The following is the presentation by the CEO of Air New Zealand, Ralph Norris, to the Annual Shareholders' Meeting held today in Auckland:
It is difficult to read or hear from an airline industry commentator lately without hearing about the degree of change that the airline industry is going through. As shareholders in Air New Zealand you will be acutely aware of this change because, unlike some to whom it is a theoretical subject, we have lived and breathed the change for the past two years.
So, rather than reiterate the obvious forces of changing travel patterns, entry of low cost carriers and the chronic over-capacity issues that we face, I am going to share with you today our vision for the industry in the future and how we are going to position Air New Zealand in that future.
The airline industry has some relatively unique features - such as the safety issues involved in flying, the regulatory structures that surround competition and the role of national flag carriers in a nation's psyche - but ultimately it is an industry like most others. It is our belief that, just as an aeroplanes flight is governed by the laws of physics, so to is the airline industry ultimately governed by the laws of economics.
The forces that have led other industries to consolidate brands that were once thought of as unassailable - such as Mobil and Exxon - will eventually lead to the consolidation of the airline industry. We are already seeing evidence of this with the KLM - Air France merger now almost certain (and Alitalia now looking to join this grouping), US Air with United Airlines and British Airways with Swiss and Iberia. Consolidation is an inevitable outcome of competition. Economies of scale and capacity rationalisation are, in my view, the base drivers.
It may take five years, or it may take fifteen years, but I have no doubt that we will see the emergence of a small number of global mega-carriers dominating the "big end" of the global aviation industry. I also believe that this consolidation will not be limited to the traditional carriers. As low cost carriers grow and start to encroach on each others networks, then they too will also consolidate. One just has to witness the discussions recently conducted in Washington DC between the European Union and the United States on an Open Skies agreement between these dominant world powers to understand that this outcome is inevitable.
In our vision, Air New Zealand will not be one of these global mega-carriers, nor will we be swallowed up as part of one of them.
I believe that, just as in other industries such as banking, niches will exist for regional independent carriers. These carriers will operate outside of the main global population centres and will have strong local market positions. This strength in their local markets will be based upon matching their cost structures and products to the values of their customers. This customer position will be underpinned by their networks which will align with the key passenger flows into and out of their home markets.
This is the framework within which we have constructed the strategy for the future of Air New Zealand.
With the Board, our management team and staff, we have methodically built a strategy for Air New Zealand that ensures that we not only survive the coming industry rationalisation, but that we thrive and grow within it.
Air New Zealand is a special company. We are the national carrier of one of the world's great tourist destinations. But as recent events have shown, this position offers us very little shelter if our costs are too high, or we are not prepared for competition.
Over the past year we have done much to prepare Air New Zealand for survival and growth.
It seems quite incredible to me that the first domestic Express Class flight flew less than one year ago. The changes that we have made to the domestic business in this short time were things that, in the past, we would have agonised endlessly about and most likely ended up with a compromise answer. Many other airlines are still in this position. Reducing airfares to stimulate passenger growth, getting rid of Business Class, dropping meals and free alcohol, reflecting the cost of sales in a customer's pricing all seem such obvious moves in hindsight, but certainly appeared daunting and risky when they were first considered.
The acceptance of this strategy by the New Zealand travelling public has exceeded even our own expectations, and certainly has proven the sceptics fears to be unfounded. It has proven that a simple, low fare model, well matched to customers' view of value is a winning combination.
We are not resting on our laurels. As the Chairman said, the domestic New Zealand market is our core business and maintaining a strong position here is strategically critical for Air New Zealand. We will continue to look for ways to simplify and improve our service; enabling us to lower fares further and thereby ensure that we remain the number one choice for the New Zealand travelling public.
Success on the Tasman is also strategically very important for Air New Zealand and again it is a market that we will vigorously defend. There are tremendous flow-on effects between the domestic and Tasman markets and losing our strength on the Tasman could quickly extend into a weaker domestic position.
For this reason, the roll-out of the Express philosophy to the Tasman business was our next priority once domestic was in place. The Tasman Express product has been very well accepted. The same simple, low cost model was adapted to include free meals and beverages and a Business Class seating option. The cost reductions, online booking proposition and fresh new approach have seen our bookings increase significantly over the prior year. Our faith in the role of the internet in travel distribution has been well placed with web bookings for Tasman travel now exceeding 20 percent, compared with less than 3 percent pre-Tasman Express. This has been driven by the simplicity of the booking process and the fact that our cheapest domestic and trans-Tasman fares will always be found on our web site.
The introduction of the A320 fleet to this market will coincide with the launch of Tasman Express one week from today.
While these changes have been successful in taking out unnecessary cost from the front-end of much of our business, they did not allow us to fundamentally change the back-office. This is because the processes driving complexity and cost have still been required by the long haul business.
Last week we announced a four-year strategic plan. This plan extends the work done on the domestic and Tasman markets to our long haul international business.
Underpinning this work are two basic notions:
- That growth in these markets will be driven by inbound leisure travellers
- That the comfort needs of the long-haul traveller are greater than that of the short-haul
These may seem fairly obvious statements but their implications on our business are profound.
We have used these principles to go through our entire business in detail and ensure that all of our processes and strategies are aligned with this view. They have impact throughout the journey that a customer takes with us - from considering travel, through deciding to come to New Zealand, booking a ticket, the airport departure process, the actual flight itself, the airport arrival process and the post-flight experiences.
The work was done by an internal team over a period of six months and recommendations were accepted by the Board earlier this month. We are now well underway with implementing the recommendations and I look forward to being able to progressively announce the individual initiatives in detail over the coming months.
