Air New Zealand reconstructed

Courtesy Air New Zealand

Courtesy Air New Zealand

IF you are planning to visit the Hobbits and the Kingdoms of Middle Earth, don’t think twice about flying Air New Zealand (Air NZ). The Kiwi carrier is probably best recognized in recent times for its innovative in-flight safety videos before take-off.

Keeping a relatively low profile, Air NZ is entering a new era of growth. In a way it is like the proverbial phoenix rising from the ashes if you recall how in 2001 with the collapse of Ansett Airlines, it had to be bailed out by the government. Air NZ acquired 50% of Ansett in 1996 for A$475m and the other 50% for A$680m in 2000. Ansett became bankrupt in 2001 and was written off with a tag of $1.32b, adding to the losses suffered by Air NZ itself.

Since then it has been a long road of reconstruction for Air NZ, which today reported earnings growth for the third consecutive financial year ending June 2014. Normalised earnings before taxation were NZ$323m (US$254m), which was an increase of 30% on last year. Statutory earnings before taxation were NZ$357m, an increase of 40%. Operating revenue held steady at NZ$4.7b, increasing by NZ$48m. However, statutory net profit after taxation increased by an impressive 45% from NZ$181m to NZ$262m. Air NZ also reported a strong operating cash flow of NZ$730m.

The good results were attributed to an increase in passenger revenue of 4.6% to NZ$3.9b and yield improvements across its network of 3.3%. The airline carried 2.3% more passengers. Of course, like many airlines presently, it has benefitted from decreased fuel costs due to falling oil prices. But additionally and perhaps more importantly, Air NZ attributed the lower cost to fleet efficiencies.

What makes Air NZ’s performance worthy of note is how it has been able to sustain a turnaround at a time when many of the world’s airlines are still see-sawing between profit and loss, that in spite of New Zealand’s not too favorable geographical at the end of the active business line. A comparison with neighbour Qantas, which was unsuccessful in bids to acquire stakes in the beleaguered airline during its tumultuous years, is inevitable. In the last three years, Air NZ has done far better than its bigger rival although Qantas has just announced a spectacular performance for 2014.

Air NZ chairman Tony Carter said: “Air New Zealand continues to be a world leading airline both in terms of customer experience and financial performance.” He added, “We have made significant progress on our key strategic initiatives. With new aircraft offering better operating economics, an optimised network with the right alliance partners, disciplined cost management and a daily focus on improving the customer experience, we are very well positioned to continue growing.”

Air NZ’s revival stems from a strategy of focussing on its strengths, and that means not pursuing willy nilly a certain course of action just because every other player is doing it. Its domestic arm is a sterling performer with a load factor above 80% and a yield of NZ$0.29 (cents per RPK). Capacity grew by 5.4%. While it is doing better, key rival Jetstar’s market share fell from 22.4% to 20.7%. It is also maintaining its market lead in the Tasman and Pacific Islands region, with a load factor of 83.4%. While Qantas was promoting Jetstar and other major airlines were spawning budget offshoots, Air NZ grounded its low-cost Freedom Air, preferring to carry “all” in one plane for trans-Tasman flights. The airline has learnt that what works for one airline may not necessarily work for another.

Internationally, the airline continues to realign its long haul network. With capacity adjustment, the load factor continues to improve, up 1.4% pts to 85.4%. Air NZ withdrew from the Hong Kong route with onward connection to London. Although a Star Alliance member, it has instead tied up an arrangement with OneWorld member Cathay Pacific. While rival Qantas is expanding aggressively in Asia and boosting its kangaroo route dominance in an alliance with Emirates to use Dubai International as its European hub (replacing Singapore Changi), in a market that has become very competitive, Air NZ is turning New Zealand’s remote geographical location into an advantage by dominating trans-Pacific channels and flying to London via Los Angeles with full fifth freedom rights.

The Kiwi carrier has learnt the bitter lesson of hasty over-expansion in its bid to take on Qantas through Ansett and competing with others in the larger world. But it is crawling back, forming strategic alliances. It is reliving its Australian dream, having increased its equity investment to 25.99% in Virgin Australia, of which Singapore Airlines (SIA) and Etihad Airways are also partners. It has also expanded its alliance with SIA to recommence flying from Auckland to Singapore, aiming to boost route capacity by 30%.

Mr Carter is optimistic. He said: “Based on our current expectations of market demand and fuel prices, we expect to improve on the 2014 result in the coming year.”

With innovative product development, Air NZ is catching the attention of competitors. And it’s not just about jazzing up in-flight safety videos; this, to Air NZ’s credit, stands it out as being bold and refreshing. The airline was among the first to introduce a premium economy cabin. And it has beaten arch-rival Qantas in the race to introduce business class seats that can be reclined for take-off and landing.


About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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