Air New Zealand Limited

welcome to the air new zealand 2024 interim results call during the presentation your phone lines will be placed on listen only until the question and answer session please refrain from asking questions until that time and with that i will turn the call over to air new zealand's head of investor relations kim coots

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.earnewzealand.co.nz forward slash Investor Centre. Also on the website you can find our interim results presentation, the interim financial report and media release, as well as other relevant disclosures. Speaking on the call today will be Chief Executive Officer Greg Foran and Chief Financial Officer Richard Thompson. Layla Peters, our GM of Corporate Finance, will also join us for the Q&A session. I would like to take a moment to remind you our comments today will include certain forward-looking statements regarding our future expectations, which may differ from actual results. We ask you read through the disclaimer, and in particular the forward-looking cautionary statement provided on slide two of the presentation. I will now hand the call over to Greg.

Thank you, Kim. Kia ora. Good morning, everyone, and thanks for joining us on today's call. Earlier today, we released our interim results to the market announcing earnings before taxation of $185 million and net profit after taxation of $129 million. This is in line with the guidance we provided back in December and reflects an expected reduction in earnings compared to the prior period. where pent-up levels of demand in a capacity-constrained environment drove a very strong performance. On the back of our result, and taking into account the strength of our balance sheet, the Board was pleased to announce that shareholders will receive an unimputed interim dividend of $0.02 per share. This represents a 41% payout ratio based on the prior 12 months NPAT and is in line with the revised dividend policy we announced last August. Over the past six months, we grew the network significantly, particularly on our international routes, with total group capacity increasing 29%. thanks to the full return of our 777-300 fleet. Scaling up isn't easy, particularly in an aviation ecosystem that is still hampered by disrupts and delays. But we've continued our training efforts, onboarding an additional 170 people and a half to help build resilience in. We know things still aren't perfect, but we've taken a series of deliberate actions to improve key operational metrics and to create an even better flying experience for our customers. And you can see that in the improved customer metrics and operational performance, which I'll touch on later. All in all, this is a result we can be proud of, especially when you consider it was delivered against the backdrop of an increasingly challenging operational environment. As just one example, the additional maintenance requirements on our Pratt & Whitney engines will see up to five of our newest and most efficient A321 neojets out of service at any one time across the next 18 months at least. The impact this has had operationally should not be understated. Productivity gains and efficiencies we anticipated at the beginning of the financial year will now take longer to realize as we carry extra costs to help keep our customers moving. Richard will touch on this more later. These challenges have once again brought out the very best in our exceptional team of Air New Zealanders who've gone above and beyond to mitigate the impact of these disruptions. For that, I want to say a huge thank you. Turning to slide five, you can see that we've made some great progress on key operational metrics. We've made improvements to our service offering both on the ground and in the air, including enhanced food and beverage offerings and in-flight entertainment options. In November, we opened our new premium check-in area at the International Terminal in Auckland Airport. We have invested in the contact centre, both in terms of people and digital tooling, which has seen average wait time numbers that are much improved. And most importantly, these investments have been noticed by our customers, with customer satisfaction levels recently returning to pre-COVID levels and holding steady. It's taken a lot of focus, hard work and deliberate investment to get these results. We believe that has been the right decision as we lean into the ongoing instability and sideswipes that the industry has been experiencing. At the end of the day, our customers will look to us regardless of whether an issue is within our control or not, and ensuring their trust in Air New Zealand is maintained is a priority. I think everyone can agree that we've seen our fair share of challenges emerge across the past six months. While these issues are not particular to Air New Zealand, and indeed are being felt by most airlines globally, that doesn't make them any less frustrating. I won't go into each point in detail here, but I'm happy to take questions later on. What I do want to focus on is the huge amount of work that's been undertaken to mitigate impacts to our schedule. As I mentioned earlier, the Pratt & Whitney additional maintenance requirement remains our single most impactful operational challenge this year and the ripple-on effects across our domestic and short-haul networks would have been immense if we had not acted quickly to secure various short-term aircraft leases. We have re-entered into a short-term wet lease with Waymos, as well as procuring two additional 777-300 dry leases. One of these is already flying on the network and the other will start in