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Identify and clearly communicate the revenue sources and cost structures of a major full service network carriers (FSNC) – Air New Zealand for the period 2012 to 2017 (five financial years)
Assess and report on the growing importance of ancillary revenues (non-flying) for Air New Zealand for the period 2012 to 2017
Assess the annual profitability of air New Zealand for the period 2012 to 2017
Identify and explain the key financial performance drivers of Air New Zealand over the period 2012 to 2017.


Task scope
• Analyse and describe the revenue and cost structures (by the reported cost categories) of Air New Zealand over the period 2012 to 2017
• Analyse and discuss the annual trends as well as the and importance of non-flying (ancillary) revenues for Air New Zealand over the period 2012 to 2017
• Identify the key factors that have affected the revenue sources and costs for Air New Zealand over the period 2012 to 2017 (five financial years). 


• Analyse and discuss the annual profitability trends of Air New Zealand over the five-year period 2012 to 2017. Calculate and predict the profitability trend for the next-five period to 2022.
• Identify and explain the key financial performance drivers of Air New Zealand during the forthcoming five-year period to 2022.

Introduction to the Airline Industry and Air New Zealand

The airline industry is fragmented withseveral regional carriers such as Air2there, Air Chathans; international carriers such as Qantas.  (Everipedia International, 2018)The New Zealand Airline Industry is a worth over $10 billions and sizeabele chunk of this indusry has been captured by Air New Zealand, the state owned Full services Carrier Network. Air Zealand does not just provide civil avaiation services to passengers but also provides a variety of other ancilliary services such as Aircraft Leasing, Financing and Insurance. The airline alone has a fleet of 105 aircraft and 27 on order. (Air New Zealand 2017)

The Air New Zealand Group consists of several subsidiaries such as  (Air New Zealand 2018) and joint ventures that do not just hep provide aircraft services but also data analytics, insurance and more.

Revenues and Profitability

The Air New Zealand group total Operational revenues have grown consistently over the period of last six years and showed a dip only in the year 2017. These revenues do not just include revenues from passenger operations but also revenues from leasing and financing of air craft, lease of poreperty and equipment and also, payment earned from interest received as well as foreign exchnage. However, the year after that i.e in the year 2017, the revnues dipped sharply to 4376 million New Zealand Dollars. (Air New Zealand, 2018)

However, accounting for revenues alone, would be a folly and provide an incomplete picture. In order to understand the financial position of the aircraft carrier better, some profitability and solvency measures must be looked at:

Net Assets

Net Assets describe the position of the assets at the end of the year. (CPA Australia, 2017) They provide a significant amount of insight into the holdings that the airline currently holds.Net Assets have shown stable growth , implying that the Group has been converting significant amounts of cash into holding such as pplant , equipment and other sources of revenues such as financial investment.

Working Capital

Working Capital helps understand the scale of the operations of the airline, Working simply helps understand whether a firm shall be able to cover it's short term liabilities and be able to operate under financially stable conditions in the short term. Airlines usually require a lot of oworking capital, one of the reasons behind the failures oof several airlines. (CPA Australia, 2017).

Earnings Per Share

Earning Per Share is simply the amount of profit available per share. Earning per share may be used to understand the profitability of an airline in the simplest way as well as provide an indicator of the efficiecy at which it is managed. (CPA Australia, 2017) .As illustrated above, the earnings per share were highest in 2016. Hence, 2016 was not just the year with the highest revenues but also with the highest profitability, In the year 2017, while revenues may have been the worst since 2012, the earnings per share indicate that this might indded have been a profitable year.

Revenue Sources of Air New Zealand Group

Comprehesive Income provides an undertsanding of various sources of revenues such as foreign exchane translations and unrealized gains and losses. These items are also crucial parts of operations, although indirect as these items could be significant sources of revenues or losses from the firm and affect the financial stability of the firm.

Sources of Revenues:

Ticket Sales are not the only sources of revenues an airline may have. There are several avenues such as freight and cargo transport, leasing of aircraft etc.

Passenger Revenues

Passenger reveues continued to grow over the period  of six years. These sources included not just ticket sales but sales of allied merchandises such s loyalty cards etc. These revenues include the in-house beverages etc. The year 2017 was the best year where passenger revenues accounted for amlost all of the total revenues.  (Air New Zealand 2018)

Cargo Revenues

Revenues from transport of freight is also a significant source of revenues for airlines. Cargo Revenues have remaained a significant sorce of income consistently for the airline, showing growth nearly every year in the last six years. Cargo revenues peaked in the year 2016 and were at their lowest in 2014. (Air New Zealand 2018)

Contract services

Contract services may refer to the various services that the group performs on a contract basis. For example, leasing of air craft. Contract services continue to be significant drivesrs of revnues and must be considered seriusly, in order to retain the consistency in cargo services. Howeverm revnues from contract services have been on the decline since 2017. However, the earnings per share have increased as contract services have declined. (Air New Zealand 2018)

Contract services may be an important source of revenue in the future as Air New Zealand plans to lease out more aircraft assets. The additional capacity created due to the purchase of new aircraft should be a significant driver of growth in revenues for the group as the group shall be able to gain wider base in new markets such as Asia (Australianaviation.Com.Au 2018). In addition, fuel hedging and foreign exchange management should also be significant sources of revenue.

