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2010 Investor Day1111
26 November 2010
Investor DayAir New Zealand
FIRST IN, BEST DRESSED
2010 Investor Day2222
Rob McDonaldChief Financial Officer
Welcome
FIRST IN, BEST DRESSED
2010 Investor Day3333
2010 Investor Day4444
Rob McDonaldChief Financial Officer
Business Update & Loyalty Programme
David MackrellDeputy Chief Financial Officer
FIRST IN, BEST DRESSED
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Line Up
• Business Update
• Domestic
• Tasman/Pacific Islands
• Long Haul
• Lining up the Initiatives
• Financial Management
• Hedging Strategy
• Fleet Management
• Loyalty Programme
2010 Investor Day6666
Business Update
• Revenue momentum continues to build
• Increased fuel prices
– Move in both crude and crack spread from September
• Favourable currency movement
– But hedging delays benefit
• Enjoying recovery across most markets
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Industry Comparison
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Domestic
• New competitive environment
• Adding capacity as demand improves
• Fleet replacement programme starts January 2011
– A320 delivers lower per seat costs and increased capacity
– Configuration (171 seats) delivers a platform which allows a cost base competitive with low cost carrier
• Initiatives in regional markets
2010 Investor Day9999
Tasman/Pacific Islands
• New product offering “Seats to Suit”
– New A320 configuration adds capacity
– Delivers a cost base that allows us to compete across all customer segments
– IFE allows flexibility of product mix configuration for every flight
• Increased penetration in Australia through online sales
• Access growing market of leisure travellers across Tasman market
• Very encouraged by bookings (29% higher than last year with 11% more seats)
• Almost flawless operational conversion of network to new business model
• After early feedback we will remove a row to create increased pitch in premium seating zone
2010 Investor Day10101010
Long Haul
• Launch new product on 777-300 ER April 2011 once three aircraft are in fleet
– First Long Haul operational flight mid January 2011
• Adding capacity back to match improving demand
• Focus on improving depth of current routes
• Strong loads across network
• 777-300ER – 338 seat count gives cost base to compete with low cost Long Haul carriers
• New Product targeting
– 4% improved RASK through optimised cabin mix
– 4% improved RASK through revolutionary product – Skycouch, Space Seat
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Financial Management
• Cash balance remains strong at more than 20% of revenue despite recent debt repayment
• Gearing stable and healthy at 47%
• Moody raised rating to Investment Grade Baa3
• Dividends maintained through Financial Crisis, increased in 2010
• Growing pool of unencumbered assets
2010 Investor Day12121212
Lining up the Initiatives
• Seats to Suit
• New Long Haul product
• Enhanced Loyalty programme
• Proposed Alliance
• Leveraging RWC2011
• Layering in capacity will improve cost efficiency
2010 Investor Day13131313
Hedging Strategy
• Objective of Hedging Strategy is to protect business from short term volatility
• Hedging provides time to adjust accordingly
– Hedging profile reflects speed of adjustment
• Continuously monitor and adapt hedging strategy
• Recent independent review reaffirmed appropriateness of strategy
2010 Investor Day14141414
Fuel Hedging Profile
Percentage Hedged by Month
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Current Maximum Minimum Target
Oct
-10
Nov
-10
Dec
-10
Jan-
11Feb
-11
Mar
-11
Apr-1
1M
ay-1
1
Jun-
11
Jul-1
1Aug
-11
Sep-1
1
Oct
-11
2010 Investor Day15151515
Fuel Hedge Position*
• The second half of FY11 is 75% hedged
Volume bbls Ceiling US$ Floor $us
Singapore Jet collars 1.9m 91 81
WTI collars 1.5m 81 71
* Fuel hedge position as at 19 November 2010
Volume bbls Ceiling US$ Floor $us
Singapore Jet collars 0.6m 93 84
WTI collars 2.1m 82 72
• The first half of FY11 is 89% hedged
2010 Investor Day16161616
Currency Composition
2010 Currency Composition
(1,000)
(800)
(600)
(400)
(200)
0
200
400
USD
Fuel
USD
other
AUD
GBP
JPY
EUR
CNY
CAD
NZ
D (
m)
2010 Investor Day17171717
Currency Hedging
• 2011 US dollar operating cash flow exposure is approx. 91%
hedged at an average NZ$/US$ rate of 0.66
• US$373m of future capex commitments are hedged at NZ$/US$
rate of 0.73 (spot)
2010 Investor Day18181818
