Air New Zealand liquidity and 2020 earnings update

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    Air New Zealand is today providing an update on its actions to reduce cash burn, as well as
    earnings expectations for the 2020 financial year following the precipitous decline in demand for
    air travel that has resulted from the outbreak of Covid-19.
    Liquidity position
    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.
    As previously disclosed to the market, once the initial restrictions for international travel into New
    Zealand were announced in March 2020, Air New Zealand moved quickly to secure a loan facility
    of up to $900 million with the New Zealand Government, to bolster liquidity and provide the airline
    with sufficient flexibility to respond to a range of potential demand recovery scenarios.
    As at close of business 25 May 2020, short-term liquidity is approximately $640 million, which does
    not include any funds from the $900 million loan facility with the Government.
    “We have not yet needed to draw down on the government loan facility, as we continue to utilise
    all available levers to reduce our cash burn and right-size the business to reflect the expectation
    that, for some time, our airline will be smaller than it was pre Covid-19” says Chief Financial Officer
    Jeff McDowall.
    The airline has already implemented a number of actions across every aspect of its cost base and
    capital expenditure portfolio, including:
    • Labour reductions of approximately 30 percent, or 4,000 employees, which is expected to
    drive annualised savings of $350 to $400 million
    • Suspension of all short-term incentive schemes for the 2020 financial year
    • Reduction of the Executive team by 30 percent
    • A 15 percent reduction in the salary of the Chief Executive and Executive team, together
    with a 15 percent reduction in Director fees through to December 2020
    • Institution of a hiring freeze and voluntary leave options
    • Deferral or cancellation of almost $700 million in expected capital expenditure to December
    2022, including deferrals of planned A321 NEO deliveries
    • Decision to ground the airline’s Boeing 777-200 and 777-300 fleet until at least the end of
    calendar 2020
    Stock exchange listings: New Zealand (NZX: AIR) / Australia (ASX: AIZ) / ADR (OTC: ANZLY)
    MARKET ANNOUNCEMENT
    Air New Zealand postal address: Private Bag 92007, Auckland, 1142, New Zealand
    Investor Relations email: investor@airnz.co.nz
    Investor website: www.airnewzealand.co.nz/investor
    • Reductions across all other areas of the airline’s cost base including cancellation of all nonessential spend, reduction in leasing costs and modification of various vendor and supplier
    terms.
    As a result of the above actions, Air New Zealand expects to reduce its average monthly cash
    outflows by approximately $50 million to $60 million1 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. Over the course of the last few months we have
    acted at pace to implement both short-term and structural cost saving measures to adapt to this
    new environment, and we will continue to seek out further opportunities to consolidate facilities,
    reduce capital spend, review fleet composition, supply chain costs and adjust our labour base
    further.
    “We know that demand for air travel will eventually rebound, so we are cognisant of striking the
    right balance between removing cost from the business and ensuring the airline is in a strong
    position to ramp up as demand recovers” says Mr McDowall.
    2020 Earnings update and outlook
    The airline had a solid start to the 2020 financial year, however market conditions deteriorated
    dramatically in early March as the spread of Covid-19 began to extend globally. That led the airline
    to confirm on 9 March 2020 that it was withdrawing any full year earnings guidance.
    “Across March and April, Air New Zealand reduced its network capacity by more than 95 percent
    as demand declined to almost zero following the implementation of the New Zealand government’s
    travel restrictions2
    . The recent move to Alert Level 2 has been a welcome reprieve, allowing us to
    get the domestic engine turning again, however it is clear that it will take some time for demand to
    return to pre-Covid levels. We are preparing for a scenario in which the airline is still 30 percent
    smaller than pre-Covid levels in two years’ time” says Mr McDowall.
    For the second half of the 2020 financial year, Air New Zealand’s network capacity is expected to
    be approximately 50 percent lower than the prior comparative period, driven by a reduction of
    approximately 90 percent in the fourth quarter. In light of this and the fact there was very little
    revenue coming in during Alert Levels 3 and 4, the airline is now expecting to report an underlying
    loss for the 2020 financial year.
    Given there is still a high degree of uncertainty regarding demand for air travel under New
    Zealand’s Alert Level 2, the period of time in which social distancing will be required on the aircraft
    1 Refers to gross cash outflows related to fixed operating costs, investing and financing activities and does not assume any benefit
    from passenger revenues given uncertainty with forecasting demand due to Covid-19. 2 A summary of the New Zealand Government’s Covid-19 alert system consisting of four levels is available at covid19.govt.nz/alertsystem/covid-19-alert-system. Under this system Alert level 4 imposes the greatest level of travel restrictions.
    Stock exchange listings: New Zealand (NZX: AIR) / Australia (ASX: AIZ) / ADR (OTC: ANZLY)
    MARKET ANNOUNCEMENT
    Air New Zealand postal address: Private Bag 92007, Auckland, 1142, New Zealand
    Investor Relations email: investor@airnz.co.nz
    Investor website: www.airnewzealand.co.nz/investor
    and the timing of a shift to Alert Level 1, the airline will not be providing specific 2020 earnings
    guidance at this time.
    Other significant items
    On 28 January, Air New Zealand provided an initial estimate of the Other Significant Items that it
    expected to report in its financial results for 2020. The airline is now expecting to recognise hedge
    losses and impairments on some aircraft assets as a result of Covid-19. As per the airline’s update
    on 28 January, these items are not included in the airline’s calculation of underlying earnings for
    the 2020 financial year. These estimates have been updated in the table below to reflect current
    expectations, however, are still subject to further review by both the airline and its auditors.

