Air New Zealand Limited · NZX:AIR
Air New Zealand — Investor Presentation (April 2003)
86 slides from Air New Zealand's investor presentation, Apr 1, 2003
Slide 1: April 2003
4 April 2003 -
Slide 2: Presentation outline
Presentation outline * Introduction * Aircraft maintenance « MRO Industry « Air New Zealand’s Engineering Operations « Airframes « Engines « Components « Tech Services « Safe Air ° TAE Financial Performance Strategic direction fe. ow AIR. NEW ZEALAND 2 2
Slide 3: Transparency of operations
Transparency of operations Operating Stats Engineering Detailed fuel | Engineering SA ’ splitby domestic performance hedging Services fo and international disclosed disclosure Investor day | Lo AIR. NEW ZEALAND
Slide 4: Portfolio of inter-related businesses
Portfolio of inter-related businesses for focus & value maximisation AIR. NEW ZEALAND
Slide 5: Portfolio of businesses (cont.)
Portfolio of businesses (cont.) Value Creating lilustrative Only Defend and Grow A ©) Terminal Services Express Class ..w Estimated WACC . ir NZ Engineering Freedom Air Services (ANZES) [ei at 0 - 6 Asset Intensity Oo International é -Nalue Destroying Vv Improve Performance or Reduce Exposure Capita
Slide 6: ANZES contributes 17% to Group EBIT
ANZES contributes 17% to Group EBIT - Dec 02 Illustrative Only Terminal Services L2. & AIR. NEW ZEALAND
Slide 7: Air New Zealand and ANZES
Air New Zealand and ANZES Businesses in transition with separate but complementary strategies Past Present Future > Brand Manager \, Suite of airlines \ semen — - t hn ET Service I nn [ers i en a VBA Plus \ VBA Strategies always linked by Brand Value, Safety and Operational Integrity
Slide 8: Separate strategies require evolution of relationship
Separate strategies require evolution of relationship Air NZ Ltd as an owner of ANZES Air NZ Airlines as a customer of * Governance ANZES » Resources . Customer focus * Brand * Quality * Clean interface » Functional Support L2. & AIR. NEW ZEALAND
Slide 9: Aircraft Maintenance
Aircraft Maintenance
Slide 10: Aircraft maintenance principles
Aircraft maintenance principles « Aircraft are maintained on an Approved Maintenance Schedule which includes: * regular servicing * inspection * repair/restoration sufficient to maintain safe flight & inherent reliability « Modern aircraft are not generally “overhauled” but their condition is assess
Slide 11: Aircraft maintenance principles (cont.)
Aircraft maintenance principles(cont.) « Components are generally maintained based on their condition, then swapped for serviceable ones when faulty and repaired in the workshops. * The Engine is the largest and most expensive component and has a maintenance schedule of its own involving: * monitori
Slide 12: Aircraft Maintenance System
Aircraft Maintenance System * Operating conditions and schedules differ substantially between long-haul and short-haul fleets. * Hours, cycles, calendar time all in equation « Sophisticated planning systems are required to track maintenance requirements « 2500 components on a 747 - all individually
Slide 13: Illustrative maintenance schedule
Illustrative maintenance schedule 14MARO3 Air New Zealand Engineering Services Illustrative Only OctO3 - Apro4 AKL AIC Maintenance Plan - 12 Month a rar Act ID oc toBEr NOvEMEEL le oecemseR I anuany FewAUARY ee a is ey F : ri i i IF Ps ee i me a ES E is [es i E ERGO ta RIOD 0 RIOD & PERIOD G7 ka PER
Slide 14: Letter Checks
Letter Checks « “A” check: routine servicing & rectification while still in service « “B” Check: more detailed servicing & rectification while still in service « “C” Check: inspection that includes: * testing of major aircraft systems * restoration of cabin interiors e structural inspections * all l
Slide 15: MRO Industry
MRO Industry Tone a ie Pa
Slide 16: Moving from captive to competitive environment
Moving from captive to competitive environment Airline Industry 1870-early 1980’s Acceleration Capacity grows. >200 new entrants Late 1980’s Hyper- competition Excess capacity 1990’s Consolidation Distressed carriers taken over or 2000’s September 11 Excess capacity becomes severe New positions beco
Slide 17: MRO industry players
MRO industry players Supplier/Customer Relationship ae! i { { Airline OEMs | Engineering i | Divisions. { ! t } ' ep i Price setters : Proprietary knowledge Life-cycle management Price setters Total support Airline backing a Pricing Squeeze r / Airline a , Pricing Squeeze ra Spin-off | | a | “ | “ i
Slide 18: MRO's operate in an attractive industry
MRO’s operate in an attractive industry 60+ 50 40 30 UD billion 20 10 0 2001 2007 2012 @ Airframe Maintenance g Engines Oo Components o Line Maintenance
Slide 19: MRO providers by revenue
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Slide 20: MRO Key Product Lines
MRO Key Product Lines AIRFRAMES Features « Airline dominance » Labour intensive (80*% of repair value) « Turn-times & burn-rates « Workflow / scale « Specific skills, not easily commoditised. Size » US$14-16B Independent 1% ENGINES Features « Supplier (OEM) power « Parts intensive (70°% of repair va
Slide 21: MRO Key Product Lines (cont.)
