Cullen demands escape hatch over Qantas deal

By VERNON SMALL deputy political editor

The Government is promising to be a more active shareholder in Air New Zealand to preserve its independence after yesterday giving "in principle" approval for Qantas to take a 22.5 per cent stake in the airline.

Officials' fears that Air New Zealand could be financially trapped in an alliance with Qantas have prompted Finance Minister Michael Cullen to write a "letter of expectations" to the airline.

In it, he stressed the national flag carrier must be able to quit the strategic alliance in good shape and quickly be able to operate independently again.

Advisers had warned Air New Zealand would face strong pressure to increasingly integrate with Qantas, lifting the costs of separating "to the point where the option to terminate is no longer a credible discipline on Qantas".

Yesterday's approval by the Government, as an 82 per cent shareholder and as Kiwi Share holder, leaves the deal in the hands of the Commerce Commission and its Australian counterpart.

The Government will reconsider if the proposal is significantly altered or if significant new information emerges.

The watchdogs will weigh the negative effects on competition against the broader national interest. They are expected to rule next July or August, but appeals could further delay the final outcome.

The proposed alliance would see Qantas pay $550 million for its 22.5 per cent stake, diluting the Government's holding to 64 per cent.

The first payment of $100 million, giving Qantas 4.99 per cent, will go ahead before Christmas and is not dependent on the regulatory authorities' decision.

Dr Cullen said the Government had not taken public opinion into account in giving conditional approval. "The Government can't own companies if it makes decisions on the basis of public opinion."

Concerns about competition could be aired at the Commerce Commission where arguments would be based on fact, not prejudice.

"There is no doubt the majority of the public opposes this proposal at this point," he said.

But it would deliver significant benefits to the company and was the best option to secure the airline's future as an international airline.

"The most likely alternative scenario is greatly intensified competition from Qantas on New Zealand domestic routes."

Without the alliance Qantas would lift the number of aircraft operating in New Zealand from five to eight and increase its transtasman capacity.

"There is a very real risk ... that under any alternative scenario Air New Zealand would shrink back to being largely a domestic operation with very little long-haul coverage at all," Dr Cullen said.

Without the Qantas deal the Government could be called on for more capital, reducing spending on health and education.

Transport Minister Paul Swain, speaking as the Kiwi Share holder, said it had been easy to approve the deal in terms of the survival of the koru brand, its impact on jobs and on Air New Zealand's international rights. The effect on tourism and on retaining a robust domestic airline were "more problematic".

The most difficult issue was whether New Zealanders would retain effective control.

The ultimate sanction would be to exit the strategic alliance, which had prompted Dr Cullen's "letter of expectations" to Air New Zealand chairman John Palmer.

National leader Bill English said Air New Zealand and the Government had been bullied by Qantas. The deal would strengthen the company "but the public interest has not been taken account of and that means higher fares, less service and no competition in the market."

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