Surviving, but must be fitter

By DANIEL RIORDAN aviation writer

Another $250 million would have pleased the market more, but the Government's $885 million bailout of Air New Zealand has at least ensured the airline's survival, if not profitability, for the foreseeable future.

The recapitalisation package, announced yesterday, will see control of the national carrier pass from Brierley Investments and Singapore Airlines to the Government, which will take up to a 83 per cent stake through a loan and equity.

Air NZ will remain a listed company, and the Government has pledged its management will stay in the hands of a streamlined board.

The deal would leave Air NZ's balance sheet in far better shape, but would not ensure its return to profitability, said Macquarie Equities senior analyst Arthur Lim.

"We don't think Air NZ will be making money for at least the next couple of years," he said.

Mr Lim said the deal would lift shareholders' funds to about $1 billion compared with net debt of $1.5 billion. That ratio of debt to equity was still too high, but manageable.

He calculated the company's net asset backing, assuming shares are issued to the Government at 24 cents, would be 23.4 cents a share.

The company made around $140 million on an earnings before interest and tax basis in the year to June 30 (excluding Ansett), and its position had since deteriorated. Interest costs on its debts, including the Government's loan, would push the company into the red, said Mr Lim.

The airline is likely to cut back routes, particularly on its international operations, which lost $50 million last year on an ebit basis.

Even domestic routes, which collectively made $149 million last year, may not be safe.

Air New Zealand acting chairman Dr Jim Farmer indicated yesterday that the company is about to announce cuts to international and domestic frequencies, routes and aircraft, reflecting the reduction in transtasman feed from Ansett's closure and the downturn in global aviation after the terrorist attacks in the US.

Mr Lim said a priority for the airline had to be re-establishing a presence in Australia. "The airline has no feeder traffic from Australia and passenger flow the other way is also a problem," he said. "Unless Ansett Mark II gets off the ground quickly or they do some deal with Virgin Blue, they'll be flying passengers into the lap of Qantas."

Finance Minister Michael Cullen said a partial sell-down of Government shares would be made only when the world aviation market made Air New Zealand viable.

"In particular, we may well be looking for a cornerstone airline shareholding within Air New Zealand because that is probably desirable from the long-term perspective of the company."

Who that cornerstone shareholder might be is unclear. Qantas, and Singapore Airlines, have been mentioned.

Air New Zealand and Singapore Airlines are working on a deal to revive Ansett Australia, which stopped flying last month after being placed in voluntary administration with the loss of up to 16,000 jobs.

Dr Farmer said a Singapore Airlines and Air New Zealand management team was trying to set up Ansett at the "value end" of the aviation market in Australia.

The market is expecting that, after Dr Farmer is replaced, there will be more changes at a board and management level, including, probably, the resignation of chief executive Gary Toomey.

Dr Farmer said trading results for September would be detailed in a few days.

nzherald.co.nz/aviation

nzherald.co.nz/travel