Air analyst puts his money on Qantas

By DANIEL RIORDAN aviation writer

Air New Zealand directors yesterday began the first of two scheduled days of talks crucial to the airline's future.

But as the directors consider the alternatives of a Qantas buy-in, increased investment by Singapore Airlines or a straight recapitalisation, an aviation analyst at Salomon Smith Barney, the investment bank advising Air NZ, has come out in support of Qantas.

Jason Smith said Qantas Airways would have found a way to "own but not control" Brierley Investments' 30 per cent stake in Air NZ - a move that would allow the Australian carrier to circumvent restrictions on Air NZ's foreign ownership levels.

Sydney-based Mr Smith said Qantas would have devised a plan that had the same effect as Brierley's ringfencing of its Air NZ stake. Brierley, though no longer a New Zealand-resident company, and therefore not entitled to own Air NZ A shares, holds its shares in an independent trust structure.

Mr Smith said Qantas would want to ensure it had the flexibility to sell this stake if Government-imposed foreign ownership restrictions were not lifted.

Qantas has proposed buying Brierley's and Singapore's stakes in Air NZ, which would then sell its wholly owned subsidiary Ansett Australia to Singapore, although Singapore prefers an alternative which would see it raise its stake in Air NZ from 25 per cent to 35 per cent and take an 80 per cent stake in Ansett Australia.

Mr Smith said the Qantas deal had "significant merit in our view and a real chance of being approved by regulators," while Singapore's alternative would face stiff opposition from both Australian regulators and Qantas.

A third plan, the recapitalisation of Air NZ within its present ownership structure, is also being considered by the directors.

Mr Smith stressed that his report on Qantas, dated June 18, represented his opinions as an equity analyst and should not be interpreted as any indication of what the investment bank presented to Air NZ directors yesterday.

Singapore chief executive Dr Cheong Choong Kong will make his airline's case to Transport Minister Mark Gosche and Finance Minister Michael Cullen in Wellington today.

But his chances do not look good, with Dr Cullen and Prime Minister Helen Clark continuing their opposition to lifting Air NZ's ownership caps (25 per cent for a single foreign airline and 35 per cent for foreign airlines in total).

Helen Clark said yesterday that she was still concerned about the potential damages to New Zealand's international landing rights should the ownership cap be lifted.

Mr Smith says Qantas could pay $A700 million to $A800 million ($900 million to $1 billion) for 55 per cent of Air NZ, which includes a capital injection of $A100 million to $A200 million ($125 million to $250 million). He says Air NZ may have no choice but to sell at least 80 per cent of Ansett to stem its losses, which he estimates at $194 million in June 2001 and $98 million the year after.

Mr Smith estimates that a Qantas "partnership" with Air NZ would bring shared savings of at least $190 million to $250 million a year for the next three to five years from rationalising capacity, codesharing, maintenance savings with complementary fleets, combining frequent flyer programmes, corporate customer initiatives, and procurement, training and labour initiatives.

Air NZ A shares (restricted to New Zealand residents) rose 4c yesterday to $1.19, off their 10-year low of 88c two months ago, while B shares (for allcomers) rose 9c to $1.56, off their low of $1.28.

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