Air New Zealand Limited · NZX:AIR
Air New Zealand — Investor Day (May 2019)
92 slides from Air New Zealand's investor day presentation, May 27, 2019
Slide 1: Market Announcement: 2019 Investor Day Materials and FY2019 Outlook
Stock exchange listings: New Zealand (NZX: AIR) / Australia (ASX: AIZ) / ADR (OTC: ANZLY) For personal use only MARKET ANNOUNCEMENT 27 May 2019 Air New Zealand 2019 Investor Day Materials and FY2019 Outlook Air New Zealand is today holding its 2019 investor day for institutional shareholders in Auck
Slide 2: Investor Day 2019
For personal use only Investor Day 2019 27 May 2019 1
Slide 3: 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 4: Today's speakers
Today’s speakers For personal use only Christopher Luxon Chief Executive Officer Nick Judd Carrie Hurihanganui Chief Strategy, Networks & Alliances Officer Chief Ground Operations Officer Cam Wallace Jeff McDowall Chief Revenue Officer Chief Financial Officer 3
Slide 5: Agenda
For personal use only Agenda 4
Slide 6: Business update
For personal use only Business update Christopher Luxon Chief Executive Officer 5
Slide 7: Key messages you should take away from today
Key messages you should take away from today For personal use only • We are resilient and adaptable, with the ability to respond quickly to changing macro conditions • We have initiatives in place to drive sustainable cost improvement, earnings growth and improved ROIC in the lower demand environmen
Slide 8: Who we are
Who we are Operational Community Financial For personal use only 79 #1 Baa2 years in operation corporate reputation investment grade credit in New Zealand for rating from Moody’s 32 5 consecutive years 13% international destinations1 #1 Annualised shareholder 20 corporate reputation return over the
Slide 9: Our GoBeyond mission continues to guide our priorities
Our GoBeyond mission continues to guide our priorities for sustainable success For personal use only 8
Slide 10: Balance between customers, culture and commercial performance
We are constantly striving for a successful balance between our customers, our culture and our commercial performance For personal use only 9
Slide 11: Key customer metrics remain high despite network disruptions
Despite network disruptions this year, our key customer metrics remain high, reflecting ongoing investment For personal use only Record level Overall customer satisfaction #1 Corporate Reputation in 6ptd Net promotor score (stable year on year) New Zealand and Australia (improvement from 2016) (no c
Slide 12: The power of our brand is embedded in our people
The power of our brand is embedded in our ~12,500 people and our continued investment in them For personal use only Learning & Development Diversity & Inclusion Future of Work Continuous learning Indigenous Growth Reskilling Development Programme Investment in mobility tools Automation New parental
Slide 13: Right business model and competitive advantages
We have the right business model and competitive advantages to sustain long-term commercial success… For personal use only Our brand and Kiwi Customer loyalty, Our alliance-driven Our simplified and service culture driven by strength Pacific Rim network fuel efficient fleet, of our domestic with the
Slide 14: 10 year shareholder return performance
…as demonstrated by our shareholder return performance over the past 10 years For personal use only 10 year total shareholder return APAC Peers Indices 348% 348% Air New Zealand China China Qantas Air Bloomberg Cathay Singapore Air New Zealand NZX50 S&P 500 Bloomberg ASX200 Eastern Southern China Wo
Slide 15: Challenges this year impacting financial and operational performance
We have faced some challenges this year which have impacted our financial and operational performance… For personal use only Rolls-Royce global engine Moderation in demand growth issues impacted network and to 3% to 5% operating costs Impacted ~2,500 flights, ~150 cancellations* Mid-year saw softeni
Slide 16: Reaffirming our 2019 outlook despite higher fuel prices
…however, we are reaffirming our 2019 outlook from January, despite higher fuel prices For personal use only Updating our Prior outlook* 2019 outlook Based on the current market Based on the current market environment and expectations for environment and reflecting an the average jet fuel price in t
Slide 17: We responded quickly to signs of a slowing growth environment
