Earnings Transcript for ANZLY - Q4 Fiscal Year 2019

Operator: Ladies and gentlemen thank you for standing by and welcome to the Air New Zealand 2020 Interim Results Investor Briefing. [Operator Instructions]. I would now like to hand over to Air New Zealand's General Manager of Investor Relations and Financial Planning, Leila Peters.

Leila Peters: Thank you, and good morning, everyone. Today's call is being recorded and will be accessible for future playback on our Investor Center website, which you can find at www.airnewzealand.co.nz/investor-centre. Also on the website, you can find our interim results presentation and financial report, media release and the relevant stock exchange disclosures. Speaking on the call today will be Chief Executive Officer, Greg Foran; and Chief Financial Officer, Jeff McDowall. I would like to remind you that our comments today will include certain forward-looking statements regarding our future expectations, which may differ from actual results. We ask that you read through the forward-looking cautionary statement provided on Slide 2 of the presentation. I would also like to draw your attention to the fact that a number of prior period comparative figures had been re-stated throughout the presentation to reflect the retrospective dis-establishment of aircraft fair value hedges which we disclosed to the market on the January 28. The group has also adapted NZ IFRS 16, the new leasing standards from the July 01, 2019. In accordance with the transition provisions of the standard comparatives have not been re-stated. I urge you to read through these statements on slide 3. Within the presentation there is also a supplementary information section that include slides that we will not specifically address during the webcast. These slides provide key financial and operational details and we recommend that you take the time to review that information. Before I hand things over to him, Greg I would like to take this opportunity to welcome you to your first Air New Zealand investor call. I'm sure that I'm not alone in saying that we're very excited to have you here and look forward to having you meet our investors and analyst community in due course. With that I will now turn the call over to Greg.

Greg Foran: Thank You Leila. Kia ora and good morning everyone and thanks for joining us on today's call. It's a great pleasure to be here and I do look forward to meeting with many of you over the coming months. I don't think I've made any secret of the fact that I am incredibly excited to have returned home to New Zealand as a CEO of one of New Zealand's most iconic and loved companies. Many of my happiest childhood memories involve my family and I traveling around our beautiful country seeing everything that the regions and centers have to offer and I'm thrilled to lead a company that provides that opportunity to all New Zealanders as well as visitors to our country. Having now spent almost a month in the business taking every opportunity I can to meet Air New Zealanders and customers alike, one thing that really stands out to me is the fact that we have an incredible culture here with a team of enthusiastic, dedicated employees who are focused on delivering an exceptional but still very Kiwi customer experience every day. If there's one thing that my career has taught me had set the power of an exceptional culture which in turn leads to the creation of an exceptional customer experience cannot be undervalued. Whether you're in the retail industry or the airline industry creating the right customer experience is the key to delivering a long-term sustainable success. I see this role as a fantastic opportunity to take the lessons I've learnt in my career to date and use them to help develop and enhance all of the things that make Air New Zealand so special. Now I would be remiss if I did not acknowledge the obvious uncertainty facing Air New Zealand at the moment with regards to COVID19 and its expected impact on the airline. You may have seen the announcements we made both last week and on Monday regarding changes to our network in direct response to the reduced demand we are seeing. We have the ability to scale these adjustments up or down depending on how the situation progresses. You can be certain that the team is closely monitoring our forward bookings profile to ensure that we have an appropriate level of capacity in the market. At this point it is clear that there will be an adverse impact to the current year's financial performance as a result of COVID19 and Jeff will provide more detail on our thinking regarding that impact later in the presentation. From my perspective Air New Zealand is a resilient business with a strong core in its domestic market and we've demonstrated the ability time and again to respond quickly to changing market conditions. We have a highly capable and experienced team who have dealt with challenges such as this before and I'm confident that we will weather the storm too. That's not to say that it won't be challenging. It will be. But the strategic advantages we've spent years investing in and enhancing will help us deliver during this time. I will now hand over to Jeff to discuss the first-half results.

