NZ's turbulent air industry hits downdraught

By BRIAN GAYNOR

The local airline industry experienced another dramatic week with the sale of Ansett New Zealand and Brierley Investments' decision to withdraw its Air New Zealand shareholding from sale.

A short history of the two companies since 1987 illustrates why Ansett NZ is now on a secure footing while the outlook for Air New Zealand remains uncertain.

When Ansett NZ started commercial operations in July 1987 its shareholders were Ansett Transport Industries (50 per cent), Brierley Investments (27.5 per cent) and the Nelson-based Newmans Group (22.5 per cent).

The internal travel of visitors who had flown to New Zealand on Qantas, Japan Airlines and American Airlines was a big source of the new airline's revenue.

Initial losses were much greater than expected and BIL and Newmans wanted out.

In 1988, Ansett Transport approached the Government for permission to acquire the remaining 50 per cent of Ansett NZ.

It received consent on the basis that it would sell 50 per cent of the company to New Zealand interests within two years.

BIL lost $16 million on the sale of its shareholding to Ansett Transport.

At the same time, the Government had called tenders for the sale of 25 per cent of Air New Zealand. The serious contenders were Qantas and British Airways, which both offered $165 million for the strategic stake.

The Treasury recommended selling to British Airways because the economic benefits were greater, the management of Qantas and Air New Zealand did not get on and Qantas' main interest was to stop British Airways acquiring a cornerstone shareholding in Air New Zealand.

The sale process caused considerable dissent within the Lange Administration. The 25 per cent sale was aborted, but quickly reinstated as a 100 per cent offer because Sir Roger Douglas wanted to achieve his $2 billion asset sales target for the 1988-89 year.

In December 1988, an agreement was signed to sell Air New Zealand to BIL (65 per cent), Qantas (20 per cent), Japan Airlines (7.5 per cent) and American Airlines (7.5 per cent) for $660 million.

One of the conditions was that BIL must eventually sell a 30 per cent shareholding through a stock exchange listing.

Qantas has received two big benefits from its Air New Zealand shareholding.

In 1993, British Airways bought 25 per cent of Qantas and this shareholding has been an important contributor to the Australian carrier's strong profit performance.

In March 1997, Qantas sold its 20 per cent shareholding in Air New Zealand for $3.80 a share. The Australian company made more than $120 million on the investment.

Japan Airlines and American Airlines have also sold out.

Air New Zealand has received little benefit from its three airline shareholders.

Ansett Transport was dismayed by the sale of Air New Zealand because of the threat to its revenue from passengers disembarking from Qantas, Japan and American Airlines.

Sir Peter Abeles, joint managing director of Ansett Transport, threatened to shut down Ansett NZ if it was not granted bilateral rights (to fly from New Zealand to an international destination) across the Tasman.

Sir Peter's objective was to create a transtasman link between Ansett Australia and Ansett NZ that would compensate for the loss of business from Qantas, Japan Airlines and American Airlines.

After heated and protracted negotiations, the Lange Government made two concessions to Ansett:

\EE The Government would use its best endeavours to persuade Qantas to extend its on-carriage arrangements with Ansett NZ.

\EE Ansett NZ could not be granted New Zealand bilateral rights because it was foreign-owned, but it could apply for these rights when it became "substantially owned and effectively controlled" by New Zealand interests.

Ansett NZ agreed to continue on this basis, but the company remained 100 per cent Australian-owned until this week's announcement.

The story took another twist in 1996 when Air New Zealand bought 50 per cent of Ansett Holdings. Ansett Holdings owns 100 per cent of Ansett's Australian domestic operation and 49 per cent of Ansett International. Ansett NZ was not part of the deal.

The acquisition was in response to Air New Zealand's declining profitability and a much-improved performance by Qantas following British Airways' involvement and its 1995 stock exchange listing.

When Singapore Airlines tried to buy the remaining 50 per cent of Ansett Holding, Air New Zealand used its veto powers to frustrate the sale.

Air New Zealand has since negotiated the purchase of 100 per cent of Ansett Holdings and shareholders will meet in Auckland on Tuesday to approve the acquisition.

In recent weeks, BIL has been discussing the sale of its 47 per cent shareholding in Air New Zealand to Singapore Airlines, one of the world's most respected airlines.

Last Tuesday, BIL said it had also received expressions of interest from Qantas and other parties but "it had withdrawn its stake from sale."

The previous day, a transtasman investment group, which includes Alan Gibbs and Trevor Farmer, announced the purchase of Ansett NZ. Although the domestic operator has $208.4 million of accumulated losses, it has been trading more profitability in recent years.

Ansett NZ will need a capital injection - nearly 100 per cent of its existing capital is redeemable preference shares - but it is in a much stronger position to take on Air New Zealand under the new ownership structure.

Several strong messages have been learned from industry developments over the past 12 years:

\EE Qantas has consistently adopted a spoiling approach towards Air New Zealand. The Australian carrier's latest interest looks like an attempt to buy a strategic shareholding in Air New Zealand and force it to divest its Ansett Holdings stake.

This could weaken Air New Zealand and reduce the competitive pressures on Qantas. Singapore Airlines would then lose interest in the New Zealand carrier.

\EE Ansett NZ is now substantially owned and effectively controlled by New Zealand interests and can apply to the Government for bilateral rights. It is now a serious threat to Air New Zealand's flagship status since BIL moved overseas and the larger company became effectively overseas-owned.

Ansett NZ could issue a legal challenge to Air New Zealand's pre-emptive position.

\EE Mr Gibbs and Mr Farmer have strong international connections. They could persuade a big international carrier to take a strategic stake in Ansett NZ, but the company would still remain substantially owned and effectively controlled by New Zealand interests.

This would further weaken Air New Zealand's dominance of the domestic and international markets.

\EE Air New Zealand has enormous potential, yet it performed poorly while under the control of Brierley and Qantas. Its future will be secure only when it finds a strong cornerstone shareholder that will make a positive contribution to the group.

On Tuesday, Air New Zealand shareholders have the opportunity to quiz Sir Selwyn Cushing and his fellow directors on the direction of the airline. The notice of meeting contains very positive profit forecasts, but Air New Zealand's poor share price performance indicates that investors are not impressed. There are important questions that should be directed at Sir Selwyn in his capacity as chairman of Air New Zealand:

\EE Is Qantas, Singapore Airlines or some other party the preferred cornerstone shareholder for Air New Zealand?

\EE Has BIL given Air New Zealand any indication why its negotiations with Singapore Airlines have stalled?

\EE Has BIL given Air New Zealand any indication whether Qantas has made a firm offer for its Air New Zealand stake? If so, what benefits would Qantas bring to the New Zealand carrier?

\EE Has BIL given any indication that it would accept a higher offer from Qantas even if it were not in the best interests of Air New Zealand?

\EE Is there any concern that Air New Zealand could lose its bilateral rights now that Ansett NZ is owned and controlled by New Zealand interests? If not, why not?

\EE Can Air New Zealand successfully integrate Ansett Holdings without a strong cornerstone shareholder?

\EE What management changes will be made to ensure that the Ansett Holdings acquisition is successful?

The direction of Air New Zealand remains uncertain. Shareholders, including institutional shareholders, have only themselves to blame if they don't demand substantive answers from Sir Selwyn and his fellow directors.

* Disclosure of interest: none.