has a risk, at least, of significant volatility in the crack spread. So having a hedge for that is, we think, prudent.
So moving on to the second hurdle, which is around investing wisely, as you know, our investment profile, our spending -- investment spending
profile, rather, is diminishing quite considerably as you get into FY '20. So the gray bars there, the narrow-body fleet deliveries we essentially have
during that period, so significantly less that you -- than you have seen. I would point out just before I move off this slide that there will be some
predelivery payments for the wide-bodies. I'll show you the details of that in a minute. That's not shown on the slide. This is just the narrow-bodies.
We utilize a considerable reduction spend and it's also been smoothed a bit as we -- and pushed out as a consequence of the deferrals that we
announced back in March.
So the 787 -- this will be about the 15th time you've heard about the 787-10 today, but still we can't help talk about it. We're just so excited about
this deal. It's a fantastic deal for us. This -- I won't dwell on that because others have. But 2 points I would make. One is the business case is really
compelling. I mean when you look at the efficiency of the aircraft, they're 25% more fuel-efficient than the aircraft it replaces, which means the
business case for replacing it is compelling. And it's not just that you have to replace it because the old aircraft are getting old. It's -- the business
case is compelling to replace, irrespective of the age of the aircraft.
The other point I'd make is this is a really kind of simple and flexible order. Simple in the sense that the capability that we have with the 787-10 that
we've ordered, very similar to the 777-200s that we'll be replacing. So we can put it straight into the network in the same way as we operate that
fleet today.
The other element of simplicity is that it's pretty much the same from an operational perspective as the 787-9s. So it doesn't add any operational
complexity at all. So it's a simple order and the flexible nature of it is, as others have talked about, we can exchange some 10s for 9s if we choose
to. And we can bring some planes early and later if we choose to. And as Christopher was talking about in the Q&A, I think that's one of the things
that has differentiated us as an airline over the past 7 or 8 years or really since the GFC, which is that we can move nimbly when circumstances
change. And a critical component of this order was continuing that.
So what does that look like in CapEx? So this sort of sets out the CapEx for the wide-body program. The first aircraft arrives in calendar '22 --
September '22, so that's our FY '23. You see some predelivery payments there creeping in mainly in 2022. The couple of things to point out here.
Now that we've made the deferral announcements, which we did back in March, there's no more than 2 aircraft in any 1 year. So the peak of this
is substantially less. The 2 bars on the right are kind of a good way of illustrating that, which is the blue-y one is the average spend during this
period and the black one is the average spend that we've had over the past 5 years. So you can see it's considerably less. One caveat, this doesn't
include some small number of narrow-bodies in this period of time. There's 2 NEOs coming in FY '24, but this is the vast bulk of it.
So what you get from that is a sense that if and when we're in the middle of this fleet replacement program, the amount that we will be spending
on aircraft CapEx is almost the maintenance level of CapEx. This is not a peak level of CapEx, even though we're doing a fleet replacement program.
So the consequence of that, we don't expect that to put any pressure on our gearing.
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And then finally, on the invest wisely elements of the framework, I would just like to reaffirm our commitment to ROIC as one of our key metrics.
It's very well embedded in our organization. At the moment, as you've heard today, we're all very committed to delivering stronger ROIC. And as
people have a great understanding of this internally now partly because, as I think I mentioned to you this time last year, we have changed our
short-term incentive scheme with a company proportion of someone's bonus as dependent on the company's ROIC performance. So that gets
people really, really focused on it, really focused, including Cam. And so -- and which means people ask questions about it, which means they
understand it better, which means that they're focused on improving our performance against it. And actually, it's hitting home right now because
as people contemplated the guidance -- the earnings guidance that we provided in January and that we reaffirmed today, people are saying, "That
means my bonus for this year is way less than it was last year." So we'll say, "Okay. We'll want to -- we need to work together to solve this. We'll
need to work together to get to earnings growth." So it's having the desired effect.
So notwithstanding the earnings per share, we are reaffirming this -- both this framework and these targets, the targets being that we think our
cost of capital is around 10%, so we want to exceed that. But actually, we want to deliver excellent returns, not just good returns, so that means
15%.
