National carrier Air New Zealand has been shattered by Covid-19, and it will likely be years before it recovers. Alex Braae reports on a sobering letter from the CEO.

What’s the latest? 

Air New Zealand CEO Greg Foran has been in the job for a matter of months, but already he is being forced to preside over by far the greatest crisis the national carrier has ever faced. In a message sent out last night, he outlined just how bad things have got.

How bad are we talking?

The losses in revenue are taking place on a colossal scale. Previously Air New Zealand had been one of the country’s biggest companies, with revenues of almost $6bn a year. Last year’s profit was a very healthy $374 million, and they had cash reserves of about a billion dollars in case of a rainy day.

But the rainy day has turned out to be a monsoon, and even those large buffers won’t come close to covering the losses. In the message, Foran said “the global reduction in air travel has hit Air New Zealand hard and we are earning less than $500 million revenue annually based on the current booking patterns. This means we are dealing with a significant reduction of over $5 billion in revenue per year.” Those are losses of around 90% of revenue, which would be catastrophic to even the most secure businesses in the world.

How can they have gone so low, so quickly?

The age of international travel is basically over for now, and may well not really return for years to come. Travel bans have been put in place all over the world, with each individual country doing their utmost to stamp out Covid-19 domestically. That includes New Zealand, where the vast majority of the cases so far are connected to international travel. It’s not at all clear what could possibly result in those bans being lifted, short of a vaccine being developed – a process that could take up to two years. Foran said for the foreseeable future, the only Air NZ planes heading overseas will be “limited international services to keep supply lines open”.

What about domestic flights? 

The airline does anticipate being able to start flying domestically again on a more regular basis, once the alert level drops below four. But even then, there will be pressure on the company. “It is clear that the Air New Zealand which emerges from Covid-19 will be a much smaller and largely domestic airline,” said Foran. Flights pretty much aren’t happening anywhere in the country right now, and some regions may still be under level four lockdown for longer than others, hampering the opportunity to plan ahead.

How many jobs are going?

One of the biggest negative outcomes of this will be the loss of thousands of jobs, both in the immediate term and over the coming months. Before Covid-19 hit, Air NZ’s workforce numbered around 12,500 people. Foran expects that in a year’s time, the workforce will be at least 30% smaller – that’s 3500 jobs gone in what is likely to be the best-case scenario. “Many Air New Zealanders have offered to take leave without pay, reduce their hours or explore voluntary exits. We have also made savings from voluntary pay cuts by the board of directors, myself as CEO and my executive team, and cancelling all incentive payments for staff on individual employment agreements,” said Foran.

Is the government helping?

It is, for several reasons. The New Zealand government is the majority shareholder in Air New Zealand, so would be hurt by it going under. There is also the sheer logistical value in having an airline service in an island nation – particularly if we need to move further towards a command economy model to fight the Covid-19 crisis. Having Air NZ planes flying overseas will be crucial for maintaining essential supplies like medicine.

The wage subsidy scheme is in place, but doesn’t much help Air New Zealand, given they must reduce the workforce. Foran said the company was grateful for it, and that they were working with the government on getting the package exactly right for the airline. But he also noted that “the subsidy is, however, a short-term measure and doesn’t right-size the business for the future”.

What about the other flow-on effects of this?

Foran wrote in his email a note of regret for Air NZ’s suppliers, which will be hit by the changes and may also have to reduce their workforces. But a wider impact will be felt most catastrophically by the tourism industry. Up until a month ago, Air New Zealand had been by far the most important organisation in the world for delivering tourists from overseas to destinations up and down the country. In a typical year, like 2017, international tourists put more than $10bn into the wider economy. For the foreseeable future, that’s just gone.

It’s possible that some of the slack in this area could be picked up by domestic tourism. And New Zealanders won’t be taking their tourism spending overseas in the near future either, so there is a chance that could be boosted. But enthusiasm should be tempered by the fact that the country as a whole will be going through a big economic downturn, making discretionary spending far tighter for a lot of people.