A I R N E W Z E A L A N DI N T E R I M S H A R E H O L D E R R E V I E W 2 011

Air New ZealandAir New ZealandTaking shapeTaking shape

“ Welcome aboard one of the biggest game changers to hit the commercial aviation industry in quite some time.” NYC Aviation

future taking flightB777-300ER flies our skies

Contents 1 FUTURE TAKING FLIGHT

2 CEO & CHAIRMAN’S REPORT

6 TRANS TASMAN TRIO

8 INNOVATIVE MARKETING

10 CRAZY ABOUT RUGBY

12 THE AIR NEW ZEALAND WAY

14 FINANCIAL COMMENTARY

15 CHANGE IN PROFITABILITY

16 FINANCIAL SUMMARY

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 1

Business PremierAir New Zealand has improved our completely lie flat bed experience with an enhanced sleep mattress made of memory foam and a full sized pillow for a truly luxurious sleep. The new dining experience means travellers are in control of their dining time and meals are prepared freshly onboard the aircraft.

Innovative Ideas- In-flight entertainment includes touch screen

entertainment systems with live news feeds and the capability for travellers to follow the schedule of events during the flight through the flight planner.

- Mood lighting effect throughout the cabin.

- The new ‘Jet Cadets’ kids experience will be a hit with children. As part of this experience we will have story time after dinner, kids packs that include head phones that actually fit them and a lunch box full of healthy snacks.

Premium Economy“We wanted to create Premium Economy as a class of its own, with its own specific seat design and service experience”. The result was another world first, the Spaceseat™ which offers two completely different experiences.

The inner Spaceseats™ are designed for socialisation allowing for a shared dining experience. The outer Spaceseats™ allow individual travellers to enjoy their own environment.

Awarded “Best Air Style” by Wallpaper* Design Awards

2011

EconomyAir New Zealand now offers a world first in Economy; the Kiwi designed Skycouch™. “The goal was to find an economy seat that would allow people in Economy to rest comfortably”. The Skycouch™ gives travellers their own space whether they are a family, a couple or an individual. You can now order snacks via the entertainment system.

Four years ago Air New Zealand embarked on a journey to redefine Long haul travel, to create the world’s best Long haul flight experience, one that looks after everyone on the plane; from families to business travellers to holiday makers. Among other things this meant we wanted to develop an economy seat that would allow people in Economy to rest comfortably. No easy quest but one that our team took on board, deciding they would not give up until they succeeded. The determination and innovation of the team resulted in changes not only to economy but to all three classes of service.

The B777-300ER aircraft itself will introduce operational efficiencies to our Long haul network compared to the B747-400. The aircraft is more fuel efficient, burning 12% less fuel and Co2 per passenger and with a capability to increase cargo volume by 40 percent.

The first passengers guaranteed to experience the next generation of Long haul travel will be on dedicated return services on NZ1 and NZ2 between Auckland and London, via Los Angeles, from April 2011. on board there are 338 seats; 44 Business Premier; 50 Premium Economy; 244 Economy, including 60 seats that convert into 20 skycouches™.

Air New Zealand has ordered a total of five B777-300ER aircraft, the last of which is due to be delivered next year.

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 3

together...ThE GLoBAL AIRLINE INDUsTRY Is shoWING sIGNs oF RECoVERY AND AIR NEW ZEALAND Is BUILDING MoMENTUM To TAKE ADVANTAGE oF ThIs IMPRoVING BUsINEss LANDsCAPE.

It is coming

It is coming

The last six months have been an exciting period as we have seen initiatives come to fruition which have further strengthened our competitive position. Overall business performance has improved. For the six months to 31 December 2010, we reported normalised earnings before taxation of $112 million, up on the $96 million for the same period last year. The Board has declared a fully imputed interim dividend of 3 cents per share. We are optimistic of continued improvement in economic conditions over the medium term and believe we have established a solid platform to take advantage of forthcoming opportunities.

FROM INNOVATION TO IMPLEMENTATIONThe arrival into Auckland of our new B777-300ER on Christmas Eve was the culmination of one of the most innovative programmes in the history of Air New Zealand. The new B777-300ER interior is world-leading and has the interest of our peers globally. We have managed to do what everyone said could not be done; we have made it possible for those travelling economy Long Haul to rest comfortably. It is a direct result of passionate and driven Air New Zealanders across the business, pushing the boundaries past where anyone else has been prepared to go and delivering on what we said we would. We are very proud of what has been achieved.

TALK OF THE TASMANThe trans-Tasman is an extremely competitive market but one that is important to our business. We have made three key strategic moves to become more competitive and grow Air New Zealand’s market share. The first was the implementation of Seats to Suit which is performing far better than we expected. Secondly we received approval from the ACCC (Australia) and MoT (New Zealand) to establish a trans-Tasman alliance with Virgin Blue.

