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Engineers' Move Raises Questions

Posted on: Monday, 20 February 2006, 15:00 CST

By SHEERAN GARRY

ACCEPTANCE BY Air New Zealand engineers of a proposal to save the airline's heavy maintenance base in Auckland will raise as many questions as it gives answers for analysts at the firm's half-year result announcement on Friday.

The result of voting last week by engineers in the Auckland and Christchurch workshops on the future of the airline's engineering division will be known tomorrow.

The proposal will save 300 of the 500 remaining jobs in the Air NZ Engineering Service, but the sticking point is the effect on engineers in the Christchurch workshop.

It is understood significantly more Christchurch workers could lose their jobs under the proposal than in Air NZ's original plan.

Analyst Paul Richardson said that whichever the way the vote went, the engineering services division was likely to report a dismal performance.

Its earnings were earlier reported to have been halved as a result of a high NZ dollar and international competition.

"But most analysts will be looking past that and asking what level of dollar savings can be achieved in any new deal with the union," said Richardson, equities manager at BT Funds Management.

Air NZ's original plan was to lay off 617 engineers and save up to $100 million over five years.

It subsequently laid off 110 jobs after deciding to outsource its wide-body aero engine business, giving savings worth $53m over five years.

The unions then proposed securing 300 of the remaining 500 jobs in wide-body airframe maintenance work through a combination of redundancies and labour reforms.

The unions say this would give savings of $48m a year over five years, and the deal has been provisionally accepted by Air NZ as delivering "the required savings".

Richardson said it was positive the unions believed they could make big savings through work practices.

But he said analysts would want to know what accommodations Air NZ might have to make by accepting a new proposal, and how it lined up with previous plans to eliminate the entire engineering division.

Richardson there was the wider issue of skilled engineering jobs being lost and not replaced. But the airline industry was a tough one, and hard decisions had to be made.

The future of the airline's engineering division is not the only ball in the air as Air NZ reports a half-year profit expected by analysts to be about $50m-$55m.

In October, Air NZ said record high fuel costs and the investment in new aircraft would drag its record pre-tax profit of $235m to $100m for the current financial year.

A subsequent fall in the price of jet fuel in November resulted in the company upgrading its full-year forecast by $40m.

But jet fuel prices resumed their upward march in December, and last month were 70% higher than the same time last year.

Air NZ declined to comment on the effect of the latest rises on the company's bottom line.

But Goldman Sachs JBWere airline analyst Peter Sigley said the impact of Air NZ's fuel surcharge and the airline's hedging policy would cushion the upcoming result.

Forsyth Barr is picking Air NZ will spend $860m in fuel in the full financial year, compared with $626m last year.

The third ball in the air for Air NZ and analysts is the wider cost- cutting exercise being undertaken by the airline.

Forsyth Barr research manager Rob Mercer said the airline was attempting a difficult shift in culture. "They are looking to strip out $250m in costs, and the question is how much of the cost- cutting drops to the bottom line, and how much they lose along the way," he said.

While Air NZ had less competition on North American and UK routes, it faced fierce battles on the trans-Tasman and Asian services.

"The pressure for constantly lower air fares threatens to undo any good work they may make in the cost-cutting arena," said Mercer. Up in the air What has been agreed

* Savings of $53 million over five years through closure of wide- body aircraft engine maintenance facilities.

* 110 job losses.

What Air NZ wants

* Savings of another $48 million over five years through closure of wide-body airframe maintenance facilities.

* 507 employees made redundant.

* Maintenance work contracted out, probably to Asia.

What the unions propose

* Cost savings through changed working conditions - such as flexible shifts, time-off in lieu - in all engineering operations in Auckland and Christchurch.

* Only 200 jobs to go.

* Outcome of staff vote on plan due tomorrow.

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Source: Sunday Star - Times; Wellington, New Zealand

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