Air New Zealand Limited · NZX:AIR
Air New Zealand — Investor Day (June 2004)
111 slides from Air New Zealand's investor day presentation, Jun 25, 2004
Slide 1: Air New Zealand Investor Day 2004
Slide 2: Abhy Maharaj, Manager - Investor Relations
Slide 3: Feedback Forms
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Slide 4: Order of Events
ORDER OF EVENTS Introduction Strategic Update Airlines Morning Tea Marketing, Network, Sales Strategic Alliance Freedom Air Financial Position/Treasury Policies Questions Lunch Site Tours Abhy Maharaj Ralph Norris Rob Fyfe Norm Thompson Mike Swiatek Craig Sinclair / Stephen Jones Rob McDonald Ralph
Slide 5: www.airnzinvestor.com
www.airnzinvestor.com
Slide 6: Ralph Norris, Managing Director & CEO
Slide 7: The race is on...
The race is on... PAST PRESENT FUTURE
Slide 8: The short haul market has changed
The short haul market has changed USA UK Europe Australia |
Slide 9: Long haul is evolving
Long haul is evolving
Slide 10: Air New Zealand ran the risk of being stuck in the middle
Air New Zealand ran the risk of being stuck in the middle Larger Carriers Post Recap - Jan 2002 LCCs winning in winning by exploiting ~ Complex offering the short haul mkt ~ Stronger financial Price ~ Financially vulnerable - Low cost - base — Brand needed refreshing ~ Medium- high costs position Su
Slide 11: Strategic repositioning - phases
Strategic repositioning - 3 phases Phase 1: _ | 1.1 Adopt new short haul business flexibility
Slide 12: 1.1 Transform short haul
1.1 Transform short haul ¢« Domestic enjoyed good levels of profitability high fares low asset utilisation full service ° Competitor (QF) produced same offering ¢ Need to defend against entry of low cost operator, but; need to protect network connections maintain / enhance margins
Slide 13: New business model
New business model - “low cost network model” Cost per ASK Cost per ASK NEW MODEL
Slide 14: More people to more places more often
More people to more places more often Compound domestic traffic growth % Jul Apr 03 04
Slide 15: Market share grows
Market share grows 18% Market share grows post Express Class
Slide 16: New low cost network model rolled out to short haul
New low cost network model rolled out to short haul : Rings a PACIFIC EXPRESS Capacity share 47% Bookings up 107% “wW TASMAN EXPRESS Capacity share 40% Traffic stimulation 15% %, EXPRESS CLASS Capacity share 76% Traffic stimulation 40%
Slide 17: 1.2 Restore brand
1.2 Restore brand ¢ Brand suffered badly through Ansett debacle ‘absolutely’ a disaster ° New campaign ‘Being there is everything” ° Advertising ranged from acknowledgement, to national pride to price ¢ Won Advertising Campaign of the Year 2003 ¢ Brand regains New Zealand icon status
Slide 18: 1.3 Financial flexibility
1.3 Financial flexibility * Significant increase in financial flexibility * Contributors have been: profitability currency working capital management * Key ratios Jun 01 Jun02 Dec03 Leverage (%) 93.0 73.8 59.3 Equity ($m) 518.0 881.8 1,127.7 Cash ($m) 764.0 594.4 894.4 Net debt ($m) 3,449.4 780.5 56
Slide 19: Strategic repositioning - phases
Strategic repositioning - 3 phases | Phase 2: | 2.0 Reorganise the business
Slide 20: 2. Reorganisation
2. Reorganisation
Slide 21: Strategic repositioning - phases
Strategic repositioning - 3 phases Phase 3: 3.0 Business transformation and long haul renewal
Slide 22: 3. Business transformation builds on short haul changes
3. Business transformation builds on short haul changes ° Key objectives of business transformation simplify ‘E’ enable lift margins/respond to margin erosion effective organisation and culture long haul renewal
Slide 23: Summary
Summary « Short haul transformation complete * A solid and continuing recovery * Business transformation and long haul renewal underway
Slide 24: Group General Manager Airlines
eralManager Airlines = —t™
Slide 25: New business model
New business model - “low cost network model” Cost per ASK Cost per ASK NEW MODEL
Slide 26: "Low cost" is not just about no frills
“Low cost” is not just about no frills Schedule Process & pace . Distribution Source: Booz Allen Hamilton
Slide 27: What about shrinking to profitable NZ flying?