This means greater reach from an extended network and a stronger presence in Australia. More recently we acquired a 14.99 percent interest in Virgin Blue in Australia through a combination of direct shares and equity swaps. We believe Virgin Blue is a strong Australian business and have confidence in its strategy and management. Access to the Australian market in our own right would not be a viable option with the capital and risks involved. Our investment in Virgin Blue gives us the opportunity to participate more directly in Australian economic and aviation growth.

All three of these initiatives create value and collectively mark a step change to strengthen our competitive position and increase profitability of the trans-Tasman market.

Your airline continued to invest throughout the worst of the global financial crisis and is now in a far stronger competitive position as a result of our innovation, people and strategic alliances. We now have a solid platform to progress and build value from these investments.

This platform has also allowed us the flexibility to play a key leadership role in our home market of New Zealand in the aftermath of the tragic earthquake in Christchurch in February.

In the first week after the earthquake we significantly increased our capacity into Christchurch and flew more than 70,000 people in and out of the city including hundreds of emergency and search and rescue personnel from New Zealand and around the world.

Air New Zealand has been operating flights to and from Christchurch since 1947 and as well as being one of the key ports on our network it is also home to our second largest workforce, with around 1900 Air New Zealanders, making us one of the largest employers in the region.

The thoughts and sympathies of all Air New Zealanders are with those who have lost loved ones in this tragedy. Fortunately none of our 1900 Christchurch based Air New Zealanders were lost or suffered serious injuries, but a number have lost family and close friends or suffered significant property damage.

Air New Zealand is committed to supporting our employees and the entire Christchurch community during this rebuilding phase and we know this commitment will be required long after the media have left and the spotlight has turned to other events. Without a doubt the impact of the Christchurch earthquake on tourism and demand will make for a challenging environment but over the coming weeks, months and years we will be resolutely focused on driving tourism and trade to the city and connecting its people with family and friends at home and around the world.

Overall Air New Zealand has had a strong six months to 31 December 2010. Passenger numbers, cargo volumes and yields have all increased year on year, with an increase in revenues of 9 percent. This has been offset by costs relating to increased capacity, increasing fuel prices and losses from foreign exchange hedges.

Fuel prices have increased, the average spot price of jet fuel increased 15 percent compared with the first half of 2010. Higher fuel prices and increased volume resulted in fuel cost being $74 million higher than the comparative 2009 period. We have seen a favourable currency movement with the NZ dollar strengthening throughout the period, although the benefit of this has been delayed due to our current hedging profile.

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 5

...something special is

starting toMORE FRIENDS, MORE REACHour people, our ability to adapt quickly to changing environments and our uniquely Air New Zealand way mean we compete internationally with airlines much bigger than we are. however our geographic location and the relatively small passenger flows to and from New Zealand make it challenging to have the network and frequency our home market customers would like. Where it does not make economic sense to fly to specific destinations in our own right we seek to build alliances with complementary partners to broaden Air New Zealand’s effective network reach. our largest alliance is our membership of star Alliance which provides Air New Zealand with connectivity to 28 other global airlines within the star Alliance and access to 1,160 airports around the world.

In addition to the star Alliance we establish code share relationships with carriers that we believe offer a valuable and complementary network to Air New Zealand’s.

Letter from

Jaan Albrecht, CEo of Star AllianceDear Norm,It was a pleasure to be in New Zealand. Great wine, great food, top accommodation, overwhelming countryside and a family feeling from the very moment we arrived.And just by the way, a business meeting that was worth every minute that we spent away from our normal routine. This is how I would describe my personal New Zealand experience:• TheNZteamdidnotrestasinglemomenttomaketheexperience

for all visitors a once in a lifetime event.• Everybodydemonstratedthecompany’srefreshingapproachtomakingairtravelsomethingtolookforwardto;startingwithquickandattentiveairportservicepersonnel,averycomfortablelong haul experience, state of the art aircraft interiors, enjoyable conversations with the concierges and other cabin attendants and last but not least this memorable and very funny safety video.• Becauseofaprogrammefilledwithcreativeandinnovativesurprises,fromiphoneguidancetohelicoptercocktails,thePrimeMinisterdirectedbarbequedinnerandcatwalks,notone of the international guests will have returned home without makingplanstocomebackagainandexperiencemoreofthiswonderful country and its people.Wholeheartedly,thankyou

Jaan

ChiefExecutiveOfficer,StarAlliance

viable. We have recently consolidated our turboprop maintenance and invested in a new maintenance facility in Nelson, which now provides both ATR and Q300 engineering and maintenance support for Mount Cook Airline and Air Nelson.

