Auckland International Airport Limited (AIA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Auckland Airport Interim Results 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, CEO, Mr. Adrian Littlewood. Thank you. Please go ahead.

Good morning, everyone, and great to have you on the call for the results for the first half of FY '21. I'm joined by Phil Neutze, our CFO. And Phil and I will be working our way through our results presentation. I think it's pretty obvious to say this is unlike any other results previously. And here's some information in here that will set a milestone for us in terms of the first time we've made an underlying loss in a period since 1998. But also reflects the wide and significant impact of COVID on our business. We'll touch on various elements throughout the result and then we'll have time for questions at the end. So let's start, again, on Page 4. And some of this is a matter of record in many ways. For those who don't have a chance to listen to the webcast. But it's been a real period of adjustment in a very dynamic way day-to-day as well as month-to-month as we've dealt with COVID. Our team are at the front line, dealing with the very ongoing changes to managing the border. And so our team here have done a stunning job of managing that as well as keeping on with core business around infrastructure upgrades and taking care of issues there. We've also managed to keep the business ticking on other fronts where it has been less affected, for example, our commercial property business. I mean the team has played an important role in connecting our country through cargo and other things. And we are still spending a lot of our time resetting our business for the COVID environment, keeping on with some of those projects that met up for the long-term, roads, fuel lines, airfields as well as taking care of other projects in our commercial development area. So we'll touch on those highlights as we go through. But I think it's important to start out with a big thanks to our team for the incredible hard work over this last year and this last half. So with that intro, I'll turn to Page 5 and just touch on some of the results. I know this will be a surprise to you. Heavily impacted by the reduction in passenger numbers flowing through to our results. So revenue down 65% odd in the period. Underlying earnings, just a click over that at 68% down in the period and leaving us with an underlying loss for the first time, as I said before, of about $10.5 million, and that compares with the corresponding period last year at about $140 million underlying profit. So quite a significant change for us in the period. As you know, passenger movements, down about 74% to 2.8 million, and that flowed through. So unsurprisingly and as signals prior, no dividends, obviously, will be paid out in this period. Just turning to Page 6 and getting it into a bit more detail. And again, some of these are not as meaningful as they usually are in terms of segment breakdown. And probably what's more of interest is the difference between the performance across the different segments. So Aeronautical revenue down as I said 74% tracking reasonably close to passengers. Retail, obviously, has been more affected, and that is a function of the exposure to international travel and the dominant impact there. And we've adopted a supportive model of our, particularly, our tenant and retailers to try and keep them stable in this intervening period. Transport has performed a bit better. It's 63% down as domestic travel has recovered. And hotels have been supported by some of the MIQ, managed isolation and quarantine facility support they have had there, but also some impact on the other hotel, the ibis that haven't been part of that program. Property has been, again, a real highlight and continued its very strong performance. And really, as I'll touch on later, reflects the underlying quality of the asset and the team's performance there. The -- we have about $220-odd million under construction and our portfolio valuation continues to grow. Finally, on associates, Queenstown has had a tough year like we have in Auckland, with revenue down near 53-odd-percent. So that's the highlights from a segment point of view. If I just touch on Page 7, just into a bit more detail on passengers. And that's just showing the layout of passenger ebbs and flows over the period. But at a high level, we've gone from having 43 destinations across our network pre-COVID, with about 30 airlines. We're now down to about 13 airlines, with about half of those destinations suspended. So that's obviously hit our international hard, and we're running at only about sort of 2% or 3% of normal international volumes in that period. So for a whole half, we only had about 150,000 international passengers and that compares in the previous half, [ 5-and-a-bit million ]. Domestic has also been hit, but it's been pleasing to see that recovery had come back and the team have worked hard to keep domestic traveling fully operational at Level 2 COVID response. And you can see in that chart on the right-hand side of Page 7, the impact that had in terms of passenger volumes once we managed to work with the government to remove some of those travel restrictions at Level 2 there. Cargo has continued to be an important part of keeping New Zealand committed. The cargo has still been down about 11% in terms of tonnage carried from 91,000 in the previous period to 81,000 in this period. So quite a dramatic change from our normal operations, if you call it that. And on Page 8, I just wanted to call out the work that our teams have done. So while we've been living with the management of COVID at the border, we worked really hard with our partners in travel and tourism and aviation to try and play our part to help figure out how we work in this new environment. So as I said, we help resolved level 2 domestic travel. But we also worked with our partners to propose models for trans-Tasman. We've developed a risk-based broader model with medical peer review process to suggest a model that could be applied to reopen to safe zones like Australia. We split our team on to 2 operating models to allow safe zone travel to occur. And we've been a launch partner for a new saliva PCR test to help our staff have a lesser base and more rapid testing protocol to protect them and New Zealand as well. So we've been hard at work on that. But I think what we really need to look at is say, well, what's the path out of this current model? And I think there are many things that we think need to happen, but a lot of those are in train, which is good, but needs to be turned from concepts into operation. And so again, operationalizing that risk-based border model, I think, is important. Confirming what are the tech required around authority to fly technologies and out of travel partners, one of those ideas that strong support from the airlines. We need to be clear, I think, around the thresholds, the metrics, vaccine rollout targets, et cetera, that is required to safely restart countries like Australia. And then we need to restart those when it is safe to do so. And that's all burnished by the ongoing development of our domestic health security around testing, tracing and new technology. And I think those things are all quite important. And I think for us, I think that's about building some clarity. We know certainty is hard to achieve in these times. But getting clarity on what are the things that matter and what's the path that business in New Zealand needs to work through, I think, will be really important in the coming months. And I think that's the path to restart safe markets like Australia and the Pacific Islands. And for us, in the tourism industry in particular and particularly also for friends and family who heavily connected with Australia and the Pacific Islands. That's very important. And for our business, it's really material in terms of the recovery path. So with that, I'll hand to Phil, who will take us through some of the detail and the financial performance. So Phil, over to you.

