Air New Zealand boosts profit and announces Special Dividend

Air New Zealand has today announced a profit before unusuals and tax of $109 million for the six month period ending 31 December 2006, an increase of 35% ($28m) on the poor performance in the same period last year.

Net profit was $74 million, up 61% ($28m), and higher yields contributed to a 12% increase in operating revenue. Based on the airline’s improved profitability and outlook, the Board has increased the interim dividend to 3 cents per share, or $32 million.

Air New Zealand Chairman John Palmer said the airline’s progress in the first six months of the year was pleasing in the face of significant challenges like high fuel prices, a weaker New Zealand dollar and intense competition from other destinations.

“All our key metrics – including yield, passenger numbers, revenue, profitability and share price are up, despite significant external pressures,” Mr Palmer said.

Jet fuel continued to be the company’s most significant cost. The average price of fuel was up 13% over the last year, and 55% over the same period two years ago.

Mr Palmer said that in 2003 the airline embarked on a substantial $2.6 billion capital investment programme. Subsequent to this, it sought to strengthen its balance sheet through a capital raising to shareholders.

With this current cycle of fleet investment coming to an end, no jet aircraft arriving until 2010, and strong gearing position of 46.7%, the airline is now in a position to return some cash to shareholders.

“Although the operating environment is still very challenging, we feel confident now about the ability to release some of the cash holdings from the balance sheet,” he said.

“With that in mind, a review of our current medium-term financial and cash projections has prompted the Board to declare a special dividend of $105 million, or 10 cents per share,” said Mr Palmer.

The record date for the interim and special dividends is the 13th of March 2007.

Mr Palmer said that despite the encouraging performance, the airline’s returns were still below their potential.

“The Board’s view is that we are not yet achieving the levels of performance we consider appropriate to properly reward shareholders for the capital employed and associated investment risk,” Mr Palmer said.

Chief Executive Rob Fyfe said it was important to consider Air New Zealand’s performance over the past six months within a wider context.

“We are confident in our strategic direction and will continue to drive the changes we need to ensure the airline is world class in everything it does,” Mr Fyfe said.

“As a niche player, we will only achieve these standards by transforming our airline into one that is nimble, flexible and innovative, able to successfully compete in a demanding operating environment.”

Mr Fyfe said priorities for the business over the next six months included clarifying the future operating model for Airport Services, growing the domestic business, consolidating Air New Zealand’s position on the Tasman and stimulating demand for the new Vancouver service, which will launch in November.

“We will also continue to simplify and reduce costs.”

Over the past six months Air New Zealand has achieved additional cost savings of $63 million and is on track to achieve targeted cost savings of $130 million for the full year.

“This is the final year of our four-year cost saving programme, which originally targeted savings of $245 million per annum once fully implemented. By the end of this programme we will have posted over $326 million in annualised savings, well up on our original target.”

Mr Fyfe said it was critical for both New Zealand and Air New Zealand to have a cohesive national tourism strategy in place. The airline was working collaboratively with the tourism industry but acknowledged there was still much work to be done.

“Air New Zealand carries more than 4.5 million passengers internationally each year. We must be world-class in all aspects of our business – online, on board and onshore – if we are to assist New Zealand to achieve its full potential.”

Air New Zealand has continued to improve its market disclosures with the addition of monthly passenger yield movements and have carried on publishing its hedge book and other relevant information.

“This has given the market an up-to-date view of how the company is performing. Analysts active in covering the company currently expect profit before unusuals and tax of between $204 and $232 million for the 2007 year. We note that the level of disclosure has allowed analysts to form a realistic expectation of the company’s performance for the current year,” Mr Palmer said.

Report by The Mole