Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Labour's sell-down alarm absurd

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Air New Zealand has frequently been a political football for politicians of all stripes who have wanted to calibrate its operations towards spurious "national interest" grounds which owe more to politics than this country's future.

So it was no surprise that this week Labour politicians claimed all sorts of calamities potentially face the airline - including another financial disaster on the scale of the 2001 bankruptcy (yes, I'm thinking of you, David Cunliffe) - simply because the Government has reduced its stake. It is an absurdity.

Yesterday's sell-down of the Government's majority stake from 73 per cent to 53 per cent through a bookbuild is long overdue.

Not only does it give Air NZ's board and management more commercial freedom to do what's right for the company shy of undue political influence (either stated or unstated), it also gives the airline more freedom to show what the real national interest is about: the ability for Air NZ to make the right strategic calls and show sustained financial performance so New Zealand continues to have a national flag carrier in the first place.

The mixed ownership model with the Government holding the majority stake and other interests giving the necessary balance can assure this focus is kept.

Where national interest also kicks in is by the airline forming strategic alliances so New Zealand ends up with the right air links to sustain our business people and traders as they move into fast-growing markets and underpin the new directions in the tourist trade.

Not by politicians issuing edicts about where the airline can fly, what cargo it can carry or what passengers.

Air NZ under chief executive Christopher Luxon is making just those strategic calls. He has adopted a "customer at the core" philosophy to retain and grow business from the airline's loyal customers through a range of measures including changes to the airports scheme announced yesterday.

This extends to the recently opened customer innovation centre outside the airline's headquarters in Fanshawe St. Moves to leverage the "internet of things" to identify and cater to individual customers' preferences are also on the horizon, with an alliance to service the Latin American market after the withdrawal of Aerolineas Argentinas.

There has been a lot of political hogwash about the sell-down by the National-led Government and the underlying philosophy of the mixed-ownership model.

But in essence, Labour invented the mixed-ownership model with its 1980s privatisation of the Bank of New Zealand and its later recapitalisation of the airline in 2001 which put it in the box seat with an 82 per cent stake (later reduced to 76 per cent after a rights issue).

It's also worth recalling that the Clark Government wanted Air NZ to form an alliance with Qantas a decade ago, which would have resulted in the Government's stake being reduced to 64 per cent. No Labour politician - including Cunliffe - raised a squawk then about how allowing another player onto the Air NZ share registry would result in the airline heading towards the knacker's yard, though arguably (and in hindsight) given Qantas' subsequent fortunes that prospect would have held more water than the subjects of this week's politicking.

So, what's the difference now?

The true commercial reality is that the previous Labour Government passed up the chance to recover the $885 million it invested in Air NZ when it recapitalised it in 2001. If Michael Cullen had sold a 25 per cent stake when the share price peaked at $3.12 in June 2007, he would have banked at least $840 million.

As I reported in May 2008, the then Finance Minister resisted the pressure from other market players (which included then Air NZ chief executive Rob Fyfe) to take a profit as the share price rose on the back of private-equity fervour.

"The Government - which had a 76.57 per cent stake at that stage - would still have been able to exert majority shareholder control from a 51 per cent holding. It would still have been able to appoint a majority of directors who could exert sufficient influence to make sure the national flag carrier continued to look to the country's interests."

The resulting payday "would have come close to covering the Crown's original entry costs for 76 per cent of the company and have earned plaudits for smart dealing", my summary read.

In other words the Government - which pumped nearly a billion dollars of taxpayers' money into the airline - could have had its cake and eaten it too.

But Cullen, like Labour today, allowed politics to overshadow market realities. Yesterday's announcement by Finance Minister Bill English and State Owned Enterprises Minister Tony Ryall that the sale of the 20 per cent stake raised $365 million underlines just why the previous Government should have taken advantage of the market highs.

The global financial crisis later took its toll on tourism and with it the airline's finances. But Air NZ has been managed well and is well-placed for the future.

What the Kiwis who bought into this week's sell-down should also expect is that no future Government is tempted to apply undue influence on its commercial operations for base political reasons.

Again, the Clark Government - rattled by political fallout over two Air NZ "ferry" charter operations to carry Australian troops to the Middle East in late 2007 - pushed Air NZ to adopt a "no surprises" policy and take notice of unspecified "national interest considerations".

Under the Companies Act, the Government cannot as the majority shareholder direct Air NZ. Its directors have fiduciary duties to run the company in the best interests of all shareholders.

The key question is whether a Labour-led Government would respect that.

The airline business is risky, being capital-intensive and hugely competitive.

Air NZ's foray into Virgin Australia has introduced considerable complexity and caught the attention of Qantas, which will be focusing on retaliatory measures.

All this means Air NZ needs good people at board and senior management level and shareholders who understand the risk-rewards nature of the business.

Denigrating the current chief executive and the board of directors, ably led by Tony Carter, with calls of alarm shows Labour has considerable work in front of it if it wishes to grow and retain the commercial community's respect.

- NZ Herald

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