contents

01 EARNING REWARDS

IN TESTING TIMES

02 CEO UPDATE

06 HAPPY TRAVELS

08 AGILITY IN ACTION

10 REGIONAL RECIPE

12 FUEL EFFICIENCY

14 FINANCIAL COMMENTARY

18 FINANCIAL SUMMARY

Air New Zealanders recently stripped off and slapped on the body paint to illustrate that our airfares have...

At Air New Zealand we like to take a straight forward honest approach - it's the way we do business.

Air New Zealand’s investor website www.airnzinvestor.com provides shareholders with monthly operating statistics, financial results, stock exchange releases, corporate governance, annual meetings, investor presentations, important dates and contact details. Shareholders can also view webcasts of key events from this site. Shareholders who would like to receive electronic news updates can email Investor Relations on investor@airnz.co.nz

The full Annual Financial Report is available by visiting our website www.airnzinvestor.com

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You may elect to have a copy sent to you by contacting Investor Relations.

FULL ANNUAL FINANCIAL REPORT

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BOARD OF DIRECTORS

Dr Jim Fox

Paul Bingham

Jane Freeman

John McDonald

Warren Larsen

John Palmer, Chairman

Roger France, Deputy Chairman

6

7

Grabaseat won the Philips Innovation Award at the Tourism Industry Awards.

Judges’ Choice Trophy awarded for an outstanding frequent flyer programme at the Loyalty 2009 Awards.

In a year of almost unprecedented fInancIal volatIlIty and subsequent sluggIsh consumer demand, aIr new Zealand has done well to record an operatIng profIt.

In these difficult times we have continued to see the spirit and morale of air new Zealanders grow. our relative performance over the year is a reflection of the work they have put in to keep ahead of competitors. our on time performance and customer service combined with the strength and depth of our network is keeping the pressure on competitors.

QUICK REACTIONS

our ability to react quickly remains a key competitive advantage and this ability will continue to serve us through the next period of uncertainty. a constant focus on cost is now entrenched in the way we do business and we continue to look for ways to lower costs. we will continue to assess the shape of our network and adapt in response

to changes in demand patterns.

LET’S LIGHTEN UP

tough times don’t need to be dreary. air new Zealanders are perfecting the art of having fun while taking their jobs seriously. this has been illustrated by the ‘nothing to hide’ advertising campaign and, as fanatical sponsors of new Zealand rugby, we have recently produced ‘our rugby song’ drawing on enthusiastic people from across the business.

we have also been re-examining the structure of our business to determine how we should position ourselves for the future. especially in these volatile times airline industry economics can change quickly. we need to understand the changing dynamics and where the greatest value can be unlocked. we intend to stay ahead during this time of inevitable change and will continue to make the sometimes tough decisions to get there. we still see the “fasten seat belts” sign on as we start the 2010 financial year, but are confident about our competitive position.

John palmer Chairman

our strong fInancIal posItIon has gIven us the abIlIty to make Investments that wIll keep us ahead of competItors. In tImes of dImInIshIng demand, superIor product and servIce are Important.

the past year has been characterised by gloomy economic conditions and consumers facing sharp declines in real personal wealth. discretionary expenditure such as travel has been hit harder than other parts of the economy. the combination of excess capacity, deteriorating demand and significant discounting have all worked against us. despite all this we have been able to adapt to the conditions and enhance our already strong financial position.

normalised earnings before tax for the 2009 financial year were $145 million, a 26 percent decrease on last year. this result positions air new Zealand as one of the top performing airlines globally, but it falls short of delivering shareholders an appropriate commercial return.

after reviewing the current trading environment and the airline’s financial position, the board has declared a fully imputed dividend of 3.5 cents per share. this reflects the 2009 operating performance while acknowledging that economic conditions remain challenging throughout the next financial year. the dividend record date is 11 september 2009.

INNOVATING WITH CONFIDENCE

the willingness we have shown to innovate in difficult times illustrates the self confidence we have developed to understand and anticipate customer behaviour. we have smoothly implemented world-first check-in innovations that have made vast improvements to domestic travel, installed in-flight entertainment for all aircraft flying trans tasman and are fitting efficiency improving winglets on our boeing 767-300 fleet.

our strong financial position has given us the ability to make investments that will keep us ahead of competitors. In times of diminishing demand, superior product and service are important. our decision to invest in lie flat beds for our business premier cabin has paid off and we are now focusing on lifting our game again when the boeing 777-300er aircraft are introduced from the end of next year.

