Air New Zealand Limited · NZX:AIR
Air New Zealand — Investor Day (June 2017)
76 slides from Air New Zealand's investor day presentation, Jun 1, 2017
Slide 1: Investor Day 2017
Investor 2. Day 2017 AIR NEW ZEALAND Yo 1 June 2017 For personal use only A STAR ALLIANCE MEMBER YW 29
Slide 2: Forward looking statements
Forward looking statements For personal use only This presentation contains forward-looking statements. Forward-looking statements often include words such as “anticipate", "expect", "intend", "plan", "believe”, “continue” or similar words in connection with discussions of future operating or financ
Slide 3: Today's speakers
For personal use only Today's speakers Investor Day 2017 Christopher Luxon Chief Executive Officer McDowall Group General Manager Corporate Finance
Slide 4: Agenda
For personal use only Agenda 9:00am - 10:15am 10:15am -10:30am 10:30am-11:15am 11:15am-12:00pm 12:00pm - 12:30pm Business update Break Continued cost Financial Questions and strategic opportunity priorities and answers growth priorities lp Rob McDonald Chix Execue Group ereral ‘Gener Manager ChietOp
Slide 5: Business update
For personal use only Business update Christopher Luxon Chief Executive Officer ap
Slide 6: Air New Zealand at a glance
Air New Zealand at a glance 77 Pacific Rim For personal use only Years in operation Focused network driven by alliance relationships 15m 11,700 Passengers carried Air New Zealand employees annually based globally 30 21 International Domestic destinations destinations #1 #1 Corporate reputation Corpo
Slide 7: Focus on New Zealand and Pacific Rim has resulted in a network 30% larger
Our focus on New Zealand and the Pacific Rim has resulted in a network that is 30% larger For personal use only 2012 2017 Routes operated by Air New Zealand Routes operated by Air New Zealand Routes operated solely by alliance partners 7 Services to Tokyo’s Haneda Airport commencing July 2017
Slide 8: Growth supported by robust demand drivers
Our growth has been supported by robust demand drivers that are expected to remain strong for the foreseeable future For personal use only Inbound New Zealand tourism continues to grow strongly Growing domestic tourism High-single digit growth in New Zealanders traveling abroad Robust New Ze
Slide 9: Our success is linked to the success of New Zealand
Our own success is inextricably linked to the success of New Zealand and this mission is what drives us every day For personal use only 9
Slide 10: A consistently high-performing culture that cannot be easily replicated
A consistently high-performing culture that cannot be easily replicated For personal use only #1 New Zealand’s most attractive employer since 2011* Manager effectiveness +10 pts 2016 2017 * Randstad survey. 10
Slide 11: Fostering deep and meaningful connections with customers and community
Fostering deep For personal use only and meaningful connections with our customers and our community 11
Slide 12: We have demonstrated our ability to generate strong returns
We have For personal use only demonstrated Total shareholder return our ability to generate strong 380% returns… 116% 84% 50% 1 year 3 year 5 year 10 year Air New Zealand NZX50 ASX200 Bloomberg World Airlines Index S&P500 Source: Bloomberg, period ending as at 12 May 2017. 12
Slide 13: Profitability and dividends achieved through the cycle
…with profitability Net profit after tax ($ millions) and dividends 463 For personal use only achieved through the 263 327 256 221 cycle 166 166 180 218 181 96 82 81 71 21 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H 2017 Dividends declared (cents per share) 14 years of c
Slide 14: Updating our 2017 outlook
Our second best Updating our 2017 outlook* result ever – proving For personal use only the agility and Based on the current market environment and jet resilience of our fuel price, 2017 earnings before taxation business are likely to exceed $525 million1 Earnings before taxation ($ millions) 663 525
Slide 15: Strategic growth priorities
For personal use only Strategic growth priorities Christopher Luxon Chief Executive Officer Jeff McDowall Group General Manager Corporate Finance Mark Street General Manager Loyalty ap
Slide 16: Leveraging our unique competitive advantages
Leveraging our For personal use only unique competitive advantages to drive future returns for our shareholders 16
Slide 17: Leveraging our unique competitive advantages
Leveraging our For personal use only unique competitive advantages to drive future returns for our shareholders 17
Slide 18: Capacity will moderate as we consolidate recent growth
