Air New Zealand Investor Day Novemeber 2010Rob McDonald Chief Financial Officer Business Update & Loyalty Programme David Mackrell Deputy Chief Financial Officer FIRST IN, BEST DRESSED

2010 Investor Day1111

26 November 2010

Investor DayAir New Zealand

FIRST IN, BEST DRESSED


Rob McDonaldChief Financial Officer

Welcome




Rob McDonaldChief Financial Officer

Business Update & Loyalty Programme

David MackrellDeputy Chief Financial Officer



Line Up

• Business Update

• Domestic

• Tasman/Pacific Islands

• Long Haul

• Lining up the Initiatives

• Financial Management

• Hedging Strategy

• Fleet Management

• Loyalty Programme


Business Update

• Revenue momentum continues to build

• Increased fuel prices

– Move in both crude and crack spread from September

• Favourable currency movement

– But hedging delays benefit

• Enjoying recovery across most markets


Industry Comparison


Domestic

• New competitive environment

• Adding capacity as demand improves

• Fleet replacement programme starts January 2011

– A320 delivers lower per seat costs and increased capacity

– Configuration (171 seats) delivers a platform which allows a cost base competitive with low cost carrier

• Initiatives in regional markets


Tasman/Pacific Islands

• New product offering “Seats to Suit”

– New A320 configuration adds capacity

– Delivers a cost base that allows us to compete across all customer segments

– IFE allows flexibility of product mix configuration for every flight

• Increased penetration in Australia through online sales

• Access growing market of leisure travellers across Tasman market

• Very encouraged by bookings (29% higher than last year with 11% more seats)

• Almost flawless operational conversion of network to new business model

• After early feedback we will remove a row to create increased pitch in premium seating zone


Long Haul

• Launch new product on 777-300 ER April 2011 once three aircraft are in fleet

– First Long Haul operational flight mid January 2011

• Adding capacity back to match improving demand

• Focus on improving depth of current routes

• Strong loads across network

• 777-300ER – 338 seat count gives cost base to compete with low cost Long Haul carriers

• New Product targeting

– 4% improved RASK through optimised cabin mix

– 4% improved RASK through revolutionary product – Skycouch, Space Seat


Financial Management

• Cash balance remains strong at more than 20% of revenue despite recent debt repayment

• Gearing stable and healthy at 47%

• Moody raised rating to Investment Grade Baa3

• Dividends maintained through Financial Crisis, increased in 2010

• Growing pool of unencumbered assets


Lining up the Initiatives

• Seats to Suit

• New Long Haul product

• Enhanced Loyalty programme

• Proposed Alliance

• Leveraging RWC2011

• Layering in capacity will improve cost efficiency


Hedging Strategy

• Objective of Hedging Strategy is to protect business from short term volatility

• Hedging provides time to adjust accordingly

– Hedging profile reflects speed of adjustment

• Continuously monitor and adapt hedging strategy

• Recent independent review reaffirmed appropriateness of strategy


Fuel Hedging Profile

Percentage Hedged by Month

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Current Maximum Minimum Target

Oct

-10

Nov

-10

Dec

-10

Jan-

11Feb

-11

Mar

-11

Apr-1

1M

ay-1

1

Jun-

11

Jul-1

1Aug

-11

Sep-1

1

Oct

-11


Fuel Hedge Position*

• The second half of FY11 is 75% hedged

Volume bbls Ceiling US$ Floor $us

Singapore Jet collars 1.9m 91 81

WTI collars 1.5m 81 71

* Fuel hedge position as at 19 November 2010

Volume bbls Ceiling US$ Floor $us

Singapore Jet collars 0.6m 93 84

WTI collars 2.1m 82 72

• The first half of FY11 is 89% hedged


Currency Composition

2010 Currency Composition

(1,000)

(800)

(600)

(400)

(200)

0

200

400

USD

Fuel

USD

other

AUD

GBP

JPY

EUR

CNY

CAD

NZ

D (

m)


Currency Hedging

• 2011 US dollar operating cash flow exposure is approx. 91%

hedged at an average NZ$/US$ rate of 0.66

• US$373m of future capex commitments are hedged at NZ$/US$

rate of 0.73 (spot)


Currency Hedging Profile

Hedge Rates and Hedging Percentages

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec FY11 Mar FY11 Jun FY11 Sep FY12 Dec FY12 Mar FY12 Jun FY12 Sep FY13 market

Ind

ica

tiv

e h

ed

ge

pe

rce

nta

ge

0.3500

0.4000

0.4500

0.5000

0.5500

0.6000

0.6500

0.7000

0.7500

0.8000

0.8500

Ex

ch

an

ge

ra

te v

ers

us

NZ

D

Indic Hedge %AUDCADEURGBPUSD


Hedging Activity Reduces Earnings Volatility

0

50

100

150

200

250

300

350

400

FY06 FY07 FY08 FY09 FY10

(Year ended 30 June)

