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Air New Zealand - speech by Paul Donovan, Vice President Australia, to key Melbourne Travel Industry Executives

Below is the full unedited speech given by Paul Donovan, Vice President Australia, Air New Zealand to key Melbourne Travel Industry Executives, today 9 May 2002.

SPEECH

This is a very important occasion for Air New Zealand, and not necessarily
an easy one for us.

Like the rest of the travel industry, we were damaged by the multiple crises
of 2001.

After the events of last year, we are smaller, poorer and wiser. But we are
very determined to survive and succeed.

I am here today because the time has come for Air New Zealand to move forward -
and we want to do so with your assistance.

You may have noticed around the room today a poster which says simply "New
Zeal".

That's the approach we are taking in 2002. New year, new challenges, new
team, new enthusiasm.

We are determined not only to ensure the long term viability and success of
Air New Zealand, but also to provide robust competition in the Australasian market, and to deliver real choice for consumers.

Providing strong competition and a real alternative was a major part of our
strategy with Ansett. We regret that our Ansett-Air NZ strategy did not work, and that it has had very significant consequences in this city and State and for air travellers throughout Australia.

Nevertheless, the feedback we have received so far is that consumers and the
travel industry want a strong Air New Zealand to join with appropriate partners to help provide a real alternative in the Australasian marketplace.

At this time, we have no single domestic airline solution in Australia - but we do have the capability to deliver significant international traffic to domestic carriers here.

Globally, the market is recovering. Passengers are flying again. Airlines are starting to increase services. Despite continued gloomy forecasts for the airline industry as a whole by the International Air Transport Association, we certainly feel that there is real optimism out there after the events of September 2001.

Here in Australia we are very excited by the opportunities ahead and have just signed off on an 18 month business plan designed not only to rebuild our position in Australia, but to expand it. We are speaking to agents, wholesalers, corporate customers, Governments and tourism offices about the future together
and we are delighted with the responses. We are also exploring opportunities to work together with our fellow Star Alliance partners to offer new and exciting
products to our customers.

Yesterday I met with the Victorian Tourism Minister, the Hon John Pandazopoulous, and the CEO of Tourism Victoria, Lois Appleby, who I'm delighted to say is here with us today. Tourism Victoria has given us a detailed proposal to consider, with a view to building inbound travel to Melbourne, and
I can assure Lois and the Government that it has been receiving very serious consideration following discussions the Minister had with our Managing
Director a short time ago.

Our history as a contributor to Australian tourism is significant, as is our role as a provider of travel to Australians flying overseas for business or pleasure. Recently, we celebrated the 62nd anniversary of Air New Zealand flights to Australia. Over that period we have grown to become the largest international airline, by passenger numbers, to operate in Australia - with the natural exception
of the national carrier, Qantas.

But while we have 62 years experience here, we are for all intents and purposes a brand new airline, just seven months old, for we have effectively had to start again. In addition to September 11, Air New Zealand was seriously affected by the
maintenance groundings of Ansett's Boeing 767s, and the eventual collapse of the carrier - which was not just our Australian subsidiary but our Australian partner.

Everybody in this room will have an opinion about the Ansett crisis, and it is not my intention today to try to change your perceptions of the past. I also understand that those opinions will be stronger in this State than in any other, as this was not only the home of Ansett but the birthplace of the airline. Many of you will ask : "Well, how do you understand this? You come from AirNew Zealand." Well, I spent my first 20 years in this industry as an Ansett employee, with
many of those years here in Melbourne. Our new Manager for Victoria, SA and Tasmania is Michael Reed, who was also a long-time Ansett staff member before coming to us in February this year. So too was our Queensland manager, Russell Bryant. And our sales team members here in Victoria - and in all other states - were Ansett employees at the time the carrier was placed in administration. We understand this market, we have a long history here and we have strong
personal relationships.

Given the complex and sensitive legal issues relating to Air New Zealand and
Ansett at present, I hope you will understand that these are now the sole
preserve of our board and head office management group, and it is not my
intention to discuss them here today.

But it is my intention to explain to you where Air New Zealand is now, and
to reinforce the fact that we are here, we are re-energised, and we are a
significant contributor to the Australian tourism industry, with passengers
from New Zealand, the Pacific, the Americas, and UK/Europe. I have spent the past few years working in New Zealand, and returned to Australia in February to take on this role.

I have to say that on arrival in Sydney two days before I started this job, I noticed a newspaper poster outside a newsagency in Sydney, which declared in large type: "Qantas Plan to Crush Air NZ".

Now there are not many ways you can really take that ... but I found it
quite motivational, because clearly it acknowledged our competitive strength
in the market.

My new role is to increase that position, by rebuilding with the industry
and our customer relationships which were damaged or diminished in 2001, as
well as rebuilding the confidence of our staff.

Few people realise that when Ansett collapsed, Air New Zealand was left
without a sales team in this country, as this function, and others, had been
merged and placed with Ansett. Nor did we have premises of our own in cities
outside Sydney.

In recent months, we have been engaged in the "de-merging" of Air New
Zealand and Ansett, and re-establishing ourselves as an independent airline
in this market.

We needed staff. We needed new offices, equipment and phones. We needed to
rebuild not only our operations, but our confidence and market confidence in
us.