Thanks, Adrian. So we're now on Slide 10. It's fair to say that pre-COVID, I never expected to be announcing an underlying loss for Auckland Airport. But our world has changed for now, and it's unlikely that we'll report an underlying profit after tax until quarantine-free international travel resumes in part, at least with Australia. So we did, however, report a GAAP compliant after-tax profit for the half year to December 30, 2020. And as set out in Slide 32 in the appendix to this presentation. Reported profit benefited from a couple of items. There was a circa $30 million upward revaluation in our investment property portfolio. And that was due to development margins achieved on 2 recently completed developments. That also benefited from the circa $15 million reversal of previously accrued CapEx project termination costs. And that reflected successful contract termination negotiations with construction companies. So turning now to Slide 11. As Adrian mentioned, thank goodness for our investment property portfolio. And that's continued to trade strongly, and that's despite us providing just under $3 million of rent abatements to our tenant's most adversely impacted by COVID-19 during the period. And all other revenue streams were down on pcp with retail income in Aeronautical passenger charges most significantly impacted. And that's on the reliance on international passengers, which were down 97% as a result of COVID-19. If you then come on the other hand, and that comprises landing and aircraft parking charges, held up better, was down by "only 50%". And this owing to strong international cargo, traffic and aircraft parking. Car parking also performed comparatively strongly, and that's owing to the contribution from domestic passengers, which were down by 45% in the period versus international, down 97%. And also because domestic car parking outperformed the domestic passenger numbers, decreasing by only 25%. And we think this reflects the preference to use our own vehicles rather than taxis, ridesharing, public transport during the pandemic. So moving to Slide 12. As we guided at the full year results announcement last August, we're pretty much delivered on our target of reducing core operating expenses by 35% compared with pre-COVID levels, with a $33 million or a 34% reduction in the period. And this excludes some one-off benefits that were also booked in the period relating to partial reversals of the prior provisions for project termination costs. Don't try to say that too quickly. And credit losses. So these plus the total OpEx reduction to 55% versus pcp. The main savings in core OpEx were 3 staff cost reductions, reduced marketing expenditure, lower consultancy spend, that's the professional services line. And reduced the outsource operations expenditure. And that's all within the asset management, maintenance and airport operations expense line. These are savings included outsourced car parking operations, bus operations, VIP lounges, baggage and trolley services in clean costs. I'll actually skip Slide 13. This shows pictorially what I've just explained on the prior slide. There's a little bit more information to peruse at your leisure. So now on Slide 14. And this provides a breakdown of the circa $100 million of capital expenditure carried out in the first half of FY '21. This is around 30% of the FY '20 CapEx run rate. And it reflects the breaks that we put on our CapEx program this year in response to COVID-19. So in addition to completing or initiating construction of the 5 investment properties mentioned on this slide, the majority of the CapEx undertaken in this half was on the essential airfield and roading projects. Restarting the rest of our suspended aeronautical infrastructure program will depend on a resumption of quarantine-free international travel between New Zealand and Australia. And at this stage, the timing of the bubble remains unclear. So before I hand back to Adrian to give a bit more color on how we are positioning for the COVID recovery. I wanted to touch briefly on our financial liquidity, and that's set out on Slide 15. So in a nutshell, we had a lot of liquidity, and this could see us through an extended period of border restrictions. Just over $900 million of that $1.6 billion of liquidity is in the form of undrawn bank facilities and the remaining nearly $700 million is in cash. We've got wavers in place for our interest coverage in gearing cabinets until 31st of December 2021. And as you can see on this page, gearing is very unlikely to be breached. But interest coverage is now negative, and that's versus the 1.5x coverage that would have been required barring wavers that we've put in place. Dividends remained suspended while the waivers are in place and Standard & Poor's is comfortable with our A- current rating. So I'll hand back to Adrian now.