So then the third element is around distributions. So first thing to note is we remain committed to consistently paying a sustainable level of ordinary
dividend. And we're really proud that we have been able to pay $2.2 billion in dividends over the past 14 years. The thing I wanted to point out,
though, is that when we talk to investors, and I talked about that at the beginning, particularly offshore investors, they sort of want to know what
we mean by consistent and sustainable. So when we publish this new framework, we will actually conclude definitions of those terms.
So firstly, by consistently pay, we mean -- what we mean by that is simply that we seek to pay a dividend every year. By sustainable, what we mean
by that is that the amount of that dividend is not a short-term focus thing. It's looking at our medium-term financial projections of earnings, CapEx
and gearing. And so it's not based on a payout ratio of the earnings in a given year.
The second element of our returning cash is you would've seen on the first slide, but repeated here, is that when we have excess cash or where
our gearing is much lower than it needs to be that we're not just going to sit on that cash. So we could go and engage in a bunch of M&A transactions
and go and buy another airline in Australia, but we can't afford that. So we won't be doing that. So if not doing a bunch of M&A transactions, we're
not just going to sit on the cash. That means that we will be looking to return excess cash to shareholders. And we're calling that out explicitly now
in the framework. And the manner in which we could do that would be determined at the time based on our market conditions, including the
share price. That could be either share buyback. It could be a special dividend. We have an agreement in place now with the Crown, which enables
us to undertake a buyback in a way that keeps the Crown's investment constant.
So I hope that provides you with a bit of an insight both in terms of how we're thinking about capital management, how the new framework
essentially reaffirms the existing elements and make some of that a little more explicit.
So I'm more happy to take more questions on that when we get to the Q&A. But in the meantime, I'll just had over to Christopher. Christopher, do
you want to wrap up?
Christopher Mark Luxon - Air New Zealand Limited - CEO
Well, thank you, Jeff. And can I just say I hope you got a sense just from the 4 executive members that you've heard present today, 3 of which
actually have come through the executive in the last 12 to 18 months, that we have a really brilliant executive team. And the renewal and the
transition that's taken place over the last 2 years has worked incredibly well. And I think you're seeing that we've got really smart, intelligent, highly
capable leaders that understand this business really well and can keep rolling it forward as we've been doing.
I just wanted to close out where I started, really, which is to say, again, I hope that you take away the 4 key messages that they really are, first and
foremost, we are a business that has built tremendous nimbleness and agility into what we're doing. We're going to continue to do it that way. It's
the -- we want to be able to survive in a global aviation world, and we're going to continue to do exactly that.
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The second thing is that we are really focused on improving earnings growth in the coming years and hope you got a good sense about how Jeff
and all of us are conceiving of doing just that.
Thirdly, we're going to make sure the quality of the result stays, thereby building excellence in a customer, cultural and commercial sense.
And finally, as Jeff alluded to, we really want to make sure we deliver and build upon the strong financial foundation that we've got, improving
earnings growth, certainly building out our revenue and cost initiatives and making sure we deliver free cash flow.
So you've -- I think those are things that are really big markers, coupled with these last 4 competitive advantages. And as I said, we will continue
to be just ruthless at making sure there is no way anyone gets through those competitive advantages, and that we build them out and we make
them stronger and better as we've been doing for the last 7 years, and that's what we'll continue to do going forward.
So with that, I think we'll open it up for some Q&A with Carrie and Jeff as well.
QUESTIONS AND ANSWERS
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Thanks so much. So we'll do our second part of Q&A right now. Carrie and Jeff are going to join us on stage with Christopher, but Nick and Cam
are not off the hook. If anyone has questions for them, they'll be able to answer. They're more than happy to. Again, we'll be taking questions from
the floor as well as through Slido. I think our first question is from Nick Mar. And if you don't mind, again, please state your name and organization.
Nick Mar - Macquarie Research - Analyst
Cool. Nick Mar from Macquarie. Just first one on the CapEx. With the new wide-body aircraft, you're now retrofitting the older aircraft with the same
cabins. And is there quite a cost associated with that?
Christopher Mark Luxon - Air New Zealand Limited - CEO
Jeff, you go.