Currency Hedging Profile
Hedge Rates and Hedging Percentages
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec FY11 Mar FY11 Jun FY11 Sep FY12 Dec FY12 Mar FY12 Jun FY12 Sep FY13 market
Ind
ica
tiv
e h
ed
ge
pe
rce
nta
ge
0.3500
0.4000
0.4500
0.5000
0.5500
0.6000
0.6500
0.7000
0.7500
0.8000
0.8500
Ex
ch
an
ge
ra
te v
ers
us
NZ
D
Indic Hedge %AUDCADEURGBPUSD
2010 Investor Day19191919
Hedging Activity Reduces Earnings Volatility
0
50
100
150
200
250
300
350
400
FY06 FY07 FY08 FY09 FY10
(Year ended 30 June)
$m
Normalised earnings before tax
Earnings before tax excluding any derivative related operating gains/losses
2010 Investor Day20202020
Fleet Management
• Significant fleet replacement preparation and activity
• 737 replacement programme on track
• 777-300 introduction on track
• Flexibility of fleet proving valuable given 787 delays
– 777-200 leases extended
– 767’s to remain in fleet
– 747 purchased
2010 Investor Day21212121
Fleet Activity
??-(3)(2)747 Exits
(1, ?)(2)(2)(3)-737 Exits
??---Boeing 787-9
-
3
-
FY
14
-
4
-
FY
15
12**2**Airbus A320
62-Boeing 777-200ER Reconfiguration
-23*Boeing 777-300ER
FY
13
FY
12
FY
11
*1 x owned, 2 x operating lease
** Operating Leases
2010 Investor Day22222222
Loyalty Programme
• Creates loyalty to Air New Zealand
• Significant sales channel
• Growing membership (10% in last 6 months)
• Core part of our business but not a separate business/profit centre
• Stimulates travel as well as rewards travel behaviour “earn to fly”and “fly to earn”
2010 Investor Day23232323
Loyalty Programme
• Enhancements to Loyalty Programme
– Expanded financial partners
• Added ANZ National, Kiwi Bank & American Express
• BNZ Global Plus Relationship continues to grow
– Enabled Airpoints earning through retail spend
• Partnership with Loyalty New Zealand (Flybuys)
• Introduction of Gift Store – allowing Airpoints to be used to buy non-air products
• More than half of Airpoints $ earned through non-air partner activity e.g. Credit card earning
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Stephen JonesGM Strategy
Trans-Tasman and the Alliance
FIRST IN, BEST DRESSED
2010 Investor Day26262626
Content
1. Regulatory structure
2. Tasman Market
3. Virgin Blue Alliance
4. Authorisation
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1. Regulatory Structure
• Single Aviation Market with Australia
• Open Skies Arrangements with other countries
• Fifth Freedom flying a permanent feature
2010 Investor Day28282828
Emirates Exercises its 5th Freedom Rights
• Emirates have fifth freedom rights allowing them to carry passengers point-to-point on the Tasman
• Emirates flight banks in Dubai encourage a morning arrival into,and evening departure from, Australian ports
• Tasman flight times allow a return journey during the day
• Marginal cost economics support competitive fares
• Consequently travel flow in their network estimated to be
– 70% of Emirates traffic is Tasman only
– 5% is Dubai
– 25% is other destinations
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2. Tasman Market is well Served
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Tasman Market Relative Size
Australian, New Zealand and Trans-Tasman Capacity Presence by ASKS for the 12 months to April 2010
Other Other
Qantas
Qantas
Jetstar
Jetstar
Jetstar
Virgin Blue
Pacific Blue
Pacific
Blue
Air NZ
Air NZ
Emirates
Tiger
Domestic Australia (74%) Trans Tasman
(19%)
Domestic NZ
(7%)
0%
20%
40%
60%
80%
100%
Ca
pa
city
Sh
are
Jetstar
2010 Investor Day31313131Page 31
Total Market Capacity in FY11 is Significantly Higher (10%) than FY08
0.0m
0.5m
1.0m
1.5m
2.0m
2.5m
3.0m
3.5m
4.0m
2005 2006 2007 2008 2009 2010 2011
Seat
s P
er
Ye
ar
Other
BI
AR
LA
TG
DJ
EK
JQ
QF
SJ
NZ
# of carriers
11.3% -3.0% -4.9% 3.5% 1.0%1.9%
10 9 9 78
2.7%
10 7
Yoy % cap change
Capacity Share by Carrier – Tasman Market
2010 Investor Day32323232
Tasman is Predominantly Leisure Market
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Tasman Capacity Growth over Longer Term
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Lo
ad
Fa
cto
r
Se
ats
an
d P
as
se
ng
ers
Month
Passengers
Seats
Load Factor
Passengers Trend
Seats Trend
LF Trend
Trans-Tasman Passengers, Seats and Load Factor
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3. Virgin Blue Alliance
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Hierarchy of Co-operation
EquityProfit ShareRevenue ShareCode ShareInterline
2010 Investor Day36363636
Where does the Value come from?