$m

Normalised earnings before tax

Earnings before tax excluding any derivative related operating gains/losses


Fleet Management

• Significant fleet replacement preparation and activity

• 737 replacement programme on track

• 777-300 introduction on track

• Flexibility of fleet proving valuable given 787 delays

– 777-200 leases extended

– 767’s to remain in fleet

– 747 purchased


Fleet Activity

??-(3)(2)747 Exits

(1, ?)(2)(2)(3)-737 Exits

??---Boeing 787-9

-

3

-

FY

14

-

4

-

FY

15

12**2**Airbus A320

62-Boeing 777-200ER Reconfiguration

-23*Boeing 777-300ER

FY

13

FY

12

FY

11

*1 x owned, 2 x operating lease

** Operating Leases


Loyalty Programme

• Creates loyalty to Air New Zealand

• Significant sales channel

• Growing membership (10% in last 6 months)

• Core part of our business but not a separate business/profit centre

• Stimulates travel as well as rewards travel behaviour “earn to fly”and “fly to earn”


Loyalty Programme

• Enhancements to Loyalty Programme

– Expanded financial partners

• Added ANZ National, Kiwi Bank & American Express

• BNZ Global Plus Relationship continues to grow

– Enabled Airpoints earning through retail spend

• Partnership with Loyalty New Zealand (Flybuys)

• Introduction of Gift Store – allowing Airpoints to be used to buy non-air products

• More than half of Airpoints $ earned through non-air partner activity e.g. Credit card earning



Stephen JonesGM Strategy

Trans-Tasman and the Alliance



Content

1. Regulatory structure

2. Tasman Market

3. Virgin Blue Alliance

4. Authorisation


1. Regulatory Structure

• Single Aviation Market with Australia

• Open Skies Arrangements with other countries

• Fifth Freedom flying a permanent feature


Emirates Exercises its 5th Freedom Rights

• Emirates have fifth freedom rights allowing them to carry passengers point-to-point on the Tasman

• Emirates flight banks in Dubai encourage a morning arrival into,and evening departure from, Australian ports

• Tasman flight times allow a return journey during the day

• Marginal cost economics support competitive fares

• Consequently travel flow in their network estimated to be

– 70% of Emirates traffic is Tasman only

– 5% is Dubai

– 25% is other destinations


2. Tasman Market is well Served


Tasman Market Relative Size

Australian, New Zealand and Trans-Tasman Capacity Presence by ASKS for the 12 months to April 2010

Other Other

Qantas

Qantas

Jetstar

Jetstar

Jetstar

Virgin Blue

Pacific Blue

Pacific

Blue

Air NZ

Air NZ

Emirates

Tiger

Domestic Australia (74%) Trans Tasman

(19%)

Domestic NZ

(7%)

0%

20%

40%

60%

80%

100%

Ca

pa

city

Sh

are

Jetstar

2010 Investor Day31313131Page 31

Total Market Capacity in FY11 is Significantly Higher (10%) than FY08

0.0m

0.5m

1.0m

1.5m

2.0m

2.5m

3.0m

3.5m

4.0m

2005 2006 2007 2008 2009 2010 2011

Seat

s P

er

Ye

ar

Other

BI

AR

LA

TG

DJ

EK

JQ

QF

SJ

NZ

# of carriers

11.3% -3.0% -4.9% 3.5% 1.0%1.9%

10 9 9 78

2.7%

10 7

Yoy % cap change

Capacity Share by Carrier – Tasman Market


Tasman is Predominantly Leisure Market


Tasman Capacity Growth over Longer Term

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Lo

ad

Fa

cto

r

Se

ats

an

d P

as

se

ng

ers

Month

Passengers

Seats

Load Factor

Passengers Trend

Seats Trend

LF Trend

Trans-Tasman Passengers, Seats and Load Factor


3. Virgin Blue Alliance


Hierarchy of Co-operation

EquityProfit ShareRevenue ShareCode ShareInterline


Where does the Value come from?

• Better Connections

• Better Frequency

• Better Distribution

• Market Stimulation

• Cost Savings


Revenue Allocation Alliance with Virgin

Australia Tasman New Zealand

Revenue Pooling on Trans Tasman Sectors

Code-share on “Network Alliance Routes”


• Not a replay of Ansett

• Not a replay of the Qantas TNA

– No capacity reductions and joint market share is only ~50%

• Not a profit share – carriers bear their own costs

• Doesn’t include stand-alone domestic sectors

• Doesn’t include Pacific Islands sectors

• Doesn’t include cargo revenue

What the Alliance is not….


Previous Alliance Proposals were quite Different

Feature QF1 QF2


Governance…How are Decisions Made?

Alliance Board

Air New ZealandCEO

Virgin BlueCEO

Alliance Revenue Team Joint Sales Team

Responsible for agreeing:

• Network

• Schedule

• Pricing

Responsible for agreeing:

• Marketing

• Sales


4. Authorisation

• Approval sought from ACCC and Ministry of Transport

• Draft Determination received from ACCC proposing to deny authorisation

• Capacity Conditions offered to allay DD competition concerns

• Subsequent ACCC Pre-Decision Conference held

• Final Determination expected by 20 December

• Minister of Transport decision expected in similar timeframe


Conditions Offered

• Six Sectors of concern identified by ACCC

– AKL-BNE, WLG-SYD, WLG-BNE, WLG-MEL, DUD-BNE, ZQN-SYD

• Maintain Minimum of Aggregate Base Capacity

• Increase Aggregate Base Capacity by 10% by Year 3

• Increase Aggregate Base Capacity by 15% by Year 5

• Maintain Minimum of Base Capacity on total market


What are the Process Options if Regulators Deny Authorisation?