Capacity will moderate as we consolidate our recent growth For personal use only Group capacity growth (Historical and current targets) 11.5% ~+5% to +7% 6.6% ~6% +3% to +4% 1.7% 0.7% 2013 2014 2015 2016 2017E 2018E 2019E 2020E 18
Slide 19: Expanding our core domestic business
Expanding our core domestic business For personal use only Growing our home market with premium network and service offerings, efficient Domestic capacity growth aircraft and coordinated partnerships (ASKs) with regional stakeholders ~35% Stimulate additional demand by growing core jet and regional
Slide 20: Stimulating demand by growing core jet and regional routes
Stimulating additional demand by growing core jet and regional routes For personal use only Growing jet service to Queenstown Growing regional service to Napier ~30% Annual capacity growth for past two years ~7% Annual capacity growth for past two years • Night flying commenced in June 2016 • Coordi
Slide 21: Investing in coordinated regional tourism campaigns
Investing in coordinated regional tourism campaigns For personal use only 21
Slide 22: Leveraging the strengths of our long-haul network
Leveraging the strengths of our long-haul network For personal use only International capacity growth Further scale opportunities across the Short-haul and Long-haul Pacific Rim (ASKs) ~30% Increasing connection opportunities via Auckland Leverage strength from alliance partnerships 2012 2013 2014 2
Slide 23: Further scale opportunities across the Pacific Rim
Further scale opportunities across the Pacific Rim For personal use only Building scale in our existing long-haul markets For example, over time we are looking to: • Continue to build Tokyo over Haneda airport; maintain Narita presence • Grow our Houston service to daily • Increase Buenos Aires serv
Slide 24: Building scale: Tokyo Haneda
Building scale: Strategic growth centred around Tokyo’s Haneda airport For personal use only Beginning in July 2017, will operate three services/week into Tokyo’s Haneda Airport • Will continue to operate daily services to Tokyo’s Narita Airport Why Haneda Airport? • Closer to central Tokyo • Better
Slide 25: Building scale: regional targeting to grow U.S. traffic
Building scale: Specific regional targeting to grow U.S. traffic For personal use only Our opportunity • “One size fits all” approach not appropriate for the U.S. market • Awareness and consideration rates for New Zealand decline beyond the West Coast Houston ideal for accessing new demand pools • K
Slide 26: Increasing connection opportunities via Auckland
Increasing connection opportunities via Auckland For personal use only 26
Slide 27: Leveraging Australia demand to maximise returns on Americas route
Leveraging Australia demand to maximise returns on our Americas route For personal use only New Zealand summer season: Revenue management • Gives us the ability to control the volume of traffic we generate from each region of sale New Zealand winter season: Indirect traffic • Can be a valuable tool
Slide 28: Targeted approach to growing Australian demand
Targeted approach to growing Australian demand for our long-haul services For personal use only State by state sales approach to Australia… … 28
Slide 29: Leverage strength from revenue-share alliance partnerships
Leverage strength from our revenue-share alliance partnerships For personal use only What it is: • Immunised revenue share arrangement negotiated bilaterally • Allows Air New Zealand to coordinate pricing, schedules and capacity with each of our partners • Provides a deeper level of cooperation and
Slide 30: Expansion of our loyalty programme
Expansion of our loyalty programme has been a core focus For personal use only 30
Slide 31: Delivering value to members and our business
Delivering value to our members and driving value to our business… For personal use only Giving our members the freedom of flight Through New Zealand’s best coalition of partners (physical and online) Using the world’s easiest loyalty currency 31
Slide 32: Notable success in key loyalty metrics
…and delivering notable success in key loyalty metrics For personal use only Membership growth Flights purchased using High Value Customer Overall member Airpoints DollarsTM satisfaction engagement 87% 2.5M 892K 70% 703K 76% 48% 1.2M 2012 Today 2013 2016 2013 2016 2015 Today New Zealand’s most 1 in
Slide 33: Airpoints is a key decision criteria for engaged customers
AirpointsTM is a key decision criteria for our most engaged customers For personal use only Domestic Short Haul Long Haul Preferred airline 40% Frequent flyer Preferred airline 54% 47% programme Frequent flyer 39% Frequent flyer programme 44% Preferred airline 46% programme Flight schedules 34% Pric
