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ASX airline share braces for FY20 loss and significant charges

Corporate travel jet flying into sunset

The Air New Zealand Limited (ASX: AIZ) share price is edging lower this morning after the airline provided a trading update. At the time of writing, Air New Zealand shares are trading 2.06% lower in early trade at $1.19.

What did Air New Zealand announce?

The airline shed light on recent trading conditions this morning, with CFO Jeff McDowall stating that network capacity across March and April was reduced by more than 95% as demand declined to almost zero.

But in more positive news, New Zealand’s recent move to Alert Level 2 has been a welcome reprieve, allowing the airline to, as Mr McDowall puts it, “get the domestic engine turning again”.

Despite this, the airline understands it will take some time for demand to return to pre-COVID-19 levels. As a result, Air New Zealand is preparing for a scenario in which it is still 30% smaller than pre-COVID-19 levels in 2 years’ time.

Looking to the back end of this financial year, Air New Zealand’s network capacity for the second half of FY20 is expected to be around 50% lower than the prior comparative period. This will be driven by a reduction of approximately 90% in the fourth quarter.

This outlook, combined with the fact that there was “very little” revenue coming in during Alert Levels 3 and 4, means that the airline is now expecting to report an underlying loss for FY20. 

For context, Air New Zealand posted a statutory profit of NZ$270 million in FY19 and more recently, a NZ$101 million statutory profit for the half year ending 31 December 2019.

Significant items impacting FY20 results

In today’s update, Air New Zealand also provided details of other significant items for FY20. According to the airline, these items represent events that are not reflective of its underlying financial performance. Therefore, the items will not be included in the airline’s calculation of underlying earnings for FY20.

The estimates, which reflect current expectations and are still subject to further review by both the airline and its auditors, are as follows:

  • De-designation of hedges: NZ$85 million to NZ$105 million
  • Aircraft impairment charge: NZ$350 million to NZ$450 million non-cash charge
  • Reorganisation costs: NZ$140 million to NZ$160 million
  • Gain on sale from airport slots: approximately NZ$21 million gain

The top end of these estimates represents a hit of up to NZ$694 million from significant items.

Liquidity position

As at close of business 25 May 2020, Air New Zealand’s short-term liquidity was approximately NZ$640 million. This doesn’t include any funds from the NZ$900 million loan facility with the New Zealand Government.

Commenting on the airline’s liquidity position, CFO Jeff McDowall said:

We have not yet needed to draw down on the government loan facility, as we continue to utilise all available levers to reduce our cash burn and right-size the business to reflect the expectation that, for some time, our airline will be smaller than it was pre Covid-19

The airline has undertaken a number of cost-saving measures across its cost base and capital expenditure portfolio. This includes a 30% reduction in its workforce (around 4,000 employees), deferral or cancellation of almost NZ$700 million in expected capital expenditure to December 2022, salary reduction of the executive team by 30%, and suspension of all short-term incentive schemes for FY20.

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Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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