Air New Zealand Limited (ASX: AIZ) has announced plans to cut staff as a result of the coronavirus pandemic. The airline will begin the "painful process" this week due to the severe economic impacts that have hit the company as a result of the virus outbreak. Air New Zealand shares are currently trading at $0.877, down 1.46%.
95% of flights cut
Air New Zealand has been forced to cut 95% of its flights as a result of the pandemic. The only flights remaining are in place to support supply lines and transport for essential services personnel. CEO Greg Foran told staff and shareholders the airline is an expensive business to run with operating costs in the billions.
"We are no different to a household. We have outgoings like debt repayments, utilities bills, lease payments (in our case planes not cars) etc . . . . and we need income (or as we call it – revenue) to cover all our bills," Foran said in a letter to shareholders and staff.
Revenue wiped out
Before COVID-19 wiped out global air travel, Air New Zealand had annual revenue of around NZ$5.8 billion. Last financial year the airline made a profit of NZ$374 million. The impact of COVID-19 means the airline is looking at revenue of less than NZ$500 million annually based on current booking patterns. "This has the potential to be catastrophic for our business unless we take some decisive action," Foran said.
International tourism flows make up two-thirds of Air New Zealand's revenue. The reality is that most countries will take a cautious approach to allowing international tourism in the next year, including New Zealand. This equates to billions of dollars in ticket sales lost and more than 1.5 million tourists who won't be arriving.
Major costs
Monthly labour costs for the airline are NZ$110 million. It has NZ$960 million in cash reserves today, but with little revenue coming in this balance will fall rapidly. The airline has arranged a Government loan which it expects it will need to draw on within months.
Costs have been reduced by asking employees to take leave without pay, forgo bonuses, and consider voluntary exits. Pay cuts have been taken by the Board of Directors and executive team. These measures, however, only go part of the way to reducing costs to a level where the airline can remain viable long-term.
A smaller airline
"It is clear that the Air New Zealand which emerges from COVID-19 is a much smaller airline and could take years to get back to its former size. We expect that even in a year's time we will be at least 30% smaller than we are today," Foran said.
As a result, Air New Zealand has announced plans to begin a large-scale reduction of its workforce. Some 3,500 roles will be shed in the coming months. The Government's wage subsidy will provide some relief but is a short term measure and doesn't right-size the business for the future. It does, however, mean that cuts to the airline's workforce are not as deep as they may otherwise have been.
"The situation we find ourselves in is no-one's fault," Foran said, "these are necessary measures to ensure our nation retains an airline, albeit a smaller one."