Slide 34: Credit card partners have delivered strong value
Working closely with our credit card partners has delivered strong value For personal use only A strong portfolio of card partners Airpoints DollarsTM issuance from financial partners ~95% 2013 2014 2015 2016 2017E 34
Slide 35: New retail loyalty coalition provides growth opportunities
Our new retail loyalty coalition provides unique opportunities for additional growth For personal use only More engagement Easier to earn Value-add 2016 Today Market-leading data coalition A growing coalition is better for everyone Lift in members provides unique value for Air New ~95% earning at gr
Slide 36: Continued cost opportunity
For personal use only Continued cost opportunity Bruce Parton Chief Operations Officer Jeff McDowall Group General Manager Corporate Finance ap
Slide 37: Leveraging our unique competitive advantages
Leveraging our For personal use only unique competitive advantages to drive future returns for our shareholders 37
Slide 38: Balancing cost management with investments for long-term success
Balancing cost management with investments for our long-term success For personal use only 38
Slide 39: Our approach to cost management
Our approach to cost management For personal use only Benchmark against global standards Sales & Other marketing Culture of continuous improvement Passenger Labour services Focus on sustainable improvements What gets measured gets managed Aircraft Operating Cost operations Structure* Small initiativ
Slide 40: Significant improvements in unit costs
We have made significant improvements in our unit costs (ex: fuel & FX) For personal use only Primary drivers of CASK* trend historical CASK 9.75 improvement 9.50 9.25 Up-gauging 9.00 8.75 Fuel efficiency 8.50 ~5% Improvement in CASK* trend 8.25 8.00 Scale economies Jun 2014 Jun 2015 Jun 2016 Dec 20
Slide 41: Continued cost improvement targeted for 2018 to 2020
Continued cost improvement targeted for 2018 to 2020 period For personal use only Illustrative CASK* targets 2018-2020 • Stable unit cost targets for 2018 reflective of lower capacity growth forecasts – Targeting efficiencies to offset inflation • Unit cost improvement (ex: fuel & FX) targeted to co
Slide 42: Strategic investments have made operations increasingly productive
Strategic investments have made our operations increasingly productive For personal use only Capacity (ASKs in millions) per Full-time Employee (FTEs) 6% Increase in 3.8x headcount* 2012-2016 3.5x 3.4x 3.3x 3.3x ~15% Improvement in productivity 2016 vs. 2012 22% Capacity growth over the same 2012 20
Slide 43: Improving variable labour unit costs
Insight into our improving variable labour unit costs For personal use only Jet cabin crew CASK Jet pilots CASK (includes inflation) (includes inflation) 0.39 0.75 0.37 0.65 0.35 0.33 0.55 0.31 0.45 0.29 0.27 0.35 0.25 0.25 2013 2014 2015 2016 2017E 2018E 2013 2014 2015 2016 2017E 2018E • A new coll
Slide 44: Benefits of interest-based problem solving with unionised workforce
Proven benefits from undergoing interest-based problem solving with our unionised work force For personal use only High Performance Engagement What is it? • Interest-based problem solving during the course of a contract period • People affected by a problem are directly involved in solving it Proven
Slide 45: Targeting stable non-variable operating costs to 2020
Focus area: targeting stable level of non-variable operating costs to 2020 For personal use only In recent years we have strengthened our business with key investments in areas including: • Digital • Brand • New market development ~$600 million non-variable operating costs that can leverage with gro
Slide 46: Additional improvements from operational areas
Additional improvements from operational areas For personal use only Select cost initiatives “One way, same way, best way” New rostering system implementation Leveraging better procurement terms via scaling with 3rd parties Mobile enabled digital solutions for cabin crew Embed emerging technologies
Slide 47: Targeting improvement in maintenance costs
While lumpy and event-driven, targeting improvement in maintenance costs For personal use only Simplified and modern fleet will result in: Fewer heavy maintenance checks for airframe Fewer components to replace or hold in inventory Age of the fleet will not impact: • Engine maintenance – driven
Slide 48: Leveraging maintenance skillset and expertise