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for a number of years now we’ve been talkIng about our flexIbIlIty that enables us to adapt the busIness quIckly to the prevaIlIng condItIons. the 2009 fInancIal year presented us wIth the perfect condItIons to demonstrate thIs abIlIty. as the global fInancIal crIsIs unravelled, demand for aIr travel rapIdly deterIorated and we have been quIck In respondIng by reducIng the number of seats we fly. as a result aIr new Zealand’s fInancIal performance has been among the best In the Industry.

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Immerse yourself in aIr new Zealand fashIon week, 21–25 september 09.

1,786 people are fans of air new Zealand fashion week

with air new Zealanders feeling happier and more connected at work we think it’s no coincidence that customer compliments are up 67%.

find out the ingredients for a great regional airline on page 11.

our continued investment over this tough period is setting us apart from our competitors. a good example of this has been the changes we have made to domestic travel. with the duration of the majority of our direct services within new Zealand being less than an hour, on time performance and a fast and efficient transit through airports is critical.

air new Zealand’s ability to fly its domestic and international customers into and out of queenstown over the busy winter season has been enhanced with 18 aircraft now fitted with advanced navigation technology. required navigation performance (rnp) was introduced onto six of air new Zealand’s 737s two years ago, with the initiative so successful that it has now recently been extended to the airline’s a320 aircraft, making air new Zealand the first airline in the world to have an entire a320 fleet rnp enabled.

adapting the business to survive can be tough as we have to say good bye to things of which we have grown fond. In June our first boeing 747-400, which was delivered to us in 1989, departed auckland for the last time to the us where it is being dismantled for parts. this signifies the start of the exit programme for our boeing 747-400 fleet which have served us well for almost two decades.

our first boeing 777-300er aircraft is due to be delivered in november next year. after reviewing the catalogue of seating and interiors for these aircraft, we were underwhelmed. therefore we have been working to design our own. we are looking to innovate in this space and have a team of air new Zealanders working to develop our own bespoke interiors. we look forward to unveiling these early next year and are certain that these will be instrumental in maintaining our market position.

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Ed Sims anyone who is a fan of kiwi-can-do is going to love our 777-300er interiors. Tues at 10.30 am

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Rob FyfeHome Profile Friends Inbox

as part of our strategy to be responsive to change we are developing a greater understanding of how our customers are altering the way they interact and gather information as a result of technology. new media is changing the way we approach marketing and blurring the line between advertising and entertainment. In this new era of marketing, the demand for fresh, innovative and creative ideas has increased dramatically.

as part of the “nothing to hide” campaign we released a “bare essentials” in-flight safety video featuring staff wearing nothing more than body-paint that received more than three million views on youtube in its first 10 days. this has been followed by the launch of our “rugby fanatic campaign” that demonstrates our passion for new Zealand and our willingness to take a leadership role in promoting the uniquely kiwi attitude as illustrated through rugby supporters.

New media

100% Pure NZ

our fortunes are linked to that of new Zealand more than any other company. new Zealand is still top of the pops in the destination desirability stakes as proven in conde nast traveller’s last poll. however, this is something that we cannot take for granted and we will need to work hard to sustain this appeal.

a major part of sustaining our attractiveness is making sure our environment remains pristine. we have continued to focus on the environmental initiatives where we can make the biggest difference. our investment in winglets, zonal dryers and more fuel efficient fleet is paying off. this combined with the capacity reductions that we have put in place reduced our fuel burn by 10 percent, lowering our carbon emissions by over 350,000 tonnes of co2 on the 2008 financial year.

the development of biofuels remains an integral part of our strategy. In december last year, in partnership with boeing and rolls royce, we completed the world’s first commercial aviation test flight powered by the

sustainable second-generation biofuel jatropha. this significant step forward was completed well ahead of experts’ original forecasted timeframe.

further research this year has shown that jatropha is unlikely to be air new Zealand’s primary source for biofuel because of the distance between our fuel pumps and where it can be grown under our strict sustainable criteria. while this is disappointing, there are many other potential sources we are looking at and although the change of focus may push out our original programme timing, we strive to be ground breakers in this area.