In recent times, we have all been reminded of our exposure to natural occurrences beyond our control. We have seen the devastating effects of the Pike River Mine disaster, flooding across the Tasman and most recently the Christchurch Earthquakes. It is heart wrenching to see such tragedies unfold, throughout these times Air New Zealand has focussed on mobilising resources quickly to support those affected whilst minimising disruptions across the network.

With over 11,000 Air New Zealanders we are deeply connected to the communities in which we operate. As New Zealand’s national carrier we try to help out where we can, to make a difference and to go the extra mile. We receive many letters of gratitude from people, organisations and charities that we have helped and we are humbled by their responses.

LOOKING FORWARDover the last six months we have seen positive business indicators emerging. overall group load factors increased by 2.6 percentage points over the same period last year, group yield has increased by 3.0 percent, we have added 2.7 percent capacity and seen an increase of 6.0 percent in demand. As we reflect on these numbers we cannot help but feel positive about this year.

Looking forward, we will start to see the positive benefits come through from the trans-Tasman Alliance with Virgin Blue as we streamline routes and improve connectivity between the airlines. We will also see benefits from the Virgin Atlantic and Etihad Airways code share agreements and investigate other opportunities to better enhance our international reach. The new Long haul product will be in full service from April and we are encouraged with forward bookings to date on the new skycouch™ and Premium Economy seating. By the end of the 2011 calendar year we will have four new B777-300ER Long haul aircraft in service. This will result in reduced operating costs from more efficient aircraft compared with the B747-400 that it is replacing and improved yield from the enhanced product offering.

The recent announcement by Prime Minister John Key that the Crown is looking at the partial privatisation of some major soE’s and a possible sell down of some of its Air New Zealand stake is good news. It is a reflection of how this business has been able to grow and prosper under the current ownership model and that there is now confidence that the Crown can, over time, reduce its long term investment but retain a majority position. There is no urgency from the company’s viewpoint, but the prospect that our shares will have a larger free float percentage and greater private participation is something we welcome.

take shape

Star Alliance Conference, Q ueenstown.

Jaan experiences a NZ Maori welcome.

IN DECEMBER AIR NEW ZEALAND HOSTED THE STAR ALLIANCE CHIEF EXECUTIVE BOARD MEETING IN QUEENSTOWN. THIS WAS THE FIRST TIME THE BOARD MEETING HAD BEEN HOSTED IN NEW ZEALAND AND WE WERE PROUD TO SHOWCASE OUR COUNTRY .

We have formed two code share alliances recently; one with Virgin Atlantic and the other with Etihad Airways. Both code shares will offer our passengers an extended reach and feed an important new source of passengers onto our services.

CHANGES AND INVESTMENT IN DOMESTIC NEW ZEALANDThe competitive landscape is constantly changing and the domestic and regional routes are no different. In November we saw Pacific Blue withdraw from domestic New Zealand, demonstrating the difficulty of being profitable in this market. This has contributed to an increase in demand for our services on the domestic routes, with passenger numbers now up 8 percent on the same period last year. We are adding capacity to meet increased demand and will continue to do so throughout the rest of the calendar year as our new Domestic A320 fleet arrives. The first aircraft has already arrived and stands out with its stunning all black paint job. We are proud of our association with New Zealand’s unique rugby heritage and the black plane demonstrates our long-standing support for the iconic All Blacks.

Regional and Domestic New Zealand is the heart of our network and we are dedicated to ensuring we provide the best service, network and frequency that is economically

The influx of international rugby fans later in the year is going to be an exceptional time for New Zealand, and Air New Zealand is excited to play an important role in showcasing our beautiful country. This will be a great opportunity for everyone to play their part and maximise our time in the limelight to create 85,000 possible New Zealand ambassadors.

something special is taking shape; we have been successful in implementing initiatives across all facets of the business to enhance Air New Zealand’s customer experience, product offering, network, technology, efficiencies and strategic position. Demand and yield has improved over the last six months, which together with the benefit of a stronger NZ dollar as our hedging profile rolls off later in the year, and the implementation of new initiatives sets a strong platform for future performance. however, fuel price volatility and the effects of the Christchurch earthquake are significant risks to the year end result.

RoB FYFE – CEo JohN PALMER – ChAIRMAN

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 7

trans-tasmantrans-tasmanAIR NEW ZEALAND FLEW 1.2 MILLIoN PAssENGERs oN 7,600 FLIGhTs BETWEEN NEW ZEALAND AND AUsTRALIA DURING ThE sIX MoNThs To DECEMBER 2010. ThIs REPREsENTED 21 PERCENT oF AIR NEW ZEALAND’s FLYING DURING ThE PERIoD.