Thank you, Phil, for giving that overview of some of those core numbers. So as I said earlier, some of these following pages is just a bit of a function of record just to record what has happened in the period, but it's important to note it, given significant work put in by the team. So Page 17, look, we've continued to work really hard to respond to the operational requirements right throughout the business. It's mainly been through process, protocol and people that we have managed that, but there have been some additional things that we've had to do, for example, we've created an off-site facility for repatriation of passengers with bags. Under the terminal split model, Terminal B model that we announced late last year and has been some modest investment required there. But the team has done a stunning job on managing the debt. We also successfully achieved the Airport Council International Health Accreditation for COVID-19 management. So that has been very welcome and the team are ready and willing to respond to whatever happens in the next little while in terms of managing COVID. Just turning on to Page 18. As I highlighted earlier, and as Phil mentioned, we have continued on with some of that core infrastructure where the opportunity has been often. So obviously, we did the runway east and west upgrade. Those are very significant and operationally complex with shortening of runway. So both of those in the runway have now been done, and we've actually pulled forward a bit of extra work announced last month around taxiways in April. While the volume of movements remains low, and we're continuing to do that as we look out to the coming years. We've also done some work on fuel lines, and we'll look to see how we can continue that work while the opportunity is there. On transport, we started to gradually just reignite some of the project components we initially suspended. One of those was the new integrated terminal exit road that we had paused. We've restarted that. So that will be an important part of the future terminal transport system. So that is going as well as the north to the city route connection upgrade and the south with NZTA, Waka Kotahi, to the Puhinui interchange. So both of those are getting a significant upgrade, mass transit lanes, new intersections and the like, which I mean both our North and South entry points are significantly upgraded for the future. So we'll continue to pick our way through those, both small and modest or medium where we think those are justified for operating requirement. But as Phil said, and I'll come back to this later, the bank moves will be subject to recovery. Just moving on 19, in terms of our consumer business, across retail and transport. Look, it's been a super tough period. As I said, it's been in management mode, really trying to support the retailers as much as we can to keep the businesses either in hibernation or in low turnover models. And so that's flowed through to our results. Been great that domestic has returned. And as Level 2 and Level 1 travel has grown. We've seen no reluctance to engage in retail. In fact, we've been trying some things with our duty-free operators getting some end-of-line stock out down there. We've also launched the domestic mall business. So it's an online channel with pickup in the domestic terminal. Look, not big business, but we're still trialing and testing ideas out there, and important we do that. Phil taps on domestic parking before a net chart on the right there just shows the return to domestic parking volumes has been good, and we've been trying to use excess capacity were possible to support that. On Page 20, as I talked before, and Phil touched on as well, investment property has continued to do a great job in terms of providing an underpin for our business, while our core travel business has been tough. And the team have concluded the food stuff development as well as the spec warehouse, which is now being leased out. As we have done in the past, been very successful in getting that spec leasing away. Speaking about development, on the right-hand side, you can see both the DC and the head office here, a fantastic development enormous development and a real mark of the team's performance, and clients are very, very pleased with that. And we've got a pipeline of about $172 million of new developments coming down the line. That's starting to show up in the key metrics. Occupancy has remained high despite COVID and the team have worked very closely just to take a very tailored approach to managing any arrangements with that. And it's been more about abatement rather than forgivement of listings. WALT has now clocked over 10, which has been great, and we still have 180 hectares available for development. Just a quick comment on hotels. And if you travel to the airport, you would have seen the hotels, the 4- and 5-star hotels. We're continuing to look at -- we've said earlier, that's really focusing on getting the structure and facades and closing those buildings. Fit-out is really a trigger-based arrangement that won't continue unless markets, particularly international markets, are going ahead. So a [ great breaks ] up in the Property division. Just thinking again out then to recovery, and we touched on this. Look, the outlook is still uncertain around international travel. We're drilling into Australia as being the most obvious and Pacific islands example of the path on recovery. It is -- it does make a significant difference to our business. How much of a difference? It's hard to say, other than that it is almost a switch for us. But what we wanted to highlight is, obviously, the Aussie outbound market is very significant. And that 11 million outbound trips internationally a year, which is significantly more than they ever came to New Zealand. So I think, assuming we have the feedback from airlines, has been very positive in terms of two-way travel can occur, there will be no shortage of capacity available on Tasman for people to go visit their friends and family. So -- and particularly, so if Australians are limited