At home

air new Zealand’s unique geography makes running a domestic airline a complex recipe. we fly four types of aircraft to 27 different airports in often testing weather conditions. especially in times of reduced demand only a handful of customers are on some flights, making the cost per passenger very high. we will do our best to keep these flights affordable, with grabaseat already offering many great specials.

Just as it was hard to wave goodbye to our oldest boeing 747 we have also had to make some tough decisions at home. after a great deal of analysis we made the difficult decisions to cease trans tasman services from hamilton and reduced trans tasman services out of dunedin. as a publicly listed company air new Zealand has a duty to its shareholders to make decisions that will sustain profitability. therefore routes that will be unable to sustain long term value must be terminated.

on a brighter note we have been able to add masterton to our regional destinations and have announced that we will start trans tasman services from rotorua later in the year. where we see potential for sustainable

Norm Thompson I love that our unique country is readily shared with others from all over the world. Fri at 12.30pm

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+ add rob as your friend Rob Fyfe Settings Logout Search

we have been working on the basis that anything can happen and are continuing to put plans in place for a wider range of scenarios than ever. we are also confident that we are in the best possible position to adapt the business to both persisting weakness in economic conditions and a rapid recovery. our financial position, dynamic work force and market leadership mean that we are in great shape to tackle the year ahead.

profitability we will continue to invest in new routes. support and loyalty for air new Zealand is very strong within new Zealand. research has shown that our customers have never felt so positive about us.

Our biggest advantage

the biggest highlight of the year for me has been the continuous stream of positive customer feedback that has flooded my inbox. customer compliments are up by 67 percent and this is a direct result of the positive attitudes and hard work of air new Zealanders.

a record number of air new Zealanders completed our 2009 culture survey. employee engagement levels improved across all the main work groups, including pilots, cabin crew, airports and engineering, with every aspect that we surveyed showing progress. there is a greater understanding of the role we all play in delivering a uniquely kiwi experience to our customers. our sense of identity as air new Zealanders continues to strengthen as does our commitment to make a difference and to ensure open, honest communication throughout the company. more air new Zealanders than ever before are genuine advocates for our airline.

Not a time to relax

while we are pleased with our progress over the past year we cannot allow ourselves the luxury of relaxation. the airline industry moves at a rapid pace, and while this can be exhausting at times, it makes an airline one of the most rewarding places to work.

the 2010 financial year is looking to be another roller coaster of a year. we are continuing with the same disciplined approach to capacity and cost management, but have the ability to add capacity as necessary.

Rob Fyfe

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Bruce Parton look forward to visiting the wairarapa again on our new service. Sun at 5.12 pm

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our 2009 ‘It’s what we thInk’ survey results show that aIr new Zealanders are feelIng more connected and happIer at work. all aspects surveyed, from understandIng where the busIness Is headIng to whether respondents feel they can dIrectly Impact on fInancIal performance, have Improved over the past two years. especIally encouragIng has been the progress In areas that are In dIrect contact wIth our customers. great Improvements have been seen at InternatIonal aIrports and In dIrect sales whIch has contrIbuted to posItIve customer feedback rocketIng upward by 67%.

In the competitive airline industry customer satisfaction is seen as a key differentiator and increasingly has become a key element of air new Zealand’s business strategy. because customers have different preferences, air new Zealanders are given the freedom to be themselves and take initiative to treat each customer in a unique way. air new Zealanders are encouraged to take the opportunity to make decisions that can make a big impact on customers’ experiences. for example, if operationally possible, our people have the ability to let customers board a flight after the check-in cut-off – this can make a massive difference to someone’s day!

new media is changing the way we do business and enables us to make more meaningful connections with our customers. we have recently launched a new website called ‘my voice’ that shortens the feedback loop from the customer to the front line. both compliments and constructive criticisms are instantly accessible to those who can make a difference. by empowering employees to solve problems and quickly receive positive feedback for these actions air new Zealanders are more satisfied. this is important as it is our people that deliver great customer service.

