The government giveth and the government taketh away.
Air New Zealand increased second-half 2021 cargo revenue by nearly 2.5 times the 2019 level to US$321 million, and 29% year-over-year, with a big boost from a government subsidy program primarily aimed at air cargo. But the overall business couldn’t withstand extended national border restrictions and a 107-day COVID lockdown of the capital, Auckland, resulting in a dramatic decline in passenger traffic and $250 million pretax loss, the company reported Thursday.
Passenger flying was down 26% from the corresponding period in fiscal year 2021 and down 84% compared to pre-COVID levels. The airline typically derives two-thirds of revenue from international passenger travel, but much of the network was effectively grounded between July and December. Prior to the domestic lockdown, Air New Zealand was enjoying a strong recovery in domestic business, with record demand in July.
Cargo represented 44% of the airline’s total revenue of $732.2 million for the six-month period. Without cargo, total operating revenue would have slid far more than 9% on a sequential basis. Compared to the second half of 2019, cargo revenue was up 147%.
CEO Greg Foran said cargo’s performance during the pandemic has encouraged management to consider investment in facilities and digital capability to take advantage of new opportunities. The goal: Make cargo a bigger proportion of the overall business than it was before COVID.
Even with its Boeing 787-9 Dreamliners temporarily dedicated for cargo service, and a 777 returning from storage as a passenger freighter, “we still have capacity to do more. … About 60% of the planes go out not full. Now that doesn’t mean that there’s 40% extra capacity. But there is plenty of opportunity for us to grow our cargo business, both domestically and internationally, by filling the bellies of our planes,” he told analysts during an earnings briefing.
Air New Zealand’s long-haul fleet consists of 14 Dreamliners and seven 777-300s, which have 44 tons of cargo capacity with a full passenger load. Last summer the company decided to retire its eight 777-200s, which are less efficient.
Cargo business will probably soften once the subsidies end, “but I don’t want to go back to where we were in 2019. I want us to actually have cargo as a good additional revenue source into the business. Obviously some of that will depend if the competitors have come back. But some of it also rests in our hands in terms of how good we are at improving our business so we get more,” Foran said, pointing to a potential role in moving e-commerce.
Whether to readjust high cargo rates will depend on whether many passenger airlines reenter the market once COVID restrictions ease and try to accumulate more freight too, the Air New Zealand chief said.
Executives said they were content being a “below-the-wing cargo operator” with no intention of stepping into pure freighters. A fleet simplification strategy will see all the 777s phased out within five years in favor of the 787. Having a single fleet in the long-haul segment outweighs the cargo benefits of the 777, they argued.
Air New Zealand’s cargo business received a strong lift with the extension through March of a government program designed to maintain international connectivity by contributing toward the cost of flying for selected airlines, and a similar program in Australia called the International Freight Assistance Mechanism.
The subsidy from the Maintaining International Air Connectivity (MIAC) program equaled 40% of the total cargo revenue for the period. It nearly doubled international cargo-only flights in the second half to about 100 per week versus 55 in the prior period, the airline said. The schemes enabled Air New Zealand to add cargo routes, including direct flights from Australia to North America.
Australia has also extended its air cargo-support scheme through March.
The programs were established in 2020 to preserve access to overseas markets when the pandemic drastically reduced passenger flying and airfreight rates shot up. Both countries heavily rely on passenger service to transport goods. The governments, recognizing that key export industries would be cut off from buyers because there wasn’t enough volume or industry financial strength to attract large numbers of dedicated freighters, stepped in to consolidate shipments and partially cover freight rates to make air cargo more affordable.
New Zealand’s scheme is different in that it is aimed at maintaining passenger service that can also meet cargo needs.
For the entire year, Air New Zealand transported 133,380 tons of goods, including nearly 12,000 tons of salmon, lobster and other seafood.
Radio New Zealand reported in December that freight forwarders worry airlift will be more difficult to obtain in 2022 as international airlines focus on servicing North America and Europe when travel fully reopens. Air Canada and Emirates pulled out of the New Zealand market last fall.
“I think maintaining air connectivity, particularly airfreight, is very important to the government. I suspect what we’ll see is a sort of a tapering of that arrangement as air passenger services start to recover. But we would be surprised if the MIAC arrangements, or current air cargo connectivity arrangements, sort of stopped dead in their tracks in March,” CFO Richard Thomson said.
Airfreight capacity in and out of New Zealand will likely remain constrained as long as social distancing measures for travelers persist, Thomson said. He predicted it will take the remainder of the year for the passenger recovery to gain steam.
Fuel prices nearly doubled in the six-month period, driving up costs by 14%. A hedging scheme kept the cost increases in check, the airline said.
Management expressed optimism that travel activity will continue to pick up as the year goes on, but uncertainty about the timing of phased border reopening and other restrictions will continue to impact international flying. Its guidance for the full fiscal year, ended June 30, calls for a $532.5 million loss. Air New Zealand has received $1.3 billion in government aid, in the form of loans and a share purchase, including $333 million in additional liquidity as recently as December to help stabilize the company.
The company recently named Alexandria Marren as chief operating officer, effective in late March. She is currently president of ABM Aviation in Atlanta. He has held leadership roles at United Airlines (NASDAQ: UAL) and rental car company Hertz. She replaces COO Carrie Hurihanganui, who is taking over as chief executive at Auckland International Airport this month.
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