Market upbeat on Air NZ cash

By DANIEL RIORDAN aviation writer

News that Air New Zealand might need a further $700 million to keep flying has failed to spook the market, with analysts saying the shortfall confirms views they have held since last year's taxpayer bailout.

Air NZ's share price rose 1c yesterday to 36c, despite the release of hundreds of pages of letters, briefing papers and Cabinet minutes related to the Air NZ bailout under the Official Information Act.

Arcus Investment Management equities head Simon Botherway said the $700 million shortfall - mentioned in a Treasury report last November - was "in the ballpark"of his firm's original estimate.

How much progress Air NZ has since made to reducing that funding gap was unclear.

But he said a rights issue of $200 million - mooted by airline managing director Ralph Norris - would go only a small way to solving the airline's capital needs, and be only the first stage of a capital-raising effort.

Macquarie Equities research head Arthur Lim said the Treasury figure related to a worst-case scenario, and conditions in the airline industry, especially in Asia, had improved since its calculation.

But Air NZ remained highly geared and might have to raise more capital on top of the rights issue, depending how the industry developed over the next couple of years.

Based on advice from consultants PA Consulting and Cameron & Co, the Treasury report said: "Air NZ is a viable business, notwithstanding a high-risk one, but requires capital of $1.705 billion."

The Government ended up providing $885 million and pledging a further $150 million if needed by June next year. The airline disputes the figure's validity, and says it is making progress towards financial solidity.

Air NZ spokesman David Beatson said the $1.705 billion was the amount that would be needed to achieve a reduction in the airline's gearing to 65 per cent by June next year, a reduction the company did not need to achieve immediately or in the coming year.

An improvement in the company's gearing could be achieved without requiring additional equity from shareholders.

"We can improve performance, retain profits and sell assets to bridge any capital gap needed to reduce our gearing to a level acceptable to our lenders," he said.

But even after last year's recapitalisation, Air New Zealand's balance sheet remains stretched.

At December 31, its gearing (as measured by debt to debt plus equity) was 93.8 per cent. After the recapitalisation on January 18, it dropped to 53.1 per cent, or 78.2 per cent with aircraft operating leases included.

Another Treasury report dated November 7 noted the sale of non-core assets could yield up to $900 million in the medium term.

But it is hard to see where that might come from. So far Air NZ has sold its Jetset travel agency businesses and is negotiating the sale of NZski.com, which runs the Coronet Peak and Remarkables fields in Queenstown and Mt Hutt in Canterbury.

The Australian Jetset business fetched less than $10 million and the New Zealand business will have fetched less. One valuation puts the ski fields' worth at between $35 million and $45 million.

But its most attractive non-core asset, its world-renowned engineering operations, are not for sale. One analyst values the business at about $200 million.

The airline admits the asset sales, along with route and fare restructuring it has announced to date, will have only an incremental long-term effect.

Instead, Air NZ is pinning its hopes on the results of the strategic review it began last year, and which is nearing completion.

The review has focused initially on changes to the airline's short-haul network (less than four hours flight time) before moving on to longer international routes.

Options include downgrading service levels on some routes, although Norris has ruled out conversion to a no-frills airline.

Other initiatives include higher ticket prices, cutting international routes, using smaller planes on some routes, and renegotiating the terms of its air points contract with Bank of New Zealand.