Logical connection Emotional connection Brand connection

4.8

4.6

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4

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JUL 08 AUG 08 SEP 08 OCT 08 NOV 08 DEC 08 JAN 09 FEB 09 MAR 09 APR 09 MAY 09 JUN 09

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LONG HAUL CAPACITY AND LOAD FACTOR YEAR ON YEAR MOVEMENTS

over the year aIr new Zealand has put Its agIlIty Into actIon and proven the rewards It can generate. as passenger demand deterIorated we were quIck to spot the changes In our forward bookIngs and worked hard to quIckly adapt. whIle long lead tImes are needed for aIrcraft orders, there are many other ways that agIlIty can be achIeved to respond In the short term.

Logical connection Emotional connection Brand connection

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JUL 08 AUG 08 SEP 08 OCT 08 NOV 08 DEC 08 JAN 09 FEB 09 MAR 09 APR 09 MAY 09 JUN 09

FLEET FLExIbILITY GRAPH

the capability for an airline to change its capacity with as little disruption to customers as possible is critical to profitability. this can be accomplished by either changing the gauge of the aircraft we fly or flying less frequently on a route. air new Zealand has the ability to operate four different aircraft on the trans tasman; boeing 747s, 777s, 767s and airbus a320s. therefore we are able to allocate the appropriate sized aircraft based on forward bookings. this is an advantage over some of our competitors that continue to fly wide body aircraft despite poor passenger loadings.

our decision to fit our boeing 767 fleet with individual seat back entertainment systems has also given us agility to change aircraft gauges on long haul services. we have used this ability on our Japanese flights in the 2009 financial year when Influenza a (h1n1) led to a number of cancellations at short notice. as a result the impact of the influenza on the business was significantly reduced.

while down gauging is our preference to keep the service frequency that our customers value, we also have the option to reduce services.

we were already doing this in response to seasonality but as the economic conditions have deteriorated it has become necessary to be more disciplined and proactive in scheduling in response to demand levels.

when necessary we will take aircraft out of the operating fleet, however in order to avoid aircraft ownership costs we need the ability to adjust our fleet size. when we make aircraft orders and take options to purchase aircraft we seek to build in as much flexibility as possible, so we have options to adjust capacity depending on conditions at the time.

In the fleet flexibility graph below we show that nine months out we have the ability to increase or decrease our long haul capacity by approximately five percent. this enables us to have greater control over ownership costs. last year we sold and leased back two of our boeing 747-400 aircraft and we also have options for the right to buy two boeing 777-300er aircraft in 2012 to expand capacity if necessary.

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air new Zealand ha

s three wholly owned

subsidiary airlines;

mount cook airline

, air nelson

and eagle airways.

each has its own m

anagement team a

nd a long history o

f flying in

new Zealand’s uniq

ue and often testin

g weather condition

s. we have spent ye

ars perfecting

our recipe, with just

the right amount o

f each ingredient to

make domestic air

travel an

economical dish for

families and friends

. we have also adde

d ingredients to ma

ke it a fast

and reliable service

for business people

whose livelihoods m

ay depend on the re

liability of our

services. with three t

ypes of aircraft and

over 550 flights pe

r day we need the b

est people

with a diverse skill se

t.

all great recipes ne

ed fresh ingredient

s and the regional a

irlines are no excep

tion. we have

recently taken delive

ry of our last new b

ombardier q300 air

craft, completing th

e fleet of 23.

these aircraft repla

ced the 33 seat sa

ab 340a aircraft. o

ur investment in the

se 50 seat

aircraft has significa

ntly improved travel

around regional ne

w Zealand providing

additional leg

room, more space u

nder seat, active no

ise and vibration sup

pression systems an

d faster trip

times – 287 knots

in cruise compared

to 265 knots for the

saab.

the $650 million in

vestment that we ha

ve made in regiona

l air travel is one of

the highest per

capita in the world a

nd we intend to kee

p investing. despite

the difficult econom

ic conditions

of the 2009 financia

l year we have cont

inued to invest in ne

w services. we laun

ched services

between auckland

/ masterton and c

hristchurch / westp

ort, where we saw p

otential for

sustainable profitab

ility and have custo

mer and community

support. the supp

ort that the

new Zealand public

show for our class

ic regional airline re

cipe will see it rema

in a fresh

and favourite dish fo

r years to come.