    De-designation of hedges
    Air New Zealand’s Group policy is to hedge up to 90 percent of its expected fuel consumption for
    the next three months, falling to a maximum of 30 percent after twelve months.
    With passenger demand at historical lows, the airline sought to maximise utilisation of aircraft by
    operating charter and repatriation flights, as well as deploying passenger aircraft on cargo-only
    missions to deliver New Zealand products to other countries and bring critical medical supplies
    back into the New Zealand market. Despite this, there has been a substantial reduction in overall
    capacity, and accordingly fuel consumption, which has resulted in fuel hedge losses for the period.
    These losses were partially offset by gains from closing out foreign exchange contracts relating to
    foreign currency operating revenues and expenditures which are no longer expected to occur.
    Stock exchange listings: New Zealand (NZX: AIR) / Australia (ASX: AIZ) / ADR (OTC: ANZLY)
    MARKET ANNOUNCEMENT
    Air New Zealand postal address: Private Bag 92007, Auckland, 1142, New Zealand
    Investor Relations email: investor@airnz.co.nz
    Investor website: www.airnewzealand.co.nz/investor
    The net impact of these items for the 2020 financial year is currently estimated to be in the range
    of $85 million to $105 million. This amount will vary if there are significant fluctuations in fuel prices
    or foreign exchange rates.
    The airline currently has un-hedged foreign currency debt as a consequence of the de-designation
    of revenue hedges resulting from a decline in expected foreign currency revenues. These liabilities
    are subject to translation risk as the liabilities are revalued each month. Gains or losses which were
    previously reflected in the airline’s Cash Flow Hedge Reserve will now be reflected in the Statement
    of Financial Performance. Fluctuations in foreign currency rates preclude the airline from providing
    an estimated impact at this time, but any amount will be reported within Other Significant Items.
    Aircraft impairment charge
    Air New Zealand anticipates that global demand for international air travel will rebuild slowly. As
    such, 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. Assessment of the impairment charge is underway
    as part of the 2020 annual results process and will be reviewed by the auditors. More information
    will be provided when the airline releases its annual results later this year.
    Reorganisation costs
    The airline had previously announced reorganisation costs in the range of $20 million to $25 million
    for the 2020 financial year. Following the swift decline in demand for air travel resulting from Covid19, the airline has confirmed reductions of approximately 30 percent of its workforce, which is
    expected to bring the total reorganisation cost for the year to a range of $140 million to $160 million.
    CEO commentary
    Chief Executive Officer Greg Foran says that the Covid-19 pandemic has had an unparalleled
    impact on the aviation industry, and the future landscape of the airline will look vastly different to
    what it does today.
    “This is without a doubt the most significant challenge our airline, and indeed the entire aviation
    industry, has ever faced. The implementation of domestic travel restrictions and border closures
    have been incredibly effective at slowing the spread of Covid-19 in a number of countries, including
    here in New Zealand, but they have also had a profound impact on demand for air travel.
    “Throughout this pandemic, Air New Zealand’s focus has first and foremost been on protecting the
    health and safety of our customers and our team, while also taking swift and decisive action to
    protect the long term viability of the airline and preserve liquidity. We are doing everything in our
    power to ensure Air New Zealand emerges strongly from this crisis.
    Stock exchange listings: New Zealand (NZX: AIR) / Australia (ASX: AIZ) / ADR (OTC: ANZLY)
    MARKET ANNOUNCEMENT
    Air New Zealand postal address: Private Bag 92007, Auckland, 1142, New Zealand
    Investor Relations email: investor@airnz.co.nz
    Investor website: www.airnewzealand.co.nz/investor
    "I am extremely grateful to our team of Air New Zealanders who have remained focused on getting
    our business up and running again and providing the high standard of customer service and care
    that we are known for, through what can only be described as an extraordinarily difficult time.
    “As we farewell a large number of our talented and immensely hard-working people from all areas
    of the business, I want to take this opportunity to thank everyone for their exceptional service to
    Air New Zealand.
    “I also want to take this opportunity to thank our customers - we know it hasn’t been an easy time
    for anyone amidst this crisis. As we begin to operate more flights our immediate priority is ensuring
    customer safety and restoring your confidence and desire to travel. There is no playbook for the
    situation we are currently facing, so we need to create our own. We appreciate your patience and
    ongoing support of Air New Zealand as we navigate our way through this” says Mr Foran.
    Conference call to be held today
    Air New Zealand will host a 30-minute Q&A session for investors and analysts today at 2.00pm
    NZT. Participants can register for the conference call here.

    courtesy of Bell Direct
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    ( DYOR )
    i hold AIZ

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