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Voice of the Commonwealth - The Global Influencer

Voice of the Commonwealth - The Global Influencer

Air New Zealand-successful repositioning

With a Government loan facility of $900 million in hand as part of its liquidity, Air New Zealand has embarked on a bumpy ride braving the global pandemic and promising a speedy and healthy recovery. In addition to the Government grant, the Group has cash of $438 million.

Performance at glance

  • Domestic capacity 76 percent of pre-Covid levels, led by robust domestic tourism and the return of business demand during the first half of the 2021 financial year.
  • Cargo revenue up 91 percent on the same period last year, supported by the Government’s International Airfreight Capacity scheme (IAFC).
  • Short-term liquidity of just over $700 million as at 23 February 2021, made up of approximately $170 million cash and $550 million undrawn funds on the Government standby loan facility (the Crown facility).
  • Continued cost discipline has resulted in a significant decline in cash burn to an average of $79 million per month from September 2020 through January 2021. For the remaining five months of the financial year, average monthly cash burn is expected to be in the range of $45 million to $55 million.
  • Steps to recapitalise the balance sheet are underway and are intended to be completed by 30 June 2021.
  • Providing customers with even greater flexibility by extending credit redemption deadline to 30 June 2022 and continuing to waive change fees for customers with international flights commencing before 30 June 2021.
  • Focus for the second half of the financial year is on maintaining strong performance in our Domestic and cargo businesses, cost discipline and operational readiness ahead of border reopenings. 

A score of measures including substantial reduction of salaries, debarred mid-dividends helped the group to further consolidate its liquidity position to be fit to confront the competition in the field.   

Forecast Liquidity

In response to the significant reduction in operations due to the global pandemic, the company has taken several actions to manage the operations and liquidity of the Group:

  • On 27 May 2020 a standby Government loan facility of $900 million was secured to support the future business operations. The facility is available until 27 May 2022 and remained undrawn as at balance date (refer note 26 for further details). The Board is considering the future capital structure of the Group with a view to enabling the settlement of this facility;
  • The Board cancelled the interim dividend payable to shareholders for the 2020 financial year;
  • Deferral or cancellation of approximately $700 million of capital expenditure for the period through to December 2022 including deferrals of Airbus A321 NEO deliveries;
  • Labour reductions of 30%, approximately 4,000 employees, including a reduction in the Executive team of 30%;
  • Short-term incentive schemes for all employees were suspended. The Chief Executive and Executive team salaries, and the Directors’ fees were reduced by 15% for the period through to 31 December 2020;
  • A wage freeze for employees on individual employment agreements;
  • A hiring freeze was implemented and voluntary leave options undertaken;
  • Government grants were applied for in relation to wage subsidies, aviation support packages and international airfreight services

Cost –cutting measures

Reductions were made across all other areas of the airline’s cost base including cancellation of all non-essential spend, reduction in lease costs and modifications of various vendor and supplier terms;

  • Following Covid-19 related tax relief being provided by the New Zealand Government, the Group elected to carrying-back the 2020 financial year income tax loss to the 2019 financial year. The Group was granted a deferral of FBT and PAYE for the period 1 July 2020 to 30 September 2021. The FBT and PAYE liabilities arising during this period will be settled during October 2021 to March 2022; and
  • The Boeing 777-200ER and Boeing 777-300ER fleets were grounded until at least the end of the 2020 calendar year.

Liquidity Position

The Group has cash of $438 million and the standby Government loan facility of $900 million at 30 June 2020 and has taken the mitigating measures to increase the Group’s liquidity.

However, in view of the uncertainties created by the Covid-19 pandemic, the Group has modelled two broader scenarios, the Base and Downside Cases for the concerned period to support its assessment of the use of going concern basis for the year ended 30 June 2020.

The Base Case reflects the Board and management’s view of the anticipated timing and recovery from the impact of the pandemic on the Group over the period covered by the going concern assessment.

Forecasts for recovery

– The recovery of capacity, which has been modelled regionally with a gradual recovery across the Group from the reduction of 95%, as measured against 2019 levels, from March 2020 to 55% lower at June 2021 and 45% lower at the end of the first quarter of the 2022 financial year (Q1 FY22.

The rate of growth varies across markets based on domestic and international travel restrictions as well as the assumptions on the opening of international borders.

The scenario assumes that the Domestic network up to 25% lower than pre-Covid-19 levels by June 2021 and remains at 25% lower during Q1 FY22. Short-haul international markets are presumed to open in a phased approach during the 2021 financial year, reaching 20% lower at June 2021 and 10% to 15% lower by the end of Q1 FY22. The long-haul international network is presumed to operate minimal capacity, inclusive of operations of freight services and the repatriation of passengers through to Q1 FY22.

– Revenue per Available Seat Kilometre (RASK) for the Group is expected to remain largely consistent with the 2019 levels over the going concern period although this assumption is dependent on the mix of Domestic versus Short-haul, business versus leisure travel and the ability and timing to restart the networks.

Downside case

The Downside Case scenario further stress to the Base Case by contemplating a longer adverse impact driven by ongoing travel restrictions in the international markets and a more gradual recovery of demand.

– Capacity is presumed to more slowly build back to be 60% lower than pre-Covid-19 levels by June 2021 and 50% lower by Q1 FY22.

This growth momentum is primarily driven by delays in short-haul international markets and continued delay of long-haul revenue due to border restrictions.

– RASK for the Domestic network is presumed to be lower than the pre-Covid-19 levels, reflecting changes to the business and leisure mix and International RASK is presumed to be constant with pre-Covid-19 levels as capacity is adjusted to reflect demand.

In addition to the Base and Downside Cases, the Board has also considered extra sensitivities of adverse factors on capacity levels, delays in border openings, short-term domestic restrictions, RASK, sales profile, fuel price, foreign exchange, refunds and credit assumptions, direct and overhead costs. The scenarios were particularly sensitive to changes in assumptions relating to delays in border re-opening,

Forecasts on RASK, sales profile and fuel prices.

Based on the liquidity level demonstrated in the Base and Downside Cases and the extra sensitivity analyses completed, the Board has a reasonable expectation that the Group has sufficient liquidity to continue to operate for the foreseeable future and, therefore, the adoption of the going concern basis for the financial statements is appropriate and accurate.

Given the uncertainty surrounding the timeframes of travel restrictions and border re-openings may occur, the potential for future waves of the Covid-19 pandemic and the severity of the economic impact, the Group is not able to provide certainty and rule out that there may not be more severe downside scenarios to such factors as capacity, timing and RASK, than those which they have considered and encountered up to now.

Air New Zealand’s successful repositioning is a model worthy of emulation not only for the Asia-Pacific region, but also for the entire Commonwealth as well as for other nations of the world. 

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