What about shrinking to profitable NZ flying? » Short term improvement in Kaitaia*, « Bay of islands returns if international airline sold aang : hakatane * Long term death spiral! . . ; isborne ~ competitor retains au Napier Ya ere ston North international feed, allowing it to increase domestic cap
Slide 28: What about being a low cost point to point carrier?
What about being a low cost point to point carrier? * Loss of some business customers « Shrink to short haul market (<5hrs) * Long term - returns low » Loss of linkage into Destination New Zealand
Slide 29: Low cost network model is adaptable to different markets
Low cost network model is adaptable to different markets Importance Importance Willingness 46 price relative of comfort relatifole of agents Reliance on purchase ontinether features Willingnessto other featuresin creating partners to to self serve itineraries achieve reach Domestic 0-2 hours Short H
Slide 30: Airlines dedicated to different markets
Airlines dedicated to different markets a S AIR NEW. ZEALAND 5 freedom air REGIONAL PACIFIC INTERNATIONAL AIRLINES AIRLINES AIRLINES Mt Cook Airline Domestic trunk Eagle Air Tasman Express Air Nelson Pacific Express
Slide 31: Simplicity is the essence of the new business model
Simplicity is the essence of the new business model « Bold initiatives underway (or implemented) to simplify ~ network structure ~— fare structures ~ selling structure ~ connectivity ~ customer journey ~ loyalty * Aligning overhead to the simplified model
Slide 32: Example: simplified connectivity
Example: simplified connectivity Connectivity a barrier for low cost carriers Structure of partnership agreements drives costs Schedule alignment drives cost Leading change in the industry Positive feedback from other airlines uS$m Network Reach Relativity 30 25 20 7 1.10 20 30 40 50 60 70 80 90 100
Slide 33: Example: customer journey
Example: customer journey e Extended self service Self check-in up to 50% - kiosks uptake target 70% 80% TARGET 70%, e Simplified boarder processing gqx, - biometric recognition 40% e Smoother, faster boarding e Excess baggage charges 20% e Faster aircraft turn around im A 0% — times Nov June 2005 2
Slide 34: Example: simplified loyalty
Example: simplified loyalty » Airpoints should: ~ drive more people to fly with us more often ~ be used where they can genuinely influence customer demand » Airpoints have been removed from smart saver fare buckets in line with what customers value » Overall programme under review
Slide 35: Overhead aligned to the new simplified model
Overhead aligned to the new simplified model « Simplified operating model drives considerable administrative cost and complexity out of the overhead structure * Simplified low cost network airline can operate with a much more productive and efficient support infrastructure
Slide 36: Building shareholder value - business transformation savings $245m
Building shareholder value - business transformation savings $245m * Not all savings expected to go straight to the bottom line ¢ Tasman illustrates increased competitive pressure on profitability 0.140 Vasman Yield 0.120 0.100 ~~ 0.080 FYO3 FY04 e Business transformation savings have made us more c
Slide 37: Fleet strategy
Fleet strategy _| Right sizing _| capacity & frequency _| to markets Simplifying the fleet structure Maintaining flexible | ownership structure Leveraging | | market | | | conditions : | prevailing | |
Slide 38: Large gap in fleet size
Large gap in fleet size Air New Zealand lacks a 250-350 seater for Asia and long haul 500 400 300 Seats A320 family 200 100 Average stage 4 6 8 10 12 14 length (hours) > <4 a > «<q @ New Tasman Asia Long haul Zealand Pacific/Atiantic
Slide 39: New fleet order
New fleet order ey
Slide 40: — : -
— : -
Slide 41: New aircraft provide new possibilities
New aircraft provide new possibilities _.., 777-200ER Range 767-300 Range 777-300ER/7E7 Range
Slide 42: Slide 42
Slide 43: Summary
Summary * Anew airline is taking shape « New business model « New aircraft « Business transformation to deliver $50m of $245m by end of July 2004
