Welcome to Air New Zealand 2024 annual results call. During the presentation, your phone lines will be placed on listen only until the question and answer session. Please refrain from asking questions until that time. With that, I will turn the call over to Air New Zealand's Head of Investor Relations, Kim Cootes. Please go ahead.
Thank you, and good morning, everyone. Today's call is being recorded and will be accessible for future playback on our Investor Center website, which you can find at www.airnewzealand.co.nz/investorcenter. Also on the website, you can find our annual results presentation, the annual report and media release, as well as other relevant disclosures. This year, our annual report includes our sustainability report and our first climate statement, which has been released as a separate online document. We encourage investors to review these materials as well. Speaking on the call today will be Chief Executive Officer, Greg Foran, and Chief Financial Officer, Richard Thomson. Leila Peters, our GM of Corporate Finance, will also join us for the Q&A session. I would like to take a moment to remind you that our comments today will include certain forward-looking statements regarding our future expectations, which may differ from actual results.
We ask you read through the disclaimer, and in particular, the forward-looking cautionary statement provided on slide two of the presentation. I will now hand the call over to Greg.
Thank you, Kim. [Foreign language] and good morning, everyone, and thanks for joining us on today's call. If I were to characterize the 2024 financial year, it would be a year that was both satisfying and rewarding, but also challenging and frustrating, often all in the same week. Our team's energy and drive to deliver for our customers shone through. We transported more than 16 million passengers on our network, 4% more than last year, despite significant aircraft constraints. We delivered improved on-time performance, up almost three percentage points, even though we operated 17% more capacity this year. Work to improve customer pain points continued. We rolled out new features on our digital app, including baggage tracing and various self-service enhancements, which give our customers more capability to self-serve and helps us manage disruptions more efficiently.
We also recently introduced our live chat function, enabling customers to resolve queries real time, which has been hugely popular. Non-voice channels now represent just over 30% of our customer interactions. We reinvigorated our Seats to Suit product on the Australia and Pacific Islands network, giving customers greater flexibility and value, with early feedback showing strong commercial take-up and customer feedback. As a result of these and many other small but meaningful improvements to our onboard offerings and pre-flight procedures, we saw customer satisfaction levels improve to pre-COVID levels. This is significant given the level of unavoidable schedule disruptions we've had to make across the year due to aircraft availability constraints. Now, you'll hear me say this often, but our exceptional team of Air New Zealanders are the secret to our success, and we were pleased once again to be awarded New Zealand's Most Attractive Employer.
It's more important than ever that we have a strong team focused on doing the right thing for our customers. Despite all of these examples, which I would firmly put in the satisfying and rewarding category, we also faced a heck of a lot of challenges. The financial result we released to the market earlier today, with earnings before taxation of NZD 222 million and net profit after taxation of NZD 146 million, was in line with the guidance we provided in April. But it was a fair way off the levels we experienced in 2023, when pent-up demand and constrained capacity across the industry led to one of the strongest financial results in our history.
And while we reported a solid first half of the 2024 financial year, the second half has proven increasingly challenging as the impact of both operating and economic headwinds became more pronounced. By far, the most impactful of these headwinds has been the unfortunate trifecta of challenges we currently face with aircraft availability across two of our major fleets, the A321neo and our Boeing 787 Dreamliners. I'll touch on that more in a moment. But what I did want to highlight here is that while these issues are temporary, we estimate our 2024 earnings would have been around NZD 100 million higher net of compensation if we'd been able to operate our aircraft and network schedule as intended. This is not an insignificant amount and really only captures directly attributable costs, not the resulting operational inefficiencies and productivity losses.
Richard will provide further detail on this shortly. Our balance sheet remains strong with the capacity to manage these temporary challenges, and the board was pleased to announce that shareholders will receive an unimputed final ordinary dividend of NZD 0.015 per share. This takes total ordinary dividends for the year to NZD 0.035 per share. The board continues to monitor opportunities for future returns to shareholders, taking into account the challenges we currently face, as well as the airline's future capital commitments. Although there are considerable distractions in the current environment, we are facing our challenges head-on. I won't go into each point in detail, but I'm happy to take questions later. What I do want to focus on here is the huge amount of work that we've undertaken to mitigate some of the headwinds we have faced.
As noted earlier, the additional maintenance requirements for both the Pratt & Whitney and Rolls-Royce engines that power our A321neo and Dreamliners, has been the single most impactful operational challenge this year. This has been further exacerbated by ongoing supply chain and labor constraints across the entire aviation ecosystem. What this issue means practically for us, is that up to six of our newest and most efficient neo aircraft have been out of service at times, and we expect this to persist to some extent across the next 12-24 months. Reduced levels of Rolls-Royce Trent 1000 engine spares in the market, have also meant that up to three of our Dreamliners are on the ground at times.