• Better Connections
• Better Frequency
• Better Distribution
• Market Stimulation
• Cost Savings
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Revenue Allocation Alliance with Virgin
Australia Tasman New Zealand
Revenue Pooling on Trans Tasman Sectors
Code-share on “Network Alliance Routes”
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• Not a replay of Ansett
• Not a replay of the Qantas TNA
– No capacity reductions and joint market share is only ~50%
• Not a profit share – carriers bear their own costs
• Doesn’t include stand-alone domestic sectors
• Doesn’t include Pacific Islands sectors
• Doesn’t include cargo revenue
What the Alliance is not….
2010 Investor Day39393939
Previous Alliance Proposals were quite Different
Feature QF1 QF2
2010 Investor Day40404040
Governance…How are Decisions Made?
Alliance Board
Air New ZealandCEO
Virgin BlueCEO
Alliance Revenue Team Joint Sales Team
Responsible for agreeing:
• Network
• Schedule
• Pricing
Responsible for agreeing:
• Marketing
• Sales
2010 Investor Day41414141
4. Authorisation
• Approval sought from ACCC and Ministry of Transport
• Draft Determination received from ACCC proposing to deny authorisation
• Capacity Conditions offered to allay DD competition concerns
• Subsequent ACCC Pre-Decision Conference held
• Final Determination expected by 20 December
• Minister of Transport decision expected in similar timeframe
2010 Investor Day42424242
Conditions Offered
• Six Sectors of concern identified by ACCC
– AKL-BNE, WLG-SYD, WLG-BNE, WLG-MEL, DUD-BNE, ZQN-SYD
• Maintain Minimum of Aggregate Base Capacity
• Increase Aggregate Base Capacity by 10% by Year 3
• Increase Aggregate Base Capacity by 15% by Year 5
• Maintain Minimum of Base Capacity on total market
2010 Investor Day43434343
What are the Process Options if Regulators Deny Authorisation?
• Option for ACT appeal if ACCC negative
– Full rehearing of case
– Same tests for authorisation as ACCC apply
– Courtroom style
• Judicial appeal possible if MOT negative
2010 Investor Day44444444
2010 Investor Day45454545
Norm ThompsonDeputy CEO
Tourism & Rugby Festival 2011
FIRST IN, BEST DRESSED
2010 Investor Day46464646
61% of Air NZ’s Revenue on our International Routes is from Offshore
International
Dom
estic
0
10
20
30
40
50
60
70
80
90
100
% of Air Capacity
by Air New ZealandAir New Zealand Revenue
Inbound v's Outbound(international routes)
61%
39%
International New Zealand
2010 Investor Day47474747
International and Domestic Tourismcontribute $22.4 billion to the Economy
Tourism Expenditure (billions)
12.9
9.5
International Domestic
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Tourism is NZ’s Largest Export Earner
Tourism
Dairy
Meat
Wood
Seafood
0
1
2
3
4
5
6
7
8
9
10
$ b
illio
ns
Value of Primary Exports
(Year ended 31 March 2010)
Source is Tourism Satellite Account 2010
2010 Investor Day49494949
70% of our Visitor Arrivals come from 5 Key Markets
China
4%
(110k)
USA
8%
(190k)
Rest of World
30%
(750k)
Japan
3%
(85k)
Australia
45%
(1.1m)
UK
10%
(250k)
TNZ research shows that
there is a market of 4.9
million Australians for
whom NZ is one of their
preferred destinations for
their next trip.
