Annual Meeting - Air New Zealand Chairman's address

Below are the entirely non edited speech notes which were prepared by Mr John Palmer, Chairman, and delivered by Mr Roger France, Deputy Chairman for delivery at the Air New Zealand's Annual Meeting held today in Auckland.

START

This address was prepared by our Chairman, John Palmer, on behalf of the Board, and I am presenting it on his behalf. 

Today, I really want to report on four key matters.

First is to recap on the undertakings that we gave to you at our last Shareholders' Meeting on 19 December last year. 

Second is to report the company's progress against those undertakings - and to look at the wider performance of the company for the year under review.

Third is to discuss issues of corporate governance for your company - particularly in terms of recent international developments.

Fourth is to look forward to the short-term business outlook for the company. Here I'll touch on some important factors affecting the international aviation environment. I'll provide you with a brief report on our first quarter performance and on our expectations for the year's end.

Undertakings given at your last annual shareholders' meeting

The issues addressed at the last annual meeting were not many in number - but they were enormous in their scale and challenge. 

A proposal to recapitalise the company - based on a 5 year financial plan and an independent appraisal report from Grant Samuel - was before you for approval. 

Issues arising from this proposal were: 

* the reconstruction of the Board

* the appointment of a new Chief Executive

* A review of governance processes for the company 

* A commitment to perform strongly against the 5 year financial plan underpinning the recapitalisation

* And the development of a competitive strategy to lift the company above the survival platform provided by that plan.

So, how have we done ?

Recapitalisation

Recapitalisation was approved at the meeting. The Crown share purchase was completed on the 18th of January 2002. That allowed the repayment of $600 million worth of short-term unsecured debt and the negotiation of new credit lines. These steps established a platform of security for the development of a new business strategy.

Reconstruction of the Board

The reconstruction of the Board was completed at the end of February. The new directors are, of course, to be reconfirmed by this Annual Meeting. I can assure shareholders that the selection process for new Board members was both rigorous and objective - with the sole aim of forming a new Board that would have the appropriate mix of skills and experience to address the dire position of the company.

I am delighted to say that the Board is performing extremely well. In my view, it is dealing with the myriad of issues confronting the company very effectively, and working to do this as a team.

Appointment of the CEO

Ralph Norris's appointment to the position of Chief Executive and Managing Director was announced on 13 February 2002. I had advised you that we would take whatever time needed to ensure that we achieved the right result. I am certain that we did. I make no apology for the brief delay in achieving a quality outcome.

Ralph Norris's contribution and impact on the company is already considerable, and enormously positive.

Governance Review

Corporate governance has become a significant issue in the wake of a series of business scandals, particularly in the United States, which have implications for listed companies everywhere.

Our own governance review was, in fact, initiated for different reasons. The restructuring of the company and the introduction of the Crown as the significant majority shareholder required changes. Because we were actively reviewing governance from the outset, we have also been able to consider other issues that have arisen from the major corporate collapses that have occurred in the course of the year.

Processes that do not conflict with other shareholders' interests have been put in place to allow the Treasury, as the Crown's agent, access to sufficient and timely information for Crown accounting and oversight purposes. These processes also ensure the information flows to the Crown as shareholder are effectively kept separate from the information the Crown receives in its various regulatory roles.

The Crown has been exemplary in its dealings with the company in regard to the Crown's rights as a majority shareholder and its respect for the Board's obligation to undertake its governance role in the interests of all shareholders.

Air New Zealand, like a number of companies, has decided to retain dual listing on both the New Zealand and Australian Stock Exchanges. Where there are differences in listing obligations between the two Exchanges, our governance standards will be set at the higher of the standards required.

At our last annual meeting, I also gave you an undertaking that we would seek external advice in relation to Directors' fees. We have done that - and we have received a report assessing that the appropriate level of fees for a Director is effectively twice that currently being paid. However, the Board has resolved that - in view of the wage moratorium applying to staff in the company - no consideration will be given to any adjustment of Directors' Fees until the wage moratorium ends in June 2003. Shareholders can expect that, at that time, fees will be reset to a level commensurate with the size of the task that the Directors are undertaking.

The Board has also taken a new approach to its relationships and visibility within the company, its subsidiary operations, and with other stakeholders and customers. Shareholders can be assured that there is a very clear understanding from the Board about the separation between governance and management in this process. It is a serious initiative by the Board to gain a better understanding of our business, starting at the coal-face - and to develop a much more open dialogue between managers and the Board to ensure that our decision making can be more effective.

To date, we have held three Board meetings with associated stakeholder functions outside Auckland. They have been particularly well received and we will continue this process.

Now, I'd like to touch on some of the broader governance issues that have been the subject of public debate.

The issue of the independence of external auditors has been given particular attention.

As a consequence, your Board has adopted a formal policy on this matter, which, among other things, places appropriate limits on the range and quantum of non-audit services obtained from the Company's external auditors.

Beyond that, I think it's particularly important that we, in New Zealand, are not seduced by all the suggestions being made for reform in corporate America post Enron.

Good governance is, in my view, always about good Board process, clear accountabilities, a high level of transparency and good communications between management and the Board, and between the Board and the company's shareholders.

Above all, it is about collective honesty, common sense and good judgement.

There is a real danger that those three elements, which are at the heart of good governance, will be diminished by a rush to find new prescriptive regulation and law to try and overcome what are essentially deficiencies in business morality.

New Zealand's capital market is small and shallow. That's not to say it can't be effective - but we must ensure that the regulatory regime here is appropriate to our market while still meeting the test of acceptability to global investors.

We must ensure that our regulatory environment recognises that calculated and managed risk is an integral part of business, and good governance is, in the end, reliant on people with ideas, energy, wisdom, judgement and honesty.