MRO Key Product Lines (cont.) Features « Many parts | Independont i 5Y% « Expensive test equipment + Increasing reliability « Centres of excellence COMPONENTS Size » US$8-9B Features » Low capital > IP heavy » High margin labour TECH SERVICES ‘Ilectual property Independent 1%
Slide 22: Global Trends in MRO industry
Global Trends in MRO industry é Increase in demand for 3rd party MRO work ® Expansion into new markets @ Centres of Excellence Strength and Speed |. @ Consolidation ° L2. & AIR. NEW ZEALAND
Slide 23: Engineering Operations
Engineering Operations Ly a eg eee : iG / es ' | 7 LD LU ae Ly ue : : i, ee Ie Le ee Lo es i Os Qo
Slide 24: Engineering operations in NZ & Australia
Engineering operations in NZ & Australia NZES CHC Base © Sate Air L2. & AIR. NEW ZEALAND
Slide 25: Engineering capability
Engineering capability Airframes OAMNZY} Engines Components Tech Services RR DART. B747 " CF6-B0A/C2 * Avionics Operator services B?767 * RB211-524D4/G3 |, Composites Design | Auckland B737 © LM2500 * EI in ti Production SAP B727 " LMs000 . Mechanical Support (Repair Manufacturing "PA O4, so chemes)
Slide 26: Manpower
Manpower ANZES AKL © ANZES CHC Safe TAE Link i iP 100 100 400 700 1200 Le. Lc 2.9 million productive man hours AIR NEW ZEALAND
Slide 27: Fully integrated IT system - SAP
Fully integrated IT system - SAP » SAP Functionality - On-Line Help - Human resource mgt - Business Process y - AOP’s L2. & AIR. NEW ZEALAND
Slide 28: Global customer base
Global customer base sx ® Aircraft ® Marine & Industrial a Northwest ichwen Airlines acuse University Paso Huston ‘O@Air Tran gpormatecch Power Solutions Brown & Root ” Tractebel San Gabriel Tescrog, Aloha Berakas Power Brunei om PNG Electricity 30% ie Commissio! 1 ite Air Pacific 25% Fansalla Energ
Slide 29: Slide 29
Slide 30: Commercial airframes capability
Commercial airframes capability Air NZ Operating Fleet 747-400 B767-200,-300 767-300 767-200 3 B727,B737 -200,-300, NGs_| 737-300 19 ATR72 9 SAAB340 16 BAE 146 Beech 1900 16 ATR72 & 46 ; £2. Link engineering: Beech 1900, Metroliners, SAAB340 Lc AIR. NEW ZEALAND
Slide 31: Core capability in Boeing offers significant opportunities
Core capability in Boeing offers significant opportunities 1200 1103 1000 800 600 400 200 # Asia/Pacific
Slide 32: ANZES will acquire Airbus capability
ANZES will acquire Airbus capability * Air NZ has purchased 15 A320’s with a further option over 20 Airbus aircraft » Airbus fleet is expected to continue to grown in the Asia Pacific region 900 800 700 600 500 400 815 fod Oo _ Oo Oo 2 a q S = oS oD CF oF ive) oD oF < < < < < < © Asia/Pacific © Worl
Slide 33: Core military airframe capability
Core military airframe capability « C-130 - Hercules « P-3 - Orion « UH1H - lroquois « A4 - Skyhawk * Macchi 339 « Seasprite
Slide 34: Range of services provided
Range of services provided ue All letter checks 747/767 Strut Ageing aircraft work Structural repairs Modifications Reconfigurations, Manufacturing Aircraft repaints IFE installation interior refurbishment Avionics installed L2. & AIR. NEW ZEALAND
Slide 35: Airframes is a labour business