Jeff McDowall: Thanks very much Greg and Kia ora to everyone on the call. Earlier this morning, we released Air New Zealand's financial results for the first six months of the 2020 financial year to the market. It was a solid result with earnings before other significant items and taxation of a $198 million reflecting the resilience of our business and the execution of our strategy despite a challenging economic backdrop. Our revenue performance was strong driven by growth in the recently launched and new markets such as Korea, Singapore, Chicago and Taipei as well as strong demand across our Domestic and Pacific Island networks. That demand in conjunction with the actions we've taken to stimulate additional leisure traffic with our domestic theory structure help contribute to a 2.8% increase in passenger revenue despite the slower demand growth environment and the impact of ongoing unrest in Hong Kong. Total revenue growth was impacted by continued weakness in the global cargo market which resulted in the decline of 9.4% excluding foreign exchange in our own cargo business. The cargo business has been challenged for the last 12 months or so predominately driven by trade tensions between the U.S. and China which is reduced demand and put pressure on yields. On the cost front, I'm pleased with the results we're seeing from our business review initiatives which have contributed to the improvement in our underlying unit cost performance for the first half. This is despite the fact that we faced increased domestic air navigation and lending charges this year. As you'll be aware fuel costs were lower this financial period which is a positive, however, the benefits of this have essentially been offset by the impact of the weaker New Zealand dollar over the same period. It's really been the continued focus on a cost base that's led to increased efficiencies and economies of scale and ultimately delivered an underlying unit cost improvement. I would like to take this opportunity to thank the team at Air New Zealand for their continued and relentless focus on driving sustainable cost savings and that's despite the external challenges the business has faced and continues to face. As we will touch on later when discussing the outlook for the remainder of the year, I really like to reiterate Greg's earliest sentiments. Air New Zealand is a strong resilient company that's adjusted its business and response to a number of external challenges in the first half. However, as we've communicated to you in the past we're not satisfied with this lower level of earnings and will continue to take necessary actions to navigate these short-term headwinds. On our investor day last May, we articulated three focus areas from a network perspective that will guide our thinking on capacity growth. They were firstly, to grow into attractive new markets thereby accessing untapped pools of demand. In the first half of this year we saw a good momentum from that strategy with revenue growth across recently launched markets performing ahead of our expectations. Next, we look to drive cost-efficient growth through upgauging to NEO aircraft on some of our short-haul services. The ongoing replacement of older A320 aircraft on the short-haul network with newer NEO aircrafts is providing good efficiencies and economies to scale which is especially helpful to our cost competitiveness as we face elevated levels of market supply on the Tasman. The last element to our network growth strategy was to moderate growth on our existing routes and drive strong risk improvement. This was most apparent markets that we had grown considerably over the past four to five years such as the overall domestic market and the Pacific Islands as well as Japan. Now to provide a brief update on our previously communicated cost initiatives. As I mentioned earlier we're seeing good progress across all three pillars. As you will remember, the overall goal of this program is to structurally reduce the cost base by approximately $60 million across a two-year period to align our cost base with the new lower demand growth environment. These cost savings are in addition to our usual daily diet of cost savings and efficiencies that help us to offset inflation. So in terms of the first pillar, we’re on track to regain efficiencies in our operations following the impact of the global Rolls-Royce engine issues on our network across the last two years or so. A large part of that inefficiency was driven by labor costs specifically having elevated levels of staff and crew available to support our customers and operations throughout the disruption. Despite the additional TEN engine maintenance backlog this half, we still expect to deliver approximately $20 million in savings related to this initiative and the 2020 financial year. A large part of the savings achieved to date have been from the ability to make more proactive network planning decisions with fewer last-minute changes to aircraft type late in the planning cycle which as we discussed last year is really inefficient from a cost perspective. Also the need to hold additional levels of both crew and other operational staff has dropped off as we built some certainty back into our schedule. Then turning to the second pillar, which is a 5% reduction in overheads. The focus here is to ensure that we have the most efficient and effective cost structure to support the business in a lower demand growth environment. We're expecting to deliver on these improvements from an earnings perspective in both 2020 and 2021. Then if we turn to the third component where we have commenced a targeted review of the operations cost base, as mentioned before this will involve some supply chain consolidation as well as improved labor utilization and optimization of our facilities. While the portion of these savings are on track to be delivered in 2020 the majority will now be delivered in 2021. Turning now to some of the financial highlights of the first half. Operating revenues was $3 billion, an increase of 3% on the prior period. Against the backdrop of the additional hit ones I highlighted earlier this is quite a strong result. This half we delivered earnings before taxation of $139 million. Earnings before other significant items and taxation were $198 million, a decline of 8.8%. As a reminder in January we announced several items that will be classified as other significant items for the financial year. A breakdown of those items can be found in the supplementary slides in the back of the presentation. Net profit after tax for the period was $101 million and reported operating cash flow was $534 million. Digging a bit deeper into the drivers of our revenue performance. Overall passenger revenue increased 2.8%, driven by strong demand growth of 4% which outpaced capacity growth of 2.8%. Risk excluding the impact of FX was marginally down which is a solid result in light of