in where else they can travel to. So that represents a very strong opportunity and certainly surveys that we've seen suggest that New Zealand has always been a place of interest for Australians. The issue has always been, why now? There is no bit of reason now if that two-way flight can be opened up. So we're really looking forward to that happening when it's safe to do so. Just on infrastructure more generally outside of the core resilience work that we're doing, obviously, the big question is the infrastructure upgrade program that we had underway. It was a very significant multibillion-dollar program. Appropriately, we put that on hold and we've been retesting that with airlines and border agencies and others through their program. And the key headlines here is that the big 8 programs, as I said on hold, but that the master plan still remains appropriate for our long-term future. The way we get about executing on that master plan and the structure of some of those projects may look different to where we were before. And I think that is the appropriate response to the post-COVID world. We can't just carry on the way we were. It was very different conditions, and we need to reset that plan. So we're going through that in detail. The fundamental strategy about getting to integration still remains important that also supports a hub strategy, which has been our focus, but we are looking at different ways to get after that goal. Also, I just wanted to note that we are engaging with Airways New Zealand in terms of the possibility of purchasing their local airfield lighting assets as they make a proposal to exit that service at various airports around the country. So the final few slides on 23 and 24. One of the hardest things we've had to figure out is how do we set our business and the broader sense for this new world and not let go of things that mean a lot to us in our local community. So we have worked really hard to hold on to things that we think are important for the long-term or where we have been supporting local organizations for a long time. So pleased we've kept up with our community trust work, supporting local organizations. We've kept up with our community support through the 12 Days of Christmas program. Our jobs and skills hub, obviously, the volume of jobs we were targeting has suddenly dropped away, but we are working with the government agencies to try and figure out how can we use our capacity and our resources in a different way to support kids getting training locally here, building apprenticeships and skills here because we will be restarting at some stage. And we want to maintain that as an important role for our support for the community for the long term as well as support for the Leukaemia & Blood Cancer, our New Zealand team through the Sky Tower Stair Challenge and Life Education Trust. So as these things are concerned, we just had to narrow our focus into the ones that we've been supporting for a long time. Finally, on Page 24, in terms of the overview. We have done a lot of work in this last period around looking at in a long-term sustainability plan. We're not new to this rodeo. We've been at this for a long time. And we set a whole bunch of targets for our business around waste, carbon and water. And the good news is we spiked on some of those targets and really beat them comfortably, but didn't have our water target. And that was partly because we hadn't accounted for the water use around our construction activities. But having beaten those primary targets in waste and carbon and looking at our water one, we want to reset for the next couple of years, 10 years. And so we're going through that process at the moment. And we've got a longer-term view about our role around those 4 pillars of purpose, people, community and place, and we'll be talking about that more in the future. So that's on the overview of the business. I just want to now turn to the outlook and guidance. It's no surprise, there is significant uncertainty more so than ever before our outlook. And obviously, the recovery of international very much affects that outlook. So we have decided to seek guidance, and we had a long discussion about this, but we felt given where we are in the year and as much as we can give guidance, we would. And so seek guidance for this year of an underlying loss of $35 million to $55 million. Now there's some key assumptions in there. I just wanted to stress. We don't have any special insight into the restart of trans-Tasman travel. So we do know the government still has and still is clear that restarting two-way travel on the Tasman is a priority. And -- but we have, for the sake of this, assume that doesn't materially start inside the balance of this financial year. And we're also assuming no further lockdowns of an extended period. Again, we don't have any special insight into that timing. And if that trans-Tasman travel does start in that period, that would obviously be very beneficial for us. We've just taken a more conservative position for the purposes of setting guidance. So for CapEx, we've just clicked that down from $250 million to $300 million, to $200 million to $230 million range, and that covers a range of different projects completing in that period. Obviously, no dividend will be declared for FY '21, which we talked about before. And obviously, the guidance, as I said before, is subject to any material adverse change, significant one-off expenses and other qualifications laid out there. So before I hand for questions, I just wanted to, again, start out with this, that I wanted to conclude again with a sincere thanks to all our team. Literally, the team have been through the meat grinder, have worked incredibly hard and taking on additional duties and work in a very, very fluid environment. They've done a superb job and I think they can all feel proud of the role they played in both supporting protection of New Zealand's border as well as trying to plan and help support a path out of this into a new environment post-COVID. So with that, I'll finish and hand back for questions.

