Air NZ and friends flying high

By ROB O'NEIL

Winners and losers in the Australian aviation wars are now emerging.

The winners, it seems are Air New Zealand, Ansett Australia and Singapore Airlines. The losers are Qantas and Virgin Australia.

Until this week Qantas was clearly the dominant carrier in the region. It had more planes, more flights and more destinations. It is also very efficient.

Now Qantas faces the prospect of competition from a genuinely strong regional rival with a network running throughout Australian domestic routes, transtasman and internationally.

For New Zealand consumers the benefits may take time to arrive. The new group will be able to increase coordinaton of schedules. Its buying power will help Air New Zealand to keep its fleets and products up to date.

All three airlines are already members of the Star Alliance, so the effect on frequent flyer and other customer programmes should be minimal.

As Ansett Australian spokesman Peter Young said this week, Ansett and Air New Zealand together are two-thirds to threequarters the size of Qantas. "We can stand toe-to-toe with Qantas and compete meaningfully."

Singapore Airlines' entry into the equation, through taking a 25 per cent stake in Air New Zealand this week, has had a magical effect on negotiations on several fronts.

Australian unions, once highly concerned about the impact of a merger on members' jobs is now more relaxed.

Singapore Airlines is cash rich and able to support the increased investment required to drive the combined business foward.

This could immediately benefit Ansett as it begins what some say is an overdue fleet replacement programme.

Singapore Airlines' deputy chairman and chief executive, Dr Cheong Choong Kong, says he will back calls for financial support where justified.

Air New Zealand has also been wooing the unions. Several weeks ago, chief executive Jim McCrea spoke to the Australian Council of Trade Unions to allay job-loss concerns, telling the organisation that the merger would enable Ansett to grow.

Singapore Airlines commitment also appears to have smoothed the merger path through Australian bureaucracy.

That does not mean, however, that the deal will go ahead without constraints.

Australian sources suggest a range of restrictions will be placed on approval by the Foreign Investment Review Board. Air New Zealand has had to pass a series of "national interest" tests to win consent for the deal.

Restrictions expected include a requirement that Ansett Australia retain an Australian head office and chief executive; that skilled jobs remain in Australia; and commitments to maintain more marginal regional aviation services.

The board is said to be concerned that the new owners not just "cherry pick" the most profitable routes as Virgin Australia planned to do.

Singapore Airlines wants an even bigger piece of Air New Zealand than the 25 per cent it now has. Transport Minister Mark Gosche had been firm in saying there will be no change to existing requirements for local ownership and control.

His stance, however, appeared to soften when he reportedly echoed Dr Cheong in saying Singapore needed to prove itself as a good shareholder in Air New Zealand before an increased stake would be considered.

Singapore Airlines' latest buy-up seems certain to provoke questions of how genuine Air New Zealand's local ownership structure really is. With both Brierley Investments and Singapore Airlines based in Singapore, some would say ownership and control have already fled the country.

Ironically, Singapore's buying of Brierley's 16.7 per cent B share stake this week has not increased overseas ownership -- just made it more obvious.

Air New Zealand has a two-tiered set of structures and restrictions to protect local ownership and the airline's bilateral arrangements.

First, there are the A and B class shares. Anyone can own B shares, but only New Zealanders and New Zealand companies can own A shares.

Brierley Investments has created a structure to allow itself to move overseas, yet effectively retain ownership of its 30 per cent A share stake.

That structure is a company called BIL NZ Assets, which holds Brierley's A shares in something akin to a trust arrangement.

BIL NZ Assets chairman Bill Wilson says the arrangement is consistent with the requirement for local ownership and does not represent an erosion of that principle.

He agrees there is no logical reason the structure could not be replicated by another foreign company wanting to own A shares.

While the Government has agreed to Brierley's structure, the real test of its acceptability would be if Brierley tried to sell its A shares to another overseas company.

What is now stopping Singapore Airlines from increasing its Air New Zealand exposure is not, therefore, the A and B share system. It is a set of second-tier restrictions that limit a foreign airline to 25 per cent ownership and a group of airlines to 35 per cent.

Meanwhile, for Virgin Australia it is back to basics. Australian sources say the company is proceeding with its launch plans, but without Singapore Airlines as financier the company will have trouble getting big fast.

Virgin Australia may become more like Britannia Airways, adopting a more opportunistic strategy with few permanent staff, high levels of contracting out and short-term aircraft leasing.

Behind the scenes at Ansett and Air New Zealand, merger preparations have been under way for months. These are focused on identifying operational efficiencies and savings flowing from the deal's completion, now expected next week.

Joint working parties have been formed to tackle specific areas. Air New Zealand chairman Sir Selwyn Cushing has been quoted as saying that savings of up to $100 million could be gained from the merger.

Ansett Australia's Mr Young says: "We've been doing a lot of detailed joint work on how to integrate post-transaction.

"Air New Zealand has close and detailed understanding of operation of Ansett's business and of issues being managed."

The relationship between Air New Zealand's Mr McCrea and departing Ansett Australia executive chairman Rod Eddington has also been close.

Mr Eddington's flight this week to the top job at British Airways, a major shareholder in Qantas, is described by Dr Cheong as a big loss.

Mr Eddington, who came to Ansett in 1997 with the mission to save the airline, takes with him detailed knowledge of both Ansett Australia's and Air New Zealand's plans and operations. Mr Eddington implemented a change programme at Ansett including the sale of non-core assets. He was also seeking a complete review of workplace practices to gain operational efficiency.

Further traps could lie in store for the new group. While Air New Zealand has made a good start with the Australian unions, it is not as compliant as the local variety.

New Zealand's national carrier could also face a transtasman challenge from Ansett New Zealand, which can now apply for bilateral rights.

On the Australian domestic scene, while the threat of a three-way price war with Virgin Australia has diminished, regional carrier Impulse is shaping up to extend its services to trunk routes with more aircraft than Virgin was proposing.

Qantas chief executive James Strong has been conspicuously silent in the past few days. Singapore Airlines' move has crystalised the future alignment of the regional airline market while exposing Qantas' moves to reacquire an Air New Zealand share as pure spoiling tactics.