Air NZ needs to go back to its global financial crisis playbook

A version of this article was originally published on March 8, 2020 by Stuff in the Sunday Star Times.

Air New Zealand is staring down the barrel of more than $100 million of lost profits during the current financial year as the coronavirus pandemic continues to unfold.

Late last month Air New Zealand gave a special market update to warn that coronavirus could impair profits by $35 million to $75 million. But over the past couple of weeks, it has become increasingly clear that the situation for Air New Zealand is likely to be much worse.

Air New Zealand’s sharemarket capitalisation has fallen more than $1 billion since the start of the year, with half of this decline coming since the airline’s coronavirus market update.

Calculations in early March suggested that markets were pricing in a total profit impairment for Air New Zealand of $85 million to $135 million due to coronavirus in the current financial year. The situation since is looking like the profit impairment will be greater than the top end of this range.

In response, the airline has taken drastic action.

Government travel restrictions effectively forced Air New Zealand to cut its China and Korea services, while lower demand has seen the airline also reduce capacity on a variety of other Asian, Pacific and trans-Tasman routes. In a headline garnering move to shore up what’s left of demand over the coming months, the airline has also sold domestic flights for as cheap as $9 and Australia fares for $69.

To cap it all off, staff are being asked to consider taking voluntary unpaid leave, in a further effort to preserve cash flows.

Further cost cutting and capacity reductions can’t be ruled out amid the uncertainty regarding coronavirus’ spread and the outlook for consumer demand.

But what do these sudden moves really mean? Is it pandemic stations for Air New Zealand or are these the actions of a shrewd business?

At this stage, the evidence points towards the latter.

Things may get worse, before they get better, but Air New Zealand is a seasoned survivor. Following the Global Financial Crisis, the airline was one of the few to come through unscathed, remarkably remaining profitable even when the sky fell in for other airlines.

Being only a small airline by global standards, Air New Zealand has the advantage of being nimble and able to adapt quickly to changing market conditions.

Putting the markets’ current expectation of the coronavirus hit against Air New Zealand’s general profit guidance suggests the airline could still return modest profit this year. The airline’s total market capitalisation still sat at over $2 billion as of mid-March. Quite a bit of wriggle room to play with before real panic sets in.

Air New Zealand is simply dusting off its Global Financial Crisis playbook again and applying the same moves to the current crisis.

The Global Financial Crisis brought with it a deep trough as banks collapsed, and jobs and houses were lost, but the eventual recovery was swift as the globe became awash with cheap money from central bank stimulus. Air New Zealand was poised to capitalise on this recovery and quickly bounced back to record profits.

In the current coronavirus context, the airline was fortunate to have already begun gearing up for a period of softer demand long before coronavirus hit. This has meant that Air New Zealand isn’t starting from a point of complacency before hunkering down to weather the storm.

A tapering of growth in international visitors to New Zealand during 2019 and a creeping up of fuel prices had seen the airline embark on a cost cutting exercise. The aim was to become leaner and meaner by trimming business as usual costs by 5%.

Part of this cost cutting exercise had already involved delaying the delivery of $750 million of new aircraft to reduce demands on cash and ensure the airline didn’t have expensive capacity sitting idly on the tarmac. Some recently arrived new aircraft may still need to be parked up, but there will now be a sense of relief that many further aircraft deliveries were delayed.

Air New Zealand knows that things will eventually recover, so just need to get through the coronavirus crisis in the best shape possible.

But this time round, the path to recovery may be more tentative for air travel than following the Global Financial Crisis.

Cheap money won’t be the thing that gets people back flying long-haul. What will be needed is for international travellers to have confidence that the pandemic is under control and that their health can be assured.

When and how the situation comes under control is very uncertain. Finance Minister Grant Robertson this week moved from a scenario of saying that tourism and the rest of the economy would be affected for a few months to the whole year.

This uncertainty is cold comfort for Air New Zealand, but the old master of survival knows it just needs to bide its time in the knowledge that things will eventually get better.