[Operator Instructions] Our first telephone question is from Andy Bowley from Forsyth Barr.

I've got a couple of questions for you. And the first around just your comments there, Adrian, around trans-Tasman bubble. Now I appreciate the opportunity is still there for two-way quarantine travel. We're hopeful that it will happen. You're clearly very hopeful. The government have suggested that it's a priority. But my question to you is, is really how realistic is the trans-Tasman bubble now in light of everything we've been through, what Australia has been through, ahead of a complete vaccination program?

Look, Andy -- and congratulations for being first again. Look -- like we just don't know. I think all the work as I understand it, has been done in the background. So I think it's both the political and sort of health advice around when it is safe to do so that we'll guide this. As you know, we -- as I said earlier, we've done a little work at our end. We're in close regular contact with our colleagues in the airports and the airlines across the Tasman. So I think many of the elements are there, but it's a judgment for the leaders of the 2 countries and their advisers to make that final call. So look, I can't -- going into Christmas I was actually quite hopeful that first quarter this calendar year, we'll be operating. Obviously, conditions have changed. So look, as I said before, it's a little bit why we're calling for clarity. Uncertainty is really hard to give. And there will always be new information coming down the tubes. But clarity in understanding what are those metrics? What are these thresholds? I think, would be incredibly valuable. And I think we can look across and see in October last year, the Aussie federal government sort of laid out a plan for the national reopening framework. I think that will be really valuable just to really hone in on our map. And I don't mind if there's uncertainty in certain areas, there were a few. But where we can start to drill into things that matter and things to focus on, I think that's what's important. So Andy, I can't give you any more than that, unfortunately.

Great. Albeit, in terms of your government engagement, Adrian, when you ask those kind of questions to the government, what's the response that you get back?