23 x Q300s

11 x ATR 72-50

0

18 x Beech 190

0D

27 x Unique ai

rports

1036 Air New Z

ealanders

New Zealand's unique geography, as a remote island

nation with rugged terrain, makes reliable domestic a

ir

services essential. We have one of the highest numbe

r of

airports per capita in the world, with Air New Zeal

and

flying to and from 27 domestic airports.

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out of thin airnew Zealand’s remote location means we are highly dependent on air travel to link us with the outside world. we realise that more fuel efficient aircraft, to both reduce fuel cost and carbon emissions, are critical. at air new Zealand greater fuel efficiency is not a distant promise based on the new generation aircraft that we have on order. It is reference to programmes we already have underway that are helping increase the efficiency of aircraft we already have in our fleet.

324

808

thousand litres of fuel annually across the 767 fleet

tonnes of carbon emissions annually across the 767 fleet

Z O NAL D RYE R S E ST I MATE D TO SAVE

Z O NAL D RYE R S E ST I MATE D TO SAVE

Photo: John Selkirk the Dominion PoSt

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R E D u c E S w E I g hT &

f u E L c O N S u M pTI O N

R E D u c E S cAR b O N

E M I S S I O N S

creating fuel savings

80% dry air recirculatedthrough cabin lining

Air intake

20% regenerated moist air for airconditioningor release overboard

3.4

200

6.5

16,000

met res

kilograms of water per aircraft

million litres of fuel annually across the 767 fleet

tonnes of carbon emissions annually across the 767 fleet

w I N g LET h E I g hT

Z O NAL D RYE R S R E M OVE OVE R

w I N g LETS E X p E cTE D TO SAVE

w I N g LETS E X p E cTE D TO SAVE

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L I f E & R E D u c E S

MAI NTE NAN c E c O ST

creating fuel savings

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Photo: StePhen JoneS, Gm StrateGic DeveloPment, anD rob mcDonalD, cfo, DiScuSS caPacity manaGement

despIte deterIoratIng economIc condItIons sIgnIfIcantly reducIng demand for aIr travel, aIr new Zealand’s fInancIal performance In the second half Improved agaInst the fIrst half of the 2009 fInancIal year.

For the 2009 financial year, normalised earnings before taxation were $145 million, a decrease of 26 percent on the 2008 financial year.

overall the year was extremely challenging, as the business firstly adapted to deal with significant increases in fuel costs, followed by rapid capacity adjustments in response to falling passenger numbers and cargo volumes. Ai

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reVenUeoperating revenue for the year decreased by $58 million, down 1.2 percent on the same period last year, to $4.6 billion. excluding the favourable impact of the weakening new Zealand currency, operating revenue was down 6.9 percent.

passenger revenue fell by $74 million which was primarily due to a 7.6 percent decrease in demand, measured in revenue passenger kilometres. this decrease in demand was offset by a $188 million positive foreign exchange impact due to the weaker new Zealand dollar against major trading currencies.

In the long haul airline yield was up 12.1 percent, due largely to the foreign exchange impact, but was partially offset by an 8.8 percent decrease in demand. capacity was reduced by 9.4 percent and the passenger load factor increased by 0.6 of a percentage point. Influenza a (h1n1) considerably weakened the performance of asian and Japanese routes in the last quarter of the financial year.

competition on the trans tasman routes intensified as competitors increased capacity despite a softening demand environment, affecting passenger load factor and yields. the tasman and pacific Island operation’s passenger load factor fell by 2.4 percentage points on last year despite a 3.9 percent reduction in capacity.

In the domestic and regional operations demand was down 3.7 percent on a 4.1 percent reduction in capacity. despite intense competition the domestic operations received strong endorsement from customers for the service improvements and domestic airport innovations.

cargo revenue was $374 million for the year, a reduction of 10 percent on the 2008 financial year despite benefiting from currency movements. on 31 march 2009 air new Zealand withdrew its dedicated freighter service, which had been operating since 2005, to reduce exposure to the weak cargo market. this reduced cargo revenue but overall profitability improved as a result of the termination of the service.

contract services revenue, including engineering, contract handling and training revenue, increased by $44 million or 15 percent in the 2009 financial year. of this increase $22 million can be attributed to foreign exchange and the remainder was primarily from increases in external engineering revenue from gas turbines and the recently acquired australian engineering businesses, tenix aviation and masling Industries.