These are not factors that any regulatory regime can legislate into existence, and over-exuberant attempts to do so will inhibit the achievement of good governance, because it will constrain the judgement of good directors and discourage the best of them from participation in business governance roles.

On that note, I'll turn to

Performance in FY02

The company performance for the year ended 30 June 2002 has been widely reported and is well known to you. I simply want to say that the achievement of a $33 million pre-tax operating profit before unusuals was a very encouraging performance, given all the issues facing aviation in general and this company in particular.

We had the benefit of some favourable movements in both currency and fuel price - but the fact that the result was considerably ahead of the target in the 5 year plan put together only a few months earlier underscored two things:

First is the considerable improvement we have been able to make to the company short-term, and

Second is the enormous volatility of the environment in which the aviation industry and this company must operate - I point I'll return to in my comments on our business outlook.

Development of competitive strategy

From the outset, the Board has recognised that the 5 year financial plan that under-pinned recapitalisation provided us with no more than a starting point.

A new competitive strategy was needed to make the company truly successful and to secure its opportunity to grow.

We have established sensible priorities for strategy development : core home market operations first, trans-Tasman and Pacific Islands short-haul international operations second, and long-haul international operations to Asia, North America, and Europe third.

Considerable progress has been made on all fronts. We will see the first phase of this work come to fruition on Friday, when the new Air New Zealand Express Class operation takes to the air. Ralph will provide you with more detail on this and other strategic initiatives in his presentation.

Development of long-haul international strategy requires very careful consideration. For too long, significant areas of the long-haul network have been unprofitable for Air New Zealand. Re-designing this aspect of our business will involve the commitment of considerable time and capital.

It is too easy to justify under-performance in areas of long-haul business in terms of the public interest obligations of the national flag carrier as a cornerstone of the increasingly important tourism sector of the New Zealand economy.

The new strategy requires clearer objectives and performance measures for long-haul operations to ensure that they have good prospects of producing satisfactory profitability, and that there is a better alignment between the requirements of the business and its shareholders and national flag carrier objectives.

Without doubt, the major strategic issue on the company's agenda is the matter of strategic partnerships with other international airlines - and, most specifically, the discussions that have been under way for some time over a proposal from Qantas to form an operating alliance with, and to acquire shares in Air New Zealand.

At the outset, I must say these discussions are not driven by the desire to raise additional equity. Air New Zealand is involved because of the much broader strategic imperative to improve our competitive positioning in the international airline market.

We are determined to achieve this improved position without compromising the principles of majority New Zealand ownership and control of the company, or its capacity to determine its own strategic direction and objectives.

Only when we have reached the point where we are convinced that we have identified the option that offers the optimum international positioning for Air New Zealand, will we turn to the issue of equity raising. Only when we have viable development strategy to justify additional investment, can we offer a prospectus worthy of consideration by shareholders.

Negotiations with Qantas are progressing satisfactorily. However, the issues are complex and difficult.

Our discussions are still incomplete and we are unable to make any further disclosure to the market at this point. There is no "done deal" as some have suggested. If there was, we would have honoured our obligations to the market and announced it. We will advise you of any development, in the proper manner, just as soon as we can.

Ultimately, the decisions on this matter will rest with regulators and shareholders. The Board's obligation is to make a thorough and detailed investigation of the options that are available, the extent to which they can be realistically pursued, and then to make a recommendation for your consideration. This obligation will be met to the very best of our ability.

Finally ... Our Business Outlook 

Our performance for the first quarter of this year - July to September - has been encouraging.

On trading to date, and without material change in the current trading environment, we are on track to achieve an end-of-year result that will be significantly higher than the outcome of $100 million earnings before interest and tax that I indicated was in sight in announcing the result for the last financial year on the 28th of August. 

Unaudited results for the first quarter - traditionally a slow period in our business cycle - show the company has achieved a profit before unusuals and tax of $30.4 million compared to a loss of $51.8 million in the same period last year. The company's unaudited net profit after tax for the first quarter of the current year is $17 million. 

This places us on track to exceed the level of profitability projected for the second year of the 5 year financial plan produced last December. Our present expectation is that the company's profit before unusuals and tax for the 2003 Financial Year will be around $200 million.

However, I must point out that the rapid and significant improvement in earnings in the first quarter demonstrates the bright side of aviation industry volatility. There is also a dark side.

The airline business environment is volatile and uncertain, as it has been for some time.

There is economic uncertainty in most major parts of the world. There is the prospect of war in Iraq, and increasing fragility and instability in the Middle East, driving up fuel prices. There is the evidence of insecurity closer to home in the Bali tragedy.

There is also a huge amount of over-capacity in the international airline industry. Competition is intensifying - and some of it is totally irrational.

Shareholders should be encouraged by the significant progress that we have made in this calendar year, in itself a period of substantial difficulty. Shareholders should also understand that, in our view, the volatility of the external environment is increasing.

That, however, is the airline business. We are not about to sit back on the sidelines and wait for things to sort themselves out.

I have absolutely no doubt that we can re-create a successful company. We have all the basic ingredients here for success : skilled and enthusiastic staff, very high levels of technical competency, a safety record that is envied in the aviation world, and a can-do Kiwi attitude that can only come from a New Zealand-owned business.

Success won't come easily. The problems are complex, the answers are hard to find, and the solutions aren't always going to be palatable. Sometime, we will have to disregard what is popular for what is right - in the best interests of the company and, because of our significance to the broader economy of New Zealand, the best interests of the country.

We have said for some time that the path to recovery was going to be long and difficult. We have made a very good start - but there is still a long way to go. For the next 12 months, we are confident about continuing to make significant progress in improving your company for you, as shareholders, and for all New Zealand.