Airframes is a labour business Illustrative Only Materials Cost of Manuf.: OEM’s Margin: Maint Margin : Labour Cost: 80% Maint Margin: 20% Labour Labour Cost: Maint Margin: Assets as at 31 Dec 02: WIP Debtors Facilities & Plant Materials Labour Cost: 80% Maint Margin: 20% 40% 40% 20% AIR. NEW ZEALAN
Slide 36: Primary market is Asia Pacific
Primary market is Asia Pacific Primary Market Secondary Market
Slide 37: Internal - External work split
Internal - External work split Auckland Christchurch Internal (FY02 manhrs) 70% 45% External (FY02 manhrs) 30% 55% Recent Customers: « Qantas * Air Canda « AWAS * China Northern « Air Canada * China Yunnan « Virgin Atlantic * RNZAF « Cathay Pacific « Virgin Blue « DHL Express * AWAS ¢ LOT-Polish * A
Slide 38: Proposed capacity growth
Proposed capacity growth Productive Hrs (m) Qo ao f Current Capacity Proposed Capacity Limitations to Growth: Availability of skilled labour and facility constraints (long term) £2. & AIR. NEW ZEALAND
Slide 39: yy LD
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Slide 40: Engine industry life cycle
Engine industry life cycle OEMs OEMs AIR. NEW ZEALAND
Slide 41: OEMs dominate the design, production and after market
OEMs dominate the design, production and after market GEES MTU @ = Rolls Royce @ Pratt & Whitney OEM’s MRO Market share: GEES - 30% Rolls Royce- 15% £2. Pratt & Whitney - 15% o AIR. NEW ZEALAND
Slide 42: ANZES engines capability
ANZES engines capability Aircraft Engine Division Marine & Industrial Engine Division » GE LM2500 » GE LM5000 : GE CF6-80A2 (B767-200) : GE CF6-80C2 (B767-300, B747-400) * GE F404 (F18 Hornet) * RR RB211-524/G3 (B747-400) Christchurch Engine Centre (P&W 51%) * P&W JT8D * RR Dart » IAE V2500 (A319, A
Slide 43: Engines is a 30% Labour & 70% materials business
Engines is a 30% Labour & 70% materials business Illustrative Only Labour Cost: 80% : . Labour Cost: 80% Maint Margin: 20% Maint Margin: 20% Labour Materials Repairs Labour Cost: 80% Cost of Manuf.: 40% Repair agency's charge 90% Maint Margin: 20% OEM's Margin: 40% Maint Margin 10% Maint Margin : 20
Slide 44: Wide secondary market as engines can be freighted all over the world
Wide secondary market as engines can be freighted all over the world Engines’ : Primary Market Engines’ Secondary Market
Slide 45: Internal - External work split
Internal - External work split Auckland CEC JV Internal (FY02 manhrs) 50% External (FY02 manhrs) 50% 400% Recent Customers: « Elpaso * Emery « RAAF * FEDEX « Royal Australian * Independent Air Freighters « Navy * Kittyhawk Air Cargo * Air Pacific « Midwest Express * AWAS * Pacific Air Express * Garu
Slide 46: Niche market - Marine & Industrial turbines
Niche market - Marine & Industrial turbines 2 100% third party work Current capability: « LM2500 (All base models & power turbines) * LM5000 (All models) « LM6000 Field Service and support « Comprehensive Component repair capability 2 2 Long term relationships (Elpaso) 2 New product options: * LM600
Slide 47: Christchurch Engine Centre
Christchurch Engine Centre * Partnership between Pratt & Whitney (51%) and Air New Zealand Ltd (49%) « The JV was launched in April 2001 when Air NZ sold 51% for US$18m « CEC has 300 staff % Pratt & Whitney € ‘AUnitad Weohnotoglas Company AIR NEW ZEALAND i : ic Christchurch Engine Centre Se AIR. NEW
Slide 48: Christchurch Engine Centre (cont.)
