SIA likely to raise Ansett stake, analysts say

10.00 am

SINGAPORE - Cash-rich Singapore Airlines (SIA) may have little choice but to help out Ansett Australia, as the Australian market is key to its operations and to beating its rival Qantas.

The Singapore carrier has two choices -- either raise its current 25 per cent stake in Air New Zealand, which owns 100 per cent of Ansett, or buy a direct stake in the Australian carrier, analysts say.

Either would pave the way for SIA to inject much-needed capital into Ansett -- which had 10 ageing aircraft grounded by the Australian aviation authorities over the busy Easter period on safety concerns -- and allow it to upgrade its fleet after having postponed a $2.51 billion fleet renewal programme two years ago.

What is holding the Singapore carrier back, analysts said, is the fact that it is limited from increasing its stake in Air NZ because of government regulations and it does not have a controlling stake in Ansett.

"SIA will do something as Australia is a strategic market for them. But I don't think it is in a position to pump money into Ansett right now as it does not have control of the airline," Lim Chin, aviation analyst at Morgan Stanley said.

The largest shareholder in Air NZ currently is Brierley Investments with a 30 per cent stake.

"How can SIA pump more money into Air NZ if the largest shareholder has no plans to do so?" said Chin.

Despite the shareholding structure at Air NZ, analysts feel SIA cannot afford to ignore Ansett's problems.

John Casey, analyst at SG Securities, said Ansett's survival was key to SIA's strategy of keeping the pressure on Qantas Airways, Australia's biggest carrier and 25 per cent owned by British Airways.

"Historically, Qantas has used their profitable domestic operations to fund their South-East Asian operations but those profits are starting to dry up," said Casey.

"SIA needs only to establish a low profit Australian operation to protect its core franchise in South-East Asia... that will keep the pressure on Qantas," he said.

Ansett has 43 per cent of the domestic Australian air market, which has seen a bloody price war erupt with the entrance of two discount operators Virgin Blue and Impulse Airlines last year.

Whether SIA might raise its stake in Air NZ would depend on whether the New Zealand government would raise the 25 per cent limit on airline ownership by foreigners.

So far, different government officials have given conflicting signals in the last couple of days on whether that cap might be lifted with the chief concern being whether the country's bilateral air rights might be affected.

Air NZ itself has been busy lobbying for the ceiling to be raised with chairman Sir Selwyn Cushing saying the move would improve the airline's ability to raise capital and fund the acquisition of new aircraft.

"If they don't lift the cap, Air NZ might go under, I don't think they want that," Morgan's Chin said. "Ansett's operations in Australia is much bigger than Air NZ and if they go bust, it will drag Air NZ along."

Analysts in Australia expected Ansett to head for an estimated full year loss of $A170-$A200 million even before the recent groundings. So far losses created from the grounding have amounted to around $NZ2.5 million.

Air NZ itself issued a profit warning last month due to losses expected from its Australian operations with analysts expecting it to chalk up losses of more than $A100 million for the year ending June 31 2001.

ING Barings analyst Philip Wickham said he believed the foreign ownership cap on Air NZ would be relaxed and SIA would raise its stake in the carrier to 40 per cent in the coming months.

Morgan's Chin also believes SIA would probably up its stake in Air NZ, if it could get approval from the government.

"They have said last year they wanted to have 40 per cent. That would give them control and allow them to pump money into Ansett," he said.

Casey felt, however, that the New Zealand government would be unlikely to change its stance, having rejected SIA's request for a higher share ownership just last year.

"The best of all possible worlds would be for SIA to get a direct stake in Ansett -- possibly 25 per cent though 50 per cent would be great," Casey said.

- REUTERS