• Option for ACT appeal if ACCC negative

– Full rehearing of case

– Same tests for authorisation as ACCC apply

– Courtroom style

• Judicial appeal possible if MOT negative



Norm ThompsonDeputy CEO

Tourism & Rugby Festival 2011



61% of Air NZ’s Revenue on our International Routes is from Offshore

International

Dom

estic

0

10

20

30

40

50

60

70

80

90

100

% of Air Capacity

by Air New ZealandAir New Zealand Revenue

Inbound v's Outbound(international routes)

61%

39%

International New Zealand


International and Domestic Tourismcontribute $22.4 billion to the Economy

Tourism Expenditure (billions)

12.9

9.5

International Domestic


Tourism is NZ’s Largest Export Earner

Tourism

Dairy

Meat

Wood

Seafood

0

1

2

3

4

5

6

7

8

9

10

$ b

illio

ns

Value of Primary Exports

(Year ended 31 March 2010)

Source is Tourism Satellite Account 2010


70% of our Visitor Arrivals come from 5 Key Markets

China

4%

(110k)

USA

8%

(190k)

Rest of World

30%

(750k)

Japan

3%

(85k)

Australia

45%

(1.1m)

UK

10%

(250k)

TNZ research shows that

there is a market of 4.9

million Australians for

whom NZ is one of their

preferred destinations for

their next trip.

*Source: Understanding the “Active Considerers‟ Market in Australia, July 2010, TNS Conversa for Tourism New Zealand


-10 -5 0 5 10 15 20

Total

Australia

UK

USA

China

Japan

Germany

Korea

Canada

Singapore

India

France

Hong Kong

% change in arrivals, Top 12 markets, y/e Oct 2010

Source: International Visitor Arrivals, September 2010

Japan Market has Moved Back into Growth


The Highest Growth in Visitor Arrivals to NZ is Forecast to come from China

0 1 2 3 4 5 6 7 8 9 10

Total

Australia

UK

USA

China

Japan

Germany

Korea

Canada

Singapore

India

France

Hong Kong

Forecast average annual change in arrivals, 2010-2016


• Globally, cruise market has grown by 7.2% pa over the last decade

• The total value added to the NZ economy from the cruise sector is forecast to reach $346 million in the 2011/12 season (up from $190 million in 2009/10)

• More ships, more passengers on each ship = opportunity

• Opportunity capped by size of port

Cruise Market

2009/102010/11

2011/12

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

Pa

sse

nge

rs

Cruise Passengers


• Multi-day conventions contributed $398 million to GDP (yr ended June 2010) of which $112 million was from international delegateexpenditure

• Average spend by international delegates was $4,049* versus $1419 for domestic delegates

• Currently not competitive in international conferences of over 1000 people because of lack of appropriate facility

• Ministry of Economic Development is putting a major focus growing business tourism, especially the convention market

– Hence the proposal to build a national convention centre in Auckland that can host over 4,000 delegates

• National convention centre = opportunity

* Only includes expenditure on airfares that is likely to have accrued to the New Zealand economy

Convention market


• Tourism in New Zealand will be boosted in 2011 from RWC2011

• Air New Zealand is crazy about rugby

• We are a not a sponsor of the tournament

• Preliminary forecasts predict 85,000 international visitors to NZ over the duration of the tournament, with 43,000 being here at any one time

• 85,000 possible visitors = 85,000 potential ambassadors for New Zealand

• We play a critical operational role to ensure the smooth flow ofteams, official and fans around the country

The Opportunity


Tournament v’s Peak


The Game Plan


Making it Fly

• All aircraft available & building capacity to meet demand

• Creating off-site check-in

– Managing customers and bags from any location at any time

• Facilitating cruise ship movements around the five cruise ships that will be in New Zealand for the event

• Tailoring our service delivery across all customer touch points to reflect the excitement of the event

Operational Excellence


Making it Fly

• Commercially beneficial

– Not putting up the ‘full’ sign until the entire country is full

• Brand Advocacy

– Air NZ award winning service

– NZ ambassadors

– Creative marketing

• Stakeholder relationships

– NZ Inc

– Tournament responsibilities

We are all Winners on the Day



Rob FyfeChief Executive Officer

Overview &

Conclusion



The Journey

‘ATW Phoenix Award’ to …ATW ‘Airline of the Year Award’ in just five years


Deliberate Investment in Culture


Great leaps forward in innovation


Industry Developments

• Consolidation

• Growth of low cost in region

• We need to be bigger to be relevant


Transition from Rebuild to Growth

• Platform established

• Leverage for growth


Documents

Air New Zealand Investor Day Novemeber 2010Rob McDonald Chief Financial Officer Business Update & Loyalty Programme David Mackrell Deputy Chief Financial Officer FIRST IN, BEST DRESSED