Jeff McDowall - Air New Zealand Limited - CFO
The -- we talked about the program to create a new premium experience a while ago. The process of installing that, we still need to work through.
But the aircraft need a cabin refresh at some point in their life. Typically, if you have a wide-body for 18 years, say, that cabin will be refreshed at
some point around the midpoint of its life. So that would be the target, is that you -- it needs -- it need to be refreshed at some point and that's
when you put the new product in there.
Christopher Mark Luxon - Air New Zealand Limited - CEO
And to give you a feel for it when they're coming, when we refreshed the 777-200s, it was 8 aircraft and it was about $120 million to completely
rebuild those 8 aircraft. And so once we get the new product in place from 2022, we'll roll it out across the rest of the fleet. It's quite an efficient, I
think, a really good fast payback kind of investment for us to do. And we probably have realized we've always been great at not and we've been
running older aircraft out, actually not having refreshed it earlier. And so Jeff's right. We'll try and look at the midpoint of the life of the aircraft as
we go forward.
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Nick Mar - Macquarie Research - Analyst
That was great. And the second one just on the business overall. How do you guys feel about how your competitors are going on things like you've
discussed around customer proposition, cost base or if you hit recovery, reducing CASK and your ability to stay ahead of that to make sure you
hold on to those benefits rather than being competed away in the market?
Christopher Mark Luxon - Air New Zealand Limited - CEO
Yes. I mean I don't think that's any different than it's been over the last 7 years, right? That's all a relative game in terms of our cost versus our
competitors, our product and service offering versus our competitors. And so part of why we're going again and actually with these new aircraft
and with these new interiors and work at Hangar 22, as Mike Tod and his team who are very aware of what's happening with our competitors are
also improving their products quite significantly, and it's time for us to go again and make sure that we maintain that head space over our competitors
to justify that revenue premium. So yes, you -- we're benchmarking a lot. We're traveling on other airlines. We see our competitors' products. We're
well aware of what's going on. And it's partly why we want to stay really invested in that customer experience to keep stepping it up.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
We have a question from online, asking how should domestic customers feel about Air New Zealand having about 100% of the domestic profit
pool. Should you manage some of that profit away?
Christopher Mark Luxon - Air New Zealand Limited - CEO
It says sorry for a prickly question as well, which is so Kiwi, isn't it? I mean it's so typically polite. Look, I mean, I think the bottom line is from a
customer point of view, we're really clear, and I would say, Jeff, jump in, that I think if I even look at L.A. and our services to America over the last 7
years, again, the same on the domestic, we're really conscious of making sure we're doing the right thing by the customer for the long run. And so
I can look at our domestic network offering of regional services and the scope of those cities and towns that we fly to, and I think the customer in
New Zealand is getting an outstanding deal. And so I think we're using our market position in a really appropriate way with our customers. We're
making sure we're passing on the benefits to our customers, go back as I said in Hamilton last Thursday, what's the price of milk 7 years -- 10 years
ago, what's the price of a house, what's the price of a Toyota Camry, and I think the value that actually Air New Zealand's had would offer its
customers is really superb, while also obviously managing our commercials in a way that means that we can reinvest. So I get the sentiment, but
I actually think we've been very mature and very responsible with the way that we've been going about building the position in New Zealand.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Any questions from the floor? Marcus? Hold on.
Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
Marcus Curley, UBS. Just 2 questions.
Christopher Mark Luxon - Air New Zealand Limited - CEO
Are you sure it's 2 or another 6?
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Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
Positive, positive. First one is on labor. Could you just -- you touched on a more challenging backdrop at the moment. Could you give us a little
feel in terms of, if you can, expectations or recent deals, what sort of levels are currently being agreed or sought after?
Carrie Hurihanganui - Air New Zealand Limited - Chief Ground Operations Officer
Yes, absolutely. I mean as I mentioned, we are seeing increasing pressure in that space and a heightened environment. We have seen an increase
just recently in regards to probably our latest deal has 3% in the first year, but lower in the second. As we continue to work through those relationships,
there's been a number of meetings that I've had, and in fact, Christopher and I have also had with union organizers, to understand kind of HPE and
that -- the relationship going forward by virtue of we share the environment that we're in and been pretty open about the need for us to continue
to build into organizing drive change in the business. So it's been a very transparent kind of conversation piece that we've had going forward.
