Kirakoto. Welcome to Shared Lunch. I'm Garth Bray. I hate to be Captain obvious, but if you are an airline and you're not flying, you can't make money. And sadly that's been the picture for part of Air New Zealand's fleet. Up to a fifth of its planes grounded at any one time thanks to engine trouble. That's also dragged down its results. You add into that higher non fuel costs and a weak economy where fewer people are flying domestically,
how on earth are they going to chart a profitable future? Well, funny you should ask Richard Thompson, the CFO might have something to say about that. Before we hear from him. It some important information you should always consider before investing.
Investing involves the risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend breading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recording.
So, Richard Thompson, I want to start actually with your own personal approach to aviation. Welcome to Sharesy Shared Lunch.
Thanks Gar good to see you.
Yeah, thank you you are a pilot in your own.
Right, Ah, yes, amateur.
So I've got a private pilot's license which is current, which I did thirty five years ago. I fly a little bit around sort of the country down in Central Uta. I go up here sort of once or twice a month. Not enough love it, but yeah, it's not quite the same as flying a jumbo, but it's my little outlet.
So being someone that's always been interested in aviation, it must be a bit of a dream to be working here.
It's a lot of fun. I've first joined here in two thousand and four and have had an association in a professional capacity with the airline since two thousand and one or two.
I think it was. It's an interesting industry to be.
Part of and a fabulous team to be part of, and we're very proud of them. No matter what sort of setbacks we're dealing with at any point in time, the team has remarkable resilience and just get out every day with a smile on their face and get the job done.
I guess the idea is that if you're a pilot, you have to I think someone said to me once, panic slowly.
Yes, So I think Greek said there, and I think, well, I think panic calmly, calmly. Yeah, sometimes you can't be too slow about it, but certainly you just want to sort of take stock of the situation, don't rush to conclusions, and just sort of calmly work your way through the sort of the curveballs that we get dealt from time to time.
So let's maybe just refresh people on the top line results that you had out of the last result there. How are things looking at the moment.
Yeah, it's a reasonably tough environment we're in at the moment. Garth.
As evidenced by the last two years results, we made it one hundred and eighty nine million before tax in the year just finished thirty June, one hundred and twenty six after tax, and there are two or three things going on that are influencing it results. Sounds like a lot of money in the absolute terms. I guess it is a lot of money, but we've got four or five billion dollars of aircraft in associated infrastructure, so as a return on total assets, a return on investment, it's
not where we want it to be. Three or four things going on there relatively at the stage week Domestic economy where optimistic that sort of improvements on the horizon is monetary policy ease these as dairies going well, that will filter through into the economy. Tourism is coming back by bit, which is good to see, but relatively weak economy just at the moment. And then in combination with
that we've got the much publicized engine challenges. So one of the great virtues of the New Zealand has always been we've continued to invest in new aircraft and equipment, which has kept the experience very fresh. In the economics
of new aircraft are pretty good. We've just been a bit unfortunate in the most recent environment to have an exposure to what's called the Trent thousand engine which we operate on the seven eight seven, and the geared turbofan Prats engine it's called the eleven hundred on the narrow body jet, and they are relatively new pieces of technology.
They are safe, they are very economic. The issue that we've got is that the maintenance cycle on these engines is about a quarter of what it would normally be, So most of these wide body Euro engines on the seven eight seven would normally fly for three three and a half thousand what we call cycles. It's starting engine turning it off effectively a flight. They are lasting at the moment about anywhere between seven hundred and nine hundred cycles,
so quite a bit less. And the problem that it causes is we have to take the engine off the aeroplane that has to go into an overhaul facility. Because neither ourselves nor Rolls Royce the engine manufacturer, expecting any of this to happen. They don't have a big enough global network of facilities to cope with the volume of these early engine removals.
And so not just from any Zealand just.