ThE CULMINATIoN oF ThEsE sTRATEGIEs oVER ThE PAsT FEW MoNThs DEMoNsTRATEs ThE DETERMINATIoN AND CLARITY ThAT AIR NEW ZEALAND hAs To DRIVE RETURNs FRoM oNE oF ThE WoRLD’s ToUGhEsT AIRLINE MARKETs.

The challenges associated with creating acceptable returns on the Tasman have been well documented over the past decade. It is a market that has been beset by over-capacity as regional carriers and foreign-flagged carriers using “fifth freedom” rights have continuously added capacity ahead of demand. With a customer base predominantly made up of leisure customers, discounted prices are a regular feature in the market as carriers compete to fill the surplus capacity.

For Air New Zealand the Tasman provides an essential range of destinations to our customers. It also provides a considerable flow of passengers who connect our services through to our domestic and broader international networks.

Creating value in this environment means constantly innovating, and we have rolled out three new strategies:

Seats to Suit is a new product that now provides passengers with the choice to pay only for what they want. From the simple seat only product through to the premium service Works Deluxe, Air New Zealand has a cost base and product range to surpass all of its competitors.

The Australasian Airline Alliance with Virgin Blue was approved by the New Zealand and Australian regulators in December. Whether it’s Kaitaia to Kalgoorlie or Dunedin to Darwin, the combined extensive networks of Air New Zealand and Virgin Blue will allow customers of both airlines to enjoy seamless journeys to wherever they want to fly between New Zealand and Australia.

Customers will also enjoy the increased frequency of the combined network meaning that they can fly when they want to fly and create holiday or work itineraries that suit their plans – not the airline schedules. The complementary sales presence that each airline has in their home markets will ensure that sales are maximised

throughout Australasia. No matter which airline they are flying on

across the Tasman, qualifying travellers are able to earn frequent flyer points on either Air New Zealand’s award-winning Airpoints™ programme or Virgin Blue’s

TrioVelocity™ programme. Access to lounges across both networks will also be available as a result of the alliance. The combination of these customer benefits is projected to lift Air New Zealand’s market share and performance in the Tasman market. To meet this expected demand increase Air New Zealand and Virgin Blue have committed to regulators to increase capacity on certain Tasman markets.

The Equity Investment in Virgin Blue provides Air New Zealand with an enduring regional alignment with one of the world’s most successful new carriers. This minority investment is an expression of our support for our alliance partner, and also widens Air New Zealand’s economic exposure to the Australasian single aviation market.

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 9AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 9

Following the success of recent innovative marketing campaigns and award winning products and services, we are taking a new approach to promoting our airfares. It will be driven through mainstream media channels like television and online, and supplemented with social media activity. We are confident that this new consistent approach will further cement Air New Zealand's position as the airline with more deals, more choice and more value.

The new approach will also give us the ability to build a more constant and familiar promotional approach for people to look out for. In order to achieve this we need to act like a retailer, giving people a shop window to browse through to find the deal that suits them best. Ultimately this will mean more deals, more choice and more value for customers and position Air New Zealand more competitively.

Jodi WilliamsHead of Marketing, International

Megan MatthewsHead of Marketing, Australasia

Mike TodGeneral Manager of Marketing

and Communications

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 11

At least 85,000 rugby fans are expected to visit New Zealand to celebrate rugby over september and october 2011. As well as creating a boost in tourism arrivals, the real opportunity lies in creating 85,000 ambassadors who will promote New Zealand to their friends and family back home.

Ensuring these visitors have an outstanding experience will be rewarded with increased tourism in the future. The real New Zealand festival aims to do just that, with hundreds of events planned right across the country offering visitors a fun way to meet New Zealanders and take part in celebrations that showcase the best of New Zealand.

Air New Zealand is also gearing up to host. With a critical role in ensuring everyone gets to the game on time, a dedicated team is focused on ensuring that all our operations run smoothly. But it does not stop there; we will be ensuring the festival atmosphere continues in the air. our passion for rugby will be

reflected during their journey on Air New Zealand – creating a memorable experience that could only happen in New Zealand!

The financial opportunity for New Zealand is significant, so we all must ensure visitors to New Zealand have a fabulous experience whilst they are here so they will want to come back for more! We are adding extra domestic capacity to accommodate the additional demand for our services from flying fans around New Zealand to ensuring our regular travellers continue to be well looked after. on the Tasman we will deploy larger aircraft for many flights to cater for the Australian market and additional flights have been scheduled between Auckland and London on selected days. At the same time we need to ensure that our normal tourism traffic continues to flow into New Zealand. The goal is for all of New Zealand, from Cape Reinga to Bluff, to be full throughout the entire tournament, not just the locations of the games and we are up for it!

