Air New Zealand Ltd.


Level 3 Accounting


Internal Assessment 2004


Achievement Standard 90504


Introduction:


Who the report is prepared for:


This report is being prepared for a potential shareholder and would include my advice as to whether or not they should purchase shares in Air New Zealand Ltd.


Purpose of report:


The purpose of this report is to fully analyze and interpret the companyís annual financial statements and other relevant information to derive the advice for the potential shareholder. Analysis and Interpretation aims to assess the profitability, liquidity and financial stability and market analysis of Air New Zealand.


Company information:


Air New Zealand is a company that focuses on the operation of Domestic and International passenger transport and cargo. Express Class launched on 1 November 2002 and with this success Air New Zealand is turning itís attention to the short haul international (Tasman and South Pacific) and long haul international products and services.


Interpretation:


Profitability


The overall profitability of Air New Zealand shows positive trends during 2002 and 2003.


The interest expense percentage, which measures the interest expense per sales dollar decreased from 2.57% in 2002 to 1.05% in 2003.


This fall in interest expense percentage contributed to the increasing Net Profit percentage as net profit increases when expenses decrease.


The declining interest expense percentage has been caused by a decrease in both current and non-current liabilities(no use ) as the business paid back some of its borrowings and finance lease liabilities which means less interest expense was required to be paid on those borrowings.


In this situation, the decrease in interest expense is a good trend.


Although the total revenue of Air New Zealand decreased to $807,605 in 2003 the effect was eliminated by a more significant decrease in interest expense as the company paid back some of its debts causing the interest expense percentage to decrease by 1.52%.


The net profit percentage which measures the net profit per sales dollar increased from -7.23% in 2002 to 4.58% in 2003. The net profit has increased in 2003 as borrowing substantially decreased causing the interest expense percentage to decrease.


Although the net profit percentage became positive in 2003 it was still not a great percentage of total revenue because even the year of 2002 begin well as traffic recovered from the September 2001 terrorist attacks, the operating of Domestic Express Class in November 2002 was quite successful and improved profitability of the business and the lower fares also resulted increase in traffic the business was not that well off. There was a decline in air travel and hence revenue due to the war in Iraq and outbreak of SARS which resulted in many passengers delayed or canceled travel plans.


However, the increase in Net Profit Percentage is a good trend.


The increasing net profit percentage is caused by the decline in operating expenditure (down by $848,291) which is a greater decrease than the decline in operating revenue (down by $807,605) due to better expense control and mostly the strengthening of the New Zealand Dollar against the United States Dollar as the expenses are predominantly United States Dollar denominated and the strong New Zealand Dollar provided exchange benefit.


Nevertheless, the revenue fell from 2002 to 2003 because there was less demand for the airline service in the second half of the financial year due to SARS outbreak and war in Iraq thus the net profit was not as high as it could have been.


The Rate of Return on equity percentage which measures the Net Profit per dollar invested by shareholders has risen from -45.72% in 2002 to 17.33% in 2003. This measure increased by 63.05% as a result of a 151.79% increase in Net Profit.


The Rate of Return on equity percentage has increased as a result of the significant increase in net profit while the numbers of shares remained the same as Air New Zealand decided not to issue more shares to the public.


The increase in the Rate of Return on equity percentage is a satisfactory trend as this means the return to shareholders for their investment was more in 2003 than 2002.The reason for this positive trend is due to an increase in net profit and the funds used to buy the large and expensive aircraft required for the long distances of international business and other property and equipments was mostly funded by borrowing rather than share issue.


The Rate of Return