Having close to one billion of our most efficient assets on the ground is suboptimal, to say the least, resulting in disruption and complexity, not only for our customers, but also for our staff, who've had to contend with constant adjustments to the schedule, reworking of rosters, swapping out of engines, sourcing spares, and countless other tasks needed to ensure we can get our customers to and from their destination. We took immediate action to minimize the disruption, leasing three Boeing 777-300s and securing additional engine spares. No easy task in a market where many other airlines globally are also searching for spares. We're also holding extra inventory across the board for spares like seat parts, to ensure supply delays don't further tie up our fleet.
You also saw us make some really difficult decisions, such as the temporary suspension of our direct route to Chicago, to make sure we could deliver a schedule that was more reliable overall for our customers. Moving on to the economic slowdown in New Zealand. Across the second half, the revenue environment tightened further as the weaker New Zealand economy started to noticeably impact demand. At the same time, reduced business travel spending by both corporate and government customers on our domestic network, compounded pressure on yields. We responded quickly, making targeted schedule reductions, reviewing our revenue management settings, and focusing on improved ancillary revenue offerings and conversion rates. Leisure demand, which is only down slightly compared to the prior year, has responded well to sales activity and marketing campaigns, and our SME segment is holding up well.
We've also seen a continuation of the competitive dynamics we highlighted at the interim results on our international network, with overall market capacity up almost 50% across the year on the North American routes we serve. Our strategy for international markets remains clear: we will prioritize our premium cabins, and you'll see this as we start our retrofit program later this year, with the introduction of innovative new products, such as BP Lux. As our new 787 start arriving from Boeing in 2026, you'll also see our long-awaited SkyNest product being released to the market. We will continue to build marketing programs that inspire travel to and from New Zealand on Air New Zealand, and you can expect to see a significant marketing activity over the next twelve months.
We're committed to operating in markets where we have confidence in our right to win and where the route is strategically important to our customers. The last point we have up on the slide is inflation on the cost base, which Richard is going to speak to more fulsomely in a moment. Despite the external dynamics at play this year, our Kia Mau strategy continues to provide a roadmap for our business. It allows us to look beyond these temporary headwinds and ensure we are acting deliberately to step change our customer proposition, and deliver sustainably stronger financial performance over the medium to long term. We've made demonstrable progress against this roadmap and are excited about the momentum building in a number of areas. I'll touch on just a few highlights from the last year.
Looking at our three key profit drivers, our efforts to grow domestic are currently somewhat challenged with the NEO issues, but we have enhanced and added more self-service offerings via our app, invested in new and efficient hybrid electric ground service equipment to support our operational reliability, and we're trialing a Starlink-powered Wi-Fi solution on domestic aircraft. All of these investments will really put us at the top of our game when we see our NEO fleet scale back up and return properly to the domestic network. Progress against our Elevate International pillar has spanned across all areas of the customer experience. We recently launched our reinvigorated Seats to Suit offering in June, which has seen a very good uptake with customers. Responding to significant demand, we're now offering Bali services year-round.
We also finished our redesigned premium check-in area at Auckland Airport and had our revenue alliance partnership with Singapore Airlines reauthorized for another five years. As we look to lift the value of our loyalty to our members in our airline, it's been a big year. After many months of hard work across the business, we have successfully launched our Airpoints program in the iFly loyalty platform a few weeks ago. iFly lays the foundation for an improved member experience, making it easier to access and view Airpoints activity and benefits, as well as streamlining the process to expand and onboard new ground-earned partners. This is a key step on our journey to create a more rewarding experience for our customers today and in the future. We expect to have more developments to share as the 2025 financial year progresses.
I won't go into details across each of our key enablers, but this year has been significant in terms of the level of new and enhanced data and digital tooling that we have put into the hands of our people. both on the front lines and across the operation. Better data at their fingertips, providing real-time information and feedback, help our people get continuously better at delivering a world-class operational performance and service for our customers. I will now pass over to Richard, who will provide more detail on the financial result.
Thanks, Greg, and [Foreign language] to everyone on the call. Before getting into details of the 2024 financial year, I thought I'd offer some further context to what Greg referred to regarding the challenges we've faced this year and what that means for the 2025 financial year. What we're dealing with is a situation where around 20% of our newest and most efficient aircraft, with a value of approximately NZD 1 billion, are grounded. As a consequence, we've not been able to fly the capacity we had planned in the 2024 financial year, and are expecting to be able to fly slightly less capacity again in the 2025 financial year. At the same time, we're carrying resources commensurate with a modest amount of network growth, but we can't achieve that growth right now. These scale economies will reverse over time as fleet becomes available again.
