Air New Zealand pull back from the regions

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#1175797 14-Nov-2014 13:18

Handle9:
Honestly airlines are super risky low ROI businesses with huge CAPEX budgets. To expect shareholders to perform a public good at their own expense is somewhat delusional.

I don't think I'm delusional, I just have a different value set to you. But using your public good perspective: -

A) The airline wouldn't exist unless it had been bailed out by the public
B) The public is a 52% shareholder - albeit a hands off shareholder
C) AirNZ already performs other public goods at it's shareholders' expense. It operates a conservation fund and other charitable programmes and it provides discounted fares to people travelling in difficult personal circumstances (e.g. family bereavement). All of those are public goods.

Note: AirNZ made a $332M normalised profit last year. The cost of the regional networks is $12M per annum which is 3.5% of that normalised profit.

Mike

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#1175807 14-Nov-2014 13:36

the next year they could lose 300 million. by keeping it that could make it 340 million.

anyway who am i to say what a business should do.

if you want to rant maybe start with power companies?

sbiddle

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#1175828 14-Nov-2014 14:00

MikeAqua:
Handle9:
Honestly airlines are super risky low ROI businesses with huge CAPEX budgets. To expect shareholders to perform a public good at their own expense is somewhat delusional.

I don't think I'm delusional, I just have a different value set to you. But using your public good perspective: -

A) The airline wouldn't exist unless it had been bailed out by the public
B) The public is a 52% shareholder - albeit a hands off shareholder
C) AirNZ already performs other public goods at it's shareholders' expense. It operates a conservation fund and other charitable programmes and it provides discounted fares to people travelling in difficult personal circumstances (e.g. family bereavement). All of those are public goods.

Note: AirNZ made a $332M normalised profit last year. The cost of the regional networks is $12M per annum which is 3.5% of that normalised profit.

If you knew anything about the performance of Air NZ (or infact most airlines) over the past 10 years you'd realise they make really, really, really lousy long term returns. You're looking at single year, that's not a good way to look at any business. Air NZ have done OK by being able to maintain pricing premiums in recent years but their CAPEX is huge as I explained a few posts above. $2 billion in new planes is currently being spent with probably another $1.5 billion needed towards the end of the decade to replace the existing 7x77Es which will be replaced.

If Ebola was to grow over the next few months and be worse than SARS or bird flu it could easily suffer a $332 million loss within the next 12 months.

MikeB4

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#1175830 14-Nov-2014 14:06

they would probably make more profit if they lent that $3.5Billion out on international loans etc as opposed to buying new aircraft.

nathan

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#1175845 14-Nov-2014 14:31

they have a mix of lease and purchased aircraft

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#1175846 14-Nov-2014 14:33

KiwiNZ: they would probably make more profit if they lent that $3.5Billion out on international loans etc as opposed to buying new aircraft.

They wouldn't be a very good airline then if they did that now would they... Show of hands of those who prefer to fly in old noisy smelly planes vs new comfy clean new ones?

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#1175873 14-Nov-2014 14:51

KiwiNZ: they would probably make more profit if they lent that $3.5Billion out on international loans etc as opposed to buying new aircraft.

umm ... they're a service company that flies ... that's what they're good at ... builders could make more money doing FOREX too ... with the amount of currency fluctuation!

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MikeAqua

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#1175876 14-Nov-2014 14:52

sbiddle: You're looking at single year, that's not a good way to look at any business. Air NZ have done OK by being able to maintain pricing premiums in recent years but their CAPEX is huge as I explained a few posts above.

$2 billion in new planes is currently being spent with probably another $1.5 billion needed towards the end of the decade to replace the existing 7x77Es which will be replaced.

AirNZ based their justification to pull out of some regions on just two years losses. So my analysis isn't much more limited than their rationale.

I agree airlines provide a horrible return on capital. But that isn't an argument for ceasing some services, it's an argument for exiting the sector altogether.

BTW I think the next thing we will see (with the move to larger regional aircraft) is fewer services per day for smaller centres.

Mike

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#1175981 14-Nov-2014 17:06

joker97:
KiwiNZ: they would probably make more profit if they lent that $3.5Billion out on international loans etc as opposed to buying new aircraft.

umm ... they're a service company that flies ... that's what they're good at ... builders could make more money doing FOREX too ... with the amount of currency fluctuation!

