The following is the address by the Chairman of Air New Zealand, John Palmer, to the Annual Shareholders' Meeting held today in Auckland:
At last year's Annual Shareholder's meeting we were reporting on a year that was one of the worst that the airline industry had ever faced. While still surrounded by a very unsettled environment, we were looking forward with some optimism that the industry would manage its recovery in an orderly manner.
Today we look back on that year and recognise, again, that this is an industry that never fails to surprise us with shocks and behaviours that make managing an airline business a real challenge.
As shareholders, you will recently have received a copy of our Annual Report. In this we reported financial performance that was amongst the best that the airline had achieved in recent years. This performance was assisted by some external factors, such as the strength of the New Zealand dollar.
Net profit before Tax and Unusual Items of 220 million dollars and Operating cash Flow of 523 million dollars were very creditable performances and were indicative of the good progress made on many fronts.
This financial performance was among the best of all airlines for that year. Now, impressive as that sounds, we are not in particularly august company. Airlines collectively have lost more money than they have made over their cumulative history. As the past few years have dramatically illustrated, the airline industry is very volatile and, with high levels of fixed costs, small changes in revenue translate into large swings in profitability.
While the impact of terrorism hit airlines very hard in 2001 / 2002, the impact of SARS and the war in Iraq had an equal, if not greater, impact in 2003. This was particularly true for airlines in the Asia region where traffic was down by more than 30 percent.
That Air New Zealand was able to deliver the financial results that it did for the 2003 financial year in the context of this downturn was extremely pleasing.
It is however not sufficient. For investors to be adequately rewarded for the risks associated with airline profitability, the good years need to be much better than this as these good years must offset the inevitable bad years that will follow.
The real difference between this result and previous years however, was not in the absolute level of financial performance, but in the changes to the airline's business model that underpin that performance. These changes, and the changes that we continue to make, have moved Air New Zealand to a stronger position in the New Zealand market and on the Tasman.
Although it was significantly assisted by the strength of the New Zealand dollar, this result was no accident. Air New Zealand is on a strategic journey to completely reinvigorate the way that it does business. Directors and management have thought through the changes required to the business and are implementing them in a very deliberate manner. We have resolved what we need to do, how we are going to do it and understood the risks of implementing. We are now getting on with it.
It what may have seemed to many to be a counter-intuitive move, we started the change by reinventing the New Zealand domestic business. This will always be the core of our business and we will defend it vigorously. The best defence comes from a strong cost position and it is for this reason that we began our re-engineering with the domestic business.
I hope that many of you are now familiar with the changes that Express have brought to the New Zealand market. Certainly New Zealanders have embraced the simple low cost fares that are the hallmark of Express Class. To offset the revenue reductions associated with lower fares, we set what we believed were aggressive but achievable targets for traffic growth. I have to say that there were many in the market who did not believe that the targets were achievable, and we have exceeded even our own expectations. Passenger traffic is up 22 percent, including many first time travellers, and that traffic continues to grow, as affordable airline travel becomes an accepted part of life for New Zealanders.
The next element in our strategy was addressing our competitive position on the Tasman. With longer flight times, and a greater degree of business travel, it was not appropriate to simply extend the domestic Express product. We have extended many of the familiar elements of Express such as simple affordable airfares and streamlined business processes but have retained a business class offering and a complementary food and beverage service.
Combined with our new A320 aircraft, which are quickly entering our fleet, the Tasman Express product positions us well for the extremely competitive trans-Tasman air travel market. Make no mistake – the competition in this market is hot with 13 competitors active on these routes. Due to its links to the New Zealand domestic market, the trans-Tasman is a core market for Air New Zealand and our Tasman Express fares have again set the standard.
As the next leg in our strategic development, we have recently concluded an extremely detailed review of every element of our international long haul market. With very long flight times, this part of our business required completely fresh thinking. Ralph Norris, in his address, will discuss this work in more detail, but it signals a fundamental repositioning of our long-haul international business. The strategy recognises that we expect growth in this market to come from the inbound leisure travellers and for this reason we will be working with Tourism New Zealand and other agencies to promote destination New Zealand. As the most asset intensive part of the business, it is critical that we get this right.
The development of strategies for these businesses has been a deliberate and methodical process, built on the back of detailed analysis and stress testing.
While these changes have set Air New Zealand on a new path, they are not sufficient to defend against determined and sustained competition from larger airlines. It is for this reason that we have proposed an alliance with Qantas.