Air New Zealand is crazy about rugby and our All Blacks safety video and new all black A320 shows it. But we are equally crazy and excited about the large influx of rugby fans to New Zealand in 2011.

media representatives expected2,000

international visitors to New Zealand85,000possible ambassadors85,000

Expanded Air New Zealand schedule to meet demand

New Zealand has ever thrownBiggest Party

From: Langridge, Leeanne (GM Direct sales)

Sent:Monday,22February20104:04p.m.

To:Parton,Bruce(GroupGMAustralasia)

Subject:SharingNZ

HiBruce

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numerous other issues. He felt their holiday was ruined and

just wanted to go home.

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thiscustomer

to leave New Zealand with a bad experience when she

loved it so much, and wanted him to leave with a great

experience by sharing her NZ.

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and with that she made the offer.

This gentleman and his friend decided to stay in NZ and

takeupDesiree’soffer,andarenowhavinga

namazing

experience.Theythinksheisanangelands

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JustwantedyoutoknowhowspecialDesiree

is!!

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From: Kate McEnaney Sent: Monday, 9 August 2010 10:05 a.m. To: Tod, Mike; Fyfe, Rob; Airpoints Fairy; Kirkham, Erica Cc: Gaynor McEnaney Subject: Dreams Come True ...

Dear Rob, Mike, Erica and the Airpoints Fairy,

As you all know, in May, I wrote to Rob and the Airpoints Fairy with the sad news that my Mum was terminally ill and in the hope that there was some way we could work together to send her, myself, my six sisters, two brothers and niece on a family holiday, something we had never done before. I was amazed and humbled to hear from you all in the hours and days that followed. And so our story began ...

It is through the pure generosity, warmth, heart and incredible goodwill of yourselves that our entire family were sent to Queenstown for the weekend. Amazingly, our dream had come true.

Following this, the offers of generosity and love flooded in, we are sincerely overwhelmed with the support we have received from yourselves and the friends, family and perfect strangers who helped make our trip a reality.

I wanted to send you all this note as a huge thank you and in celebration of the amazing people (you!) that bring so much joy to others, and to thank you and all of those who have so generously given us their time, products, services and heart in order to make this trip the incredibly special experience it was ....

Rob Fyfe, Mike Tod and the Airpoints Fairy Team.

The amazing crew on board Flight NZ639 to Queenstown: Captain Peter Mountfort and First Officer Steve Bunn. Cabin Crew; Nicola Morriss, Tracy Giggins and Diana Savali. This team will stay in our hearts and memory forever, such a

special bunch of people.

The road is long and it will have its ups and downs, but for now we live life to the full every day, filling it with good times and good people.

Our love to you all for giving us such a special gift. Words cannot thank you enough and I hope you know just how much this means to us and what a life changing experience you have given us.

Keep smiling and my very best wishes for your business, your families and all of the incredible work you do and the ongoing difference you make in so many peoples lives.

If there is anything I can ever do for you please don’t hesitate to ask.

All our love,

Mum (Gaynor), Kate, Becky, Danielle, Ashleigh, Brittany, Madison, Cody, Tyler, Kennedy and Tamzyn-Rose.

X

To break the news to her family, Kate gave each person a pair of gloves with a name tag attached to each pair. On one side was their name and on the other side a word which they needed to join together to spell out...

Dear Rob,

As a regular flyer and a reasonably demanding consumer, I am usually pretty quick to pass judgement on the occasions when I experience a less than appropriate customer experience. This is no such occasion, so I thought I would take the time to let you know.My wife and I recently travelled on Air New Zealand from Auckland to Wellington to attend a family wedding in Martinborough. On arrival in Wellington, and walking from the gate to reclaim our luggage, in a horrible moment I realised that I had left the suit carrier containing my suit, my shirt and my wife’s dress in Koru club in Auckland! Oops ... We returned quickly to the service desk in Koru Club in Wellington and explained our little problem to your staff member, Pauline. She, in an unflappable manner immediately summed up the situation and put a call through to Carol in Koru Auckland. Carol found the suit carrier exactly where it had been left, delivering it to the 10:30 Auckland to Wellington plane, who delivered to Pauline waiting at the gate in Wellington at 11:30, who in turn delivered it to us.

To me, while the problem resolution actually seems very obvious and easy, as it does now as I recall what happened, I know there are a lot of little things needing to work right in organisations to make these things happen. The key thing, being the attitude and action of your/Air New Zealand people. Pauline summed up my Wife’s anxiety very quickly and just acted! As did Carol in Auckland and the aircrew. No one questioned rules, processes or the manual... they just did the right thing! Problem solved. They had the opportunity to create a WOW! moment and absolutely did.