As Greg says, we've brought in extra triple seven three hundred capacity this year and earlier decided to retain some older leased A320s, but it's costly, complex, and a very difficult situation to navigate. Now turning to slide eight, I will touch on some of the key financial highlights for the year. Operating revenue was NZD 6.8 billion, up 7% on last year, driven by strong capacity growth on our international long-haul network. We were also able to operate all of our triple seven three hundreds across the financial year for the first time since COVID. Passenger revenue grew to NZD 5.9 billion, including NZD 90 million of breakage on unused customer credits, and cargo revenue was NZD 459 million.
Earnings before taxation was NZD 222 million, and we ended the financial year with liquidity of NZD 1.5 billion, as we undertook a number of initiatives to get liquidity into the range targeted in our capital management framework. I'll touch on those initiatives shortly. Our balance sheet remains strong, and we ended the year with a net debt to EBITDA ratio of 0.8 times. And as Greg mentioned in his opening remarks, the board has declared an unimputed final dividend of NZD 0.015 per share. That brings the total 2024 ordinary dividend to NZD 0.035 per share. As a reminder, we expect any dividends over the next few years will remain unimputed. Moving on to slide nine and the profitability waterfall. I'll only highlight a few key points here, as there's quite a lot to this slide.
As we noted at the half-year result, a significant part of the profitability challenge this year has been the cumulative impact of ongoing inflationary cost pressures across the business. Combine this with the financial impact of the aircraft availability issues, the demand softness we have seen since September 2023 domestically, and the significant competition on our U.S. network, it all points to a pretty difficult operating environment. RASK for the year decreased 10.9%, excluding credit breakage and FX, as both load factors and yields were impacted by significant growth in international long-haul capacity. Including the impact of unused customer credit breakage of NZD 90 million, RASK decreased 9.8%, excluding FX. You can find more information about RASK by route group in the appendices of this presentation. Cargo revenue was 27% lower than 2023, although still performs well above pre-COVID levels.
Last year, we still had a portion of the New Zealand government cargo subsidy scheme in place. However, this year there was no subsidy benefit. Greater levels of competitor capacity on North America has impacted yields, despite cargo volumes increasing 19%. We've provided a breakdown and some commentary on our cargo markets in slide 20, which you can find in the appendices. Moving to the cost base, there are a few things to highlight here. Greg mentioned earlier that earnings before taxation for the year would have been around NZD 100 million higher net of compensation, had we not had to contend with all of the aircraft availability issues we have faced this year. Although we won't go into this in too much detail, the impact is across a number of cost lines, notably fuel, labor, maintenance, aircraft operations, ownership costs, and other expenses.
I will cover fuel costs in detail later on. Labor costs were up 13% to NZD 1.6 billion. This increase was driven by both increased flying, particularly long haul, and wage inflation, which averaged just over 5% for the year. Maintenance, aircraft operations, and passenger services costs were up NZD 265 million or 19%, again, primarily driven by increased flying on international long-haul routes, as well as rate or price-related inflation of approximately 6%. Price inflation from airport charges and air traffic control were significantly above this level, and just to close this slide out, one of the many flow-on effects we face due to the additional engine maintenance requirements is that productivity gains and efficiencies anticipated at the beginning of the financial year are proving difficult to realize.
We estimate that relative to the levels of productivity achieved pre-COVID, we have about NZD 50 million in productivity gains yet to be realized due to constant adjustments to the schedule, scale economies, and the resulting inefficiencies. This is on top of the inefficiencies factored into the NZD 100 million number that we've spoken about already. Touching briefly on slide 10 in our CASK performance. While costs increased across all areas as we restored our international network, reported CASK improved 1.6%. This was driven by lower fuel prices and the change in mix of flying, with a higher proportion of lower CASK long-haul flying compared to last year. This was partially offset by broad-based price inflation, which led to a NZD 225 million increase in non-fuel operating costs.
Underlying CASK, which excludes the impact of fuel, foreign exchange, and third-party maintenance, deteriorated slightly by 0.6%. Looking ahead to the 2025 financial year, we expect underlying CASK to remain under pressure as the business leans into a full year impact of having a number of our most efficient aircraft grounded for extended periods of time due to the previously discussed additional engine maintenance requirements. Turning to slide 11, the impact of inflation being felt across the business is significant, but it's certainly not unique to New Zealand or the aviation sector. We've attempted to summarize wage price inflation across our direct operational workforce, as well as price increases from our supply chain and third-party service providers. You can see that there's been a substantial increase from pre-COVID levels, and that much of this is rate or price-driven rather than activity-driven.