Christopher Mark Luxon - Air New Zealand Limited - CEO
I think there's no doubt about it. If you look at labor relations in the country, it's been quite agitated by the public sector positions and expectations
that have been sitting there. Having said all that, you've got to remember, we used to -- we've probably driven 30% of the industrial relations law
of this country through the precedence over the previous 30 years. And we've had a really benign and very constructive labor agreements and
arrangements over the last 7 or 8 years. Despite all of that, what we're really observing in the unions is 2 things. One is within unions is often splits
between delegates and the management of those unions and tensions within a union. There's often competition between unions. And then you
get to the company interaction. And so as Carrie said, yes, it's manifesting itself in deals that we're managing to get away around 3%. We've just
signed off our long-haul cabin crew agreement, which was ratified at 77% on Saturday night, which is now 1,000 workers on contract. So yes, there's
pressure there, but we've got a good sense to manage that. And importantly, by virtue of the relationship with the unions, they understand the
realities of the business. And therefore, their expectations, I think, are appropriate.
Marcus Curley - UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research
And secondly, Jeff, could you give us a little bit of color, if you can, about how you made your surplus capital, so the difference between how you're
going to measure the amount that possibly will exist in the future over and above what you think you need?
Jeff McDowall - Air New Zealand Limited - CFO
Yes. Sure. I mean it will be more of an art than a science. But essentially, it's looking at the -- where we sit from a gearing perspective rather than a
cash perspective through the next investment cycle. So as we -- if you asked the -- me that a year ago, we're contemplating the fleet replacement
before we smoothed it. We would be saying that we need to get gearing below the range so that it stays within the range as we go through that
phase. Now that we've stretched it out a bit, it will put less pressure on gearing, very little pressure on gearing. So that effectively, it's reduced the
bar in terms of how much gearing we need to get through that. So I can't tell you the precise sense, but the thinking is, is that we want to make
sure that we own it fully, possibly in the 45% to 55% range as we contemplate the next CapEx cycle.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
We have another question from online before we go to John. What is the biggest operational, I think, function to sustainably reduce CAS? Is what
I'm guessing the question is meant to be. Carrie, maybe I'll hand that to you.
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Carrie Hurihanganui - Air New Zealand Limited - Chief Ground Operations Officer
It's [American] if we're looking very much as I was talking about before, fuel burn, optimization and we achieved that through all sorts of things,
whether it be waste, weight and those other elements, but that is overwhelmingly our largest agenda item. But there is the opportunity in that
waste space and a good diversion from landfill, the opportunity from supply chain and what we're investing in, but those would be the 2 primary
areas that we're focused in as far as driving reduced CASK.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
John?
John Middleton
John Middleton from Mint Asset Management. Can you talk a little bit about pilots? A lot of what we've been focusing on is being rank and file
clause changes. But I was just wondering 2 things really. One, if moving to a 787 fleet benefits in terms of pilot cost. And then two, are the pilots
sharing in the cost reduction programs? Or are they slightly sort of apart from the rest of the business?
Jeff McDowall - Air New Zealand Limited - CFO
So well, in terms of 787, it certainly increases the efficiency of the pilot the way we can use the pilot folks who have become essentially use the
same pool as we use for the -9s. The other thing we talked about, when John Whittaker was here, a multiyear agreement that we have with pilots,
which has a 3-year agreement, but with an MOU that extends that for a further 3 terms, which we think as a great, both the reflection of the maturity
of the relationship, but also the arrangement that provides some certainty to both and provide some sharing of benefits and some sharing of
guidance. So it kind of locks in a rate that has some inflation indexing, but then it's got some mechanisms around productivity gearing.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
And John, our Chief Pilot, Captain Dave Morgan, is in the back, so you might want to check with him during the wine part -- portion of the event,
and he can give you some more details.
Christopher Mark Luxon - Air New Zealand Limited - CEO
He's just a fascinating guy to talk to on any occasions, on any subjects. I'd just do that anyway.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Other questions? Stuart in the back. Right behind you.