the mix of long-haul capacity growth in the period. I will touch on the cargo business in more detail shortly but overall revenues declined 9.4% excluding foreign exchange. We've summarized our cost performance here and I will touch on underlying cash performance in the coming slides. Briefly reviewing the impact to fuel in the first half overall costs increased 1.15% or $7 million. That movement reflects the decline in average fuel price of $28 million offset by the weaker New Zealand dollar which drove $20 million of additional cost. Increased flying across the network also resulted in $15 million of additional fuel costs in the period. We saw the benefits of our modern fuel-efficient fleet as well as the mix impact of capacity growth on longer sectors where fuel volumes growing only 2.3% on capacity growth of 2.8% in the period. Now I will briefly touch on some of the key movements which affected our profitability during the year. To better understand the dynamics of each component we've isolated the impact of foreign exchange. I won't go into the details of every single item here but the detailed profitability waterfall and commentary can be found in the interim financial report on the investor center website. We've already discussed passenger revenue performance and I will cover the cargo business shortly. However, I wanted to point out that within the $76 million of revenue growth is $26 million in other revenue which is largely from additional maintenance work for third parties including on U.S. Navy gas turbine engines. Labor costs increased by 1.3% well below our capacity growth. This was driven by our efforts on cost initiatives that I have already touched on as well as reduced incentive payments compared to the prior period. Growth in our full-time equivalent workforce or FTAs was 2.7% which is broadly in line with capacity growth. The majority of growth this year was in crewing and airports. Moving over now to maintenance aircraft, operations and passenger service costs which increased by $52 million. This increase was primarily driven by maintenance activity associated with the U.S. navy gas turbine engine contracts as well as the weaker New Zealand dollar and overall growth in the fleet. A significant step up in domestic air navigation and landing charges in the period also impacted our profitability as we absorbed high single-digit price increases. I would also like to highlight that sales, marketing and other expenses remained essentially flat highlighting our ability to leverage efficiencies as we focus on productivity initiatives within the airline. Ownership costs increased by $29 million, driven by new aircraft deliveries. This increase was lower than our earlier expectations partly due to delays in the delivery schedule of some aircraft which has pushed out the timing of those costs into subsequent financial periods. We're now expecting around $55 million to $60 million of additional ownership costs in the 2020 financial year which is less than the $70 million to $80 million estimate we provided in our annual results call last August and lastly the weaker New Zealand dollar resulted in an adverse impact of $21 million to profitability in the period. If we look at passenger revenue performance by market and I am just going to focus on a few here that we haven't discussed already, during the first half of the year we saw very high levels of demand on our Japan RASK as a result of the Rugby World Cup which drove high double-digit RASK growth as well as strong yields in the first half. This was of course partially offset by the impact of the ongoing disruptions in Hong Kong. The Tasman market continued to experience the high levels of market capacity that followed the end of our alliance airlines relationship with Virgin Australia. In November, we also announced the suspension of our twice-weekly seasonal Christchurch to Perth service as well as the cancellation of our second daily Auckland to Perth flight through December as a result of the additional maintenance requirements on our Trent 1000 TEN engines which impacted passenger revenues. For the Pacific islands excluding Samoa further capacity rationalization particularly on routes such as Honolulu and Denpasar, which had experienced high growth in the last 18 months or so helped drive strong risk and yield. Samoa was however impacted by the measles outbreak. We also benefited from positive passenger revenue performance on our core domestic market with more moderated capacity driving strong year-on-year risk outcomes and increased load factors. This is largely driven by continued demand strength in the corporate market and fear the stimulation of domestic demand following the domestic theory structure we announced last year. For the last few months of the half we also added additional capacity on some of our regional routes following the announcement of the withdrawal of Jetstar from the New Zealand regional market. And finally if we look at the Americas, in particular North America we saw a weaker New Zealand dollar and picked outbound demand on some of the U.S. routes. This combined with an overall increase in market capacity of around 5% year-on-year lead to some softness and risk and yields albeit off a strong base. Our additional frequency into Chicago, up from three times per week to five delivered strong revenue growth. So as I mentioned earlier this morning the continued slowdown in the global freight market has led to an overall decline in our own cargo business of 9.4% excluding foreign exchange. A large portion of that decline was driven by reduced flows between China and the U.S. as trade tensions continue. We have also seen a change in pricing behavior was the slowing demand environment particularly Tasman with high levels of discounting in the market putting pressure on both volumes and yields. There was also a mix component to the cargo story. Our team has worked hard to source additional demand from some of our secondary cargo markets. However, this is typically being for lower value products which have resulted in lower overall revenue. The other thing to bear in mind when looking at the year-on-year cargo performance is that we're comparing against a strong first half in the 2019 financial year as a slowdown only really started in the second half of last year. In January and early February we were seeing early signs that the cargo market was starting to stabilize. However, the outbreak of COVID19 has impeded that recovery. Turning out to operating costs. CASK, when adjusted for the impact of fuel price effects and maintenance for third parties improved by 0.5%. This contributed $59 million to profit in the period and reflects the benefit of cost efficiencies and economies of scale as we grew our long-haul network during the first half. It's worth noting that while we expect the business will continue to achieve fair the cost initiative and