We responded quickly to signs of a slowing growth environment… For personal use only Forward bookings reflect softer revenue growth to prior Announcement of business Commenced further cost forecast. Market notification of review including network growth transformation reviews across earnings expecta
Slide 18: Immediate and decisive action to adjust our business
…and took immediate and decisive action to adjust our business Network Fleet For personal use only • Revised medium term growth to 3% to • Adjust aircraft deliveries to reflect 5% (from 5% to 7%) slower growth environment • Focused on optimising network to • Fleet deferrals of ~$750 million maximise
Slide 19: Preliminary 2020 capacity plan
Focused network strategy is demonstrated by our preliminary 2020 capacity plan For personal use only ~+5% Long-haul Long-haul Domestic Tasman & Preliminary 2020 New Routes Existing Routes Pacific Islands Capacity Growth 18
Slide 20: Recent fleet deferral decisions support 3% to 5% growth
Recent fleet deferral decisions support the 3% to 5% growth target… For personal use only Communicated as at 28 March: Revised aircraft delivery schedule: 1 Delivery schedule as at 26 May 2019. 2 Does not reflect two additional A321 NEO aircraft on order for expected delivery in 2024. 19
Slide 21: Updated external forecasts reflect moderation of tourism growth
…as do updated external forecasts reflecting a moderation of tourism growth rates… For personal use only * Stats New Zealand and Ministry of Business, Innovation and Employment. The forecast annual growth rate of 4% represents the forecast CAGR for international visitor arrivals to New Zealand in th
Slide 22: Maintaining fleet flexibility
…however, we continue to maintain fleet flexibility that we can leverage should the demand environment change For personal use only Ability to flex down our fleet* Ability to expand the fleet 5 • Purchase growth units early termination options FY21 FY20 one 777-300ER two 777-300ERs** • Incremental o
Slide 23: Cost reduction programme targeting $60 million in savings
Cost reduction programme targeting $60 million in annualised savings by the end of 2021 For personal use only The cost reduction programme is focused on three key pillars: 1 2 3 Removal of ~5% reduction in A targeted review of inefficiencies overheads through the operations cost associated with the
Slide 24: We will continue to invest in the customer experience
We will continue to invest in the customer experience… For personal use only 23 23
Slide 25: Commitment to purchase 787-10 Dreamliners from 2023
…as demonstrated today with our commitment to purchase 8 787-10 Dreamliners from 2023 For personal use only Partnership with Boeing and GE provides many advantages Superior operating Able to perform a similar economics when mission set to the current compared to 777-200 777-200 fleet Highly fuel-eff
Slide 26: What you will hear today
What you will hear today For personal use only We have attractive opportunities to achieve medium-term network growth of 3% to 5% We have numerous initiatives to drive strong revenue performance We have multiple levers to drive continued operational efficiencies and productivity in the future We are
Slide 27: Network opportunities
For personal use only Network Nick Judd opportunities Chief Strategy, Networks & Alliances Officer 26
Slide 28: Strong and diversified network with further growth opportunities
We have a strong and diversified network with further Header opportunities for text profitable growth For personal use only 9 Routes operated by Air New Zealand Routes operated solely by alliance partners Seoul route will commence late Nov 2019 27
Slide 29: Competitors are finding the New Zealand market difficult
Competitors are finding the New Zealand market difficult For personal use only Asia North America • Hong Kong Airlines exit from Air Canada AKL-HKG in May 2019 Pacific introducing seasonal • Exit of AirAsia X from AKL-OOL Islands service YVR-AKL from Dec 2019 • China airlines exit AKL-SYD and CHC-ME
Slide 30: Continuously focused on route performance and fleet utilisation
Continuously focused on route performance and ensuring that our fleet is utilised in the best way possible For personal use only • All routes evaluated against their strategic objectives and profitability Grow Grow targets on a quarterly basis yield capacity Load factor (%) Review Grow load factor C
Slide 31: Continuously focused on route performance and fleet utilisation