This experience shows to me the true Air New Zealand brand .... it is your people and the things that they just do without thinking! Amazing!

Congratulations and Thank you

Mark Inwood

“This experience shows to me the true

Air New Zealand brand... it is your people and the things

that they just do without thinking! Amazing! ” Mark Inwood

Air New Zealand – it’s who we are

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 13

Hello Rob

We haven’t met but I thought I’d pass the following on

to you as it is indeed a commendation on the business

you run.

I listened in to an international conversation amongst

well-travelled tourists at a Fiji resort last week when the

topic arose of the ‘best airlines in the world ’. It sparked

vigorous and detailed debate. I didn’t venture an opinion

as the conversation intrigued me enough to just soak it

up – the participants were American, German, Swiss,

British and Canadian. The unanimous agreement was

Air New Z ealand was the best while Singapore Air

was second. I was flabbergasted, not because I had any

preconception but rather that such a small airline on the

global stage would (a) be known sufficiently by these folk

and (b) be so highly regarded,

So congratulations to you and your people. While I may

not agree on the concept of governments owning airlines

and all that entails in terms of interminable calls on

the taxpayer – I certainly can recognise excellence in

management and product when it arises and competition

to achieve that persists no matter who owns particular

carriers.

Best wishes

G

Dr Gareth Morgan

Gareth Morgan Investments Ltd.

air new zealand group

Financial Commentaryair new zealand group

Change in Profitability

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 15

Air New Zealand’s normalised earnings before taxation for the first half of the 2011 financial year were $112 million, including an $18 million gain on equity swaps relating to the investment in Virgin Blue. Air New Zealand has continued to gain revenue momentum and added back capacity as demand has improved. However increasing fuel prices and the drag of foreign exchange hedge losses offset increased revenue.

In october last year, Moody’s recognised our “relative good performance and resilience through the downturn” and upgraded our credit rating from Ba1 to Baa3 investment grade with the “expectation of continued improved performance for the company which is now enjoying more stable operating conditions”. This is a positive, independent, international assessment of how we have managed through this phase of the economic cycle and one that shows our agility in challenging operating conditions. This action by Moody’s was against the trend of reducing airline ratings by rating agencies in recent years.

Revenueoperating revenue for the six months increased by $182 million, up 8.9 percent on the same period last year to $2.2 billion. Excluding the impact of foreign exchange rates operating revenue was up 11.6 percent.

Passenger revenue increased by $155 million, primarily due to a 6.0 percent increase in demand and overall yield improvement of 3.0 percent.

Long haul yields improved significantly by 7.2 percent, with a 2.1 percent increase in capacity and a 1.3 percentage point increase in load factor, to 84.6 percent. This improvement reflects a slow recovery from the impact of the global recession and recovering Asian markets, which were impacted by the influenza A (h1N1) outbreak for a material part of the prior period.

Revenue performance for the Tasman and Pacific Islands was stronger than the previous period with demand up 9.7 percent. The improvement reflects both economic recovery and the expansion of the Tasman market to absorb surplus capacity. The seats to suit product has proven to be particularly successful on the highly competitive Tasman route with the airline adding approximately

10 percent capacity since its introduction mid November 2010. Loads improved overall on the Tasman and Pacific Islands by 4.3 percentage points with yields unchanged.

In the domestic and regional operations demand was up 9.3 percent on increased capacity of 2.7 percent improving loads by 4.9 percentage points. overall Domestic yields were down 2.1 percent as demand was stimulated with reduced fares.

Cargo revenue was $144 million for the six months, an increase of 13.4 percent on the previous period. overall increased demand and improved yield on the Pacific and Asian routes were the primary drivers of the improvement.

Contract services revenue, including engineering, contract handling and training revenue decreased slightly with revenue down $1 million on the comparable period to $164 million.

other revenue increased by $11 million due to increased charter activity and higher ancillary revenue.

Expensesoperating expenditure increased by 2.1 percent on the 2009 comparative period after excluding the impact of fuel and foreign exchange on a 2.7 percent increase in capacity.

Labour cost increased by $29 million or 5.9 percent compared with the same period in the 2010 financial year. Full time employees have increased by 2 percent since December 2009. The increase in full time employees and associated labour costs reflects more activity across the airline, alongside rate increases.

The average Us dollar in-to-plane cost of fuel, excluding hedges relating to other periods, increased by 20 percent on the same period last year. Fuel usage increased by 3 percent compared to the December 2009 period, driven by the increase in capacity. A combination of increased activity and higher fuel prices has increased fuel for the six months to December 2010 by $74 million.