From the New Zealand, it's a global issue. We're probably unique in this part of the world in the Southern Hemisphere having that engine, but there's a lot of Northern Hemisphere carriers that have got it. So the engine ends up in a queue to get fixed, and that queue
at times has been over a year long. So it's meant that we've had at times or right now, four or five of our fourteen to seven eight sevens on the ground and four or five of our brand new A three twenty one's on the ground, and a business that makes margins as fine as our own relatively thin margins. Having twenty percenty of your domestic jet fleet sitting on the ground, costing you money but not earning an income, has a negative effect on financial performance.
Obviously, does an aircraft make any money at all when it's sitting on the ground.
None. No, it spends money.
And that's one of the other factors in all of this is to actually keep the aircraft on ground we call it AOG. To keep that position at twenty percent of the fleet has required us to spend a whole lot of money in the background to maintain it there. If we're not least triple seven aeroplanes or we've leased in twenty plus spare engines for the narrow body jet fleet, actually the ground at fleet would be much bigger than it is. But that's a huge impost on the business.
We're getting some compensation for it, but in the round we're getting roughly thirty cents in every dollar it's costing us. So that's it's been a big drag on the business.
I want to talk about that because presumably if it's a manufacturer of fault, it's not performing. I mean, obviously there's nothing like the Consumer Guarantees Act that's working here, there'll be some pretty serious litigation going on. Is this a negotiated settlement effectively between you and the manufacturers to achieve that or is it an advance on what might come later.
No, it's a negotiated, ongoing settlement, so it's not full and final. As long as the problem persists, we hope to be able to negotiate more compensation, but it's not a given. And one of the reasons why it's more challenging than you think it might be is in New Zealand signed the contract on the Rolls Royce engines back in two thousand and four, so that contract was signed twenty one years ago, so we're out of any sort
of traditional engine warranty period. Obviously, there are commitments in the contract keep us in a spares position, but really the terms of those arrangements didn't contemplate the environment that US and all these other airlines with the same engine type are grappling with. So the negotiated settlements we're doing the best we can, but it's not as straightforward. Does it probably should be, or or might look to a layperson.
Does that change at all the kind of approach you have to how you'll handle engine fleet purchases these kinds of things in the future. Are you're going to mix things up a bit, Are you going to put better agreements in place? How does it change? It's a great question, Garth. I'm not sure you can put better agreements in place. If the engine manufacturers had to make good to the last dollar, all the losses incurred by these airlines around the world would probably go bankrupt themselves.
So there's sort of a limit to how much they can cover. But I think if there's a lesson in all of this.
There is. We were a very early move on the seven eight seven.
We were actually the launch customer for that aeroplane end engine with A and A at that point the engine hadn't been built. And on the GTF the Pratz engine. It's a great engine, but we're a relatively early mover. If there was one thing you'd put sort of the internet in the institutional archive is maybe god a little bit later, wait until these things have got five or six years on wing and then pile into it. I think it's the lesson there in terms of sort of
going back to the engine itself that we've got. They are good engines and When they're performing, they perform really well. We've got a bit of diversity going forward on the seven eight seven. We have both the roles and the gen X gen X on the new airplanes that are delivering starting to deliver from early next year. And we've got a mixture of the old V twenty five hundred and the GTF on the airbus fleet, so we do have a bit of diversification of technology across the airline.
But so, how did you reach the view that you would have achieved substantially higher revenue without this problem. I think it was like one hundred and sixty five million was the figure that.
It's meat of compensation.
Wow.
Yeah, So the actually the cost to us is in gross terms two hundred and fifty three hundred million, and that's a combination of a number of factors. One, we are flying at the moment the wrong aircraft types to the wrong markets. So we've got great big Triple sevens with huge premium cabins flying up to Japan, for instance, which is the wrong size aeroplane and the wrong cabin mix for that market. We've got higher variable operating costs,
so that's expensive. We've got the cost of leasing extra aircraft in to keep the network intact to the extent we can. So we've got as I said, three triple seven three hundreds that we've rented in short term. By that I mean anywhere between three and six years, and
so that's an expense. All of those aeroplanes are in a different configuration to our own, so we carry an entire bespoke parts pool for the aeroplane, different catering carts, the seats themselves have got different componentry on them, so we have to carry huge inventories of different components.
So you've had to buy a whole bunch of spears.