Stuart Williams - Nikko Asset Management New Zealand Limited - Head of Equities
Stuart Williams, Nikko Asset Management. The reference to external consultant for the cost-out program, I'm just interested in how you're going
to remunerate them. Obviously, you've seen some real shockers in the New Zealand market in terms of $2 for you and $1 for me sort of thing. So
maybe you could just talk about...
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Christopher Mark Luxon - Air New Zealand Limited - CEO
It's not that model.
Stuart Williams - Nikko Asset Management New Zealand Limited - Head of Equities
Yes. I appreciate it. Just to get your attention. Just how wide the agreement is, when it starts. Yes.
Jeff McDowall - Air New Zealand Limited - CFO
I mean I couldn't agree with you more. So we have got a very simple fee-for-service model for this arrangement. And in terms of the scope of it, it's
what we'd call wider support, which essentially is the functions that aren't operational. So it could be my team, HR, it's -- there was marketing. It's
any -- it's digital. It's any of those support functions that aren't frontline operational. And really, what we're looking for the consultants to do is to
bring some benchmarks, to bring some experiences from other organizations, to look at the organization in an independent way to see how we
can make the operating model more efficient. And given, I think Carrie showed the graph that showed our overhead cost trend, which just shows
that in nominal terms, it's pretty flat and capacity-adjusted terms, it's actually down 25%. So we don't have a fat overhead base, which is why we're
looking to inject a bit of an independent set of tools. But it's also why the target isn't a mix of focus in reduction in overhead, that says it's a decent
amount of money. It can be managed without significant organizational change. It's attrition-type level of change, but we think it -- it's important
and valuable and goes straight to the bottom line.
Christopher Mark Luxon - Air New Zealand Limited - CEO
It is a pretty big philosophy of ours, which is we don't use consultants. And so I think this is the second occasion in my 7 or 8 years that I've been
here that we've done so. The trick is we come with a really ruthless and tight brief about what they're here to help us with. It's time bounded. And
more importantly, we steal what they do with great pride and their processes as an approach to it and actually educate our own people, so that
we can build that capability into how we go about it. I agree with you. I think some of the involvement of consultants has been just obtuse and
not very smart at all. And we know how to do a lot of the basic cost-out stuff. What we're looking here is for a smarter, more intelligent provocation
to us about how we could potentially organize on global best practice. And so very tight brace, well managed. Nick Judd and Dave Page from our
strategy team are just excellent at just making sure there's no mission creep. And the kind of people we want to work with want to get -- fit with
us culturally and also have to be prepared to share the way they think about things, so that we can understand and build our own education.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Shane?
Shane Solly - Harbour Asset Management Limited - Director & Portfolio Manager
Shane Solly from Harbor Asset Management. Just wondering whether you could talk about your relationship with the government as your major
shareholder and just picking up on a comment about the ability to return capital, while you're maintaining the shareholding and how that works.
So just how are you going with your relationship?
Christopher Mark Luxon - Air New Zealand Limited - CEO
Why don't I talk relationship and I'll let Jeff talk about the share buyback piece. On the relationship front, it's actually been very, very constructive.
I know you hear a bit of stuff in the news. And there's some politics that sort of is populist at times and designed for different reasons. But the reality
is, from our perspective, we found that a very constructive relationship. And so our relationship with the shareholder, Minister Grant Robinson, our
relationship with the other Ministers, which is our normal -- we don't -- we're not seeing any influence over the operations of the business and the
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way someone could comment on in-flight safety videos. We tend to think they're just -- the controversy is fantastic for us in a marketing sense, so
the more the merrier. But apart from that, I mean, it's been a very reasonable transition and as we've expected. And frankly, as we manage with
Helen Clark's government and John Key's government and now Jacinda Ardern's government. So I think it's been a pretty seamless sort of transition
and process. Did you want to talk about the shareholder?
Jeff McDowall - Air New Zealand Limited - CFO
Yes. So just briefly, the agreement's actually published and it's the same one that's in place with the mix management model of companies. And
so the mechanism is described there. Actually, [Aaron Gill] from Treasury is here, so he can take you through it. But the -- but essentially, the Crown
just sells into a buyback, so that their proportional few holding remains the same.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Andy?