Our expectation is that we will see this trend continue in some areas, such as airport charges and maintenance costs. The investments we are making in digital and infrastructure areas will help mitigate some of this pressure over time and help drive efficiencies in the cost base. slide 12 summarizes the fuel hedge portfolio. We're almost 90% hedged for the first half of the 2025 financial year and about 60% hedged for the second half. Hedges are currently structured as collars with an average ceiling of around $80, but with considerable downside participation. We regularly look to restructure our hedge book to adjust the profile where appropriate. All future hedges are for Brent Crude, meaning that fuel costs still remain exposed to volatility in the crack spread between crude and jet fuel prices, which has seen less volatility in recent months.
Into plane costs remain elevated compared to prior periods due to inflationary cost pressures, supply chain issues, and higher tanker rates as a result of geopolitical events in the Red Sea. In this slide, we've provided our current estimate of fuel costs, which assume an average jet fuel price of $95 a barrel. In the past two months, the price has been anywhere between $90 and $105 per barrel. We've provided an estimate of how an increase or decrease in fuel price would impact our fuel costs for the full year, all else being equal, which includes the impact of our current hedge book. Moving on to slide 13 and an update on our aircraft CapEx profile. This is changing as we continue to work through challenges across the aviation supply chain and what that means for the fleet plan.
Delivery of the first two new 787s with GE engines is expected in the 2026 financial year. Our experience suggests that uncertainty and delays around delivery timeframes for new aircraft remains a risk, and we're reviewing the wide-body fleet plan through to the end of the decade with this in mind. The benefits that a simplified wide-body fleet of all 787s provides us with are likely to be delayed, given the supply constraints in the industry. The CapEx profile on the chart here is based on current assumptions regarding delivery dates, noting that we have already adjusted and extended the profile of the eight new 787s, but this may change further. One of the key mitigants we have to manage this risk is the phased exit of our 777-300 aircraft, which we are considering extending for several more years.
These aircraft have considerable economic life left in them, and combined with the revised 787 delivery dates, provides a good capital efficient option for future long-haul growth. As we look out to 2030 and beyond, we're closely balancing the sustainability and operating cost benefits that come from investing in new fleet with the level of invested capital that we believe to be prudent. Our wide-body fleet age is relatively low, at under 10 years on average, with sufficient room to float that upward to 12 years or so, giving us flexibility to make adjustments. The interior retrofit for the existing 14 787s is about to get underway, which you can see on the stacked bar chart, is a multi-year program worth approximately NZD 500 million.
We had hoped to induct the first aircraft in August this year, but pending some delays related to parts supply, that timing has been moved to October. This means that the expected CapEx spend will also slide to the right slightly. After around two years of careful planning, we're very excited to get the first aircraft up into Singapore in a few months time, so our customers can experience the new interior product in early 2025 calendar year. Turning briefly to new aircraft deliveries this coming year, we will receive two additional ATR 72 turboprops for our regional domestic network and two A321neos in a short-haul international configuration. We will be looking to finance the ATR aircraft following a series of cash purchases of new aircraft completed in the 2024 financial year. The A321neos are on 12-year lease terms.
The total forecast aircraft CapEx is approximately NZD 3.2 billion through to 2029, and as we get closer to delivery dates for the 787s, we will soon be turning our minds to funding options for those aircraft. Turning to slide 14, we've taken a number of steps this year to align our current metrics with targets set out in our revised capital management framework, which was finalized in 2023. In addition to reinstating an ordinary dividend in line with our target payout ratio range, we have purchased two A321neos with cash, growing our pool of unencumbered aircraft assets to approximately NZD 1.6 billion. This is more than 50% higher than the level we had just prior to COVID. We also chose to make early repayments of NZD 70 million in secured aircraft debt and completed several purchase options on leased aircraft.
On slide 23 in the appendix, you can find more details of our unencumbered fleet portfolio. This past March, we canceled the NZD 400 million undrawn syndicated standby facility, and in May, we were pleased to enter into a syndicated, unsecured revolving credit facility for $250 million with our global banking partners. It is our intention that this facility remain undrawn, but it does support our liquidity target of NZD 1.2 billion-NZD $1.5 billion. Now, I'd like to turn back to Greg, who will comment on our capacity expectations and outlook.