Costs and Costs Structure

The airline industry worldwide is characetrized by high costs and high scale of operations. (Air New Zealand, 2008) Globally, there are few industries that face uncertanity to the extent thaat the airline industry does. Chief among the reasons for this uncertanity are the volatility in fuel prices and volatility in exchange rates. Additionallly, the global political scenario and natural weather and climateic conditions present complexities that often requires changes in strategies and schedules. These may ncrease the costs of airlines.  (Barbot, Costa and Sochirca September 2008)

Profitability and Solvency Measures

In general the costs of air craft maintenance and marketing and sales are more or less fixed by costs such as fuel, labour costs and passenger services tend to vary accounrding the number of passengers and scale of operation.

Significant Drivers of Costs:

Fuel

Fuels costs not only make up some of the most significant costs but also the cause of great volatility. Air New Zealand spent 13% of it's costs on fuel.  (Air New Zealand 2018)

If one were to place the fuel costs and earnings per share(EPS), there seems to be an inverse relationship between fuel costs and EPS, signifying that there is a direct effect of volatility in fuel prices and profit. The Company does practice fuel hediging and other practices to lower the costs.  (Air New Zealand 2018)

Labour Costs

Labour costs for the airline include all personnel, whether on contract basis or on payroll basis. Labour costs amounted for second largest expenditure class for Aair New Zealand Group. (Air New Zealand 2018)Illustration 6: Labour Costs for Air New Zealand(2012-2017)

The labour costs seem to be proportionate to the revenues, implying that as the scale of operations increases, the labour costs have increased. It is important that there in marginal efficiency in the investment in labour, to help bring doown the costs of labour.

Air Craft Operations

Costs of operation of the fleet of air craft include costs of acquiring aair craft, financing, insurance, maintenance and housekeeping costs,traffic control etc. As seen in Illistration 5, aircraft maintenace in 50% of the costs. Hence, it is important to reduce the costs for every unit of the air  (Air New Zealand 2018)

Other Costs

Other costs include sales and marketing, passenger services and maintenance. Amajor cost factor that has not been included in this analysis aare the gains and losses are accrued due to foreign exchange.  Gains in foreugn exchange are seen as earning while losses are seen as costs. As the airline operates worldwide, significaant amount of foreign exchange must be managed. Air New Zealand has introduced American Depository Receipts which would allow it's capital gains to be realized in US Dollars, one of the most commonly used currencies world wide. (Air New Zealand 2018).

Air New Zealand is building its capacity by increasing its fleet of air craft. The increased capacity is expected to drive the fixed as well as the variable costs. Aircraft Maintenance is especially expected to maintain costs.

Conclusion

Full service carriers , in general, tend to be less financially efficient that low cost carriers. (Barbot, Costa and Sochirca September 2008) Yet, Air New Zealand has shown exceptional growth and profitability for airline industry. Economies of scale is crucial for large full service carrier to thrive.  (Barbot, Costa and Sochirca September 2008)The absence of any other significant domestic full service carrier in New Zealand and having regional subsidiariesallows domestic market of New Zealand. (Air New Zealand 2018) This may be one of the reasons of profitability

AIR NEW ZEALAND (2008). 2006/07 Financial review of Air New Zealand Limited. 

AIR NEW ZEALAND (2018). About Air New Zealand. [online]. 

AIR NEW ZEALAND (2018). American Depositary Receipt (ADR) information. 

AIR NEW ZEALAND (2018). Fuel Hedging.

AIR NEW ZEALAND (2018). Investor Centre. [online].

AIR NEW ZEALAND (2017). Operating fleet. [online]

AUSTRALIANAVIATION.COM.AU (2018). AIR NEW ZEALAND FLAGS NEW WIDEBODY ORDER IN 2019. 

BARBOT, Cristina, COSTA, Alvaro and SOCHIRCA, Elena (September 2008). Airlines performance in the new market context: A comparative productivity and efficiency analysis. Journal of Air Transport Management, 14 (5), 270-274.

CPA AUSTRALIA (2017). Financial Accounting and Reporting Study Guide (Seventh Edition). 

EVERIPEDIA INTERNATIONAL (2018). List of airlines in New Zealand.

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