Andrew James Bowley - Forsyth Barr Group Ltd., Research Division - Head of Research
Andy Bowley from Forsyth Barr. So Carrie, you mentioned the airports authorities and the fact that airports can set charges as they see fit. Now the
government, in light of the last question I thought I'd bring this up, have proposed changes to the airport authorities act in terms of removing that
component. How do you think that's going to change the relationship between you and the airports and the broader consultation process for
them to set charges?
Carrie Hurihanganui - Air New Zealand Limited - Chief Ground Operations Officer
Great question. Thank you, Andy. First, I think there's 2 things. One is obviously as far as what's proposed, we're working through and providing
feedback on what's the process. We actually worked very hard in regards to having a collaborative relationship on an ongoing basis because the
-- if you look at the infrastructure and the impact that has across our network, we need to get that right. So we will continue with that collaborative
approach. But obviously, the dynamics would change if that was successful by virtue of how we engage and how they think about future infrastructure,
how that's planned out over the price increase and otherwise. So we're fascinated to see over the next couple of months how that continues and
rolls out. But I would say that we've taken a collaborative approach and we will continue to do so.
Andrew James Bowley - Forsyth Barr Group Ltd., Research Division - Head of Research
Does it realistically give you any -- does it give you more power in terms of that price setting process?
Christopher Mark Luxon - Air New Zealand Limited - CEO
Well, I think, I mean from my perspective, I mean the new civil aviation bill, it's in draft format, we'll get feedback by July 6 on that. But clearly,
removing that anomaly, which was for airports to set prices as they see fit with the airport authorities, which actually this replaces, for us, that's all
a good thing. And it's the direction that we've been wanting things to move into for some time, as you well know. I think it just leads -- ultimately,
we're very clear we want that, the airport authorities, that clause removed. The [axe] is going to be dismantled and put into the civil aviation bill.
Secondarily, we know we won't negotiate arbitrating and just be able to have a conversation in a commercial basis. And as Carrie said, we have a
number of mechanisms. I talked to top meetings between our Boards and our executive teams. Carrie manages the relationship directly with Adrian
Littlewood and see Auckland Airport, meets regularly with him to understand the infrastructure challenges. So we -- we're able to -- in our world,
we're able to compartmentalize the operational challenges around the infrastructure from the regulatory pieces around what's the right framework
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to get the right incentives in place to drive future investment going forward. So I feel we've got that balance right. Obviously, airports might have
a different view.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Any other questions? Craig?
Craig Brown - ANZ New Zealand Investments Limited - Portfolio Manager of Australasian Equities
Craig Brown from ANZ. Jeff, the flexibility you get in the new aircraft purchases, how much does that cost? And how do you weight up? I understand
you need that flexibility and it's a great thing, but the cost of not having it, I mean, would it be a material difference?
Jeff McDowall - Air New Zealand Limited - CFO
It was for pilots. It's hard to say what the [comp effect] to us because we negotiate that as part of the deal. I don't think it's a material cost as long
as you set up the deal in that way in the first place. So the -- I mean, we think -- there are actually other -- and Christopher touched on it on his
presentation, there's other mechanisms we can use to get flexibility as well, including the leased aircraft that we have. So we didn't have to rely
just on this fleet replacement to create the flexibility, but it's a valuable thing to have, so -- and very, very little practical cost.
Leila Peters - Air New Zealand Limited - Head of IR & Financial Planning
Thank you, Craig. Any final questions before we move to the refreshments? No?
Okay. So with that, I think that wraps up the day for us. I do want to say thank you for spending a good amount of your time, beginning of the week,
invested in Air New Zealand and our management team and allowing us to tell some of the stories that we have to tell you. I acknowledge that
you're all very busy, and so we really do thank you for letting us spend this amount of time with you.
On a personal note, we're always looking for feedback on how we can improve these sessions and our interactions with investors, analysts and our
banking partners, so please feel free to let me know.
And as always, if any of you would like to schedule any follow-up meetings or calls, please contact myself or my colleague, Kim, in the back, and
we'll definitely set that up. As a reminder, we have a number of senior leadership -- members of our senior leadership teams here across strategy,
sustainability, revenue, network, so please feel free to mix and mingle with them.
And with that, that concludes our 2019 Investor Day. Thank you.
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