Leveraging our maintenance skillset and expertise to drive additional value For personal use only Air New Zealand’s share Christchurch Engine Centre of CEC earnings • 49% ownership stake ($millions) 23 • Operated by Pratt & Whitney • Strong growth prospects 7 with V2500 engine 2015 2016 APU Partners
Slide 49: Simplified and modern fleet strategy is proving successful
Our strategy of a simplified and modern fleet is proving successful For personal use only 2012 Today Wide-body Benefits from fleet programme: B747 B747 Competitive customer proposition B767 B767 with same seat types, fresh and B777 family B777 family B787 modern interiors and same IFE Narrow-body
Slide 50: A consistent, high quality aircraft product
A consistent, high quality aircraft product that delivers tangible value For personal use only 50
Slide 51: New 787-9 deliveries skewed to higher premium product
Our new deliveries of 787-9 aircraft will have a For personal use only different configuration that is skewed to a higher premium product 4 Remaining B787-9 aircraft delivered in 2018 and 2019* 54% Increase in premium cabin seats vs. current B787-9s * Represents financial year. 51
Slide 52: Strides in fleet efficiency to date
Great strides have been made in fleet efficiency to date For personal use only Marked improvement in routes that have transitioned to the B787-9 Shanghai Tokyo Hawaii 52
Slide 53: Short-haul fleet to gain efficiencies with neo aircraft
…and our short-haul fleet will soon gain strong efficiencies with delivery of neo aircraft For personal use only 53
Slide 54: Financial priorities
For personal use only Financial priorities Rob McDonald Chief Financial Officer ap
Slide 55: Leveraging our unique competitive advantages
Leveraging our For personal use only unique competitive advantages to drive future returns for our shareholders 55
Slide 56: The financial framework that guides us
The financial framework that guides us For personal use only 56
Slide 57: A stable investment credit rating backed by strong financials
A stable investment credit rating backed by strong financials For personal use only Our investment grade rating reflects: Moody’s credit rating Investment grade • Strong domestic market position Baa1 • Resilience of international routes Baa2 to competitive pressure • Strong liquidity position Baa3 •
Slide 58: Appropriate level of gearing
An appropriate level of gearing that reflects the near completion of our capex programme For personal use only Lower than 45% to 55% target 45% to 55% gearing* target 55.9% 1H 2017 52.4% Range serves as a guide - 48.6% some years it may be 46.1% appropriate to be above or 42.9% below the target rang
Slide 59: Diverse and flexible debt portfolio
Our debt portfolio today is diverse and flexible, with a preference towards long-term borrowings For personal use only Our debt funding profile has transformed Debt maturity (in NZ$ millions) Secured debt Operating 4% $600 lease @ 7x* 36% As at $500 June 2012 $400 Unsecured Finance debt leases $300
Slide 60: Changing debt mix has lowered cost of funding
Over time, the changing mix of our debt has contributed to a lower cost of funding For personal use only 60
Slide 61: Delivery of NEO aircraft delayed ~12 months
Delivery of NEO aircraft will be delayed ~12 months, impacting timing of capex spend For personal use only • Existing lease periods on five A320ceo aircraft extended to safeguard impact of delay • Allows for the new version of A321, with redesigned interior – 214 seats vs. original configuration of
Slide 62: Aircraft delivery schedule adjusted for NEO delay
Aircraft delivery schedule adjusted for the NEO delay For personal use only Aircraft delivery schedule (as at 31 May 2017) Number in Delivery Dates (financial year) Number existing on order 2H 2017 2018 2019 2020 2021 fleet Boeing 787-9 9 3 - 2 1 - - Owned fleet Airbus A320/A321 NEOs* - 8 - - 6 2 -
Slide 63: Minor timing shift in aircraft-related capex
Minor timing shift in aircraft-related capex of ~$1.6 billion through 2021 For personal use only What we said in February 2017* Today’s aircraft capex outlook* 1,000 1,000 Actual Forecast 800 800 Actual Forecast ~$450m Annual aircraft depreciation $ millions $ millions 600 600 400 400 200 200 0 0 20
Slide 64: Increasing proportion of owned fleet
Increasing proportion of owned fleet with targeted age between 8 to 10 years For personal use only 2012 2020 Leased Leased 25% Total fleet Owned 8.5 38% 6.9 62% years Owned years 75% Leased Leased 26% 29% Wide-body jets 8.2 8.1 Owned years Owned years 74% 71% Owned Leased 28% Narrow-body jets 9.3 5.