Continuously focused on route performance and ensuring that our fleet is utilised in the best way possible For personal use only • All routes evaluated against their strategic objectives and profitability targets on a quarterly basis Grow yield Grow capacity – Action plans created for routes in Load
Slide 32: Continuously focused on route performance and fleet utilisation
Continuously focused on route performance and ensuring that our fleet is utilised in the best way possible For personal use only • All routes evaluated against their strategic objectives and profitability targets on a quarterly basis Grow yield Grow capacity – Action plans created for routes in Load
Slide 33: Case Study: Re-timing of our Hong Kong flight
Case Study: Re-timing of our Hong Kong flight For personal use only • Previously operated AKL-HKG as an overnight flight • This left one widebody aircraft on the ground for ~11 hours before the next scheduled departure • By re-timing this flight, ground time reduces to ~2 hours which enables us to:
Slide 34: Moderate network growth driven by three principles
Moderate network growth over the medium-term will be driven by three principles For personal use only Group capacity growth (Historical and current targets) 11.5% 6.6% 6.3% 1 Attractive new markets 5.0% Average of ~4% ~+3% to +5% 2 Upgauge aircraft 2015 2016 2017 2018 2019E 2020E-2022E 3 Maintain or
Slide 35: Growth focused on stimulating demand from new markets
Growth will be focused on stimulating demand from new markets For personal use only Long-haul Tasman Domestic Seoul Chicago Taipei Auckland Brisbane Singapore Auckland Wellington Queenstown Invercargill Christchurch 34
Slide 36: Case study: Expanding into Seoul
Case study: Diversifying demand in Asia by expanding into Seoul 1 Attractive new markets 2 Upgauge aircraft For personal use only Maintain or constrain 3 Why Seoul? existing routes Inbound leisure demand is strong, with Seoul being New Zealand’s third largest Asian market Currently ~40,000 Korea
Slide 37: NEO aircraft driving cost effective growth on Tasman and Pacific Islands
NEO aircraft driving cost effective growth on Tasman and Pacific Islands markets 1 Attractive new markets 2 Upgauge aircraft For personal use only Maintain or constrain 3 existing routes Realising cost efficiencies with upgauged aircraft Lower cost per seat A320 CEO A320 NEO A321 NEO Lower cost per
Slide 38: Targeting positive RASK on existing routes
Targeting positive RASK on existing routes with stable or slightly declining capacity 1 Attractive new markets 2 Upgauge aircraft For personal use only Maintain or constrain 3 existing routes Domestic example Domestic network seats (Actuals & indicative forecast) ~13.8 million seats • Over 20% seat
Slide 39: Revenue share alliances and code share partnerships
Our strong position is further supported by revenue Header text share alliances and deep code share partnerships For personal use only 9 Revenue share alliance partner Code share partner Routes operated by Air New Zealand Routes operated solely by alliance partners Seoul route will commence late Nov
Slide 40: Tasman performance following end of Virgin Australia alliance
Tasman performance following end of Virgin Australia alliance has met our expectations For personal use only • Large volumes of additional capacity have been added on the Tasman by several Trans-tasman capacity share* competitors • We have made rational capacity 34% 37% decisions and continue to foc
Slide 41: Our future network plans
Our future network plans What you can expect For personal use only • Overall 2021 and 2022 capacity growth expected to be lower than 2020 • Aspiration to grow new markets into daily services • Continuous optimisation of existing network as needed − Including fleet type and scheduling − Relentless fo
Slide 42: Delivering profitable revenue growth
For personal use only Delivering profitable Cam Wallace revenue growth Chief Revenue Officer 41
Slide 43: Key opportunities to drive profitable revenue growth
Focused on key opportunities to drive profitable revenue growth For personal use only Maintain strength in our home market Drive effective market development activities to support new routes Leverage customer segmentation data Invest further in the premium customer experience Increase value from loy
Slide 44: Highest domestic market share of any APAC airline
We have the highest domestic market share of any APAC airline For personal use only Leveraging our domestic competitive advantages: LCC Competitor 18% • New Zealand's most iconic and trusted brand • Unmatched network offering against sole LCC competitor − Over 400 flights daily to 20 domestic destin