Yes. Look, I think it's really -- it's a cabinet call. I think there are many dimensions they have to weigh up. We are not close to all that detail that they have to consider. And so I can't give you more than that other than to say that we're doing our part, and we're trying to propose answers in models that can be applied. Look, I think as the government have said publicly, the [ wallets ] is absolutely there, but they're judging many different factors at the same time. So it's really a call for government. We can only play our part in supporting that reopening when it's safe to do so.

Yes. Okay. I appreciate that. The second question around the retail concessions and the 3-pronged to this question and essentially go on 3 different questions. But which concessions have exited the international terminal over the past 6 months, would be the first one. The second would be, what's the timetable for concession renewal retender processes, particularly for Duty Free? And then, thirdly, at what stage do you make the decision to go to a single Duty Free operator?

Yes. So just on the first one, I doubt we've had any exits yet. And again, I think that reflects our approach as being to very much allow these retailers to go on hibernation. There's tons of people involved, and they've had to move once the late subsidy came off to a lot of those staff, which is a disappointment. But we haven't had any formal exits yet, which has been great. In terms of the timetable on the relicensing, that time line hasn't changed from what we indicated earlier. I think we broadly, a couple of years plus away from that cycle, but they aren't exactly the same in terms of time line. It's going to be interesting to see how this plays out, post pandemic and travel retail. I still think that, as I alluded to before, in New Zealand, as a destination, we'll have a characteristic of being quite an attractive and safe place to travel to, where people maybe uncertain. And that's just the time we're getting from airlines, when we do our channel checks. So that will be attractive. It's still a very attractive channel and will continue to be so, I believe. So yes, a few [ moves ] away from that. And on single operator, as we said before, that remains an area of focus for us, of real interest. It seems that there's an anachronism, but to operate a model when the world has completely changed from the 2007, 2008 period when that last came up. So look, we'll work our way through that. I think timing we'll be working back from when a sensible concessioning process works for the Duty Free to work out when that formal decision needs to be made, but I don't have a formal date for you, Andy.

Our next telephone question is from Rob Koh from MS. Since there is no response from Rob, we'll go to Adrian Allbon from Jarden.

Two questions, principally. The first one, can -- and maybe this is for Phil. Are you able to just give us a bit more sort of depth on why you expect, I guess, the second half loss at the underlying impact level to deepen within your outlook kind of assumptions here?

Yes. Yes, I can respond to the high level on that. So looking at interest and depreciation, we expect that to be $6 million to $7 million higher in the second half than the first half as a result of recently commissioned assets. We had a tailwind from a reversal of about $4 million of expected credit losses [ for this ]. Don't expect that to repeat. And we're also not factoring in any further wage subsidy receipts and we had about 2 million of those in the first half. So that adds up to roughly $10 million after-tax impact. And also we're allowed, potentially, for some forth starting swap closeouts at the end of this financial year, if we don't refinancing -- if we can't finance an upcoming $150 million bond issue, and that would have a hit this financial year of circa $10 million, but then you'll get the benefit of that equal amount over the next 5 years. So that adds up to about a $20 million deterioration from H1, which would give you a result of around about $41 million. Underlying loss in the midpoint of our guidance range is $45 million plus.

Okay. That's clear. So look, so if we sort of took your second quarter, EBITDA, I guess, per month, that's a sort of operating assumption that sort of buried across the second half and most of the sort of -- most of the delta of the elements you just described?

Yes. That will be a sensible approach, yes.

Okay. The second question, like, the presentation, I guess, is lodged on markets as to how you kind of are going to approach the next regulatory period. Can you give us a little bit of detail around the expected timing of that? And what you're sort of thinking or process steps are as we sort of move through the middle of this year?

Sorry, you're talking about the timing of the next aeronautical price reset?

Yes. Sorry.

Yes. So that is uncertain at the moment. Currently, we're expected to reset as at 1st of July 2022, so for FY '23 onwards. But there's a lot of uncertainty out there at the moment. And as we touched on our aeronautical infrastructure program, to a large extent, is on hold at the moment until we get some quarantine-free travel up and running with Australia and the timing of that's uncertain. So we wouldn't go ahead and reprice until we have more certainty around the infrastructure development program.