Thanks, Richard. I will briefly touch on our current expectations for capacity this year, noting there is a fair degree of uncertainty as we continue to manage evolving maintenance plans from Rolls-Royce and to a lesser extent, Pratt & Whitney. The key message I think here, is that we are temporarily constrained in terms of the level of capacity growth we can achieve in the first half of the 2025 financial year. That all comes down to aircraft availability, with the additional maintenance requirements on the 787s and A321s. Without that growth, it makes for a difficult revenue story and a difficult cost story. As aircraft availability issues start to resolve, we are turning our minds to the network opportunities and potential new routes we may look to serve in the medium to longer term. Turning now to the outlook.
As we look to the first half of FY 2025, we are expecting a continuation of the challenging trading conditions we experienced in the second half of FY 2024. Given the ongoing economic and operational uncertainties, we are not providing guidance at this time. What I want to leave you with here, though, is the confidence that we are doing everything in our power to set the airline up for success as these frustrating but temporary challenges start to abate. Our balance sheet is robust and has the capacity to withstand these tougher conditions without compromising our strategy. We remain committed to investing sensibly in the areas that will deliver value for our customers and our people, as well as focusing on opportunities to improve returns for shareholders. We believe in the strength of our Kia Mau strategy and our fantastic team.
I'm excited about the opportunities ahead as we move out of this current cycle. I'll now hand over to the operator for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by as we compile the Q&A roster. Our first question comes from the line of Andy Bowley from Forsyth Barr. Please go ahead.
Thanks, operator, and good morning, guys. A couple of questions from me. The first is around the RASK backdrop here. I've just been looking at your July operating stats, and I recognize that's just one month in a seasonally slower part of the year, but we're showing long haul up 1% or so on the prior year. We're seeing short haul modestly down. I wonder if you could give us a sense of how you see the RASK backdrop evolving, particularly over the next six months. I recognize that twelve months might be a stretch, but, you know, thoughts on RASK through FY 2025 at this stage of the year, please.
Hi, Andy. Richard here. Thanks for the question. I'll do my best to address that, and I'll run through it briefly, market by market. So domestic, as you well know, has got the shortest booking curve. We're seeing a little. We're certainly seeing a stabilization of yields, I think, in the domestic market on the look forward. We are sort of adopting just some changes to our revenue management settings that are proving helpful. Year on year, we are seeing sort of a mid-single digit yield decline until we start lapping September, October this year, which you'll recall, same time last year was when we first saw sort of government travel and corporate travel start to dial back a bit. So that's domestic.
The Tasman's holding up pretty well, in a RASK sense or yield sense, particularly from the Australian point of sale. It's a little softer out of New Zealand, but net-net, you know, flat, on the Tasman. Pacific Islands' performance to date's been good, actually. The forward position is down ever so slightly, but again, it's a sort of a shorter dated booking market. North America, a bit more complicated, so New Zealand outbound demand's definitely softer. I think we can attribute that to a combination of what's going on in the economy and the fact for a Kiwi, a US holiday is pretty expensive at the current exchange rate, but we're seeing that offset, in large part by North American demand, so that's improved. When I say North America, sort of specifically referring to Canada there.
The U.S. is flat, but Canada is sort of offsetting the weakness we're seeing out of New Zealand. Australia point of sale is performing pretty well, too, on North America. That's just helping overall offset the yield declines we're seeing out of New Zealand. If you look at future bookings, sort of flat to 5% declines in yields. Asia and Japan performed pretty well, with yields up. The only thing I would call out, particularly over the high season in Japan, in particular, is because of the engine shortages. Again, we normally fly seven eight sevens up into that market. We're flying the triple seven up into that market, which has got a much bigger premium cabin. That will show up as better yield.
It may not show up as better RASK, because they're pretty big premium cabins to fill, particularly on the Japan market. So overall, you know, I think probably the answer to your question is, it depends which point of sale you're talking to, but net-net, we're sort of flat, you know, up to 5% down, depending on the market. Does that help?
and that's specifically for the first half, or is that kind of-
Yes
your broad expectation for the year?
No, first half. First half.
Okay. So then if I build that into your capacity backdrop, and I take your comments around costs continuing to increase here on a unit basis, you know, are you confident that you'll be profitable through the first half? Or, you know, is there an expectation that this is a loss-making half, and we can make good in the second half?