Since last December, when we were recapitalised by the New Zealand
Government - now our majority shareholder - we have restructured to become
an independent entity. We are making excellent progress.

We have:

- repaid $600 million in unsecured debt

- reduced our total workforce by 800 jobs

- reduced executive management from 17 to 7

- reduced management salaries by up to 15 %

- reduced total management payroll by 30 %

- reduced our board of directors from 13 to 6

- cut our directors' fees by up to 50 %

- sold the Jetset corporate and retail travel businesses

- and just yesterday, we announced the sale of our ski resorts near
Queenstown, on New Zealand's South Island

And that's not all.

Last week, we advised the Australian and New Zealand stock exchanges of an
improved financial performance, bringing forward our expectations of
breakeven results, and profit forecasts.

We have secured a major contract to refurbish up to 15 Qantas Boeing 747s at
our Auckland maintenance centre - recognition not only that we offer competitive pricing, but that we provide quality work.

We have secured new partners for our Air Points frequent flyer programme,
including Diners Club Rewards, Westpac's Altitude programme, and the Accor
and Stamford accommodation groups. 

We have opened new offices in Melbourne and Perth, with Brisbane and Sydney to follow.

We have established or expanded joint fares with carriers including Virgin
Atlantic Airways, and are continuing discussions about cooperation with a
range of other carriers including Emirates.

We have offered for the first time special deals from Australia to Las
Vegas, with free US domestic sectors from Los Angeles.

We have doubled our daily code share service between Frankfurt and Los
Angeles, which feeds tourists directly into our flights to Australia and New
Zealand and, just this week ...

We have been awarded fourth place in a prestigious international survey by
Skytrax Research in London of in flight service and cabin staff, after
Malaysia Airlines, Cathay Pacific and Singapore Airlines.

The judges comments included the following: " Air New Zealand has had a
difficult year financially, but can take encouragement from their very high
ranking for cabin staff - a small airline by contrast with the top 3, Air
New Zealand was consistently praised for the sincerity and general warmth of
staff service."

So there is no doubt that we are in recovery mode.

The big question now is where to from here?

In the new travel economy, we need to review very carefully the ways in
which we work, and we need to ask ourselves "Is this the best way?"

We have restructured to become an independent entity, and we are also aware
that we need to be a very different entity to what we were. We have completed the reconstruction - from scratch - of our Australian sales and distribution operation.
We are moving to cut our operating costs, and we are continuing to identify or examine areas where improvements can be achieved.

One of the biggest costs, for instance, is distribution - not just for us,
but for all airlines. In recent months, a number of major North American carriers have eliminated base commission payments to travel agents. I have said many times and I will continue to say that we rely very heavily upon travel agents to sell our products for us. We want to work with agents - and indeed, we need to work with agents - but let's be frank, what we want most is to work with those who are loyal to us.

Put another way, why should an airline pay the same commission to an
unfaithful agent as it does to an agent who provides support through good
times and bad? Why not pay for performance? This is not my idea - this is happening already.

We also need to revisit the issue of internet bookings for point-to-point
fares, which are becoming increasingly popular in our industry, and are now
widely used by many of our competitors, and are even advertised on
billboards!

Another example of the significant change now sweeping our industry is the
emergence and success of low cost, low fare carriers which started with
Southwest in the USA, continued with Easyjet, Ryanair, Freedom and Virgin
Blue, and now sees the almost weekly emergence of a Buzz or a Zap or a
Tango.

Who would have thought at this time last year that Ryanair - if indeed you'd
heard of them - would have greater market capitalisation than British
Airways. Or that Qantas, which has built its reputation on full service operations,
would invest in a huge fleet of one class domestic aircraft, and create a
low-cost international operation? We all need to think now about sustainable service.

While the climate is improving, it is still challenging, and we need to
continue to evaluate critically the routes we fly and the businesses we
operate, and ask ourselves if this is the best way. We need to ensure that the fare and freight yields are at sustainable levels ...

... Why? Because the Direct Operating Costs of a Boeing 737-300, for example, is approximately $47,000 per flight. Add selling costs and that figure can climb as high as $55,000 per flight return.

And all of this at a time when fare yields are coming under continued
pressure. Fiscal responsibility and shareholder value have to be the most important considerations. We all need to consider our options - including some which may never have entered our thinking before.Recognising opportunities and speed to market are critical if we are to succeed, and we know from what the market and the industry are telling us that a strong Air New Zealand is vital for competition in this region.

Ladies and gentlemen, Air New Zealand has turned the corner, and is growing
again in Australia - thanks to your efforts.

We have a new Chairman, John Palmer, and a new Board of Directors with a clear focus on the bottom line. And we have a new CEO Ralph Norris, providing us with certainty and a clear sense of direction. Ralph is an innovator, a great leader and one of New Zealand's most successful businessmen, and is now working around the clock with his team to develop and implement the strategy to take our airline forward.

We are encouraged by the level of industry support for us as well as the
public's positive reaction to Air New Zealand, and today I would simply like
to say "thank you" to those who have supported us - please continue!

I think the signs are very positive, not just for Air New Zealand but for the industry of which we are all part and I look forward to standing here in front of you at the end of this year with an equally positive story to tell.

Thank you.

The above is the full unedited speech given by Paul Donovan, Vice President Australia, Air New Zealand to key Melbourne Travel Industry Executives today 9 May 2002.

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