And so like just sort of reflective on what Adrian was sort of saying earlier, would the key market in terms of the process really based certainty on when the trans-Tasman bubble would potentially operate? Because clearly a lot of your other items are sort of particular to that event as well.

Yes, that's correct.

Okay. So literally, there's sort of nothing really to do at the moment until you get certainty or clarity on those features?

Yes, that's right. Well, I think we'll have a clearer view by the end of this financial year. In fact, if we wanted to go ahead and reprice as at 1st of July 2022, we have to get cracking very quickly at the start of FY '22. So we'll be making that call round about the end of this financial year.

I will try the line of Mr. Rob Koh, again, from MS.

Can you hear me guys?

Yes, we can.

Great. Okay. Can I just ask a follow-on question about the price resetting? If, heaven forbid, we have no certainty heading into FY '23. What are the kind of fallback arrangements?

Most likely that, well, in fact the inevitable that pricing would remain unchanged from today because we haven't undertaken a formal price reset. And there would be a holding pattern until we had confidence around quarantine-free travel, particularly with Australia.

Yes. Okay. That makes sense. And then just, I guess, a more, I don't know, third order-type issue. But previously, you've had an interest rate hedging strategy, which focused on the near term, given that rates are actually moving, are you -- how are you evolving your rate hedging strategy?

Good question. So at the moment, we're fully hedged versus treasury policy. So a level of fixed rate borrowing, including hedges, is right at the top of the range. And that's because we've slowed down our buying programs compared to what we expected when we've put on those hedges. So we don't have any headroom really to lock in more at the moment under policy. So we're -- I think it's -- off the top of my head, circa 60% hedged at the moment.

Okay. And I guess, I know you've got a lot on your plate, but is there any thought about reviewing the treasury policy in view of the rates environment, I guess?

Yes. We are looking at it. In fact, we've made the conscious decision not to rectify the treasury policy breach of being over hedged at the moment. And the next step is to discuss at our treasury management committee and then at the Board, should we laid up on more hedging, given that there's a bit of inflation pressure coming through now and potential for that to see through to interest rates.

Our next telephone question is from Wade Gardiner from Craigs Investment Partners.

A couple of quick questions from me. First of all, you've made a lot of operating cost savings over the last 6 months. Looking forward, do you think some of those will be permanent savings? If we go forward into -- back into normal operations in a couple of years' time? And if so, would you like to provide some quantity around that.

Wade, Adrian here. I'll start and Phil might jump in. Look, I think we've repealed back reasonably firmly. We don't carry a lot of overhead normally. So I think as we add back, we will need to grow again. We've always had that sort of general target about gross operating margin by that 75% mark, and that's probably the best guide we can give. And I think if we're not investing in that way, we're not investing in the rebuild of the business, particularly for things at marketing and other costs, consumer growth, spend growth. So -- but having said that, there'll always be some things that we've managed through this period to improve on. And so net-net are probably enough -- at a similar level, but there will be some benefits around the traps, I think. So I know it's not specific, but that's a broad guide, I think.

That's all right. And then on a short-term basis with the safe zones that you've added, what does that do to operating costs? Is there a lot of extra costs involved in that?

Not significant. There are some costs. We've managed that pretty well. A lot of those extra costs actually fall to border agencies and others, MIQ. So we've tried to focus on enabling infrastructure, but there are some modest additional costs for us. But manageable, I think. A lot of those are falling to agencies.

Okay. In regards to the USPP waivers, you made the comment in the presentation that I think you sort of assumed December 31, 2021 in terms of borders reopening. If let's say, it extends for another 6 months beyond that, maybe even longer, what's the -- do we -- when do you run into an issue with those waivers again? And what's the process?

Yes. So ballpark to control that 1.5x interest coverage covenant, we would need Tasman and Pacific back to 50% of pre-COVID levels on average in FY '22. So what that means is if we're into FY '22 by the end of Q1, and we don't have a Tasman bubble, that's when we need to pick up the phone and start our conversations with the banks and USPP lenders.

And the next telephone question is from Marcus Curley from UBS.