efficiencies in the second half of the year, the recently announced capacity reductions relating to the impact of COVID19 will impact overall case for 2020. Our operating cash flows remain robust $554 million on a reported basis. When adjusting for the impact of the new leasing standard which resulted in the reclassification of lease payments operating cash flow has declined 11% to $423 million. This has been primarily driven by a one-off cash outflow of $55 million as we entered into a maintenance agreement to prepay certain engine parts at an attractive discount, as well as the reduced level of earnings. We ended the period with cash on hand of $1 billion which reflects a slight decline of 4.9% but it's still at the top end of our target liquidity range of $700 million to $1 billion. The airline continues to maintain a stable investment grade credit rating from Moody's of Baa2. Gearing was 54.3% and remains in our target range of 45% to 55%. There was a 2.6 percentage point increase in gearing which reflects continued investment in aircraft. Our reported gearing has been impacted by both the adoption of NZ IFRS 16 from the July, 01 2019 as well as the disestablishment of fair value aircraft hitches, which we disclosed to the market in late January. On the supplementary sides we provided a reconciliation of the gearing changes relating to this. Finally, the board was pleased to announce a fully imputed dividend of $0.11 per share consistent with the prior period. In the chart on slide 17 you can see the phasing of our updated aircraft capital expenditures through to 2023, which totaled approximately $1.5 billion based on the exchange rate of $0.65. You will also see that we've reflected some timing changes on now expected delivery of NEO aircraft for the domestic market. Initially delivery of the first three domestic units was expected in the 2021 financial year. However, we are now expecting to receive just one unit in the year with the other two units moving now into the 2022 financial year. We have also deferred two further units from 2022 to 2023. Now turning to the remainder of the year. As Greg mentioned we are facing a large degree of uncertainty with regards to demand across our international and domestic network as a result of the COVID19 outbreak. We've seen our forward booking trends evolve at quite a rapid pace over the past few weeks with notable softening and demand across a number of our markets. We believe this reduction in demand is temporary, however, we have taken immediate action to mitigate the loss of revenue from COVID19 that includes putting in place a number of capacity reductions across our Asia, Tasman and domestic networks which we announced to the market on Monday along with an update to expected earnings range for the 2020 financial year. We've also taken the opportunity to adjust our schedule to drive more efficient flying using our 787 aircraft on routes such as Honolulu and Bali, given some of those aircraft have now been freed up following the route cancellations and capacity reductions we've made. As clear that our Asian Network will be the most directly impacted by COVID19 specifically our Shanghai route where services have been suspended since early February following the government's restriction on travel to Mainland China. We have also suspended services to Seoul from early March until the end of June. In addition to the direct impact of cancellations we've also seen weak and bound demand from other markets in the region particularly Hong Kong but also in Japan and Taipei where we have experienced some group cancellations. Singapore has also seen a slowdown and connecting traffic and we've adjusted our frequency there in response to this. The need of all this is that we've implemented targeted capacity reductions across a number of markets in Asia with a declining plane capacity of approximately 17% for the months of February through June. Then if I look at the Tasman, we have observed some softening of demand there in the past two weeks or so. We've implemented capacity reductions of approximately 3% on the Tasman over the March to May period. On our domestic network we are seeing weaker demand on our Christchurch and Queenstown routes reflecting the decline and in-bound Asian visitors. As a consequence we've made a number of frequency changes in these markets reducing capacity by around 2% over the period of March through April. It's also worth noting that our Pacific Island network has not seen any notable changes in demand following the outbreak. We're also seeing some increased bookings for our North American services as customers look to transit to Europe via U.S. ports rather than through Asia. Turning to slide 20, we've summarized the current thinking on capacity for the second half of the year and what that means for full-year capacity. Previously we had anticipated a capacity growth in the second half of the year to exceed what we saw in the first half as new long-haul routes such as Seoul and the Christchurch to Singapore service drove faster growth, as well as the impact of increasing the frequency of Taipei and Chicago services compared to the prior year. Based on our current expectations and the capacity adjustments we've announced we are expecting second half capacity growth to be in the range of 1% to 2% which would imply 2020 full year capacity growth of around 2%. Turning to fuel and our outlook for the remainder of the financial year based on our hitching profile. To be helpful we've provided an outlook of estimated fuel costs for the second half of the year with an assumption of average jet fuel now at $65 per barrel but reflects the current market demand following the impact of COVID19. Based on the makeup of our hitches we've also provided in the approximation of how moves up or down on fuel price would impact a fuel cost for the second half of the year. A USD65 per barrel for jet fuel now fuel costs in the second half would be approximately indeed $590 million which would bring our full year fuel costs to approximately $1.25 billion. While the situation is uncertain based on our current assumptions of lower demand as well as the benefit of the announced capacity reductions and lower jet fuel prices, the airline currently expects a net negative impact earnings in the range of $35 million to $75 million as a result of COVID19. At the midpoint of the estimated range above which is approximately $55 million, the airline is targeting earnings before other significant items and taxation to be in the range of approximately $300 million to $350 million assuming jet fuel prices remain at $65 per barrel for the remainder of the year and excluding the impact of our IFRS 16 the new leasing standard. The airline will provide an update to this guidance should the current assumptions materially change. I will now pass you over to Greg who is going to leave you with some closing remarks.

