History condemns Qantas proposal

By BRIAN GAYNOR

The purchase of a controlling stake in Air New Zealand by Qantas Airways is not in the best interests of our national carrier.

The proposal is little more than a clever mechanism that will enable Brierley Investments to quit the company and make it easier, under stock exchange rules, for Singapore Airlines to buy Ansett Australia.

Qantas and Air New Zealand are fierce rivals as they both try to dominate the southwest Pacific.

A substantial shareholding in Air New Zealand would enable Qantas to control its long-time rival and condemn our national carrier to a minor and subservient role in the region.

To understand the fractured relationship between Qantas and Air New Zealand we need to go back to the late 1980s.

When the New Zealand Government offered 25 per cent of Air New Zealand for sale in 1988 there were two bidders, Qantas and British Airways. Each offered $165 million, but the Treasury recommended selling to British Airways because Qantas' main interest was to stop British Airways acquiring a cornerstone shareholding in its arch-rival, Air New Zealand's management was totally opposed to Qantas and there were far greater economic benefits from a BA shareholding.

But the full impact of the sharemarket crash was being felt at the time. The budget deficit was spiralling out of control and the Finance Minister, Roger Douglas, was determined to plug the gap by accelerating asset sales.

After acrimonious debate among senior cabinet ministers, it was decided to sell 100 per cent of Air New Zealand and two bidders were asked to resubmit their offers on that basis.

A Qantas consortium (Qantas 20 per cent, Brierley Investments 65 per cent, Japan Air Lines and American Airlines 7.5 per cent each) returned with an offer of $660 million, or $2.36 a share.

British Airways' consortium (BA 25 per cent, the now-defunct Development Finance Corporation 65 per cent, and the now-defunct Japanese property and tourism investor EIE 10 per cent) bid only $441 million, but said it would pass on 90 per cent of profits realised when shares were later sold to the public.

BA believed that the Government would eventually realise $800 million plus from this offer.

But the final decision was strongly influenced by the Government's short-term financial requirements and, to the consternation of Air New Zealand management, the Qantas consortium acquired the national carrier in April 1989.

Six months later, BIL sold a 25 per cent shareholding to the public at $2.40 a share and 5 per cent to staff at $2.16 a share.

The original overseas shareholders did not stay long. American Airlines and Japan Air Lines sold out relatively quickly. In March 1997, Qantas sold its 20 per cent stake for $3.80 a share.

The Australian company made more than $120 million in profit, but it is doubtful that it made any meaningful contribution to Air New Zealand.

After Qantas quit, the New Zealand carrier had no non-executive directors with international airline experience.

Meanwhile, in March 1993, the Australian Government sold 25 per cent of Qantas to British Airways for $A665 million or $2.66 a share.

In mid-1995 the Government sold the remaining 75 per cent to institutions and the public at $1.93 a share.

British Airways has made a very strong contribution to Qantas and the UK carrier continues to have three board representatives. The Australian company has benefited substantially from its association with BA, and its sharemarket value, after adjusting for subsequent equity issues, has grown by more than $A1800 million since privatisation.

By contrast, Air New Zealand is worth less today than it was in 1989.

Its total cost has been $1391 million - the original $660 million price plus subsequent equity contributions of $731 million.

When Sir Selwyn Cushing stepped aside on Tuesday, the company had a sharemarket value of $981 million, a loss of $410 million since privatisation.

Under Bob Matthew's chairmanship, which began in April 1989 and ended on May 27, 1998, the company's value increased by $179 million. Under Sir Selwyn Cushing's stewardship, which began the same day, Air New Zealand has lost $589 million in value.

Air New Zealand would have performed substantially better if a 25 per cent shareholding had been sold to British Airways in 1989, the remaining shares were later sold to the public and there had been no involvement by Brierley Investments.

The main reason for Air New Zealand's problems is the purchase of the debt-ridden, poorly performing Ansett Australia for $A1.05 billion ($1.3 billion). It was financed mostly by borrowing and Air New Zealand now has shareholder funds of only $1.9 billion compared with total assets of $9.5 billion.

The company is trying to spin the story that it had no option but to buy Ansett if it wanted to secure its long-term future. This is plainly ridiculous. Singapore Airlines desperately wanted to buy 50 per cent of the Australian carrier and it should have been relatively easy to strike a deal with SIA to the advantage of Air New Zealand.

But Sir Selwyn Cushing and his board ignored the company's international growth opportunities and went for broke on Ansett. Air New Zealand shareholders are now paying a big price in share price performance.

The latest Qantas proposal looks like a major kite-flying exercise aimed at distracting Air New Zealand and has no hope of passing a number of regulatory barriers, including the takeovers code to be introduced on July 1.

But the plan could be attractive to the different parties for several reasons.

Singapore Airlines could sell its 25 per cent Air New Zealand shareholding to Qantas. This would allow Qantas to vote in favour of the sale of Ansett to Singapore Airlines, which would have to abstain under stock exchange rules.

Brierley Investments could sell some, or all, of its 30 per cent Air New Zealand shareholding to Qantas.

This is an option if it can persuade the Government to change its rules, or to accept a structure similar to the one allowing the Bermuda-registered company to hold shares designated for New Zealand residents.

BIL has had several former cabinet ministers on its board and may believe that it still has political clout in Wellington.

Qantas could gain effective control of Air New Zealand and strike a deal with Singapore Airlines that would keep the Asian carrier and Ansett off the Tasman.

This would allow Qantas and Air New Zealand to raise prices on this route. A Singapore Airlines-controlled Ansett would also be much tougher competition for Virgin Blue and could force the discount operator out of Australia to the advantage of Qantas.

Based on the experience of the early 1990s, Qantas' interest in Air New Zealand is totally self-serving. It will do everything it can to extract full value for its shareholders.

It is wishful thinking to believe that a change in control from Brierley Investments to Qantas would be in the best interests of Air New Zealand's minority shareholders.

Air New Zealand's problems will be resolved only when Brierley Investments' influence is completely removed from the board table.

This would be achieved if the Government forces BIL to unwind the spurious trust structure that allows the Bermuda-registered company to hold shares designated for New Zealand residents only.

The New Zealand Government, taxpayers and investors owe no favours to BIL and its interests should rank bottom when determining the future of Air New Zealand.

If Brierley Investments is forced to sell its Air New Zealand shareholding, plenty of domestic investors, including corporates, institutions and individuals, would be willing to buy these shares, although BIL might be forced to accept less than the present market price.

Air New Zealand would then have a more secure shareholder base and could forget about Qantas.

It could then go to Singapore Airlines with a strengthened hand and negotiate the sale of some or all of Ansett.

In return, the powerful Asian carrier would be asked to make a long-term commitment to Air New Zealand in terms of its 25 per cent shareholding, financial resources and board and management expertise.

* bgaynor@xtra.co.nz

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