Maintenance expense reduced by $26 million or 15.4 percent compared to the previous period, attributable to the timing of maintenance checks and reduced costs associated with lower third party activity. Aircraft operations and passenger services costs increased in line with capacity and passenger growth.

sales and marketing expenses increased by 8.5 percent compared with the six months to December 2009 to $140 million. This was primarily due to increased commissions as a result of higher revenue and increased promotional spend. other expenses decreased $15 million to $104 million for the six months mainly reflecting the $18 million gain on equity swaps in relation to the subsequent investment in Virgin Blue.

The depreciation and amortisation cost increased by $2 million to $151 million compared to the same period last year. Rental and lease expenses reduced by $16 million relative to the corresponding period last year, primarily driven by the positive impact of foreign exchange and return of aircraft to lessors.

Net finance costs, excluding gains and losses from derivatives that hedge exposures in other financial periods were up $2 million.

Foreign Exchange ImpactThe overall strengthening of the New Zealand dollar reduced the translation of foreign currency costs but also reduced the translation of foreign currency income, resulting in no net benefit. however, due to foreign exchange hedging losses of $75 million compared with a gain of $9 million in the prior period and hedge timing adjustments, the overall reduction in earnings due to foreign exchange was $97 million.

Cash PositionNet cash generated from operating activities, prior to the impact of the rollover of foreign exchange contracts was $210 million, an increase of $45 million on the comparable period last financial year.

A further $491 million was invested in fixed assets during the period, including the final payment for the first B777-300ER, progress payments for future aircraft, the purchase of a B747-400 which was previously on operating lease and two new flight simulators.

The net cash inflow from financing activities was $81 million. New debt drawn of $257 million was secured against the new asset purchases and were partially offset by debt repayments of $123 million and dividend payments of $39 million made during the period.

Financial PositionClosing net cash was $940 million at December 2010. The balance has reduced by $127 million from June 2010 mainly due to outgoing payments for fixed assets. Net gearing, including capitalised operating leases, improved 4.5 percentage points from June 2010 to 42.8 percent at December 2010.

December 2009 normalised earnings

before taxation $96m

Passenger yield +$77m

- Long haul yields improved by 7.2 percent (13.0 percent FX Adjusted)

- short haul yields deteriorated by 1.5 percent (1.0 percent FX Adjusted)

reflecting seats to suit and Regional discounting

Passenger traffic +$127m

- Passenger demand was up 6.0 percent

- Capacity increased by 2.7 percent to meet the growth opportunities from

improving passenger demand

- The resulting passenger load factor for the Group improved 2.6

percentage points to 84.2 percent

Cargo, contract services and other revenue +$34m- A 10 percent increase in freight yields and a 6 percent increase in

volumes, along with additional charter and ancillary revenues

Labour -$30m - Increased capacity combined with rate increases

Fuel -$106m- The average into plane cost was up 20 percent compared with last year

- Fuel consumption rose by 3 percent from increased capacity

Maintenance +$20m- savings from the fleet primarily due to timing of checks along with

reduced costs from lower third party activity

Aircraft operations and passenger services -$12m- Aircraft operations and passenger service costs rose on the back of

capacity increases and greater passenger numbers

sales and marketing -$12m- sales and marketing increased in line with greater revenue, primarily

commission increases, along with additional promotional spend

Depreciation and lease costs +$4m- Lease costs reduced due to the purchase of aircraft previously on

operating lease and the return of aircraft to lessors

Net impact of foreign exchange movements -$97m- The impact of currency movements on revenue and cost, together with

foreign exchange hedging losses compared with gains last year

other +$11m- Includes an $18 million gain on equity swaps taken out to provide price

protection in the event of an actual purchase of shares in Virgin Blue

December 2010 normalised earnings

before taxation$112m

+$3m - Net impact of derivatives that hedge exposures in other financial periods

December 2010 earnings before taxation $115m

The key changes in profitability are broken down in the table below.

These numbers isolate the impact of foreign exchange and also derivatives that hedge exposures in other financial periods.