Not only will this work ensure that we can bring the simple, low fare proposition to the long-haul business but importantly, it will also allow us to address the back-office complexity and duplication throughout the entire company.
The benefits from this programme in aggregate are estimated to total $245 million per annum by 2007. Now clearly not all of this will translate directly into profit improvement as we are in a market where high levels of competition continue to erode revenue yields.
I must stress that this is a growth strategy. By having a competitive cost base, focussed on delivering what customers value, we can deliver the lower fares that will allow us to grow our business significantly. This has been dramatically demonstrated by the domestic Express success.
I would also like to make it clear that this work sits very comfortably alongside our intention to work more closely with Qantas.
As the Chairman has said, we expect that we will receive the final determination from the New Zealand Commerce Commission later this week. While we have been making good progress with our strategic repositioning, I must emphasise that this is not a substitute for the alliance. Airline travel is no longer a luxury item – it is a part of our everyday lives and must increasingly compete not only for a customer's travel dollar but also for their general discretionary spend.
Nearly every airline in the world is making changes to their business to reduce costs and increase customer value. The changes we have made merely keep us in the race. I fully expect them to be matched on many fronts by our competitors. We will need to continuously examine our business in this way and keep making changes to ensure that the competition does not pass us by.
The alliance with Qantas is a much deeper and forward thinking response to the industry. It positions us within the vision I outlined earlier for the industry structure.
History has made it very clear to us that there is not room for two full-service airlines within the New Zealand market.
Forcing Qantas and ourselves to "fight it out" will waste resources and diminish the benefits that will flow to the country and the airlines from allowing the alliance.
The benefits of the alliance to the New Zealand economy have been subject to detailed examination by some of the world's leading economists. I believe that there is overwhelming evidence that the benefits are substantial and meet the test that the Commerce Commission has set down.
I would like to now touch upon what I believe to be the key success factor in implementing all of the business strategies we have described today - and that is people.
Air New Zealand is a people business. We fly around ten million passengers a year, and employ around 10,000 people. It is only through understanding people - both our customers and our staff - that the Board and management can make the business successful. This process starts at the top and flows throughout the business.
I have recently reduced and restructured my senior management team to ensure that I have the right mix of skills and teamwork that can lead the business into the coming change. We are fortunate to have a team that is talented and passionate about making Air New Zealand a success.
This restructuring will continue throughout the business over the coming months as we proceed through the reorganisation programme. While this can be an uncomfortable process for some, it is absolutely necessary. There will be some unavoidable job losses but it is my intention that these will be led through attrition as much as possible, and that the focus will be on the back-office rather than the customer facing positions. We will be consulting with all of our staff and their representatives as a critical part of this process.
If we are successful with the repositioning of the business, then growth will follow. With growth comes more jobs - and these will be jobs that will enjoy the stability that comes from being part of a successful business.
Before concluding and handing you back to the Chairman to move onto the more formal business of the meeting, I would like to make a few comments about the recent business performance and outlook.
The performance for the first quarter of the current financial year has been very good. We carried around a quarter of a million more passengers this quarter than the we did last year; largely due to the success of Express Class in our domestic market. Group capacity increased 4.5 percent to 7.4 billion Available Seat Kilometers, while Group traffic was up two percent to 5.5 billion Revenue Passenger Kilometers.
First quarter yield declined 6.5 percent to 11.7 cents when compared to the first quarter of the previous financial year. This decline is largely due to the strengthening of the New Zealand Dollar against key customer currencies. Since the beginning of this financial year, the New Zealand Dollar has gained another 12 percent on the US Dollar and 10 percent on the Yen. However this is not all bad news. As around 45 percent of our costs are US Dollar denominated, we stand to benefit from the strengthening dollar. This equates to a gain of around $10-15 million for every cent increase against the US Dollar.
Looking forward to the end of the financial year we expect that, all other things being equal, we will deliver a profit slightly above that of the 2003 financial year. That was a profit before Unusuals and Tax of around $220 million. Continued strength in the New Zealand dollar could lift this level higher.
Now, as we have stressed numerous times, our profitability is very volatile and subject to numerous factors over which we have little or no control. We will continue to monitor our profit outlook and hope to be able to give you further guidance on this at the release of our half year results on February the 26th next year.
So, summarising my comments, I believe that Air New Zealand is facing up to its responsibility to change. We have methodically prioritised, developed and implemented strategies that will return the company to sustainable growth. We have not, and will not, avoid the difficult decisions and have taken them in the long-term best interests of the company and its shareholders.
NOTE: The content of all Air New Zealand media releases are accurate at the time of issue, as stated at the top of each release. For updates on any changes, please contact Air New Zealand.
Air New Zealand is proud to be a member of Star Alliance. The Star Alliance network was established in 1997 as the first truly global airline alliance to offer worldwide reach, recognition and seamless service to the international traveller. Its acceptance by the market has been recognised by numerous awards, including the Air Transport World Market Leadership Award, Best Airline Alliance by both Business Traveller Magazine and Skytrax. The member airlines are: Adria Airways, Air Canada, Air China, Air New Zealand, ANA, Asiana Airlines, Austrian, Blue1, bmi, Continental Airlines, Croatia Airlines, EGYPTAIR, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Shanghai Airlines, Singapore Airlines, South African Airways, Spanair, SWISS, TAP Portugal, Turkish Airlines, THAI, United and US Airways. Aegean Airlines, Air India, Brussels Airlines and TAM have been announced as future members. Overall, the Star Alliance network offers 19,500 daily flights to 1,071 airports in 171 countries.
For more information about Air New Zealand visit www.airnewzealand.com and for more information about Star Alliance visit www.staralliance.com.