Christchurch Engine Centre (cont.) * Capability: ° P&W JT8D-Std ¢ JT8D-200 turbofan engines «RR DART turboprop engines ° IAE V2500 turbofans from mid 2004 * Production - 100 JT8D engines per year, plus 65 Darts per year (95 in 2002) * [AE V2500 line supported by Air N2Z’s selection of V2500 engines
Slide 49: Components
Components
Slide 50: Components offers a range of products
Components offers a range of products « Avionics Repairs « Composite Repairs * Mechanical repairs L2. & AIR. NEW ZEALAND
Slide 51: Components is a 40% labour & 60% materials business
Components is a 40% labour & 60% materials business Illustrative Only Disassemble, Reps? Labour Cost: 80% Labour Cost: 80% Maint Margin: 20% Maint Margin: 20% Labour Materials Labour Cost: 80% Cost of Manuf.: 40% Maint Margin: 20% OEM’s Margin: 40% Maint Margin: 20% Assets as at 31 Dec 02: $32m WIP
Slide 52: Strategic alliances with OEM's have extended market reach
Strategic alliances with OEM’s have extended market reach Strategic Alliance with Rockwell Collins Strategic Alliance with ACSS
Slide 53: Internal - External work split
Internal - External work split Auckland Christchurch Internal (FY02 manhrs) 80% 55% External (FY02 manhrs) 20% 45% Recent Customers: « ACSS * RAAF » Qantas * RNZAF « Cathay « AWAS « RNZAF *« SAAB * Rockwell ¢ Airwork L2. & AIR. NEW ZEALAND
Slide 54: Le a S : o _ yy i ae Lo ay ae DD _
Le a S : o _ yy i ae Lo ay ae DD _ ve
Slide 55: Tech Services capability
Tech Services capability * Design services * Operator service * Design for manufacturing « Production services
Slide 56: Tech services is a labour & IP business
Tech services is a labour & IP business Iltustrative Only requirement Labour Intellectual Property . Create Intellectual Property 55% Labour Cost: 60% s . Maint Margin: 40% Maint Margin 45% Resell to subsequent Customers at market rates Assets as at 31 Dec 02: $4.2m WIP $3m Debtors $1im £2. Faciliti
Slide 57: Technical has world-wide reach
Technical has world-wide reach Technical ” , RAAF, RNZAF, GECAS
Slide 58: ANZES Technical has significant growth potential
ANZES Technical has significant growth potential * 30% of man hours on external contracts ° Existing infrastructure, IP and systems (SAP) * Low marginal cost for incremental customers » Low capital requirements as intellectual property business L2. & AIR. NEW ZEALAND
Slide 59: Safe Air
. : Ir Safe A
Slide 60: Safe Air profile
Safe Air profile ° Located at Blenheim’s Woodburne airfield ° 3 hangers * engine overhaul facility * test cell * propeller overhaul facility (largest in southern hemisphere) * Safe Air owns and operates AirProp services propeller overhaul maintenance facility at Moorabbin Airport (Victoria Australia
Slide 61: A one stop shop for medium sized military & civil aircraft
A one stop shop for medium sized mary & civil aircraft « C130 —® P&W J52- |» Safe Air has + Safe Air Hercules — P8BIC | extensive provide design - HS748 _* RR Viper _ capability for and + BAE 146 680-43 the design | consultancy - A4Skyhawk = * RR Allison | manufacture —_—_ services > Kaman SH26 | T5
Slide 62: 90+% man-hours on external work
90+% man-hours on external work Large customers have included: e RNZAF RAAF Kaman Aerospace (US) Advanced training system Philippines Air Force BAE Systems Tenix Defence Dowty Aerospace propellers Trans Asia Airways Armada de Chile Awpost L2. & AIR. NEW ZEALAND
Slide 63: fi Bic
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Slide 64: Australian engineering operations
Australian engineering operations * Two sites - Amberley (QLD) and Richmond (NSW) * 100+ staff in Australia - significant growth opportunities « Capabilities « airframe, engine & component MRO « aircraft and support equipment design * aircraft corrosion control and painting L2. & AIR. NEW ZEALAND
Slide 65: Australian Defence Force (ADF) focus