DIVIDEND PAYMENT 3 cents per share

DIVIDEND RECORD DATE > 11 March 2011

DRP PRICE SET DATE > 21 March 2011

DIVIDEND PAYMENT DATE > 22 March 2011

FINANCIAL PERFORMANCE (unaudited)

6 MONThS TO 6 MONThS TO 12 MONThS TO 31 DEC 2010 31 DEC 2009 30 JUNE 2010

$M $M $M

Operating RevenuePassenger revenue 1,834 1,679 3,305Cargo 144 127 255Contract services and other revenue 258 248 486

2,236 2,054 4,046Operating ExpenditureLabour (521) (492) (976)Fuel (529) (458) (939)Maintenance (143) (169) (326)Aircraft operations (196) (190) (369)Passenger services (126) (124) (240)sales and marketing (140) (129) (261)Foreign exchange (losses)/gains (75) 9 6other expenses (104) (119) (233)

(1,834) (1,672) (3,338)

Earnings Before Finance Costs, Depreciation,Amortisation, Rental Expenses and Taxation 402 382 708Depreciation and amortisation (151) (149) (294)Rental and lease expenses (124) (140) (263)

Earnings Before Finance Costs and Taxation 127 93 151Net finance costs (12) (9) (28)

Profit Before Taxation 115 84 123Taxation expense (17) (28) (41)

Net Profit Attributable to Shareholders of Parent Company 98 56 82

Interim and final dividend declared per share (cents) 3.0 3.0 7.0Net tangible assets per share (cents) 150 138 141

Supplementary informationEarnings before Taxation (per NZ IFRs above) 115 84 123Reverse net (gains)/losses on derivatives that hedge exposures in other financial periods: Fuel derivatives (2) 1 8 Foreign exchange derivatives (1) 11 6

Normalised Earnings before Taxation 112 96 137

Normalised Earnings after Taxation 96 64 92

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 (unaudited)

6 MONThS TO 6 MONThS TO 12 MONThS TO 31 DEC 2010 31 DEC 2009 30 JUNE 2010

$M $M $M

Cash inflows from operating activities 2,217 2,083 4,192Cash outflows from operating activities (2,007) (1,918) (3,721)

210 165 471Rollover of foreign exchange contracts relating to operating activities 26 (81) (137)

Net cash flow from operating activities 236 84 334Net cash flow from investing activities (444) (254) (450)Net cash flow from financing activities 81 (308) (390)

Decrease in cash and cash equivalents (127) (478) (506)Cash and cash equivalents at the beginning of the period 1,067 1,573 1,573

Cash and Cash Equivalents at End of the Period 940 1,095 1,067

FINANCIAL POSITION (unaudited)

AS AT 31 DEC 2010 31 DEC 2009 30 JUNE 2010

$M $M $M

Bank and short term deposits 942 1,095 1,067Trade and other receivables 357 345 322Inventories 171 148 162Derivative financial assets 81 52 62Income taxation - 7 16other assets 46 55 59

Total Current Assets 1,597 1,702 1,688

Trade and other receivables 35 39 38Property, plant and equipment 2,568 2,328 2,230Intangible assets 49 41 43Investments 55 61 61Derivative financial assets - 2 10other assets 550 393 527

Total Non-Current Assets 3,257 2,864 2,909

Total Assets 4,854 4,566 4,597

Bank overdraft and short term borrowings 2 - -Trade and other payables 402 366 348Revenue in advance 774 715 788Interest-bearing liabilities 145 182 175Derivative financial liabilities 124 187 62Provisions 71 41 65Income taxation 1 - -other liabilities 153 137 169

Total Current Liabilities 1,672 1,628 1,607

Revenue in advance 120 113 114Interest-bearing liabilities 1,005 919 900Derivative financial liabilities 17 6 1Provisions 107 149 137other liabilities 32 31 37Deferred taxation 229 199 235

Total Non-Current Liabilities 1,510 1,417 1,424

Total Liabilities 3,182 3,045 3,031

Net Assets 1,672 1,521 1,566

Issued capital 2,263 2,247 2,252Reserves (591) (726) (686)

Total Equity 1,672 1,521 1,566

The summary financial information has been derived from, and should be read in conjunction with, the Air New Zealand Group Interim Financial statements (the ‘Full Interim Financial statements’). The Full Interim Financial statements, dated 24 February 2011, are available at: www.airnzinvestor.com. The summary financial information cannot be expected to provide as complete an understanding as provided by the Full Interim Financial statements. The accounting policies used in these financial statements are consistent with those used as at 30 June 2010.

air new zealand group

Financial Summaryair new zealand group

Financial Summary

The full Interim 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 Interim Financial Report

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

Investor Relations OfficeShare RegistrarLINK MARKET SERVICES LIMITED

Level 12, 120 Albert Street, Auckland, New ZealandPO Box 91976, Auckland, 1142, New ZealandEmail: lmsenquiries@linkmarketservices.comWebsite: www.linkmarketservices.com New Zealand Phone: (64 9) 375 5998 Fax: (64 9) 375 5990Australia Phone: (61 2) 8280 7111

AIR NEW ZEALAND INTERIM shAREhoLDER REVIEW 2011 17

Long-haul. Redesigned from scratch.