Greg Foran: Thank you Jeff. Just to close I wanted to discuss a strategy review that we are currently undertaking. As some of you will be aware I’ve recently initiated a piece of work around Air New Zealand strategy to assist us in setting a course for the airline's future. This piece of work or directed diagnostic as I like to call it will involve reviewing our strategic opportunities and risks to assist not only where we play but where we can win going forward. We've assembled a cross-functional team from areas of the business such as networks, commercial, customer and operations just to name a few. This team will lead the strategy review and use the vast knowledge and experience of Air New Zealanders across the whole business to inform the diagnostic. Key focus areas will include our route network, sustainability agenda, loyalty proposition, digital ambition, profitability and importantly our culture. The stringy review will likely conclude in the DA and will tackle some core questions about the airline and how we can best deliver for our customers. I think this is a really exciting time for Air New Zealand and I look forward to sharing more with you in the coming months. So with that, can I say thank you very much for listening. I know you will have lots of questions. So, operator please open up the line.

Operator: [Operator Instructions] Our first question comes from Andrew Bowley from Forsyth Barr. Please go ahead.

Andrew Bowley: Thanks, operator. And good morning, guys. Welcome, Greg and Hi Jeff and then Leila. I've got a couple of questions. The first, which is for you Greg and thanks for your comments on the strategy you reviewed just now. But in your opening comments you made the reference to customer experience being critical to success. Now, you've had the opportunity to talk to staff and customers about the customer experience over the past month or so in terms of the work you've done internally and the emails we've been getting is as frequent flyers externally. But certainly keen to hear what your observations are about the experience thus far. And any thoughts as to how you can enhance what you're seeing and hearing.