Australian Defence Force (ADF) focus ¢ Three long term ADF maintenance contract - 8 years + * Support for: «F111 ° F/A-18 * C-130 «P3 * B707 * Chinook * Blackhawk * Seahawk 12 a AIR. NEW ZEALAND * Sea King
Slide 66: Illustrative Example
Illustrative Example i ae hein , ie ea toy a LD : ae a : e Ls
Slide 67: ZK-NBC: a major project
ZK-NBC: a major project cl ie AIR. NEW ZEALAND
Slide 68: Assessment of ZK-NBC
Assessment of ZK-NBC « Production team sent out to secure aircraft * Tech Services team sent to BNE to assess damage and prepare evaluation of repair * Report sent to Boeing ® Boeing approved evaluation report ° Repairs commenced L2. & AIR. NEW ZEALAND
Slide 69: Multiple stakeholders in any incident
Multiple stakeholders in any incident OEM Manufacturer Task Manufacturer Maintenance id Cards i Maintenance Planning Manual Data Manufacturer Regulatory Review Board Service Letters Requirements & Recommendations Operators Regulatory t Authority Repetitive Requirements Operator generated RMT’s # ¢ H
Slide 70: Project involved a number of different areas
Project involved a number of different areas Scope of work * Leading edge repair « Slat replacement « Wing repairs « L/H pylon replacement * L/H and R/H engine replacement Time * 3 months * 4000 man-hours « 60 tradespeople and support Le. LC AIR. NEW ZEALAND
Slide 71: The Result
The Result L2. & AIR. NEW ZEALAND
Slide 72: Performance
Performance a ; a
Slide 73: Stability in earnings
Stability in earnings 30000 5 25000 +4 20000 + 15000 + EBIT ($000) 10000 + 5000 + 6 mths to Dec 01 6 mths to Jun 02 6 mths to Dec 02 fo & AIR. NEW ZEALAND
Slide 74: FY02 performance in a portfolio context
FYO2 performance in a portfolio context liltustrative only Value Creating . Ove and Grow rech Services Orne 35% 30% 25% @ any, | Sa Airframes AKL 45% {—Aictomes cHe _ : Estimated WACC Return on Assets 40% Engines AKL components AKL ngines 5% 0% [Components CHC 5% ~10% “15% =, Value Destroying 20% Im
Slide 75: Performance forecast shows improvement
Performance forecast shows l mM p roveme nt liltustrative only +» Value Creating t % Defend and Grow Fach Services 35% | Our. ° . 30% Sate Air © 25% r) Airframes Aki 10% | Compgnents Akl : . Airframes CHC . 15% — Estimated WACC Return on Assets Components CHC nO 10% ma Engines Akl 5% ow 5% 10% “15%
Slide 76: $500m in assets (excl. CEC)
$500m in assets (excl. CEC) —__ Assets by product line Assets by type Materials Components $32m Tag | |_Tech Services £2. $4m $4m ‘S AIR. NEW ZEALAND
Slide 77: Strategic Direction
Strategic Direction
Slide 78: ANZES' businesses are at different stages in a value maturity cycle
ANZES’ businesses are at different stages in a value maturity cycle Illustrative only Value Value Marine & industrial ) Airframes Technical Services Time Time Challenge for management is to bring new life to the value cycle, or harvest the value
Slide 79: Retaining operational integrity is core to growth
Retaining operational integrity is core to growth * Reputation and value growth depend on excellence and integrity Recent Air New Zealand incidents have questioned performance * normalised for flight hours, the rate is not abnormal e * however - questions are rightly raised is this a leading indicat
Slide 80: ANZES will grow value by deploying competencies into attractive markets
ANZES will grow value by deploying competencies into attractive markets « Current competencies are derived from past strategies and have served ANZES and Air New Zealand well « Future value growth will derive from: * maximising value from current markets and customers ¢ leveraging competencies into
Slide 81: Growth is considered on three horizons
Slide 82: Horizon 1: Do more with what we've got
Slide 83: Horizon 1 is not opportunity constrained
Slide 84: Horizon 2: Extend the platform
Slide 85: H3: Find the future
Slide 86: Slide 86