Slide 45: Three distinct domestic customer segments
Domestic traffic is driven by three different and distinct customer segments and dynamics For personal use only Business Travel Inbound Tourism Domestic Tourism Strong relationships and contracts Stimulation of new international Fare restructure implemented with Corporate, SME and markets (e.g. Seou
Slide 46: Organisational sales structure valued by business customers
Organisational sales structure and multi-product approach is valued by our business customers For personal use only * Larger SME’s are account managed. 45
Slide 47: Attracting inbound leisure customers
We understand how to attract inbound leisure customers better than our competition For personal use only • Trip consideration Dreaming • Flight ads for prospecting …we actively engage • Hotel ads for prospecting Planning with customers across every phase of travel consideration • Flight ads for reta
Slide 48: Case study: Stimulating interest prior to Chicago route launch
Case study: Stimulating interest in New Zealand and Air New Zealand prior to Chicago route launch For personal use only Focus: present the Air New Zealand brand and New Zealand destination that will get consumers motivated to experience and share amongst their friends and followers Solution: provide
Slide 49: Customer segmentation for better investment returns
Understanding our customers better allows us to make investment decisions with better returns For personal use only Customer segmentation profiles 48
Slide 50: Seats to Suit customer segmentation
Innovators in customer segmentation with “Seats to Suit” focused on short-haul markets… For personal use only Domestic Seats to Suit International Short-haul Seats to Suit 49
Slide 51: New long-haul economy product
…and we will be looking to roll out a new long-haul economy product, offering additional comfort For personal use only New long-haul product will offer: • More leg room • Front of Economy cabin • Additional AirpointsTM earned Seat pitch • Differentiated seat set-up and soft product Leg room 50
Slide 52: Premium cabins have grown in popularity across long-haul
Premium cabins have grown in popularity across our long-haul network For personal use only Revenue as a proportion of International long-haul revenue Business PremierTM 26% 29% Premium Economy 14% 16% Economy 60% 55% 2013 2013 2018 2018 51
Slide 53: Maximising premium travel experiences in cabin planning
Maximising experiences of premium travel that customers will value is key to future cabin planning For personal use only • Continuous innovation in cabin experience • Applicable across various markets • Consideration of interplay between hard and soft product • Focus on personalisation elements 52
Slide 54: Airpoints loyalty programme
Our unique AirpointsTM loyalty programme is simple, transparent and strongly valued by New Zealanders For personal use only Simple loyalty currency Most aspirational loyalty A loyalty programme that is with no restrictions programme in New Zealand truly valued by members • Low expiry rate indicates
Slide 55: Partner relationships drive a loyalty ecosystem
Our partner relationships help drive a loyalty ecosystem that adds further value For personal use only Airpoints DollarsTM issuance from 65+ ground partners our financial partners ~130% Food Fuel Financial Services Utilities Real Shopping Estate 2013 2014 2015 2016 2017 2018 2019E 54
Slide 56: High value loyalty members and premium cabin bookings
Clear linkage between our high value loyalty members and increased premium cabin bookings For personal use only Long-haul premium cabin revenue bookings Business Premier Premium Economy 10% 11% 21% 26% 7% 9% 9% 9% 14% 8% 11% 12% 33% 19% 29% 11% 43% 40% 41% 37% 2015 2018 2015 2018 Elite Gold Silver J
Slide 57: Driving continued high growth in ancillary product demand
Focused on driving continued high growth in ancillary product demand For personal use only What is included in our definition of Direct Ancillary? • Seat Select • OneUpTM Direct ancillary • SkyCouchTM revenue has grown • Unaccompanied Minor ~3x • Excess Baggage 2013 2014 2015 2016 2017 2018 56
Slide 58: Applying machine learning to revenue management
We are in the early stages of applying machine learning to further optimise revenue management For personal use only Several weaknesses with traditional When used with existing systems, revenue management systems machine learning can improve our results • Reliance on historical booking Improve the
