Air NZ Expects To Continue To Improve Performance

Media Release
28 August 2007

Air New Zealand Expects To Continue To Improve Performance Despite Challenging Market Conditions

Air New Zealand today announced a profit of $268 million before unusuals and tax for the year ended 30 June 2007, an increase of 79 percent on the previous year.

“This is the strongest result in the past decade and comes off the back of significant growth in passenger revenue, and a continued reduction in unit operating costs,” says Chairman John Palmer.

The Board has declared a fully imputed final dividend of 5 cents per share. Combined with the interim dividend of 3 cents per share and the special dividend of 10 cents per share, total distributions to shareholders will be in excess of $190 million in respect of the 2007 financial year.

Net profit after tax was $214 million, 123 percent up on the previous year.

“We are pleased with the level of profitability, particularly in light of the ongoing pressures we face from competitors, and the challenge of accommodating increased fuel costs and excess charges at some New Zealand airports,” says Mr Palmer.

“The challenge for our management team is to continue to adapt and improve the performance of the airline and, based on their track record of the past four years, I have every confidence in their ability to achieve just that.”

Highlights of Air New Zealand’s year included:

* Cutting the price of domestic travel by up to 26 percent in February 2007

* The introduction of a range of innovative pricing and marketing initiatives including Grab-a-Seat, The Pink Flight and MTV Flight, the $1 Fare promotion and Kids flying free for the July school holidays

* Launching new routes from Auckland to Shanghai and Auckland via Hong Kong to London

* Committing, as the launch customer, to the purchase of further Boeing 787-9 aircraft - bringing firm orders to eight.

* The purchase of four Boeing 777-300ER aircraft

* Completing the introduction of the Boeing 777-200ER international fleet

* Introducing eight Q300 regional aircraft

* Completing a significant reorganisation of Tasman and Pacific Island services

“The past year will go down as one of the most pivotal and exciting in Air New Zealand’s history. All the hard work of Air New Zealanders over the past few years to shape an airline that the nation can really be proud of is starting to pay off,” says Chief Executive Officer Rob Fyfe.

“Air New Zealand is a nimble airline whose world class product and services combine with a low operating cost base and uniquely Kiwi personality to provide a strong platform for growth both domestically and internationally,” says Mr Fyfe.

“We firmly expect that the success we have achieved at home and in existing and new international destinations will continue over the next year as we further seek to expand our business.”

Mr Fyfe says continuing to improve the domestic travel experience and strengthening the Tasman proposition will be ‘front and centre’ over the next few years, alongside the continuing expansion of the international network.

“Our success to date has been the result of continually making domestic travel more affordable, never losing sight of what our customers value, and not being afraid to innovate and try new ideas. This same approach has seen our Tasman business return to profitability, but rather than ‘take a breather’ we intend to continue to adapt our Tasman operation and significantly enhance our product and service proposition to cushion us from the next capacity wave that we expect to hit the market.”

By rationalising capacity and reviewing flight schedules over the past twelve months, Air New Zealand has improved load factors on Tasman and Pacific Island routes from 70.9% in 2006 to 75.3% in 2007. While these load factors are still modest by international standards, this has had a significant positive impact on profitability on the Tasman.

Operational review

Operating revenue for the year was $4.3 billion, an increase of $492 million or 13% over last year.

Passengers carried increased by 4.9% to 12.5 million across the Group and this combined with improved yields as a result of the great customer reaction to our new Business Premier and Premium Economy proposition were the key drivers of this improved revenue performance.

Engineering was able to accept additional external service and design work having agreed a competitive labour agreement with our staff and having completed the Boeing 747-400 refit programme. Subsequent to 30 June 2007, we announced that Air New Zealand Technical Operations has now secured a contract to service wide body aircraft for Hawaiian Airlines, securing up to $45 million of revenue over the next five years and Air New Zealand’s Safe Air has secured a six-year contract with the Royal New Zealand Air Force to service C130 Hercules, P3 Orion and Iroquois aircraft worth $110 million in revenue.

During the year we continued with our business transformation programme, which delivered a further $128 million of revenue, productivity and cost benefits and underpinned a significant portion of our profit growth. As a result of the business transformation programme, productivity improved with operating expenditure (excluding the impact of foreign exchange and fuel price rises) increasing by 2% against a backdrop of a capacity uplift of 3.1%. Our labour cost as a percentage of revenue fell from 22.7% last year to 20.6% this year – an improvement of 9%.

Cash position

Cash generated from operating activities was $584 million, $242 million more than in 2006. This is prior to the impact of the rollover of short-dated foreign exchange contracts relating to other financial periods.

Cash applied to asset purchases in the year was $556 million, and largely related to the introduction of eight Q300 regional aircraft and the final two aircraft in the Boeing 777-200ER fleet.

Additional debt of $493 million was drawn down to fund these purchases.
During the year, Air New Zealand repaid $249 million of debt.

Financial position

The closing net cash balance was $1.06 billion.

Total assets increased $159 million, mostly relating to the acquisition of new aircraft assets during the year, offset by depreciation and the sale and retirement of some aircraft from the fleet.

The company’s net gearing (including net capitalised aircraft operating leases) improved to 47.3%.

Outlook

Currency and fuel prices continue to have a significant influence on the airline’s financial performance. We have protected against short term fluctuations in both areas. We currently have 90% of our net USD operating cash flow for 2008 hedged at 0.6710 cents for every New Zealand dollar and we have hedged 62% of our estimated 2008 fuel uplift at an average crude oil price of US$70.50 per barrel.

On top of this, we aim to continue to decrease the amount of fuel we burn relative to the number of passengers we carry.

The company has built up strong earnings momentum, particularly in the second half of 2007. This momentum has carried through into early 2008 with strong forward bookings. To the extent that the operating environment does not change materially, we expect to better the 2007 PBUT result in 2008.

In the longer term, our Boeing 787-9 and 777-300ER aircraft orders represent a solid platform on which the airline can grow into the next decade. These aircraft will offer greater flexibility to our international network and allow us to open up new routes to and from New Zealand.

ENDS

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