Greg Foran: Yes, sure. Thank you for your question and thanks for following us. So, we've got lots of responses and as you can imagine from our leadership across the business and as you've mentioned from alight and go customers and in fact a lot of how staff how Air Zealand staff have decided to let me know. So, look we colliding those in and having a look at them. I guess my overriding comment is I think this is a really good business. I think it's in pretty good shape but like any business there's always opportunities where you can tweak things and you can adjust them. So, we're just going to sensibly go through that list and in fact that prices is underway at the moment. And as chance would have it, we've got our first meeting on it actually in a few hours' time to go and review some of the points; some of them small; some of them medium size; some of them a bit bigger. And we'll think about these as we pull together our strategy and make adjustments where we think we need to. But it's been a really useful exercise and I would characterize it by it’s a good way to often get the unvarnished truth on your business and when you get to that level it creates opportunities either to take action.

Andrew Bowley: Do you see Greg any kind of low hanging fruit in relation to customer experience or more broadly in terms of than what you deserve across the business thus far?

Greg Foran: Yes, sure. There that's what I said, there you can generally group these things and I've done this exercise before and to some quick wins and we actually put those in a work stream that we’re calling urge in the ginger items. And so as I said, there are some of those and we're just going to sensibly as I mentioned beginning staff noon staff I have a look at those. And where it makes sense we'll make decisions and where we need more data we'll go back and get it but we'll just sensibly work through those. But there are some.

Andrew Bowley: Okay, thanks. And then thought of hearing about that in due course. So, second question probably for you Jeff forward-looking in relation to Corona virus. You've talked through. Now historically you've reacted to far quicker than your competitors in responding to demand changes. But could you talk about how you see the capacity response from other airlines in relation to Corona virus in terms of both timing and quantum and the possible impact that that has on you going forward.

Jeff McDowall: Yes, hi Andy. Yes, that's right. We have typically being quite faster, yet the situations like this. And I think as we have this time. But we're also seeing other airlines particularly in this region react really quickly as well. So, yes for example on the Tasman we're seeing both Qantas and Virgin announce some reductions in the last few days. And so I think that's appropriate. And actually this is an unprecedented intent and airlines everywhere we're obviously managing it and monitoring it very closely. And just on the Tasman, just one observation at night. There is that they the Tasman has a number of sort of underrated impacts. One is that there had been a lot of historically Chinese group customer's line on the Tasman and I had mostly been on other airlines. We hadn’t carried a significant proportionate in. and this it's also been a wide point to Asia for customers originating in other points of New Zealand flying through to Asia. And again, we are relatively less exposed to that than the other airline. So, you can kind of see that in the capacity reductions that the Australian Airlines have announced on the Tasman.

Leila Peters: And then the other thing I would just add Andy is if we look further into Asia, markets adjusting about Hong Kong. Obviously we work really closely with our airlines partners there and so we've been working with them through capacity discussions as well.

Andrew Bowley: Great, thanks guys.

Operator: Our next question comes from Owen Birrell from Goldman Sachs. Please go ahead.

Owen Birrell: Yes. Just a few questions from me. You talked about that China is moving from a Tasman falling. And you're not being as exposed. But clearly that's probably one of the drivers behind increased discounting on that route. Can you give us a feel for the level of discounting you're seeing more broadly, through into Asia or even into the U.S. as carriers try to incentivize volumes on their existing capacity?

