Aerial intrigue far from over

By DANIEL RIORDAN

Air New Zealand's new managing director, Ralph Norris, knows as well as anyone that the problems facing the aviation industry in New Zealand and Australia are far from over.

Australia will soon learn if it has room for three major airlines when Ansett is relaunched, and New Zealand is about to find out if it has room for two, as Qantas prepares to bolster its operations here.

In competing against Air New Zealand, Qantas will tread a fine line.

Ultimately, it would like nothing better than to take a cornerstone stake in Air New Zealand - and to control the Australasian market.

But to do so it will need the blessing of the airline's 82 per cent shareholder, the New Zealand Government.

Having grudgingly stumped up $885 million for its stake, with $150 million more on hand if needed (and it will be), the Government will want a decent price when it eventually sells. The better Air New Zealand's health, the higher that price will be.

Qantas, on the other hand, will want to pay as little as possible, and the best way to achieve that is for it to make life as difficult as possible for its smaller Kiwi rival, but without going so hard that it is seen as predatory.

The New Zealand market cannot be looked at in isolation. What Qantas does here, and what Air New Zealand does in response, will affect both airlines' strategies in Australia.

The Sydney-based Centre for Asia-Pacific Aviation painted a bleak picture of the industry in its regional aviation outlook for this year, released last month.

It warned that the likely emergence of three or four powerful European-United States airline groups would create intense competitive pressure and Asia-Pacific carriers would struggle on long-haul routes as they faced global airlines operating within the region.

It said Air New Zealand's survival would require a healthy marketplace "for which there are no guarantees".

A key priority for the Government will be finding a partner-owner for Air New Zealand, "still fragile after its near-collapse last year" as the centre's report says.

"It is difficult to see a partner other than Qantas, but developments in the Australian domestic market will largely define the outcome."

Ansett's demise last year gave Qantas a domestic buffer against the downturn in international markets after September 11.

It was too busy making money from the void left by Ansett to worry too much about New Zealand, but now it has widened its focus.

Qantas knows that the Government's exit options for its Air New Zealand stake are limited.

Most international airlines are struggling to get their own houses in order and none has as much to gain as Qantas from controlling Air New Zealand.

As Ansett's new owners, the Tesna syndicate of Melbourne businessmen Solomon Lew and Lindsay Fox, struggle to get the airline back in the air, Qantas continues to scrap over the Australian domestic market with Virgin Blue.

But if and when Tesna begins operations, many expect another round of industry rationalisation within 12 months.

Deutsche Bank analyst Kevin O'Connor is one who believes Tesna's business model will not be low cost enough to succeed.

UBS Warburg analyst Graeme Wald estimates Ansett II will need a 25 per cent market share to survive.

To get that, it will have to fight Virgin Blue and Qantas, which with its 85 per cent market share, will be sure to turn up the heat when Ansett II is relaunched.

Mr Wald believes Ansett II will have to go all out for that target using aggressive price cutting, risking the demise of either itself or Virgin Blue.

It might also have to lower its ambitions and downsize when it finds that it cannot make the target.

Qantas is about to lift its presence here and is expected to boost its services on the Auckland, Wellington and Christchurch routes.

Chief executive Geoff Dixon stirred up a hornets' nest when he was reported as saying that he planned to put Air New Zealand out of business.

In public and in dialogue with the New Zealand Government, Qantas will not want to be seen as the wolf at the door, but the tougher it is for Air New Zealand, the better the outlook for Qantas.

Not only is it chasing Kiwi dollars, it wants to be able to feed more passengers into its international flights.

Air New Zealand is making the right noises about developing a strategy to combat a stronger Qantas.

Mr Norris takes over on Monday, but the market will not have a real feeling for how the airline has been travelling until it releases its December half-year result on March 7.

Meanwhile, Virgin Blue's owner, Sir Richard Branson, is likely to play a key role in Air New Zealand's future, as he did once before, when by declining to sell to Air New Zealand he effectively sealed Ansett's fate.

Air New Zealand still needs an alliance with an Australian carrier to replace the feeder traffic it lost with Ansett's demise.

What odds of Virgin Blue meeting that need?

With Ansett II yet to reveal who it would like as partner, the rumour mill has been working overtime.

This week, Sir Richard initially described as "bollocks" Australian reports that Tesna and Virgin Blue were in merger or takeover talks.

But it is now clear that the two parties are, at the very least, talking about joint venture opportunities.

Those opportunities could involve Virgin's access to Ansett II's better landing slots and airport facilities, or they may see Virgin Blue continuing to focus on the discount end of the market in a coordinated arrangement with a full-service Ansett II.

Virgin Blue still wants to fly here by the end of the year, but like Qantas it has been otherwise engaged in taking advantage of the post-Ansett opportunities in Australia.

An alliance between Air New Zealand and Virgin Blue would still meet the needs of both airlines.

Air New Zealand would gain the Australian partner it has lacked since Ansett went under, and Virgin Blue would probably have its entry into New Zealand smoothed.

It would also be able to provide the low cost component of a one-two punch for Air New Zealand, now being partly met by Air New Zealand subsidiary Freedom Air, which could be subsumed into Virgin Blue.

If Virgin Blue and Ansett II do cosy up, Air New Zealand's ability to form some sort of alliance with the pair becomes even more crucial.

Such a three-pronged alliance might represent the only real threat to Qantas' dominance of the Australasian market. It could also frustrate Qantas' chances of being Air New Zealand's cornerstone shareholder.


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