oPerating eXPenSeSoperating expenditure decreased 5 percent on last year, after excluding the impact of fuel and the net impact of derivatives that relate to exposures in other financial periods.

labour costs increased by $53 million, or 5 percent compared with the 2008 financial year, to $1,019 million. rate increases and performance incentive pay offset savings from capacity reductions and productivity improvements were eroded by the diseconomies of scale as a result of

reduced flying. during the period air new Zealand introduced an executive pay freeze, an elective four day working week and a voluntary redundancy programme to adapt the business to the reduction in passenger numbers. full time employees decreased by 4 percent excluding increases related to the recently acquired businesses.

the average us dollar in-to-plane cost of fuel, excluding hedges, decreased by 15 percent year on year. however, this decrease has been more than offset by fuel hedging losses and unfavourable foreign exchange movements. the reported fuel cost also includes the net impact of derivatives that hedge exposures in other financial periods.

fuel usage was reduced by 878,000 barrels, a 10 percent reduction. this decrease resulted from reduced capacity and the withdrawal of the freighter service, combined with fuel saving initiatives.

maintenance and overhaul expenses increased by $80 million, or 32 percent, for the period. this was primarily due to the lower new Zealand dollar that increased the cost by $57 million. additional costs were incurred due to additional maintenance activity and from the consolidation of recently acquired engineering businesses, which were offset by revenue generated by these businesses.

aircraft operations and passenger services costs were higher than in the 2008 financial year. however, excluding the impact of foreign exchange both decreased by 2 percent.

sales and marketing expenses reduced by 15 percent compared with the last financial year, excluding the impact of foreign exchange. other expenses were inline at $261 million for the twelve months.

the depreciation and amortisation cost decreased by 13 percent to $276 million. this was primarily due to the change in the residual values of assets driven by the weakening new Zealand dollar combined with the sale and lease back of two boeing 747-400 aircraft in august 2008. In converse, rental and lease expenses increased by 24 percent as a result of the foreign exchange impact and the lease of the two boeing 747-400s.

net finance costs, excluding gains from derivatives that hedge exposures in other periods, were $88 million. this was an increase of $20 million, excluding the impact of foreign exchange, as lower interest rates reduced the total interest income. holding us dollar hedges became more expensive as the differential between us and nZ interest rates increased.

Foreign eXCHange iMPaCtforeign exchange hedging gains for the period were $376 million. the $366 million gain shown in the financial statements includes $10 million of losses that hedge exposures in other financial periods. In the 2008 financial year air new Zealand’s losses relating to foreign exchange hedges were $121 million, resulting in a $497 million year on year benefit.

the weaker new Zealand dollar had a positive impact of $263 million on translation of foreign

income compared to last year. conversely the stronger us dollar had a negative impact of $488 million on costs of which $301 million related to fuel. these impacts combined with the movement in foreign exchange hedging effects resulted in a net benefit from foreign exchange movements of $272 million compared to last year.

CaSH PoSitionnet cash generated from operating activities, prior to the impact of the rollover of short-dated foreign exchange contracts, was $355 million, a decrease of $307 million on last year. this is primarily due to reduced forward sales and higher tax payments.

the total investment in fixed assets was $318 million during the year. this included the installation of in-flight entertainment systems in the airbus a320 and boeing 767 fleets, innovations at the domestic airports, two q300 aircraft and progress payments on the boeing 777-300er aircraft. asset sales, including the sale and lease back of two boeing 747-400 aircraft, realised $104 million of cash. cash outflows of $21 million arose from the acquisition of new businesses, including tenix aviation, masling Industries and vcubed.

net cash inflow from financing activities was $14 million. cash inflows relating to foreign exchange debt hedges of $281 million were offset by net debt repayments of $204 million and dividend payments totalling $63 million.

FinanCial PoSitionclosing net cash was $1.6 billion, which is 22 percent higher than 30 June 2008. In the 2010 financial year this balance will be significantly reduced by progress payments for aircraft deliveries beginning in the 2011 financial year and the recent strengthening of the new Zealand dollar resulting in cash outflows relating to debt hedges. net gearing, including capitalised operating leases, has improved marginally from 45.3 percent in June 2008 to 45.0 percent in June 2009.

