Ansett buy would lift Air NZ into big league

By Yoke Har Lee

Air New Zealand's full acquisition of Ansett Australia may give it short term financial indigestion but also propel it to be a major Australasian airline with revenues of some $8 billion.

The combined Air NZ-Ansett Australia revenue would rank it just under Qantas Airways, at $9.5 billion, while Air NZ is now a third the size of Qantas.

Combined, Air NZ and Ansett Australia would have total fleet of 177 (89 jet and 88 non-jet aircraft) while Qantas has 146 aircraft (98 jet and 48 non-jet).

Analysts across the Tasman and in Asia said Air New Zealand stood to gain from fully owning Ansett.

The two airlines, who are now code-sharing partners, have a spread of over 2,000 flights per week.

Exercising first right to buy Ansett Australia would also be Air NZ's major chance to push through corporate strategy for Ansett while having Singapore Airlines (SIA) as a partner would mean Air NZ being the smaller partner of two equal shareholders.

"With status quo Air NZ is in there with a sleeping partner which is essentially a non-airline operator where you would assume therefore that it has reasonable control over the decisions. With SIA (in the equation) it will be a junior airline partner in a bigger airline," said Peter Harbison, managing director for Australia-based Centre for Asia Pacific Aviation.

He said as it was right now, Ansett Australia was probably not much of "juicy plum". "As part of a larger equation, in the medium to long term, it will be very comfortable to have it firmly under control. Ansett is about to undergo reincarnation."

At present, Ansett is the poor cousin in relation to Qantas, a position that its chief executive Rod Eddington has been trying to repair.

A major restructuring programme focused on cost savings, reorganising its international policy as well as refocussing of its domestic markets, have turned things around for Ansett.

The Australian domestic airline market is lucrative, Mr Harbison said, proven by Qantas' ability to turn in profits of some A$90 million (NZ$109 million) from its domestic operations out of total profits of A$250 million.

Ansett, was also in analysts view, under valued, a point not missed on Air NZ, they said.

Jason Smith, aviation analyst for Salomon Smith Barney, based in Sydney was of the opinion that Air NZ would be in a position to raise the A$500 million required, either through debt or equity, or a combination of both.

Air NZ would also be in a very strong position to realise Ansett's enormous potential.

"The merged entity would triple the size of Air NZ and enable it to significantly improve its economies of scale. An enormous amount of duplication could be reduced with the merger," Mr Smith said.

The duplication include among others, terminals, lounges, reservation systems, senior management, maintenance and purchasing.

Analysts also noted that Ansett will benefit from the Sydney 2000 Olympics - something of a bonanza.

Ansett has already reported commercial returns of A$650 million in new and protected sales from its sponsorship of the Sydney Olympic games.

Reuters quoted Ansett's Olympic general manager Glenn Robertson as saying that the airline was aiming for an overall target of A$900 in sales by the time the games begin in September 2000. It also expects to see a one-off boost in revenue of A$100 million from travel generated by the games, the Reuters report said.

Analysts said although Air NZ would benefit from having Singapore Airlines' strong partnership in Ansett, strategy-wise, it might not be as positive.

What would be ideal is the ability of Air NZ to work out a deal with SIA, providing three airlines a solid chance to exploit opportunities in the Aussie market.

Rating agency Standard and Poors (S&P) has placed Air NZ on its credit watch list at the end of March.

S&P reckoned that a consolidation of Air NZ with Ansett would add additional financial risk although there were greater operational efficiencies from the merger.

When Air NZ bought over its initial 50 per cent in Ansett, it raised $252 million through a three for 11 rights issue that allowed it to repay short-term debt associated with the Ansett investment, S&P said.

This helped drop its gearing ratio. But in 1997, Air NZ raised its proportion of secured debt.

S&P said Air NZ's has demonstrated so far that it maintained a moderate financial policy.

A Singapore-based analyst who did some projections of Air NZ's gearing said a simple analysis of Air NZ-Ansett consolidated debt showed that additional debt would mean Air NZ having higher than industry average gearing ratio.

But Mr Smith of Salomon said: "Yes, it would stretch them a couple years - financially, operationally and also from a management point of view but it makes a lot of sense. Why pay top dollar three years ago to get 50 per cent. This is their real opportunity to get a 100 per cent to really push through reforms. If they can't work out a mutually beneficial shareholding arrangement with Singapore, they would be crazy not to (go ahead)."