Air NZ Earnings Down 24% On High Fuel Costs

Media Release
26 August 2008

Air New Zealand Earnings Down 24% On High Fuel Cost

Air New Zealand today announced Normalised Earnings* before unusual items and taxation of $197 million for the year ended 30 June 2008, a decrease of 24 percent on last year.

Operating revenue was $4,667 million for the year, up $388 million or 9.1 percent on the same period last year. The increase was primarily due to additional capacity added both to the domestic and long haul airlines and higher load factors, up 2.8 percentage points to 79.3 percent. The airline carried 13.2 million customers, which is up 5.6 percent on the previous year.

The Board has reviewed the current trading environment and imputation credit availability and declared a fully imputed dividend of 3.5 cents per share. Dividends declared for the year have totalled 8.5 cents per share, reflecting the 2008 operating performance while recognising the importance of maintaining financial flexibility through what promises to be a period of significant adjustment for the airline industry. The dividend record date is 9 September 2008.

Air New Zealand Chairman John Palmer said the airline’s strong operating performance had enabled it to deliver a solid profit against a backdrop of record fuel prices. The cost of fuel increased by $300 million** in the past year. Despite fare increases, Air New Zealand continues to only partially recover the increase in the total cost of fuel.

“The current challenges facing airlines are immense but the Board is confident that Air New Zealand is in a good position to create and seize opportunities in both the domestic and international businesses.  Our ability to innovate and adapt much more rapidly than many of our competitors, combined with our strong financial position and the strength that comes with having a committed and stable shareholder base, continues to ensure we have a strong platform for growth.

“In 2009, we will continue to examine all aspects of our operations and decisions will be made quickly to ensure capacity closely matches demand. Innovation will again be a key theme in our pursuit of creating world class and uniquely Kiwi travel experiences.”

Mr Palmer said the Board has set Air New Zealand’s management team with the challenge of looking at further new revenue opportunities in the tourism and travel sectors.

“We are already having success in areas like business jet interior design and refits, online sales and industry training.  We believe that in the current economic environment there may be opportunities to leverage our existing competencies and financial strength.”

Mr Palmer said Chief Executive Officer Rob Fyfe and the Air New Zealand management team performed very well in the year ended 30 June 2008, making a number of operational improvements while dealing with an array of challenges facing the business.

Mr Fyfe said that while market conditions are challenging, Air New Zealand is in great shape to respond.

“A strong balance sheet and cash liquidity are a good platform for success. Furthermore, our demonstrated strengths in moving at speed to realign our networks to the markets with the greatest growth opportunities, delivering innovative products and an inspiring Kiwi experience see us well positioned for the challenges ahead. We will continue to make decisions that do not limit our long-term growth aspirations and are acutely aware of the need to stimulate demand at a time when people around the globe are becoming more reluctant to spend money.

“Our position as the leader in the short haul market will be strengthened and renewed focus will be placed on ensuring we continue to be the leader on the long haul routes we choose to fly.”

Chairman John Palmer said the second half of the 2008 financial year marked the start of a period of substantial adjustment in commercial aviation and 2009 looks set to bring more changes as the industry adapts to live with higher jet fuel costs.

The volatile price of jet fuel and uncertain economic conditions make it difficult to accurately forecast the financial result for the 2009 financial year. Based on the existing hedging policy and network plan, in the current market conditions Air New Zealand expects to operate profitably, on a Normalised Earnings basis, if the average price of jet fuel is below US$140 per barrel for the 2009 financial year.

Key highlights:

Record operating revenue, up 9.1 percent, passenger numbers up 5.6 percent
Normalised Earnings* before unusual items and taxation of $197 million
Net cash position of $1.3 billion, up 22 percent
Launched direct service from Auckland to Vancouver
Award winning product and service
Revenue per employee up 4.2 percent

International Financial reporting Standards (NZ IFRS)

The 2008 annual financial statements are Air New Zealand’s first full set of accounts compiled under New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). To comply with NZ IFRS, some accounting policies and classifications have been changed, affecting both earnings and total equity.

All comparatives have been restated on a NZ IFRS compliant basis. The changes that have the most material impact on the financial results are the way the Group accounts for fixed assets, including aircraft maintenance, our loyalty programme and financial instruments such as fuel and foreign exchange hedging.

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