I think what we're all saying, Andy, at the moment, is that we expect sort of the trading conditions and performance largely for the first half to continue, and at this stage, second half of 2024 into the first half of 2025, and then our expectation beyond that would be, we do expect to see monetary conditions start to ease in the New Zealand domestic economy. I think it'll take a little while for confidence to return, so that's very much a sort of second half and beyond phenomenon. And then beyond that, of course, 2025, I think will be the low point for aircraft AOGs. Once we start getting the 321s back into the system and some more 787s flying, we will start to see the benefits of that starting to come through.
Probably the only other point I would make is we're doing all of our internal planning at the moment on a $95 fuel price. That, over the last month or two, has actually bounced around between $90 and $105. I think right here, right now, it's sort of somewhere between $91 and $92, I think. So in the first half, you know, there may be a little bit of relief on fuel price.
All right, great. So maybe just lastly, just to nail down on the, on the level of unit cost growth, you know, up 6% through FY 2024, how do you see that trending through FY 2025? Recognize, you know, you still-
Mm
expect significant cost growth, but, is that coming down, and what kind of percentage?
Yeah. It will come down. I think there's sort of two components to it, and we've broken out labor and everything else. Labor came in just a fraction over 5% for the year. That was higher in the direct labor base and lower in the support office labor base. Both of those we expect to moderate over 2025, and going beyond. In terms of third-party costs, sort of called out aeronautical charges as sort of a key mover, and we sort of expect that to continue increasing. Whether we get some alleviation on some of the other costs remains to be seen. I think sort of in-flight services costs, I would expect to moderate. Engineering parts and supplies, I think is probably another 6 to 12 months away from moderating.
So, I'm not quite sure it'll nudge 8% for those third-party costs again this year, but it will certainly be, I think, sort of continue to trend above 5% for those costs.
Overall, non-fuel unit costs, yeah, still up, you know, comfortably above CPI?
Yeah.
That's my question.
I think, yeah, I think that's right. You know, if you, if you take the two in combination, weighted average, just see, as you pointed out, it sort of came in at six. We'd expect labor to come down by one, one and a half on that, and the third-party cost remains to be seen. There's the sort of the prospect of that coming down by one or two. But as I say, we are still expecting some cost pressure from well, ongoing cost pressure from aeronautical charges, and I would still expect some on engineering parts and materials, given that the global aviation supply chain, while improving incrementally, still finds itself under quite considerable pressure.
Yep, no, tough times. Thanks a lot, Richard. Much appreciated.
Thanks, Andy.
Thank you. Our next question comes from the line of Marcus Curley from UBS. Please go ahead.
Morning, gents. I just wondered if we could start with the non-passenger revenue outlook. Yeah, could you talk a little bit to what your expectations are for, you know, cargo, other revenues, and also engineering? Obviously, you've shut down your gas turbine there, so just keen for a bit of color, if possible.
Very quickly, Marcus, on those three. So cargo, we do expect to be down on the NZD 359 million-NZD 459 million that we posted this year. I expect that to be down, I don't know, 10%, going forward. We're seeing good cargo volumes, but yield declines are more than offsetting that at the moment. I think we're gonna sort of normalize above a good year pre-COVID, but we will end up being close to NZD 400 million than NZD 500 million, in 2025. We'll see, I think, a further step up in ancillary revenue over the course of the year. You would've seen over the last three or four months, we've put through some price increases sort of across the board on our ancillary products, and we're seeing some good uptick there.
So I think we expect that to improve over the course of the next financial year. Third party engineering, there's relatively little scope to do much more than we do at the moment. We've got contracts with the New Zealand Defense Force, and but the hangars in both Auckland and Christchurch are relatively full, so the likelihood of us getting more third-party revenue than we've got this year is relatively low. Probably the only other comment I would make, and it's going back to the direct ancillary products, is that our not just sort of price increases, but our conversion on that is steadily improving and continues to improve. And that's off the back, Marcus, of some good digital work that the team are doing.
So it might be attachment rates on rental cars or getting people to purchase bags ahead of time. So a lot of work being done by the team to improve the back-end systems, and that's coming through in things like ancillary. It also comes through in things like the call center, where we're just continuously able to take numbers out, because take, for example, you know, we had to have 700-800 people in the call center a year or two ago, and we were doing up to 80-85 thousand calls a week. On a reasonable week now, that's down to 21,000. So it's just about digitizing the airline and making it easier for self-service, but the big prize is productivity and a better experience for customers.
Actually, just picking up on that point, and sorry, Marcus, we've probably more than answered your question, but I've got a supplementary on Andy's question, which is just around some of the costs that we're incurring through that we incurred in 2024. A couple of areas where we will get relief. The Wamos wet lease is clearly gone now. That was NZD 30 million of incremental cost in the year just gone. And to Greg's point, it just prompted me. We are at a point now where through some self-service and more automation, digital investment, we're making some decent progress now in getting rid of or removing some of that extra cost we were carrying in the contact center. So just a little bit of extra color there. Marcus, I hope that answers your question.
