31-Aug-2012 2:43 PM

Rob Fyfe bows out of Air New Zealand with projection for profits to double in 2013

Analysis

Outgoing CEO Rob Fyfe punctuated his final delivery of annual results for Air New Zealand (ANZ) with a surprising and bullish call for underlying profits in FY2013 to double from FY2012's NZD91 million (USD73 million). It is a possible financial achievement as much as it is a testament to Mr Fyfe's legacy of completely turning around ANZ financially, operationally and culturally. Mr Fyfe attributed the projected higher profits to ANZ's agility to quickly implement business improvements because it has the backing of its employees.

It is a diametric comparison to ANZ's competitor across the Tasman, Qantas, which a week prior posted its first loss in nearly 20 years as it struggles to turnaround its business as it combats an alienated workforce. The mood was far more sour at ANZ when Mr Fyfe joined, but through diplomacy, frontline exposure and the occasional splattering of body paint, Mr Fyfe has created an all-around successful airline. It is a rare achievement.

21% revenue increase on 0.8% capacity increase

ANZ reported year-on-year growth for the fiscal year ending 30-Jun-2012 in almost all key metrics, although partially as a result of a weak proceeding year that was heavily impacted by natural disasters at home and abroad. The growth was capped with a 21% increase in revenue on only a 0.8% net increase in available seat kilometres. Fuel added NZD248 million (USD199 million) of cost. ANZ's operating margin increased from 1.7% to 2.0% – meagre, but welcomed growth in a world otherwise reporting declining and negative margins.

Air New Zealand financial summary (NZD): FY2012 vs FY2011

Air New Zealand operating performance summary: FY2012 vs FY2011

Air New Zealand profit changes: FY2012 vs FY2011

Limited changes across network

Aside from ANZ's projected profit increase for FY2013, there were few highlights in the carrier's results, reflective not of poor performance but rather staying the course and managing well in trying times.

New domestic destinations were opened and the network gained from more efficient and larger capacity A320s further replacing Boeing 737-300s. While ANZ largely has a domestic monopoly outside of trunk routes, Mr Fyfe reported average fares have fallen 6%. A trial permitting same-day standby for domestic services will be extended.

Services increased across the Tasman in conjunction with partner Virgin Australia, of which ANZ owns 19.99%. Mr Fyfe said the carrier's trans-Tasman position, previously significantly loss-making, had become "sustainable". Mr Fyfe noted its advantage of having, with Virgin, a 50% share of capacity but 52% and sometimes as high as 54% or 55% share of passengers flown. The network is expected to be strengthened as Virgin further builds its corporate network and following the Feb-2013 cutover to the Sabre reservation system, which will permit greater and easier global bookings across its network, including the trans-Tasman.

Mr Fyfe reported success on the re-introduced Auckland-Bali seasonal service and expects it will return in FY2013 and possibly for a longer period of time. Cargo uplift increased as a result of ANZ seeing the full gain from its five Boeing 777-300ERs, which can carry 40% more cargo than the Boeing 747-400s they replace. Yields increased by 2.9%, a reflection of ANZ's long-haul network being tilted more towards North America than Asia, where other carriers are reporting deep losses on the cargo side. Overall cargo revenue was up 7.2%

Air New Zealand domestic performance summary: FY2012 vs FY2011

Air New Zealand short-haul international (trans-Tasman and Pacific island) performance summary: FY2012 vs FY2011

Air New Zealand long-haul performance summary: FY2012 vs FY2011

Strategy remains unchanged as ANZ considers more partners and North America services

The carrier's strategy remains relatively unchanged. The carrier discussed medium-term growth in long-haul markets during its 1H2012 results briefing and its focus on partners when Christopher Luxon was named to succeed Mr Fyfe from 01-Jan-2013. Mr Fyfe was eager to play up partnerships, saying over the next 12 months there could be "some quite significant alliances and relationships established".

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Alliances and other initiatives will contribute to ANZ's goal of boosting its already solid 80%-plus load factor.

Mr Fyfe disclosed ANZ was considering partnering with Virgin Australia to bolster its North America network. Growth may occur on opening a fourth North American gateway to supplement Los Angeles, San Francisco and Vancouver. The carriers could look to jointly market trans-Pacific services, giving more convenient itineraries for dual-destination passengers looking to fly into one country and out of the other. Qantas had long marketed such opportunity with its Auckland-Los Angeles service, which it suspended in May-2012 in order to shift the growth into its domestic market, where Virgin Australia is making inroads.

Marketing of services would not require regulatory approval but a codeshare or joint venture would. Virgin would have to address an ANZ trans-Pacific partnership with its trans-Pacific ATI partner Delta. But with Delta seeing success on its Sydney service, its sole route in the Pacific, and a global network to look after, ANZ nudging in may be a small concern. Virgin for a few years has been interested in replicating – with its own metal or virtually – Qantas' dual-destination advantage. Mr Fyfe provided no timeframe, noting that with the Feb-2013 Sabre cutover, “Virgin have a tremendous amount on their plate”.

Mr Fyfe briefly mentioned South America remains of interest to the carrier. As CAPA previously noted, the continent remains a struggle to viably serve due to a lack of potential partners and viable routes. However, a warning from International Airlines Group to its Iberia subsidiary to prepare for reinvigorated competition with Latin American carriers could be a hint that Brazil's TAM Airlines may not join sister airline LAN in oneworld. A potentially independent TAM could be a carrier for ANZ to partner with, although this alliance movement has yet to play out.

Mr Fyfe reported a rebound in the key Japanese market, which quickly collapsed following the Mar-2011 earthquake and resulting tsunami. Also in north Asia Mr Fyfe noted the slowdown in China, but ANZ is far less exposed with only a single destination, Shanghai, having cut Beijing during its long-haul review.

ANZ's aircraft delivery timetable is relatively light for the next two years.

Air New Zealand aircraft delivery timetable: FY2013-FY2016

Increased profit improvement initiatives

ANZ updated its profit improvement initiatives, announced in Feb-2012, to include a targeted NZD55 million (USD44 million) from supply chain and labour efficiency, which it had not calculated in Feb-2012. These initiatives include changes from its long-haul network review. ANZ expects to realise NZD130 million (USD104 million) in FY2013.

Air New Zealand profit improvement initiatives (NZD): FY2013-FY2015

Area	Total – New (Aug-2012)	Total – Old (Feb-2012)	Implementation Date (no later than)
Overhead costs	60 million	60 million	FY2013
Ancillary revenue	40 million	40 million	FY2014
Network	60 million	60 million	FY2014
Fleet	35 million	35 million	FY2015
Supply chain and labour efficiency	55 million	n/a	FY2015
Total	250 million	195+ million	FY2015

A quiet period as ANZ prepares for CEO changeover – and then more innovation

ANZ is understandably entering a quiet period as Mr Fyfe prepares to handover to Mr Luxon, a capable executive who brings a wealth of experience in retail, the sector airlines lag behind in savvy marketing and selling. But for now, unless any new partnerships fan out in the coming months, the quietness at ANZ provides all the more opportunity to commemorate Mr Fyfe's impressive, to say the least, turnaround of ANZ and reflect on the platform he has established for his successor to take the carrier further.

Background Information

Air New Zealand fleet: 30-Jun-2012