Air New Zealand would be better placed to ride out its current turbulence if it had stood by its own words four years ago and not paid shareholders dividends

There’s some irony in our national airline Air New Zealand deciding – in the face of losses – to suspend payment of dividends this year.

Because, you see, if we go back four years, Air New Zealand was saying it would not be considering paying dividends at all UNTIL 2026.

That’s right, when the airline held its big capital raise for $1.2 billion in 2022 – much needed after the company’s travails during the pandemic – the airline (which of course was not paying dividends then) said that "subject to performance, dividends are expected to be considered from FY26".

But that’s not what happened.

In fact, the airline has between then and now paid $420 million to shareholders (remembering that the Crown courtesy of we, the taxpayers, owns 51%, so will have taken slightly over half of that), while a further $80 million was spent helping shareholders more indirectly through a now ended share buyback scheme. (The dividend and buyback figures were sourced from Air New Zealand annual reports).

That’s pretty much half a billion dollars back to shareholders during a period in which the airline had indicated it would not pay dividends.

When I opined about the Air New Zealand capital raising in March 2022, I was very taken with the message about the airline not looking at paying dividends till 2026.

I said this:

It's very sensible that Air NZ's not making any promises on paying any dividends before 2026, which of course demonstrates that profits it does make before that time will be held in the coffers to bolster shareholders' funds. Very sensible. 

I said 'very sensible' – twice. Would that those words from Air New Zealand been followed up by similarly sensible actions.

Now, I can already hear the calls of how I’m twisting things and being very unreasonable. So, I will explain what happened. Because what Air New Zealand did is eminently explainable. But it was wrong.

If we can recall, in the 2022-23 period we got let off the Covid ‘leash’. Having been locked up in New Zealand, we were allowed to travel again. What followed was what became colourfully described as “revenge travel” – a kind of collective blowing off of steam.

The key thing about that particular period was none of us particularly bothered how much this travel was costing us – which was a very different approach to how we had conducted ourselves prior to 2020. We went from 'If we can afford it" to ‘Never mind the cost – I’m going!’.

Airlines, including Air New Zealand, that had mothballed large parts of their fleets, had to literally in some cases get planes back from half way around the world. This meant there was nothing like the pre-Covid capacity available for some time. But there was strong demand.

What do you get when strong demand meets limited supply? Why, high prices of course.

In that 2022-23 year Air New Zealand was enjoying yields (revenues per flying passenger) that are the stuff of airline fantasies.

Somewhat cutting the story short, the outcome was that for the 2023 financial year Air New Zealand made its second biggest profit ever. 

Turning the tap on

And over $200 million of it was paid as what was styled at the time as a special dividend to shareholders. Significantly though, having turned the tap on, the airline then carried on paying dividends in the next two years. This was so, even while the profitability started to – inevitably- fall off from that one-off 2023 performance, as the punters rediscovered the ability to say “how much?!” and “I’m not paying that”.

I thought at the time Air New Zealand’s board was making a mistake because that 2023 year was not typical. Not at all. It was a one-off stemming from extraordinary circumstances. And while the board appeared to acknowledge that at the time, it still made the decision it did.

I can fully understand the pressure the airline would have been under. Shareholders as a breed have never been more hungry for dividends than they are these days. And how do you make the second biggest profit you’ve ever made and then turn to your shareholders and say ‘sorry, none for you’?

But Air New Zealand did have that line in its 2022 capital raising material that it could have fallen back on. "Subject to performance dividends are expected to be considered from 2026." And that’s what it should have done regardless of some  inevitable squawking from shareholders.

How nice would it be if Air New Zealand still had that $500 million it gave away to shareholders in its coffers. That would certainly be a great buffer in what’s a now very uncertain environment.

It might be worth bearing all that mind as we watch what unfolds with the airline in coming months and as it undertakes its ‘strategic review’.

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