Slide 59: Operational excellence
For personal use only Operational Carrie Hurihanganui excellence Chief Ground Operations Officer 58
Slide 60: Cost control has helped drive strong CASK performance
Our approach to cost control has helped drive strong Jeremy – Can you please design Network growth principles can be illustrated by this chart so it takes up the CASK performance in recent years majority of the slide? I would our preliminary 2020 capacity plan also like to have a background image fo
Slide 61: Targeting flat to improving CASK performance
Looking ahead we are targeting flat to improving CASK performance over the next three years For personal use only Indicative CASK trend Targeting flat to low single digit nominal CASK improvement 60
Slide 62: Cross-functional initiatives to improve efficiencies
Cross-functional initiatives in place to improve efficiencies across the business For personal use only Strategic supply chain Next generation engines (A320/1NEOs) Fuel burn optimisation 61
Slide 63: Multi-tiered supply chain with further efficiencies
Our supply chain is multi-tiered and complex, with the ability to generate further efficiencies For personal use only ~$1.3 billion ~4,200 suppliers across all facets of our operation in annual addressable spend1 41% 59% New Zealand Global based based 1 Spend excluding labour, fuel, aircraft, air na
Slide 64: Strategic supply chain partnerships
Strategic supply chain partnerships can help mitigate risk, step change the way we do business and add value For personal use only Creation of Supply Chain Centre of Excellence Alignment of the value chain activities across the organisation Increasing trend of suppliers helping to drive innova
Slide 65: Fuel efficiencies should continue to improve
Fuel efficiencies should continue to improve as a result of investment in modern fleet and optimisation tools For personal use only Fuel efficiency - ASKs/barrel Future fuel efficiency driven by: ~13% improvement • Additional NEO aircraft 4.86 4.87 4.90 4.94 • System advances to optimise flight plan
Slide 66: Economies of scale from long-haul flying and overhead reductions
Continued economies of scale expected from long-haul flying and overhead reductions For personal use only Balancing network growth while maintaining control on overhead costs Network capacity (ASKs) Actual overhead costs vs. inflation-adjusted overhead costs ~30% growth Resulting in a ~25% Resulting
Slide 67: Key initiatives to improve productivity
Working on several key initiatives to improve productivity For personal use only Mobility tools Automation Organisational structure 66
Slide 68: Example: Digitising service
Example: Digitising service For personal use only Moving from situations that require manual processes and human intervention… 67
Slide 69: Example: Digitising service, future state
Example: Digitising service For personal use only Future state …to empowering our customers to resolve issues with personalised channels 68
Slide 70: Example: Phased mobility strategy for operations
Example: Phased mobility strategy for operations For personal use only Empowering our people to better serve our customers using digital tools and data 2020 2021 2022 Developing mobile front-end Mobility tools rolled out to Front-end digital solution digital platforms to operational wider Airports w
Slide 71: Culture is critical to sustainable cost improvement
Culture is critical to delivering sustainable cost improvement For personal use only 70
Slide 72: Financial priorities
For personal use only Financial Jeff McDowall priorities Chief Financial Officer 71
Slide 73: Capital management framework
We have a capital management framework that is focused on financial resilience and sustainable shareholder value For personal use only Ensure long term resilience Invest wisely Return excess cash* • Stable investment grade • Disciplined spending on • Commitment to consistently rating capex to suppor
Slide 74: Strong and resilient balance sheet
Our strong and resilient balance sheet provides the foundation for a stable investment grade credit rating… For personal use only Target gearing range of 45% to 55% Investment grade credit rating* 52.4% 51.8% 52.4% 56.4% 48.6% Adjusted gross debt 2.0x to 3.3x to EBITDA target range * Bloomberg data
Slide 75: Diverse and flexible debt portfolio