ConClUSionair new Zealand’s ability to adapt its business rapidly in reaction to a wide range of market conditions has enabled it to maintain its strong financial position throughout an extraordinarily challenging 2009 financial year.

while some certainty is provided by foreign exchange and fuel hedges that we have put in place, demand remains a key variable that is difficult to predict. the same adaptability displayed in the 2009 financial year will be imperative throughout the 2010 financial year.

FinAnCiAl CoMMenTArY

ChAnge in proFiTAbiliTY

the key changes In profItabIlIty are broken down In the table below:

2008 normalised earnings before taxation $197m

passenger yield +$18m > short haul yields improved by 0.5 percent

> long haul yields improved by 12.1 percent

passenger traffic –$280m > passenger demand was down 7.6 percent

> capacity reduced by 7.2 percent reflecting proactive capacity management in response to falling passenger demand

> the resulting passenger load factor for the group was 79.0 percent, down 0.3 of a percentage point on 2008 demand

freight, contract services and other revenue –$59m > lower freight volumes and termination of round-the-world freighter service offset increases in contract services revenue

labour –$48m > rate increases offset savings from capacity reductions and productivity improvements

fuel –$5m > fuel usage was reduced by 10 percent, to 8.1 million barrels

> the average us dollar in-to-plane cost of fuel, excluding hedges, decreased by 15 percent year on year

> this decrease has been more than offset by the movement in fuel hedging of $375 million

maintenance –$23m > additional maintenance activity and the consolidation of recently acquired engineering businesses which generate external revenues

aircraft operations and passenger services +$14m > aircraft operation and passenger service costs decreased on the back of capacity reductions and fewer passenger numbers

sales and marketing +$51m > lower sales and marketing due to capacity reductions and lower cost of sale

depreciation and lease costs +$25m >� depreciation costs were reduced by increased residual values, driven by the weakening new Zealand dollar

net finance costs –$20m > reduced interest revenue as a result of lower interest rates and a higher cost of holding us dollar hedges due to the weaker new Zealand currency

net impact of foreign exchange movements +$272m > the weaker new Zealand dollar had a negative net impact on translation of foreign income and cost compared to last year

> this impact combined with the movement in foreign exchange hedging gains resulted in a net benefit from foreign exchange movements compared to last year

gain on acquisition of subsidiaries +$10m > acquisition of tenix aviation

other –$7m

2009 normalised earnings before taxation $145m

–$138m > net impact of derivatives that hedge exposures in other financial periods

2009 earnings before taxation $7m

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fInancIal performance

12 MontHS to 12 MontHS to 30 JUne 2009 30 JUne 2008

$m $m

operating revenuepassenger revenue 3,734 3,808cargo 374 416contract services and other revenue 501 443

4,609 4,667operating expenditurelabour (1,019) (966)fuel (1,687) (1,122)maintenance (327) (247)aircraft operations (423) (412)passenger services (275) (254)sales and marketing (295) (330)foreign exchange gains/(losses) 366 (128)other expenses (261) (261)

(3,921) (3,720)

earnings before finance costs, Depreciation,amortisation, rental expenses and taxation 688 947depreciation and amortisation (276) (318)rental and lease expenses (334) (270)

earnings before finance costs and taxation 78 359net finance costs (71) (55)

Profit before taxation 7 304taxation credit/(expense) 14 (86)

net Profit attributable to Shareholders of Parent company 21 218

Interim and final dividend declared per share (cents) 6.5 8.5net tangible assets per share (cents) 147 145

Supplementary informationearnings before taxation (per nZ Ifrs above) 7 304reverse net (gains)/losses on derivatives that hedge exposures in other financial periods:fuel derivatives 130 (129)foreign exchange derivatives 9 20Interest rate derivatives (1) 2

normalised earnings before taxation 145 197

normalised earnings after taxation 118 146

normalised earnings represents earnings stated in compliance with nZ Ifrs after excluding net gains and losses on derivatives that hedge exposures in other financial periods.

cash flows

12 MontHS to 12 MontHS to 30 JUne 2009 30 JUne 2008

$m $m

cash inflows from operating activities 4,704 4,854cash outflows from operating activities (4,349) (4,192)

355 662rollover of foreign exchange contracts relating to operating activities 131 81

net cash flow from operating activities 486 743net cash flow from investing activities (216) (290)net cash flow from financing activities 14 (221)