Jeff McDowall: Hi Owen, yes you know it's exactly right. I mean, that although the impact for us on the Tasman isn’t so much that we carry a number of flight passengers is just that why they're not being there it changes the supply demand balance. And so you do see more discounting. We're seeing some, the Tasman had been in a similar over supplied mode for a little while and so the pros and hitting quite aggressive and if anything that has increased it somewhat in the last few weeks. And with respect to the U.S., actually, for us we're seeing that quite strong for a couple of reasons that outbound demand and this you know super, I have to caution all of this by saying look it's really it's only been three booking weeks really. But we're seeing quite strong demand from New Zealand to the U.S. and you could yes speculate that some people are choosing the U.S. as a destination and preference to Asia and that's giving a bit more demand. And we've also seeing some New Zealand Europe traffic choose you as it's a gateway and preference to Asia. So, for both of those reasons it's quite strong and we're having as a consequence of that, seeing any real change or any increased intensity from a pricing perspective. And some of this for Asia, airlines have really reacted there with capacity changes rather than pricing.

Owen Birrell: I guess, this is a subsequent question to that. It's obviously very difficult for yourselves but even more so for us to try and determine I guess the balance between what's happening with demand, the levels of discounting and offset by the capacity reductions across the industry. Are you able to give us some sense on like even directionally which way you think RASK is going to go over this interim period?

Greg Foran: Not really is a short answer. I mean, it's just so early to tell. So, I can't really -- I mean the Asia route in particular is very difficult to forecast. But I think like I said, it's not a market in which airlines are out there kind of stimulate demand. They're really reacting with capacity. So, the RASK here can count depends on how the balance plays out. Elsewhere in the new wake, we would expect to see U.S. too tracking strongly. And the mix just seeing a little bit of weakness as we talked about based on few inbound tourists and a little bit of outbound in Sid demand to Asia which connects to domestical side being weaker.

Owen Birrell: Actually why I asked the question is slightly differently. Based on your current I guess booking expectations, where do you see load factors barraging. Are they going to be falling or are you matching the capacity reductions to the demand profile?

Greg Foran: Yes. To the extent that we can, we are doing that but recognizing that it's a bit lumpy because yes typically if you're operating a daily service, you can obviously move capacity in increments of a seventh and demand doesn't move in increments of a seventh. So, it was never perfect but we're doing that as much as we can. I mean, it's really difficult like I say with it's I think it's a third of February when the government introduced border restrictions. It might have been second of February. And so it had really three booking weeks in stance so it is quite difficult to draw any firm conclusions on what the impact for the next four months will be.

Owen Birrell: Okay. Just a final question from me. In terms of fleets coming on, how much weight do you have coming on in the next say 12 months?

Greg Foran: So it's you got a light period for fleet deliveries. We've got and if I think you want to think we have one Asia on one A320 delivering. And that's all.

Owen Birrell: Okay excellent, thank you.

Operator: [Operator Instructions] Our next question comes from Marcus Curley from UBS. Please go ahead.

Marcus Curley: Hi good morning, team. Just a few from me. Can we start with the costs? I just Jeff I just wonder if you could call out yes within yes the maintenance aircraft passenger services bucket, and the elements that related to that third-party maintenance and the aviation charges?

Jeff McDowall: Yes. So, there may -- a third-party maintenance for new. And that's what we kind of oscillated out from CASK'ets. There is a -- if you look at the stats, true P&L is quite a big at list. For that be you see a -- the only co-op left in the contract services line in the revenue. So, which is why we're trying to oscillate out that for the -- oscillate that out -- sorry for the purpose of the CASK reduction or with the CASK analysis. And as you look at maintenance cost, excluding that, and if you also exclude currency. Then what you see is maintenance cost actually growing less than capacity. So, that's we're quite happy with that picture. That's the underline mechanics cost disciplines, yes very much evident. And then the third thing you call that is you say is as it has been one of our big causes of cost escalation which is air navigation charges primarily but also landing charges to a lesser extent. But they quite are pronounced and pay it on their operating costs.

