Learning how to fly at a lower altitude Over the speed bump
Air NZ is still growing, but not as fast as it was — and that’s just part of the cycle, chief financial officer tells Grant Bradley
Just before Christmas, Air New Zealand’s revenue-forecasting team saw something they hadn’t seen in years. Following two years when domestic travel grew by about 8 per cent, Christmas was looking a little soggy. There were signs of a slowdown, but no trend.
In January, however, it became apparent that a pattern was emerging — one that would throw a spanner in the works of profit forecasts and confront a new generation of staff with something they hadn’t experienced: a pause in growth.
In its lucrative domestic market, leisure travellers weren’t booking in the same numbers and international visitor growth rates had slowed.
The airline is something of a canary in the coalmine for the wider economy, early to see trends. And late in January it surprised the market with the size of the downgrade to its full-year profit. Instead of up to $525 million, pre-tax profit could be as low as $340m.
“We were the first company to indicate the changed environment, at least in such an overt way,” says Jeff McDowall, who has been chief financial officer for just over a year.
He says it was hard to put his finger on what caused the sudden slowdown over summer. House price growth is good for travel but that had been slowing for some time in Auckland. Likewise, the momentum of new car sales had slowed — but that had been apparent for a while too. But card-spending data was off quite quickly over Christmas and international arrivals were flattening.
Up to a quarter of Air New Zealand’s domestic passengers are overseas tourists, and the internal network is where yields are sweetest. A response was needed.
In March the airline announced it would cut back network growth from up to 7 per cent to as low as 3 per cent, defer the big spend on A321 aircraft and the coming wide-body planes, and cut support service overheads by 5 per cent.
Top-level executives have elected to freeze their own pay for 12 months and consultants are about to be appointed to identify where other savings can be made. In the middle of it all is 51-year-old McDowall, who, if he’s feeling the heat, does a good job of looking relaxed.
In the blood
McDowall, who a colleague describes as having one of the big brains of the business, grew up in Upper Hutt and went to the local college, which he says was a great school with a great headmaster.
His father Graeme worked at Air NZ (formerly NAC) for 40 years, retiring two weeks before Jeff started. His mother, Geraldine, was a flight attendant for NAC, his uncle spent his whole career in planning roles for the airline and his step-grandfather was a long-serving NAC staffer.
For all that, there wasn’t a lot of airline talk around the dinner table, says McDowall. There was an interest in flying, though. His father flew gliders, which the young McDowall would count taking off from an airstrip at the head of the Hutt Valley. Naturally, he went on to learn to fly.
“It was fun learning to fly but it’s not a cheap hobby so I figured if I wasn’t going to do it for a career, I’d be better to focus on something else.” At Victoria University he did a commerce degree with a major in accounting, aiming at getting a job at the end of it.
That led to a graduate programme at Mobil, where he worked for just under two years, including in London where he travelled with his girlfriend, Colleen. The couple later married.
Back in Wellington he got a job helping transform the dusty organisation that was the Land and Deeds office of the Justice Department (now Land Information NZ). He was 24 and in an office which had just made the move from fountain pens to ballpoints.
It may have been old-fashioned, but the office was where he got an idea of what he wanted to do longterm.
The experience of working in a tight-knit leadership team and being able to make a difference created the ambition to work in an executive team in a big business.
Next came a stint at PwC, working in a wide variety of businesses, some of them in distress.
“You learn things really fast in a consultancy,” says McDowall.
Then, in 2000, he joined Air New Zealand. His first job: working in finance on the integration of Ansett Australia.
“That didn’t work out as we’d hoped,” he says with a grim smile.
Into the storm
In 2001, Air New Zealand-owned Ansett’s woes were piling up. Described as having a Noah’s Ark fleet by one airline boss (“one of every aircraft known to man”), it was tired, bleeding cash and suffering from aircraft groundings.
McDowall was spending a lot of his time in Melbourne, buried in a project aimed at shifting the finance functions to New Zealand and not fully aware of what was happening in the commercial, operations part of the business. “I had about 80 staff in Melbourne. It was tricky for everyone — they knew my job was to bring their job back to Auckland.”
He was in Port Douglas on September 11 (the final blow for Ansett, and nearly Air NZ) where former President Bill Clinton was also on holiday and the centre of a massive security operation.
Next day McDowall was in Sydney, where he got a taste of the growing fury among Ansett staff when he saw a rally of some of the 15,000 workers who were now out of a job.
He was also in limbo. “My job disappeared because the need to integrate Ansett went away so for a month nobody knew what their job was going to be and we had no structure and no CEO for a while.”
Air New Zealand was focused on its own survival. Although it was profitable, its capital base was a mess. “It could only get better at that point.”
A new structure was formed and he got the job of manager of corporate finance, focused on divesting the noncore assets the airline didn’t need. “To try and bolster our balance sheet — we needed every dollar we could get.”
Air New Zealand used to own skifields, so the first assets on the block were Mt Hutt, Coronet Peak and the Remarkables. They sold quickly but not at fire-sale prices.
Back on track
Not long after the recapitalisation, Rob Fyfe joined the airline as chief information officer and led a big business transformation project which McDowall was part of.
The business was now semi-stable. “That was a great experience. Rob was such an innovative guy and somewhat fearless; in an environment like that you’ve got be.”