June. These aircraft have a lease period of three to four years, with some optionality to extend if required. We are also in the process of finalising the lease of a third 777-300 aircraft, which would arrive later in the year and again has a lease term of four years. Despite our best efforts, these issues, along with those of other airlines, causes a greater proportion of our customers to call, email or use social media channels to reach us than before. Case in point, when Alaska Airlines had the 737 MAX issue in January, our contact centre was flooded with calls from customers with questions about their itineraries, even though we don't operate that aircraft type. We made the decision in November to add temporary resource into the contact centre to help with expected core volume increases, as well as respond much more rapidly to written queries. This has driven considerable improvements in wait times and other key metrics we monitor closely. As we roll out additional digital tooling in the coming months, some of these costs will come out as we enable greater self-service functionality. Altogether, we estimate a further $35 million of additional costs in the second half to mitigate customer impacts resulting from these challenges. Turning now to slide seven, we haven't been the only carrier scaling our network back up towards pre-COVID levels, and this has been particularly evident on North America. As we entered into the summer high season, international competition really kicked up, driving historically high levels of capacity on the US to New Zealand market in a very short period of time. For context, in January market capacity between the US and New Zealand grew around 65%, whereas US arrivals were only up 35%. While fares held up initially, there was a notable pressure on fares and on month's sales build going into December and January peak holiday season. Both yields and load factors are now seeing softness driven by excess supply. We're seeing the most competitive pricing in the economy cabins, with US carriers offering what we believe to be unsustainably low fares. Premium cabin pricing and demand continues to hold up well, and we're seeing more resilience in pricing levels for those passengers. The other area of increased market capacity is on the Tasman, although the competitive dynamics are different. We are one carrier down in this market, and both Air New Zealand and Qantas have grown back strongly. Demand in this market tends to be price sensitive, but has responded well to fare adjustments and sales activity undertaken to stimulate demand. Average fares are still well above pre-COVID levels and are reflective of the significant increase in costs to operate. There are a number of bright spots as well, notably the Pacific Islands, which is a market of critical importance to us in terms of linkages to New Zealand. Demand in these markets remains strong. In Asia, we see continued strength in outbound travel to Japan. due not only to the weaker yen, but also great word of mouth from Kiwi travellers. Singapore as a hub remains very popular, and in the past six months we've seen tremendous traffic from India coming to New Zealand via this port. Turning to domestic, as we signalled back in September, corporate and government demand has continued to track below last year. This has put pressure on yields in this part of the network. As a result of lower demand, we'll be making some targeted capacity reductions. In addition, as a consequence of the continued inflationary impact across our cost base, we will be lifting our pricing. We are cognisant that the leisure traveller is more price sensitive, and this will further impact demand somewhat, but we'll manage this carefully and adjust as necessary. Based on what we can see in our forward bookings profile, we expect continued yield pressure, particularly into the fourth quarter, which is our traditional low season. This will be most evident on the long-haul international markets. The fourth quarter is always a difficult period to forecast and will be even more so this year given the intense competitive environment. Our experience suggests that at some point we will see both pricing and capacity adjustments from our competitors, some of whom are unfamiliar with the New Zealand market and its dynamics. Finally, building on what I've just laid out, we've provided a market update on the 19th of February, stating that a number of continuing economic and operational conditions have deteriorated and are now expected to have a significant adverse impact on performance in the second half. These include the impact of additional competition on forward revenue performance, ongoing weakness in the domestic corporate and government demand, temporary cost headwinds of $35 million in the second half to alleviate customer impacts and operational pressures, as well as ongoing cost inflation. In light of these conditions, the airline considers that performance for the second half of the 2024 financial year will be markedly lower than the first half. In this context, and assuming an average jet fuel price of $105 US a barrel for the second half, the airline currently expects earnings before taxation for the 2024 financial year to be in the range of $200 to $240 million. This range includes $20 million of currently assumed additional COVID-related credit breakage over the second half. Those future redemptions of COVID-related credits remain uncertain and subject to further actions. I will now pass over to Richard, who will provide more detail on the first half result, as well as update you on our fuel hedging, fleet and capital management performance.