Slide 44: Norm Thompson, Group General Manager Mktg, Network & Sales
Slide 45: Inspiring Journeys
inspiring Memories INSPIRING inspiring Returns inspiring Teams 3 4 JOURNEYS
Slide 46: Inspiring memories - Made in New Zealand
Inspiring memories - Made in New Zealand We believe: « That business is built on relationships and the best deals are handmade * That the best way to say “I love you” is with a hug * That you can’t truly appreciate New Zealand’s beauty through a documentary « That New Zealand is the most inspiring c
Slide 47: Target marketing - Air NZ and Tourism NZ
Target marketing - Air NZ and Tourism NZ * |t’s not about everyone who is coming to New Zealand today * |t’s about who we want to come to New Zealand in the future * |t’s about targeting a growing group of travellers... where growth is faster than the overall travel market
Slide 48: Target marketing
Target marketing Population of the country . a Tourism New Zealand trade and consumer marketing 2 ctiv ity Long Haul travel market of country NS Air New Zealand target marke of country
Slide 49: Inspiring teams
Inspiring teams inspiring Teams nUruEse Committed to delighting our customers and growing our business
Slide 50: I am proud to work for Air New Zealand
| am proud to work for Air New Zealand 6.0 5.8 8 « Scale: 52 : 6 - totally agree 5.0 « 4-5 tend to agree as « 2-3 tend to disagree tA * 1 - totally disagree 4.2 4.0 Jan 02 Jul 02 Jan 03 Source: Employee Survey
Slide 51: Inspiring returns - Being number one in every market we serve
Inspiring returns - Being number 1 in every market we serve Business Transformation INSPIRING (3 examples) JOURNEYS - Network strategy - New in-flight experience - Ecommerce strategy
Slide 52: Inspiring returns: Network strategy
Inspiring returns Example One: INSPIRING NETWORK JOURNEYS STRATEGY :
Slide 53: New destinations added
3 new destinations added 1997: AKL - Seoul 2003: AKL - Fukuoka SYD - LAX flights flights withdrawn withdrawn 1995: 2000: 2004: AKL - Fukuoka AKL - Frankfurt CHC - Wanaka flights commence flights withdrawn AKL - San Francisco CHC - LAX flights commence
Slide 54: More competitive and diversified network
More competitive and diversified network 737 Operations A320 Family & 767 — 777 oe 747
Slide 55: Inspiring returns: New inflight experience
Inspiring returns Example Two: INSPIRING NEW INFLIGHT % Vuilass EXPERIENCE
Slide 56: The new experience
The new experience « Premium class * pitch 60 inches * complete ‘lie flat” beds * in-arm IFE * Best economy class in the world * pitch 34 inches * back of seat IFE * audio visual on demand « Announcement next week
Slide 57: Inspiring returns: Ecommerce strategy
Inspiring returns Example Three: INSPIRING ECOMMERCE A JOURNEYS STRATEGY
Slide 58: Ecommerce strategy
Ecommerce strategy « Multi-channel distribution - click, call, visit « Delivering simplified fares to the market * Changed our booking engine and web site * benchmarked against LCCs « Allowing customers to self serve * Providing premium service for those who want it, but charging a service fee for i
Slide 59: Domestic Express delivery and results set the benchmark
Domestic Express delivery and results set the benchmark % of Booking 80% 70% 60% 50% 40% 30% 20% 10% 0% Domestic Express % of Net Pax Booked 69% Aa% 11% 8% Call Agents Other Centres Direct Channel [77 Pre Express Post Express
Slide 60: Tasman Express results showed a similar pattern
Tasman Express results showed a similar pattern % of Booking 80% 70% 60% 50% 40% 30% 20% 10% 0% Tasman Express % of Net Pax Booked 72% [7] Pre Express 33% Agents Channel Other Direct Post Express
Slide 61: And more recently Pacific Express
And more recently Pacific Express % of Booking 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Pacific Express % of Net Pax Booked 83% 44%, 15% 9 Q 4 6%-6B% 1% Call Agents Other Online Centres Direct Channel [7] Pre Express Post Express
Slide 62: Driving growth of online transactions
Driving growth of online transactions 140 120 100 Online Bookings 80 (000s) 60 2002 2003 2004
Slide 63: How have travel agents responded?