Leila Peters: And Marcus, you'll see that come through in the aircraft operations and predominantly in to a lesser extent passenger services.

Marcus Curley: But I suppose the reason for the question is it just seems like there's more cost pressure on the business and I would have thought and you obviously you're only calling out these two elements. And within the presentation and outside of these components would you yet do you think you're seeing more underlying cost pressure?

Jeff McDowall: Not really. I mean, if you look at the labor line for example, we're really happy with how that's played out. So, we got I think labor is at 1.3%. And there's also about two point next thing well capacity and average labor rate increases if you like with us fleet wise and independent -- employment contract people of between 2.5% and 3%. So, you add some efficiency, you would have expected labor cost to increase north of 5% and that's only a 1.3. Some of that a big chunk of that is the efficiencies that we have implemented that we highlighted earlier in the year. But also the daily dive of cost initiatives that we look to implement, coupled with the countries that scale. And also, actually a reduction incentive payments which you had done expect with profitability being where it is.

Marcus Curley: Okay. And then, just draw me on cost. So, overheads up. Is there a reflection or other costs as you like to call it? Is that a reflection of the delayed cost savings and you know in bucket three. Or is there more to it than it?

Leila Peters: Sorry Marcus, when you say overhead expenses, are you taking about other expenses which, what are you referring to?

Marcus Curley: Correct, yes. Yes, other expenses, 159.

Leila Peters: Right. So, that --.

Marcus Curley: And I'm just trying to correlate that with the delayed savings.

Leila Peters: So, that's not that line items not really linked to the three pillars of the cost initiatives that Jeff spoke to earlier in the presentation. What that increase is related to is predominantly increase in digital licensing cost and some additional property cost.

Marcus Curley: Okay. And secondly, you talked about you have 787 bash, chances to ravel in '23. Are you reconsidering that given the demand environment at the moment?

Jeff McDowall: We have a strategy project that Greg has talked about earlier. So, we're looking at everything as part of that. But at the moment we have so these two planning for that aircraft to arrive at that time. They, the purpose of that program wasn’t really fleet growth at all, it was replacing the 777 200s. And that is and they will exit the aircraft the fleet by that time. So, we're still on track for there.

Marcus Curley: Okay. And just could you just provide a little bit of an update where you sit with the 787 engine issues. You obviously in the presentation referred to some more delays and yes in terms of you have a second round of maintenance. Is it still having an impact on the business?

Greg Foran: Yes is the short answer but in line with what we expected. So, to give you an update right now, we have three aircraft, three 787 aircraft and out of action which is in line with what we expected to have at this point. That is expected till you get down to two aircraft in the next couple of weeks, the first half of March ending down to one by the end of March. So, that is I mean it has been frustrating as you can imagine. One good thing if there is such a thing this time around that we had much more notice of these impacts. So whereas in the past these things have happened in quite short notice which has delivered a lot of inefficiencies into our cost space and also a lot of customer disruption. This time we have had much more notice so now we will see continue to get the efficiency savings that we were targeting but also provide much better customer outcomes which in this case is included having Cathay Pacific operate our Hong Kong service and applies between the long way to elevate those short falls.

Marcus Curley: Okay and finally from me. You obviously you maintained the dividend I was just wondering Greg could comment around whether the capital structure is part of the strategic review or how are you thinking about that in the context of the current review and obviously the Corona virus?

Greg Foran: Yes. Sure. Look when we set out dividend we -- I think about it in the framework we believe that's consistent and sustainable and this point in balance sheet is pretty resilience and the CapEx profile is such that we feel comfortable when maintaining the current level of dividend. We will get through the strategy project and as we would expect us to do we will then consider what we want to do from there.

Marcus Curley: Okay. Thank you.

Operator: [Operator Instructions] There are no further question. So I will pass back to your speakers for closing comments.

Greg Foran: I would just like to thank everyone listening on the call for the time and interest in Air New Zealand. And if you would like to schedule a call or meeting or any follow-up questions please direct those requests through Leila and our Investor Relations team. Thank you.