I was using it to illustrate that AirNZ ROI is not high and that the Shareholders could get a better ROI by lending the Capital as opposed to purchasing new Fleet.

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#1175987 14-Nov-2014 17:23

MikeAqua:
BTW I think the next thing we will see (with the move to larger regional aircraft) is fewer services per day for smaller centres.

That's already happened.

ckc

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#1175991 14-Nov-2014 17:26

In lots of areas councils subsidise public transport to run unprofitable routes. I don't know why the government/councils aren't trying to make a financial case for doing this for the regions. There has to be an economic and social case for putting some money toward it in some cases where the towns would just be cut off - like Westport.

Lots of the airports concerned can be served by others within an hour's drive, but Westport is two hours of hard driving up SH8 from Hokitika. And worse still, the only major centre that flies to Hokitika is ChCh. Anyone from Auckland or Wellington going there is looking at a four hour trip and a hire car from Hokitika.

Man, it's hard enough getting in and out of Dunedin, which is relatively big, and even that place is supported mostly by the university. I can't imagine how Westport is going to cope with being so isolated.

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#1176032 14-Nov-2014 18:15

MikeAqua:
BTW I think the next thing we will see (with the move to larger regional aircraft) is fewer services per day for smaller centres.

That all depends if putting on bigger aircraft with lower pricing increases passenger numbers or not. Bigger numbers of flights exist for two reasons - capacity and convenience.

Whangarei is an example of a destination where B1900's were pulled for a number of reasons including cost, runway conditions and local environmental factors and replaced by Q300s. This initially resulted in a cutback in flights as you had an initial glut of seats, but with the lower costs of the Q300 comes lower fares, and this has resulted in more seats and now an increase in flight numbers again.

Handle9

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#1176059 14-Nov-2014 19:02

MikeAqua:
Handle9:
Honestly airlines are super risky low ROI businesses with huge CAPEX budgets. To expect shareholders to perform a public good at their own expense is somewhat delusional.

I don't think I'm delusional, I just have a different value set to you. But using your public good perspective: -

A) The airline wouldn't exist unless it had been bailed out by the public
B) The public is a 52% shareholder - albeit a hands off shareholder
C) AirNZ already performs other public goods at it's shareholders' expense. It operates a conservation fund and other charitable programmes and it provides discounted fares to people travelling in difficult personal circumstances (e.g. family bereavement). All of those are public goods.

Note: AirNZ made a $332M normalised profit last year. The cost of the regional networks is $12M per annum which is 3.5% of that normalised profit.

Businesses exist to make money. Yes Air Nz have various minor charity endeavours which they do for advertising purposes, not because they are for the public good.

Quite frankly any CEO that allowed a company to loose 3.5% of it's net profit for no return is grossly failing his fiduciary duty to his shareholders. It's not like the shareholders are going to see any benefit from that loss of returns. The fact that the government is a shareholder is only relevant if they provide that direction, which they haven't.

If it is that important to provide an air service to these regions then the community or government should be subsidising it, not the shareholders of a company.

Handle9

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#1176062 14-Nov-2014 19:10

billbennett:
Honestly airlines are super risky low ROI businesses with huge CAPEX budgets. To expect shareholders to perform a public good at their own expense is somewhat delusional.

But the government expects telcos to do that with the Telecommunications Development Levy.

They are forced to do so, it's not out of some deep love of doing the right thing.

JimmyH

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#1176200 15-Nov-2014 09:00

afe66: I thought the government owned 51% of air new Zealand and so has the "power" surely to tell the company they own to do this that and the other.

They appoint more of the board of directors than any other group or all the other shareholders combined.

They wont for political reasons or not wanting to interfere with a business but that's different surely from saying they "cant" interfere.

A.

My understanding is that if the government appointed directors deliberately voted to do things that lost money to further the government's political objectives, then they would be breaking the law by not acting in the best interests of the company. The other shareholders could sue them for this, and they would be personally liable. So, understandably they won't do it.

Also, if the government started behaving this way, who would ever go into business with them? People who have invested their savings in AirNZ and the power companies etc on the understanding that they are commercially run.

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