Yes, it did. Secondly, just, well, just as an aside, Richard, what line item was that wet lease within?
Other expenses.
Yeah. Good.
Yeah.
Just moving to fuel, like the guidance at NZD 1.6 billion did surprise me a touch, on the high side, you know, given, you know, you're talking NZD 95, you know, yeah, that's down nearly 10% on your price point fuel, you know, your Singapore jet fuel price of NZD 24. You know, what level of hedging losses is incorporated in that NZD 1.6 billion?
The hedging losses are in the slide, Marcus, based on the date that we value them. But just to point on the overall NZD 1.6 billion, it doesn't just include, obviously, the largest component, which is jet fuel, but that elevated into-plane costs that Richard would have spoken to at our interim result as a result of the Mideast conflict still driving higher into-plane costs. And then, of course, we do have increases in the NZU prices for our domestic carbon offsets incorporated into those assumptions.
Yeah, so just on that, Marcus, the NZU costs, so over the course of last year have been in the sort of low mid-fifties. Next year, we're expecting that to be close to seventy.
Okay. So the increase in the into-plane costs, which you can see in the results as well, could you explain why that relates to the, you know, the conflict? Is that just yeah, the fact that the, you know, into-plane costs, you know, have gone up? Like I struggle to. Yeah, when I think about into-plane, I think about, you know, the cost of, you know, someone, you know, delivering the fuel to the aircraft at the airport, as opposed to necessarily a commodity style impact.
It's the whole thing. So, certainly the costs, and we use as a whole range of fuel suppliers at the various airports around the network. They've all got the same cost pressures that the rest of us have, and so we've seen as we've renegotiated those contracts, and we've done a couple in the last year, we've seen those costs increase significantly. But we are as part of that supply chain into the wing of the aircraft, subjected to sort of sea freight costs for the product as it sort of gets to the appropriate ports. So, there's no one part of the supply chain that the costs of which don't turn up in the costs of the final product.
And so at this elevated, would you expect, you know, given what you're hearing and seeing, you know, much relief over time, you know, on engine?
No, yeah, I doubt it. Most of these things, you know, it's pretty manual work. So, there are labor costs, there are the costs of the equipment, and costs of physically getting the fuel into the aircraft. These sort of contracts get renegotiated every two or three years, and tend to go up in price or stay flat rather than ratchet down, would be is our practical experience.
Yes. Yeah, no, obviously have increased a lot over the years.
The other thing I would add to that, Marcus, is, more generally over the sort of longer term, is we've seen a rationalization in the number of players prepared to provide the service. So, whereas five or six years ago, you'd go out there and all the oil companies would bid for the work, now you've got a subset of them bidding for the work. Some of them have, sort of taken themselves out of the market supply altogether. It's quite an interesting dynamic.
Last question from me. Yeah, this obviously is a little dated, but yeah, when you did your capital raise and the documents that came out with that, you know, sort of this year and next year was expected to be a big uplift in non-aircraft related CapEx, you know, specifically, yeah, related to property and cargo. Are those investments still expected to make? I just wondered if you could provide some guidance on that non-aircraft CapEx sort of profile.
Yeah, sure. So, the property CapEx, the big two big-ticket items in there are the new hangar at Auckland, and we're half built. I don't know if you've been out there recently and seen it. It's coming up out of the ground at the moment. So we expect an elevated property CapEx spend over the course of 2025. At the end of next calendar year, the thing will be largely built, so we'll have 100 going through more or less on the hangar this year on that. We've spent about 40 or 50 so far. We've got the lounge development in Auckland, so it's new international lounge, which doubles in size out there. That work, I don't think, gets underway in earnest until financial year 2026.
Yeah.
But is some tens of millions of dollars, when that occurs. And the cargo shed , which is the other one, has moved to the right. So back when we did the capital raise, we were expecting that facility to be commissioned in 2026, 2027. That is now more likely to be commissioned in 2029.
That's not necessarily us slowing it down. It's just trying to get a deal done with Auckland Airport.
Partly. Yeah, partly, but, well, I mean, the two organizations are working sort of well together on getting that thing sort of designed and off the ground, but it's effectively moved to the right by two or three financial years.
Are you still moving offices?
No.
Okay.
We've extended the lease here until. We're in the process-
Yeah, we're doing that. We've got options to extend the lease on the,
Till 2032.
