Kangaroo to the rescue

As talks continue behind closed doors, DANIEL RIORDAN examines the options for a Qantas takeover of its NZ franchisee.

Heard the one about the kiwi, the parrot and the kangaroo who couldn't make whoopee?

With negotiations on the future of Qantas NZ continuing into Easter, no punchline is in sight.

The tryst sounded a grand idea when announced last June. A bunch of New Zealand investors under the name Tasman Pacific Airlines would run the country's second airline as a franchise of Qantas Airways. Travellers on Qantas NZ would enjoy the benefits of Qantas' expertise and an alternative to Air New Zealand would be assured.

Tasman Pacific, which a few months earlier had paid Rupert Murdoch's News Corp $36.5 million for Ansett New Zealand, trumpeted the local hero theme as loudly as it could, even if a quarter of the shares were in Australian hands.

And David Belcher, the merchant banker who had stitched the consortium together, chose as the new owners' codename, Zazu - the irascible parrot charged with protecting the heir to the throne in the Disney movie The Lion King.

"It has all the right connotations of loyalty and tradition," said Mr Belcher.

"We also wanted to have a group of investors who were loyal to the company for the long term. They needed to believe in the company's ability to grow shareholder wealth, not just reap a dividend every six months. Building an airline is a long-haul journey, and each of the investors have their seatbelts fastened for that trip."

But this month the ride got too bumpy for even these grizzled investment veterans.

Although none of the parties will confirm it, Qantas is understood to have held a preemptive right to buy its New Zealand franchisee from day one of the agreement.

High-placed sources within Qantas confirm the airline's end game has always been full ownership. A few years ago it looked at buying Ansett NZ from News Corp but baulked at an asking price of close to $80 million.

It is unclear how much of the continuing negotiations for a sale was initiated by Qantas' moving to protect its brand, and how much was Tasman Pacific calling for help as its losses mounted.

But when insolvency adviser Ferrier Hodgson's top man, Michael Stiassny, was spotted in the Qantas NZ offices last week, the odds on a change of ownership became very short, with price the key factor.

Clearly the franchisee's performance has failed to match the expectations of either party.

Analysts had predicted the airline would mount a real challenge to Air New Zealand's market dominance.

Qantas would help with economic advice and management systems, provide access to the oneworld global airline alliance, offer smoother international travel connections for Qantas NZ passengers, and greater clout when the airline bought needs ranging from fuel to uniforms and cutlery.

Qantas contributed towards a $6 million rebranding exercise, and Qantas NZ agreed to pay what is believed to be several millions of dollars for the franchise rights, the first Qantas had negotiated anywhere.

But the bright hopes - based on the previous 12 months' cost-cutting, including renegotiating pilot contracts, revamping engineering and selling a plane - have not been met. Tasman Pacific is believed to be losing several hundred thousand dollars a month.

Arcus Investment Management equity head Simon Botherway says: "The investors were very brave, but it's always been a marginal proposition, especially since the [December 1999] pilots' dispute."

After news of the negotiations broke a week ago, a cone of silence has descended over Qantas NZ's Auckland headquarters, broken on only two occasions. The airline denied that debenture holder the BNZ had called in the financial advisers, and a report that chairman Ken Cowley had sold out of the consortium. It said Mr Cowley remained a major shareholder.

If Qantas does take over, it is expected to replace eight 90-seater BAe146 whisper jets with Boeing 737s, which can seat 129 passengers. Qantas NZ leases the whisper jets through Ansett Worldwide Aviation Services, an expensive arrangement from Ansett NZ's start-up days. Qantas would buy out those leases.

The 737s would provide 20 to 25 per cent lower seat-kilometre costs. And they would be easier and cheaper to maintain than the whisper jets, which have to be serviced at a purpose-built Christchurch base.

The 737s enjoy other advantages over the whisper jets.

Qantas, when it was considering flying in New Zealand on its own account, looked at flying 737s on the main routes. Now one option for the airline is to fly those planes across the Tasman as well, linking into domestic routes.

JP Morgan analyst Arthur Lim says Air New Zealand makes great use of its 737s across the Tasman.

"The airline business is all about maximising load factors and enhancing yields.

"One of the problems with the transtasman routes has been using the big planes and not being able to get the load factors up. By using 737s you can have more flights better suited to the needs of travellers."

A Qantas 737 could fly to Auckland from Sydney and a few hours later be flying to Wellington then back across the Tasman - or whatever mix was most efficient for demand at the time.

Domestically, Qantas NZ also flies five 40-seat Dash 8-102 aircraft and two 50-seater Dash 8-311s on smaller routes. In addition, subsidiary Tasman Pacific Connection operates three Jetstream 32 commuter aircraft, each seating 19 passengers. The airline might continue with these arrangements or use more feeder services on some of the Dash routes.

The industry has been abuzz with rumours Qantas will slash its 1100-strong local workforce.

Heads of the unions that represent the workers say they have not been privy to the negotiations between the two airlines.

But flight attendants union representative Terry Law said his 160 Qantas NZ members were cautiously optimistic at the prospect of new owners. "If this goes ahead, it brings an end to the uncertainty we've operated under once and for all."

House of Travel director Chris Paulsen said the travel industry would also welcome the move.

"We need two strong domestic carriers. Ansett NZ really struggled and Qantas NZ wasn't making the right kinds of inroads. If Qantas owns the operations we'll see better equipment, maybe 737s and more capacity into the main trunk."

Marketing transtasman flights out of provincial New Zealand would also be easier.

Easier, one imagines, than having a parrot perch on a kangaroo's shoulder.