Increase in cash and cash equivalents 284 232cash and cash equivalents at beginning of the year 1,289 1,057

cash and cash equivalents at end of the year 1,573 1,289

FinAnCiAl SuMMArY

fInancIal posItIon aS at 30 JUne 2009 30 JUne 2008

$m $m

bank and short term deposits 1,573 1,289trade and other receivables 362 447Inventories 143 123derivative financial assets 143 208Income taxation 7 7other assets 47 38

total current assets 2,275 2,112

trade and other receivables 34 28property, plant and equipment 2,337 2,534Intangible assets 39 40Investments 62 49derivative financial assets – 6other assets 298 254

total non-current assets 2,770 2,911

total assets 5,045 5,023

trade and other payables 374 480revenue in advance 721 822Interest-bearing liabilities 172 158derivative financial liabilities 282 84provisions 34 27other liabilities 176 136

total current liabilities 1,759 1,707

revenue in advance 114 109Interest-bearing liabilities 1,107 1,167derivative financial liabilities 25 3provisions 164 116other liabilities 38 45deferred taxation 233 299

total non-current liabilities 1,681 1,739

total liabilities 3,440 3,446

net assets 1,605 1,577

Issued capital 2,237 2,227reserves (632) (650)

total equity 1,605 1,577

the summary financial information has been derived from, and should be read in conjunction with, the air new Zealand group annual financial statements (the ‘full financial statements’). the full financial statements, dated 27 august 2009, are available at: www.airnzinvestor.com. the summary financial information cannot be expected to provide as complete an understanding as provided by the full financial statements. the accounting policies used in these financial statements are attached in the notes to the full financial statements.

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chief Information officer Julia raue was named 2009 computerworld awards cIo of the year.

air new Zealand achieved enviro-gold accreditation, the highest rating under the qualmark green responsible tourism criteria.

air new Zealand was named overall winner of the 2009 loyalty awards for the most innovative frequent flier programme.

airline business ‘airline strategy award – technology’ received for redefining the domestic airport experience.

air new Zealand receives air transport world ‘public relations award’ for the management of external communications during a challenging year. this is only the second time the award has been given in eleven years.

BOARD OF DIRECTORS

Dr Jim Fox

Paul Bingham

Jane Freeman

John McDonald

Warren Larsen

John Palmer, Chairman

Roger France, Deputy Chairman

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Grabaseat won the Philips Innovation Award at the Tourism Industry Awards.

Judges’ Choice Trophy awarded for an outstanding frequent flyer programme at the Loyalty 2009 Awards.

contents

01 EARNING REWARDS

IN TESTING TIMES

02 CEO UPDATE

06 HAPPY TRAVELS

08 AGILITY IN ACTION

10 REGIONAL RECIPE

12 FUEL EFFICIENCY

14 FINANCIAL COMMENTARY

18 FINANCIAL SUMMARY

Air New Zealanders recently stripped off and slapped on the body paint to illustrate that our airfares have...

At Air New Zealand we like to take a straight forward honest approach - it's the way we do business.

Air New Zealand’s investor website www.airnzinvestor.com provides shareholders with monthly operating statistics, financial results, stock exchange releases, corporate governance, annual meetings, investor presentations, important dates and contact details. Shareholders can also view webcasts of key events from this site. Shareholders who would like to receive electronic news updates can email Investor Relations on investor@airnz.co.nz

The full Annual Financial Report is available by visiting our website www.airnzinvestor.com

or

You may elect to have a copy sent to you by contacting Investor Relations.

FULL ANNUAL FINANCIAL REPORT

SHAREHOLDER COMMUNICATION

Link Market Services LimitedLevel 12120 Albert StreetAuckland, New ZealandPO Box 91976,Auckland 1142, New ZealandEmail: lmsenquiries@linkmarketservices.comWebsite: www.linkmarketservices.comNew Zealand Phone: (64 9) 375 5998 Fax: (64 9) 375 5990Australia Phone: (61 2) 8280 7111

SHARE REGISTRAR

Private Bag 92007Auckland 1142New ZealandPhone: 0800 22 22 18 (New Zealand) (64 9) 336 2287 (Overseas)Fax: (64 9) 336 2664Email: investor@airnz.co.nzWebsite: www.airnzinvestor.com

INVESTOR RELATIONS OFFICE

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