We have to do the millions of dollars of all that.
And then on the narrow body jet type or jet fleet I alluded to before, we've had to keep the fleet flying. What we've got flying, we've had to leasen a huge number of spare engines. Normally we would have four spares in normal times. We are carrying twenty soon
to go to twenty one, and these at enormous cost. So, without giving too many secrets away, the cost of renting these engines runs to up to a couple of one hundred thousand US dollars a month per engine, and that's before you start burning any time off the engine because there are life limited parts on it. So the total cost of that's enormous. So that's the second big issue.
The third issue is because we don't know when this problems exactly when it's going to cure itself, and we want to be ready to fly the full network when the engine issue recovers. We're carrying most of the staff that we were carrying pre COVID in different parts of the business pilots, airports, engineering and maintenance.
That has to be a lesson from COVID, surely, because I think as a company you lost a huge number of staff four right, so.
You also we've got all the staff for that very reason. We've learned through the COVID that it's really hard, particularly in a country as small as this, with a highly specialized workforce. You can't just magic them up. So we've got everybody on deck, but we are flying twelve percent less capacity than we were in twenty nineteen. So there's a big scale this economy occurring there in the short term, but we are playing a long term game, so we're not chasing it down.
We're prepared for the upswing. Lolocky, you've got a bit of a bank balance. They're a cushion the falls.
It is helpful.
We don't take it for granted though, and we certainly don't want to waste it.
That's I mean, that's on top of a high cost environment, as I understand, where you're paying a lot more. What sort of extra costs are you carrying that everybody is facing if they're in the airline.
Yeah, I think so everybody in the airline business is facing higher labor costs, although that that is starting to moderate, has moderated over the last year or two. Engineering parts and components are still incredibly expensive. Through COVID, the global
aeronautical supply chain was interrupted badly. You've got you always think about Boeing, Eearbus, General Electric roles, but actually each of those big manufacturers have got huge supply chains of much smaller or organizations, a lot of whom or not a lot of whom, but a number of whom went bankrupt and COVID. You have got one customer might be Boeing. Boeing is not buying anything off you.
You're on life support.
So a lot of them disappeared from the landscape during COVID, and some of them haven't come back, and the ones that are back are inundated with demand can't keep up with it. So classic economics, supply demand even't got much supply, plenty of demand. Guess what that does to prices. So we're still seeing that increase materially, and we buy a lot of those parts and materials in US dollars, So the current exchange rate isn't helpful on that front either.
But I think, gosh, why are you still shut up shop and go home kind of thing?
Oh no, we love it.
We're New Zealand's largest deer carrier. You know, we obviously the biggest oper domestically. We've got a big network domestically, we sort of cover just about everything.
We've got some.
Really good regional operators here Chats sounds a great barrier.
More deals with them, you think coming out in.
Origin they do some great jobs, sort of in some of the smaller ports, really good job. They're facing similar precures to us, and we're increasingly working with them where we can to just sort of help each other out.
That govern announcement around I think it was like a thirty million dollar facility to try and help that in lining sort of enabling them to take it straight through to your service or whatever. Does that actually is that going to help it all?
I think it will help. We shouldn't overstate the benefits of that, but it is beneficial.
And does that make those smaller regional flights potentially more viable though smaller, it should help, yes, during christ down with it.
It won't bring the costs down, but it might help with the revenue and loads.
I mean, all this kind of comes back to what does it cost to fly around? I think I heard Greg saying, like anything under two hundred bucks, you're not really making any money.
I think that's probably right. Little know in fact, but fun fact is the smaller the aeroplane in, the shorter the sect you're flying, the higher the seat cost. So we often get sort of asked questions why it costs as much to fly from Timaru to Gisbon as it costs to fly from sort of Auckland to Brisbane, for instance,
or even further afield, And it's just scale economies. It's the same reason why it costs you a fortune to go on a scenic flight around Mount Koch and a six seater versus you know, flying in New Zealand from Dunedin to Auckland, you're.