…and we have a diverse and flexible debt portfolio with very attractive funding costs For personal use only Debt funding profile Average cost of on balance sheet debt Increase largely 5% driven by a ~40% increase in average USD base rate1 4% Operating lease @ Secured 7x* debt 33% 37% 3% As at 1H 201
Slide 76: Cash levels at upper end of liquidity range
Looking to the near term we expect cash levels will remain at the upper end of our liquidity range For personal use only • As communicated last year, we have updated our liquidity range to target $700 million to $1 billion cash − Now transitioning to this target range − Primary mechanism by which we
Slide 77: Fuel hedge portfolio
We continue to mitigate some volatility in jet fuel pricing with our hedge portfolio For personal use only Fuel hedge position* (hedged volume as a proportion of estimated consumption) • Our hedging policy continues to focus on 80% providing our business with time to adjust 69% • In 2019 we also add
Slide 78: Substantial reduction in aircraft capex from 2020 to 2022
We see a substantial reduction in aircraft capex from 2020 to 2022 compared to recent years For personal use only Aircraft capex outlook* 1,000 Actual Forecast 800 600 $ millions 400 200 0 2015 2016 2017 2018 2019** 2020 2021 2022 Financial year * Per 28 March 2019 disclosure to NZX and ASX; assumes
Slide 79: 787-10 selection will have strong economic benefits
Our selection of the 787-10 aircraft to replace our existing 777-200 fleet will have strong economic benefits… For personal use only Fuel burn comparison: 787-10 vs 777-200 • Eight 787-10 aircraft, powered by GE engines 777-200 • Options to purchase additional aircraft and substitution rights provid
Slide 80: Phasing of aircraft programme lowers annual capex
…and the phasing of this aircraft programme will result in lower annual aircraft capex levels For personal use only 787-10 programme capex outlook* ~50% lower average spend Expected aircraft delivery: * Capital expenditure outlook only represents 787-10 programme. 79
Slide 81: ROIC as a key metric
We measure success using ROIC as one of our key metrics For personal use only How we discuss success with our people and external stakeholders Excellent return ~15% Return that exceeds our pre-tax cost of capital ~10% Sub-optimal return 80
Slide 82: Committed to a sustainable ordinary dividend
We remain committed to consistently paying a sustainable level of ordinary dividend… For personal use only What do we mean by “consistently pay” and “sustainable”? $2.2 billion in declared dividends over 14 years Consistently pay The Board seeks to distribute part of the profits in the form of an or
Slide 83: Financial resilience and shareholder returns
…while keeping financial resilience and shareholder returns at the forefront of our minds For personal use only Ensure long term resilience Invest wisely Return excess cash* • Stable investment grade • Disciplined spending on • Commitment to consistently rating capex to support growth pay a sustaina
Slide 84: Key messages you should take away from today
Key messages you should take away from today For personal use only • We are resilient and adaptable, with the ability to respond quickly to changing macro conditions • We have a clear strategy in place to drive sustainable cost improvement, earnings growth and improved ROIC in the lower demand envir
Slide 85: Right business model and competitive advantages
We have the right business model and competitive advantages to sustain long-term commercial success For personal use only 84
Slide 86: Thank you
For personal use only Thank you <p
Slide 87: Questions
For personal use only Questions 86
Slide 88: Appendix
For personal use only Appendix 87
Slide 89: Speaker biographies
Speaker biographies For personal use only Christopher Luxon Chief Executive Officer Christopher has been Chief Executive Officer since 2013 and under his leadership the airline has delivered record profits, all time high customer satisfaction scores and achieved its highest levels of staff engagemen
Slide 90: Glossary of key terms
Glossary of key 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 Gearing Net Debt / (Net Debt + Equity); Net Debt includes capitalised aircraft
Slide 91: Where to find more information about Air New Zealand
Where to find more information about Air New Zealand 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
Slide 92: For personal use only
For personal use only L2. AIR NEW ZEALAND \o_ A A STAR ALLIANCE MEMBER YS"