Cost Cuts Not Enough As Air NZ Braces For Big Loss

By Glenn Dyer | More Articles by Glenn Dyer

In a lengthy update on Tuesday Air New Zealand has given a strong hint of how it sees the immediate future for its business – perhaps some more domestic flights, but most international travel will be out until 2021.

At the same, it is now expecting to report a loss for the year to June, thanks to the sharp fall in passenger numbers and revenue for the June half.

Air New Zealand said in the statement that it’s Boeing 777-200ER and 777-300ER fleet (the long-range workhorses) had been grounded until at least the end of the year. There was no mention of whether the newer Boeing 787 Dreamliners would remain grounded.

That doesn’t preclude travel to and from Australia – which is mostly done by Boeing 7373s and the short-range Airbus A320 jets.

The grounding of the 777 fleets will see Air New Zealand take a huge impairment charge of upwards of $NZ400 million on the value of those planes for the year to June.

“Air New Zealand anticipates that global demand for international air travel will rebuild slowly,“ the airline said on Tuesday.

“As a result the airline expects to book an impairment charge in the 2020 financial year relating to some of its Boeing 777 aircraft.

“The airline currently estimates a non-cash impairment charge in relation to these aircraft in the range of $350 million to $450 million, which will be partially offset by a reduction in the airline’s deferred tax liability,” Air New Zealand said.

Air NZ confirmed that more redundancies are planned – as many as 4,000, or a third of its staff numbers. That will see annual savings of up to $NZ400 million a year.

As well as the redundancies, the company confirmed it was cutting its executive team by 30% and deferring or canceling almost $NZ700 million in expected capital expenditure, including deferring the planned delivery of Airbus A321 Neo aircraft.

Air New Zealand says it has not yet drawn down on the $NZ900 million loan that the Government has advanced.

Chief financial officer Jeff McDowall said the company’s short-term liquidity as of Monday was $NZ640 million, which does not include the government loan, so the airline’s finances remain in reasonable shape.

McDowall said that as a result of the actions, Air New Zealand expects to reduce its average monthly cash outflows by about $50m to $60m for the 2021 financial year.

“Like all businesses at this time, we find ourselves facing an environment where revenues will be a small fraction of what we are accustomed to,’’ he said in Tuesday’s statement.

It expects the second half of its financial year to only have half the previous year’s capacity and with little revenue coming in under alert levels 3 and 4, the airline is now expecting to report an underlying loss for the 2020 year.

The airline expects some savings — $NZ21 million in payments for the sale of airport slots. But it also expected to pay $NZ140 to $NZ160 million in 2020 for ‘’reorganisation costs’’.

“Prior to the outbreak of Covid-19, Air New Zealand was in a strong position with a resilient balance sheet and short-term liquidity of more than $1 billion.

“The airline has no financial covenants on new or existing debt facilities and no significant debt maturities until 2022. The airline has taken and will continue to take swift and decisive action to preserve and enhance liquidity and minimise cash burn,” the company said on Tuesday.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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