Just spreading the costs over over a much bigger base, the bigger the aeroplane gets. Because it's an era of pretty stiff competition. I mean, obviously there's renewed competition in the domestic marketplace as well. That must make things quite challenging.
Yet again, yes it is.
We've always had competition on domestic main trunk and that competition is as intense as it's ever been. We've got a great network, a great product. We're very proud of the service we deliver. We're motivated to that as affordably as we possibly can, working hard to ensure that we are price competitive. But we've got a very big, ubiquitous network in New Zealand and we're the only ones actually in the country that fly to virtually all of these places.
The tough thing was some of the competition is the competition gets to pick and choose the ones that they want to go after us on and so therefore tend to restrict the flying to the biggest, most lucrative sort of markets in the country.
Behind all of that are some very patient shareholders. And I'm not even talking about the Crown at this point. I mean, I think I'm not wrong in saying that the Any Zealand is probably the most held stock or one of the most held stocks on the shareses platform. It does seem to have quite a wide base. What's going on there because the results are, as you say, challenging.
Is it right?
Why people hanging on to it?
Well, I don't know.
We don't know whether people are hanging on to it or not. That we people buying and selling shares all the time.
Well, you're selling home buying a few. At the moment. The buyback that's been going on, what are we about forty million dollars through.
It's it's one hundred million dollar buy back, which we're sort of planning what we need to have to sort of finish by the end of the calendar year, and we're a bit over halfway through that.
And reasonable prices. He would have to say at the moment, yes, that's right, Yeah, and that's obviously we wouldn't be buying shares back if we didn't think if we were confident in the in the long term, medium long term value of the company.
There's no point in us buying shares back for more than we think they're worth. But we're in the middle of that process at the moment. We've got a capital management framework that we're working tightly within, and we just had some flexibility within that to give offer an opportunity for shareholders.
That might want to sell in the buyback. The ability to do that.
That comes at a cost. I mean, that's potentially funds that you could arguably use for to support a dividend policy. That's a lot that's more generous than what it is at the moment.
So we've got a different way of dealing with the dividend. So the dividend policy we published a couple of years ago links it to earnings, which we think is appropriate. So it's anywhere between forty and seventy percent of rolling net profit after tax. So as earnings come under pressure, the dividend comes down. As earnings improve, the dividend goes up.
But we treat decisions around buybacks entirely independently of earnings in the dividend policy, so the buyback is more a function of the strength of the balance sheet, our liquidity position, our capex profile, our gearing ratio, how much debt we've got in the business, and whether we've got the ability to thunder buy back while maintaining all our capital management metrics. So we the scope for the buyback program we're running today.
But I think back to your thing around earnings and shareholders patients, which I think you know it's an important it's a very important question. We're obviously confident in the future of the organization, but short term earnings are under pressure and through sort of three reasons I've given some of them, but three things that make a successful airline generally you need some scale so the business. It always helps, particularly in a high inflation environment. It helps if the
business is growing and we have plans to grow. We've got a great fleet plan we're getting We've just taken delivery of two new A three twenty one narrowbody jets and we're getting some seven eight sevens early next year. Five years late, mind, but they are arriving.
But it's important to have growth.
With twenty percent of the jet fleet on the ground at the moment, we haven't been able to pursue the growth agenda we would have liked, but that is coming. The second element of it is new technology. New aircraft technology generally or almost exclusively lowers the cost seek cost of traveling, and we can use that to either make fears more competitive and grow the top line end or
bankerter's margin, usually some combination of the two. But with our very best aircraft ten or eleven of them grounded at the moment, we are not getting the fleet economics that we would have expected.
We're paying for it.
So we've got half a billion dollars worth of brand new A three twenty one sitting around at the moment, burning a literal and figurative hole in the ground.
But we're in the ballot.
We're not getting the balance, so we reliant at the moment on just good cost control, and that is hard and high inflationary environment, but we're making good progress on there. So we've got one of the three levers sort of going for us at the moment. But that and that will be that will persist over twenty twenty six. But our expectation now we're getting to the closer to the
end of these engine problems than the beginning. None of us thought it would take this long, but over the course of financial year twenty seven and twenty eight, we would expect those issues to start resolving themselves and we'll get onto a normal footing and start to have those three levers working in our favor.