We have put a substantial level of resource into designing and explaining the benefits of the alliance and we now await the final determination by New Zealand Commerce Commission of approval of our application for authorisation. We expect that their final determination will be made later this week.
In the view of the Board and management, the logic of the alliance is compelling.
We have explained the logic of our alliance proposal in many public forums over the past 15 months. However, for renewed clarity, I would like to reiterate what I believe to be the three key reasons why the Board and management believe that the alliance with Qantas is the right decision for the company and for the country.
For Travellers: The alliance with Qantas delivers cost savings – both short-term and long-term, increased schedule efficiency, and broad network reach.
For New Zealanders: The alliance with Qantas ensures that New Zealand will retain an independent airline that is fully and permanently aligned with the promotion of New Zealand as a destination for travellers – both domestically and internationally. Retaining this airline, Air New Zealand, will deliver benefits to tourism, freight services, engineering skills and employment.
For Shareholders: The alliance with Qantas provides Air New Zealand with the foundation for a sustainable business strategy and the balance sheet strength to pursue and execute this strategy.
The benefits of the alliance have been set against the scenarios we believe will unfold in the absence of the alliance. These scenarios have a common feature of increased competition. As our applications to the regulatory authorities have made their way through the necessary systems over the past year, it has been interesting to note that what has evolved in airline competition is very consistent with our predictions. The nature and extent of the competition, driven by low-cost VBAs such as Virgin Blue and full-service global carriers such as Emirates is as we predicted.
What this competition will do to our business is also predictable. We do not have the balance sheet strength to win a prolonged war of attrition with these carriers and others such as Qantas. What we have seen over the past year validates our view of the future. If we wait to see whether the remainder of our predictions are also true – then it will be too late to react and we will have failed in our duty to the business.
We recognise that some people see this as a Qantas takeover. It is not. For Air New Zealand to be successful it must be confident and capable of being cost and market competitive alongside Qantas. The Alliance will give us that opportunity, but it is only the start, and continuing on with our other strategic initiatives is crucial for delivering good long term performance.
The alliance is consistent with the inexorable move toward consolidation across the industry. The recent moves by Air France and KLM, BA and Iberia, are further evidence that the logic that supports the alliance also applies globally. The initiation of talks between the United States and the European Union on an Open Skies agreement is a very important development. If successful, it will facilitate the spread of deregulation to other markets allowing a more rational approach to capacity management in the industry.
If our application for authorisation by the New Zealand Commerce Commission is successful, we will then require approval from the Australian Competition Tribunal and from shareholders before the alliance can be implemented. We are hopeful that this can be achieved in the first half of 2004.
For you as shareholders, we are well aware that getting some return is very important.
I would like to now explain briefly the Board's position on dividends. In the 2003 year we did not declare a dividend, and nor do we expect to be in a position to declare an Interim dividend with the half year results. The Board is of the view that there is still much progress to be made before we are comfortable with our financial position. Earnings remain volatile as we have seen, and gearing remains above our target range, even though we have made good progress. We continue to face substantial capital demands with fleet and product upgrades currently being considered. With much of our debt denominated in US dollars we also remain susceptible to a fall in the value of the New Zealand dollar.
We will review our position over the next few months, and at the announcement of the half year results we hope to be able to give a view on whether a final dividend is likely and appropriate.
Before concluding, I would like to make some comments on the subject of corporate governance. As I have stated in the Annual Report, the Air New Zealand Board expects of itself the highest standard of corporate governance. This can only occur where the Board members individually, and the Board collectively, act ethically and in a manner consistent with the values of the business. While we need some measure of regulatory surveillance, this can never substitute for ensuring that directors and boards embrace the ethics and values expected of them.
Accordingly, I believe that the correct approach to corporate governance is one based on principles rather than rules. As New Zealand and Australia further develop their corporate governance frameworks, I urge regulators to work forward on this basis.
Increasing black letter law will not be the best way forward, and having a tick or explain regime will require boards to be fully accountable, while at the same time giving companies the opportunity to tailor governance to the particular requirements of their company. Especially in the areas of board makeup and independence, quarterly reporting, and wider stakeholder responsibility, a principles based approach will deliver a better outcome for shareholders and the market. I hope on these issues the NZX and the Securities Commission will listen to their stakeholders.
At the last two Annual Shareholders' Meetings we have covered the issue of Directors' Fees.
This year, with the wage moratorium ending within the company, directors felt that it was appropriate to again review the issue of fees and have decided to accept the recommendation of an independent external review as outlined in the Annual Report.
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.