Slide 65: Flexibility to adjust our fleet
Flexibility to adjust our fleet should the demand environment change For personal use only Ability to flex down our fleet Ability to expand the fleet 2 lease expirations in the next 3 years two B777-200ERs expiring 2020 Purchase growth units Incremental operating leases 6 early termination options 2
Slide 66: Utilising hedging and liquidity to manage risk
Utilising hedging and liquidity to effectively manage our risk For personal use only Fuel Liquidity • Tenor of 12 months • Target liquidity ratio of 20% to 30% • Primarily utilise collar structure • Flexible debt structure allows us to effectively • Currently hedged near policy maximums manage our l
Slide 67: Putting ROIC performance into perspective
Putting ROIC For personal use only performance into perspective Excellent return ~15% Pre-tax ROIC Return that exceeds our 19% pre-tax cost of capital 16% 14% ~15% ~10% 12% 7% Sub-optimal return 2012 2013 2014 2015 2016 2017E 67
Slide 68: Positioned to deliver strong dividends
A sustainable business positioned to deliver strong dividends for our shareholders For personal use only • We target consistently distributing dividends to Ordinary dividends paid (cents per share) our shareholders each period 20.0 16.0 • Dividend is not linked to a pay-out ratio 10.0 10.0 8.0 8.5 8
Slide 69: Leveraging unique competitive advantages for shareholder returns
Resilient core domestic business For personal use only Positioned to leverage our unique competitive advantages to drive future returns for our Pacific Rim focused international network shareholders Focused on sustainable cost improvements Investment-grade financial strength 69
Slide 70: Thank you
For personal use only Thank you <p
Slide 71: Appendix
For personal use only Appendix Investor Day 2017 lp
Slide 72: Executive biographies
For personal use only Christopher has been Chief Executive Bruce joined Air New Zealand in 1996 Rob joined Air New Zealand in 1993 and has Officer since January 2013 having and has been Chief Operations Officer been Chief Financial Officer since 2004. His previously held the role of Group General si
Slide 73: Glossary of terms
Glossary of terms For personal use only Available Seat Kilometres (ASKs) Number of seats operated multiplied by the distance flown (capacity) Cost/ASK (CASK) Operating expenses divided by the total ASK for the period Cost of Debt Effective pre-tax interest rate paid on current debt obligations Geari
Slide 74: Pre-tax ROIC calculation example
Pre-tax ROIC calculation example For personal use only June 2016 June 2015 Reference in 2016 Annual $M $M Financial Results Statement of Financial Performance (page 2) Earnings before taxation 663 474 Add back: Net finance costs 47 52 Statement of Financial Performance (page 2) Note 21 – Operating L
Slide 75: Where to find more information about us
Where to find more information about us For personal use only Resources Investor website: www.airnewzealand.co.nz/investor-centre Monthly traffic updates: www.airnewzealand.co.nz/monthly-operating-data Quarterly fuel hedging disclosure: www.airnewzealand.co.nz/fuel-hedging-announcements Corporate go
Slide 76: For personal use only
For personal use only 2 AIR NEW ZEALAND Yo A Pe A STAR ALLIANCE MEMBER 44” | 2@