Thirty-one, thirty-two. And the thinking behind that was, that sort of at its original inception, we thought that it was going to be a very low-cost way of accommodating people out at the airport precinct, because we've got actually a reasonable amount of space out there. As we got into detailed design work, as often happens with property projects, the cost and complexity of the design started to outweigh the benefits of the shift. And so, and quite apart from the fact that we've got a lot on our plates at the moment, and ahead of the shift doesn't feature high on that list of priorities. So we've, as Greg says, delayed it for reconsideration out until the early 2030s .
The other thing that we take into account is we are spending quite a bit on digital, and that's sort of circa NZD 50 million-NZD 60 million a year, and I've already spoken about some of the things that's getting spent on, and we've also just recently been able to get the new loyalty program in place, and that was a 2-3-year piece of work, but a lot of those digital things are designed to provide better efficiencies in the business.
And we'll continue to-
Okay.
Because we know we get a good return on investment. Thanks, Marcus. Next?
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. Our next question comes from the line of Nick Mar from Macquarie. Please go ahead.
Morning, guys. Just on the cargo loss revenues, obviously, you didn't fly any sort of cargo on your flight. Of that sort of NZD 170 million decline, how would you attribute that to sort of a profitability impact for the business?
I think it was about NZD 90-NZD 93, from memory. Nick?
Yep, that's good. And then on the dividend, can you just provide some clarification on how the policy works? Like, if I take the 12 months for FY 2024 in terms of the, you know, impact on the EPS and the dividend declared. The payout seems to come in above the 40%-70% range. Can you just talk about how that's calculated? Obviously, it's a rolling 12-month basis.
Yeah, sure. No, so we are calculating the dividend on a rolling, it is a rolling twelve-month calculation, as opposed to a wash-up calculation at the conclusion of each financial year, so I apologize if there's any confusion in that, but that is the logic.
So just for clarity for others potentially on the call, the interim 2024 ordinary dividend was calculated on a rolling 12-month NPAT, taking into account the second half of FY 2023 and the first half of FY 2024, taking that rolling twelve months and applying a payout ratio, which was around 40% at that time. As we looked at the final ordinary dividend of NZD 0.015 per share, that took into account the rolling twelve months, which was the full year 2024 NPAT, at 69% payout ratio, which equates to the 1.5. The altogether FY 2024 ordinary dividend of NZD 0.035 , you are right, Nick, would be therefore above our payout ratio range, but we don't calculate it that way. So apologies if there's any confusion, but that is how the board has considered it.
The reason for that is to smooth the peaks and the troughs of the dividend to reflect potentially changing circumstances in the airline's operating environment.
But on that smoothing piece, given that you've essentially overpaid in the second half, when you roll forward to the first half of 2025, isn't that gonna mean that you cannot pay a dividend, which sort of goes against smoothing any distribution?
It smooths the peaks and the troughs. The point that we overpaid in the first half, I would not characterize it that way. We paid based on-
But there are items in the second half.
Past experience. So shareholders can see the benefit on the upside and a little bit on the downside either way, but it does all link to performance, the rolling performance. I would also point out that, of course, we do have a liquidity policy as part of that capital management framework of NZD 1.2 billion-NZD 1.5 billion. We are at the very upper end of that target right now, and the board, as always, contemplates additional capital management levers outside of the ordinary dividends, which would include things such as special dividend or buybacks.
No, that's helpful. And then lastly, on sort of sustainability and everything, I see there's a sort of 10% SAF volume by 2030. Is that sort of the new target metric? I think it's down from about 20%.
No, it's not a new target, but just sort of by way of background, you're all aware of the fact that we exited the Science Based Targets initiative a month or so ago. We're still committed to reaching our 2050 targets, net zero. The 2030 target of is linked to a, let's call it, Clean Skies policy that World Economic Forum have promulgated. And we've included sort of what we expect the costs of that to be on the business. And there's a lot of water to go under the bridge, clearly, as SAF production comes online and then matures. But we do believe we've got a reasonable prospect of getting to 10% of the fuel uplift in SAF by 2030.
It's not designed to replace the SBTi target. It's just there. We think it's a realistic goal to shoot for.
No, that's great for me. Thank you.
Thank you. I see no further questions at this time. I would now like to turn the conference back to Greg.
Thank you again for joining us today, everyone. I appreciate you listening in and for your support of Air New Zealand. If you do want to schedule a call or a meeting for any follow-up questions, please direct those requests through to Kim, in our investor relations team. Thank you.
This concludes today's conference call. Thank you all for participating. You may now disconnect.