*Source: Understanding the “Active Considerers‟ Market in Australia, July 2010, TNS Conversa for Tourism New Zealand
2010 Investor Day50505050
-10 -5 0 5 10 15 20
Total
Australia
UK
USA
China
Japan
Germany
Korea
Canada
Singapore
India
France
Hong Kong
% change in arrivals, Top 12 markets, y/e Oct 2010
Source: International Visitor Arrivals, September 2010
Japan Market has Moved Back into Growth
2010 Investor Day51515151
The Highest Growth in Visitor Arrivals to NZ is Forecast to come from China
0 1 2 3 4 5 6 7 8 9 10
Total
Australia
UK
USA
China
Japan
Germany
Korea
Canada
Singapore
India
France
Hong Kong
Forecast average annual change in arrivals, 2010-2016
2010 Investor Day52525252
• Globally, cruise market has grown by 7.2% pa over the last decade
• The total value added to the NZ economy from the cruise sector is forecast to reach $346 million in the 2011/12 season (up from $190 million in 2009/10)
• More ships, more passengers on each ship = opportunity
• Opportunity capped by size of port
Cruise Market
2009/102010/11
2011/12
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
Pa
sse
nge
rs
Cruise Passengers
2010 Investor Day53535353
• Multi-day conventions contributed $398 million to GDP (yr ended June 2010) of which $112 million was from international delegateexpenditure
• Average spend by international delegates was $4,049* versus $1419 for domestic delegates
• Currently not competitive in international conferences of over 1000 people because of lack of appropriate facility
• Ministry of Economic Development is putting a major focus growing business tourism, especially the convention market
– Hence the proposal to build a national convention centre in Auckland that can host over 4,000 delegates
• National convention centre = opportunity
* Only includes expenditure on airfares that is likely to have accrued to the New Zealand economy
Convention market
2010 Investor Day54545454
• Tourism in New Zealand will be boosted in 2011 from RWC2011
• Air New Zealand is crazy about rugby
• We are a not a sponsor of the tournament
• Preliminary forecasts predict 85,000 international visitors to NZ over the duration of the tournament, with 43,000 being here at any one time
• 85,000 possible visitors = 85,000 potential ambassadors for New Zealand
• We play a critical operational role to ensure the smooth flow ofteams, official and fans around the country
The Opportunity
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Tournament v’s Peak
2010 Investor Day56565656
The Game Plan
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Making it Fly
• All aircraft available & building capacity to meet demand
• Creating off-site check-in
– Managing customers and bags from any location at any time
• Facilitating cruise ship movements around the five cruise ships that will be in New Zealand for the event
• Tailoring our service delivery across all customer touch points to reflect the excitement of the event
Operational Excellence
2010 Investor Day58585858
Making it Fly
• Commercially beneficial
– Not putting up the ‘full’ sign until the entire country is full
• Brand Advocacy
– Air NZ award winning service
– NZ ambassadors
– Creative marketing
• Stakeholder relationships
– NZ Inc
– Tournament responsibilities
We are all Winners on the Day
2010 Investor Day59595959
2010 Investor Day60606060
Rob FyfeChief Executive Officer
Overview &
Conclusion
FIRST IN, BEST DRESSED
2010 Investor Day61616161
The Journey
‘ATW Phoenix Award’ to …ATW ‘Airline of the Year Award’ in just five years
2010 Investor Day62626262
Deliberate Investment in Culture
2010 Investor Day63636363
Great leaps forward in innovation
2010 Investor Day64646464
Industry Developments
• Consolidation
• Growth of low cost in region
• We need to be bigger to be relevant
2010 Investor Day65656565
Transition from Rebuild to Growth
• Platform established
• Leverage for growth
2010 Investor Day66666666