A couple of years back, I think when you had the capital rays that sort of set yourselves up for all this twenty twenty two, and you were talking about being app at about ninety percent of COVID levels. By now, yes, it's right nowhere, nowhere near it.
I think we're at.
About eighty eight of pre COVID levels eighty seven, but at huge cost. All these rented triple sevens, all these rented engines, a whole bunch of new aircraft that we're paying for in terms of depreciation and invested capital that aren't doing anything. And so while we're close to that level of flying, it's coming at a significant cost burden that what we didn't anticipate nearly four years ago, Garth was the capital rais'd.
Be nice to get some tourists too, It would something like what I think I read fifty or fifty five percent levels coming out of China compared with pre COVID levels. Obviously that's an industry wide problem, but it's it's it's another one of those levers that anyw Zealand's already always been quite keen to sign, pull and support what's what's going on there.
At a total country level, I think we're at eighty seven eighty eight percent of where we were visitor arrivals pre COVID, but within that number, averages are deceiving. So within that number, actually the US is ahead of where it was pre COVID. So the exchange rate of US tourists coming to New Zealand now actually the exchange rates amazing for all the reasons why it's tough for a key to travel to US the US at the moment, so US is sitting actually well above where we were pretty COVID.
Australia just behind.
I think they might be ninety two to ninety three percent of where they were, but they're strong to demand out of Australia. So it's one of our best performing markets, as you say or allude to the big gap at the moments out of China market. So we are I think half or very close to half of where we
were before. I think I've read somewhere it's like over five hundred dollars for someone to come here before they've even bought the ticket, right, there's a huge visa cost, and then you've got that extra visa levy that's been put on for tourism and conservation purposes and instead of pricing ourselves out of the.
I don't think it helps. So I'm not for sure it's five hundred dollars. It's four forty one, I think for.
The visa and then the hondy on top and then on top.
So is expensive us in our Singapore offic a couple of weeks ago talking to the team up there, and there's no doubt it's a friction point compared to other countries who have got much lower sort of costs of entry. And I think one of the tough things with the visa is that it's a levy that's imposed at the time people are making decisions about where they're traveling. It's not like they've arrived in country committed, you know. So there's no doubt in my mind that it is influencing.
Where people choose to travel.
We are have become a much higher cost destination than we were in the past, still very desirable and we're still getting good and bound tourism, but that is a friction point.
I think all of this makes me think, like I said, how on earth do you sort of keep turning up with a smile on your face then when it feels this challenging. I mean, any aircraft that sets out without knowing when it's going to land, where it's going to land is in some real.
We're an airline that's been around for eighty five years. There's a huge amount of pride in the airline is it is an amazing place to work. A lot of our workforce because they are aeronautically minded, with the single biggest employer in the country by a long way of people in this industry. We've got a lot of people on the staff who have been with the company for twenty years, like me, thirty forty fifty. In fact, I have a member of staff who has celebrated sixty years
with the company. This sort of huge commitment to the cause. People A lot of people on the staff have seen the various ups and downs through the years, and there have been people are philosophical. I think about where we're at in the cycle. We have a good plan going forward, great fleet plan, great product, you know, the wide body fleet at the moment, it's just starting now. It's been refreshed. We've got four of the fourteen seven eight sevens now
with the new interiors in them. We fly the flag offshore lots of different countries in North America, Japan, North Asia, Southeast Asia, Australia, so where one of the country's biggest cheerleaders, and people just get a thrill out of that. And it doesn't seem no matter how tough the situation is. People we just get that fulfillment and pride out of representing the country as well as we can, and.
That's what gets people or keeps people going.
Okay, Richard Thompson, if we'll return our seats to the upright position, I believe that our flight here has ended. Thank you for flying Cheesy Shared Lunch this week. If you like that, let us know. If there's something else you want to know, let us know. And I hope you enjoyed that wherever you listen to it straight off the app on YouTube. I heart all the places you get your podcast. Omit. That's us for this week. H