It was then that he and Stephen Jones, whose last job at the airline was chief networks and alliances officer, built on a frequent travellers club scheme to develop one of the big successes that lives on strongly today: the Airpoints Dollars programme that now has three million members.
Through finance manager and commercial general manager roles, McDowall learnt the inner workings of the airline and just how it makes a profit. He became involved in network planning and revenue management for short-haul routes.
Then the global financial crisis hit. McDowall recalls looking in October 2008 at a short-haul revenue forecast (about half the business) and thinking it was about $100m short of where it needed to be for the year. He wandered up to Fyfe’s office and explained the bad news.
Air New Zealand wasn’t badly placed to cope: it was leaner than its rivals and adjusted capacity to suit.
While climbing out of the GFC, the airline continued to make low profits and only really began to generate the big results within the past five to six years.
Under Christopher Luxon as chief executive, McDowall got closer to his current role and served a year with his predecessor, the astute Rob McDonald, who knew every part of the airline. McDowall got a taste of investor relations, treasury funding and fleet acquisition.
It was just as McDonald was stepping back in 2017 that very serious problems emerged with turbine blades on Dreamliner engines.
“That was my induction to the CFO role. Rob was gradually taking his hand off the tiller and sticking my hand on it — that was a couple of weeks before Christmas.”
Air New Zealand scrambled quickly, paying big money for a Portuguese wet-lease operator to fly routes while the airline’s 787s were grounded. They weren’t cheap and
the planes were old, but passengers got to where they needed to be.
With as many as five of 13 Dreamliners on the ground during the past 18 months, the airline moved to long-term leases of other aircraft its own staff could crew. It will soon be down to one Dreamliner on the ground, waiting for engine repairs.
“It’s much more managed so we’re not getting the surprises that we were — it is containable now.” Engine maker Rolls-Royce was “very supportive”.
There is confidentiality around compensation and there was “no material impact” in the first half-year of the disruption, but plenty of money was being spent.
Good airline bosses are natural optimists. They work in a highspending, mainly low-margin industry where, with the exception of the past few years, most airlines lose money.
McDowall has that positivity; his airline’s pause in growth can be used to its advantage.
“That period of high growth does put a bit of workload pressure on people. Some people will believe pausing is not such a bad thing, it gives a bit of time to catch up.”
That’s a sentiment apparent this week on the floor at the Trenz tourism event in Rotorua. Other operators say the double-digit growth of the past few years has put strain on staff, who are now able to take a break while businesses consolidate.
But for Air NZ staff it will take some adjustment, especially for about half the 12,000 workers who have joined the airline since the GFC. They’ve generally seen profits go up and enjoyed annual bonuses of up to $2500.
“Every year has been better than the year before — nobody likes to see things go backwards,” says McDowall.
Air New Zealand has made a point of using consultants sparingly, but they’ve been called in this time.
McDowall — who knows all about job uncertainty — says the process is not about cutting head count.
“It’s not just about cost cutting and belt trimming — it could involve investing in some stuff, whether it be digital tools or automation to find ways of making the business more productive.” Support functions of finance, marketing and human relations would be under the microscope, but operational staff — pilots, cabin crew, engineers and airport staff — are not. Bonuses are likely to be smaller at year’s end.
He says that if staff numbers do fall by 5 per cent, that would be less than the usual attrition rate.
The cost review would be more of a sprint than a marathon — results should be known in three months.
Harbour Asset management portfolio manager Shane Solly says because the airline has been through a rapid period of capacity growth, some inefficiencies have emerged. He is confident they can be found and cut out without cutting service.
McDowall’s experience in both the good and the bad times will help in the current environment, says Solly.
And McDowall points out it’s not all gloom. There are new routes, more capacity on select services and the airline is still growing. “It’s still healthy — it’s just lower. This is relatively normal part of a cycle.”
Then there were two
As Air New Zealand’s chief financial officer, Jeff McDowall is central to one of the biggest calls in more than 15 years — the next generation of longhaul aircraft.
The airline is in the final stages of selecting new aircraft to replace its eight 777-200s. Key staff and the board have been looking closely at a new version of the Boeing 787 Dreamliner and the Airbus A350XWB.
It’s a massive call. The total value of that commitment, including engines and maintenance agreements, is more than half the company’s $3b market capitalisation.
“It’s a big decision — they’re in the fleet for 18 years minimum. It does shape the future of the company.”
With an announcement just weeks away, McDowall is not about to let on which way the airline will lean.
But a leap to an Airbus A350-900 or the elegant -1000 for its wide-body future would be a bigger call than opting for a new iteration of the plane it knows and rates — the Dreamliner (engines excepted).
Further advances of that plane would make it even more suited to the ultra-long-haul flying the airline is determinedly aiming at, with Auckland-New York non-stop firmly in its sights.
But he’s keen to keep the guessing going. “You can do that with [both] those — either could get us to New York depending on how we set them.” The board has been actively involved in the process, formally discussing it six times.
Air New Zealand was early to commit to the Dreamliner, signing the deal in 2004 when it was known as the 7E7.
“If you look at what the company is now, a lot of it due to the decisions made in the early 2000s,” says McDowall.
Getting this next one right would leave another legacy he’d love to be part of.
It’s not just about cost cutting and belt trimming — it could involve investing in some stuff, whether it be digital tools or automation to find ways of making the business more productive.