How have travel agents responded? « Lower fares have stimulated demand driving more volume through travel agents « Agents making higher margins now than before * [Increased transparency as customers know what service they are paying for
Slide 64: E-ticket growth and penetration
E-ticket growth and penetration 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of network coverage 1997 1998 1999 2001 2002 2003 2004
Slide 65: E-ticket growth and penetration
E-ticket growth and penetration 100% 80% 60% 40% 20% 0% Electronic Ticket Usage Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2003 2004 Domestic Tasman Pacific International
Slide 66: Inspiring Memories
Inspiring Memories Focused on New Zealand and Kiwi style inspiring Returns inspiring Teams Accelerated by JOURNEYS Committed to being # 1 in every delighting our market through customers and target marketing growing our business
Slide 67: Strategic Alliance presenter
Slide 68: Air NZ and Qantas go back a long way together
Air NZ and Qantas go back a long way together 1920s: Qantas formed 1940s: TEAL Formed. Starts flying AKL-SYD, Australian Govt. holds 50% share 19606: NZ Government buys back 50% owned by Australia. TEAL renamed Air New Zealand 1980s: Air New Zealand privatised. Qantas takes 19.9% stake 1990s: Air Ne
Slide 69: Phases of the alliance
3 phases of the alliance * Negotiation - evaluating benefits to both companies and how they would be allocated * Regulatory Approval - evaluating overall benefits to NZ and Australia and how they would be allocated * Implementation - ensuring benefits are realised
Slide 70: Core arguments
3 core arguments ‘ Low Cost Carriers (LCC’s or VBA’s) have changed the industry structure and provide better price competition 2 Single Aviation Market (SAM) drives competitive action to push for consolidation of Full Service Airlines (FSA) in Australia/New Zealand 3 Barriers to entry and expansion
Slide 71: What the alliance will achieve
What the alliance will achieve » A stronger network in terms of breadth and depth: ~ provides revenue efficiencies relative to both LCC (VBA) and FSA competitors ~ stimulates additional revenue for the Australasian region * Opportunities to reduce cost structures through: ~ removal of duplicate acti
Slide 72: Alliance value drivers...
Alliance value drivers... Schedule Changes | Cost Joint | Synergies Selling
Slide 73: ...will deliver benefits
..-will deliver benefits Schedule Changes Cost Joint Synergies Selling
Slide 74: Inter-relationships between value drivers and benefits
Inter-relationships between value driver and benefits Schedule Synergies
Slide 75: Environment has changed but core arguments stand
Environment has changed but 3 core arguments stand January 2002 Air NZ just out of re- capitalisation High uncertainty over future air travel demand (shocks) ® Uncertainty over future sustainability of Star Alliance + partners Qantas one of the most financially successful airlines in« the world Toda
Slide 76: Significant Tasman capacity growth
Significant Tasman capacity growth Trans Tasman capacity change (Aug’04 vs Aug’02) Wm Change in Total Tasman Seats & Total Tasman Seats August 2004 Qantas NI = -— < Emirates Freedom Return Seats Per Week Pacific Blue Royal Brunei Aerolineas Thai Polynesian LAN | Royal Tongan Garuda Malaysia Source:
Slide 77: The process continues....
The process continues.... * Appeal in Australia completed May 2004 ~ de novo case — 3 person tribunal ~ lasted 4 weeks -~ thousands of pages of testimony, transcripts, etc. * Appeal in New Zealand starts July 5 — appeal on the record and updated evidence ~ 2 person court ~ expected to last 4-5 weeks
Slide 78: Summary
Summary * Financial ~ Capital injection ~ improved profitability compared with non-alliance environment * Competitive ~ reduces risk ~ strengthens Air NZ network to compete with new airlines in the region * Regulatory ~ non-existent barriers to entry and commercial logic for the transaction eliminat
Slide 79: Mike Swiatek, General Manager Joint Ventures
Slide 80: Ventures structure
Ventures structure VENTURES AIRPORT FREEDOM SERVICES AIR
Slide 81: Craig Sinclair, Group General Manager Ventures
Slide 82: Stephen Jones, General Manager Freedom Air
Slide 83: Agenda
Slide 84: History of Freedom Air
Slide 85: Current route network
Slide 86: Freedom Air - Basic dimensions
Slide 87: Our Customers
Slide 88: Low fares
Slide 89: Low cost base
Slide 90: Where will Freedom fly?
Slide 91: Minimal overlap with Air NZ
Slide 92: Minimal overlap with Air NZ
Slide 93: Stand-Alone from Air NZ
Slide 94: Provides a benchmark to Air NZ
Slide 95: An innovation testing ground
Slide 96: Fare Choice: the value of flexibility...
Slide 97: The next 12 months...
Slide 98: Rob McDonald, Acting CFO
Slide 99: Presentation outline
Slide 100: The world has changed a lot in 3 years
Slide 101: Balance sheet stronger
Slide 102: Debt maturity profile benign
Slide 103: Good liquidity
Slide 104: Capex and Funding
Slide 105: Financial Position Summary
Slide 106: Core Treasury Policies
Slide 107: Jet fuel hedging
Slide 108: Fuel hedging - 10 year performance
Slide 109: Currency hedging
Slide 110: Balance Sheet hedging
Slide 111: 4 key take-outs