Straight question: who is really running our national flag carrier Air New Zealand? Is it CEO Greg Foran and chair Dame Therese Walsh, or is it Finance Minister Grant Robertson?
Right now Air NZ is in a commercial straitjacket. It is haemorrhaging cash.
And if the Cabinet does not agree next week to lead a capital-raising for the airline, it will be forced to draw down on that usurious $900 million convertible loan facility it struck with Robertson back on March 20 just before New Zealand first went into lockdown.
Robertson gets this. But a sensible Cabinet decision is also overshadowed by the optics around the upcoming election. Already, NZ First leader Winston Peters has suggested the Crown should look to boost its 51 per cent stake in the airline and increase Government direction over its operations — particularly to increase services to the regions.
That's one reason why Robertson and Labour have also been prepared to push out a decision until after the election. But the postponement of the election for another month from September 19 to October 17 just raises new uncertainties about the ability of markets to sustain a significant capital raise at sensible pricing.
Really, this is not the time to play politics.
The Covid-19 pandemic has crippled Air NZ's international operations and this second lockdown in Auckland has again knocked the airline off its perch just as its domestic operations were picking up pace.
The airline — led by Walsh — has been advocating for months now to its 51 per cent shareholder (the Government) that it should step up and lead a capital raise to restore the company's balance sheet.
Foran and chief financial officer Jeff McDowall have been frequent visitors to the Beehive or on Zoom calls keeping ministers and their officials up to date as the airline takes on board the financial impact, not only of the lockdowns, but also the reduction in the number of passengers coming back to New Zealand because managed isolation and quarantine facilities could not cope, and the costs of keeping subsidised flights going to take exports to key markets.
Next Thursday, the airline will announce its full-year financial results for the year to June 2020. In 2019, former CEO Christopher Luxon's last year at the top, it announced annual earnings before taxation of $374m, compared to $540m in the prior period. The impact of higher fuel prices and problems with the Rolls-Royce engines had taken a toll.
His successor, Foran, could have been expected to unveil much higher earnings this year. Covid-19 changed that.
But surely, when Air NZ went cap in hand to the Government back in March it could have expected a commercial solution.
Remember, this was at a time when other New Zealand companies hit by the Covid-changed world were planning to raise capital. Auckland Airport — also hit hard by Covid-19 — was one of them.
On April 6 it announced it was conducting an equity raise of up to $1.2 billion to restore its balance sheet to ensure it "remained well-capitalised during the period of strict border controls and significantly reduced passenger numbers, with the aim of ensuring it was well positioned for a post Covid-19 recovery." What Air NZ — also reliant on passenger numbers — got instead was that excruciating debt funding agreement.
The Treasury and Government adviser Goldman Sachs' Andrew Barclay were in the mix. The rationale for striking a swingeing interest rate for the facility was that it would stop other New Zealand companies coming to the Government asking for financial help.
Air NZ will have to pay 7-8 per cent interest on the first $600m it borrows from Government; and 9 per cent if it draws down the other $300m. The rates increase by 1 per cent if the airline needs the loan for more than one year.
If it does draw down the loan — which will happen if the capital raising does not proceed — Air NZ will not be able to pay dividends to other shareholders while it is in place.
The high interest cost was meant to act as a barrier.
Neglected in this rationale was one salient factor. Air NZ was not simply another New Zealand blue chip seeking backdoor help. This was a company seeking capital from its major shareholder — the Government (or to put it correctly, "the Crown").
It is this country's lifeline to the world, ferrying New Zealanders back home to escape the ravages of the pandemic, maintaining external links to markets and domestic services within the country.
The loan facility does not address its balance sheet issues. As is the way of all major debt, once drawn down, it puts in train a series of consequences. For Air New Zealand, not only does it impose higher debt servicing costs, but in order to further protect the balance sheet it will lose its flexibility to "carry staff". Foran's prior warnings of more redundancies will quickly come to pass and a company which has been struggling to keep morale high will find that even harder to retain.
From the Crown's perspective that $900m loan has to be repaid — unlike equity. But again, the loan takes priority in the event of a default.
It is a vicious cycle.
All major airlines have taken a severe hit in the wake of the pandemic, which has brought much of international aviation, in particular, to a standstill.
Most of those key airlines have raised equity, shoring up liquidity to withstand an uncertain future. Among them: Qantas, Cathay Pacific, United Airlines, American Airlines, IAG, Easyjet, Lufthansa, Singapore Airlines, Air Canada, Southwest, and Finnair. Some have also taken on board more debt but the aim has to be to have a solid balance sheet.
Factor in also that prior to the pandemic emerging, Air NZ was among just a handful of international airlines which had the distinction of being rated investment grade.
On a Zoom call this week, Ruth Stroppiana, from Moody's Analytics in Sydney, noted the potential for international capital markets to come under pressure this year. Others have pointed to the risk that international equity markets will shorten up as the US election draws closer.
Research analysts have expected the company to announce a $800m to $1.2b capital raise.
They had thought that would occur at the time of the annual result next Thursday. Those doing soundings on Air NZ's behalf seeking support for institutional funding — Forsyth Barr and UBS — will no doubt find support at this point. There is no guarantee support will not diminish if the global pandemic deepens and the return of international aviation toward previous heights is postponed.
Already, the proposed transtasman bubble is unlikely to emerge in the near term.
So it is getting tougher for the airline. It is also getting tougher for Robertson.
Does the Cabinet simply recognise Air New Zealand's request to support a capital raising while the going is good — a step which would also keep faith with its fellow airline shareholders under the mixed ownership model?
Or does NZ First once again prove to be the Cabinet handbrake?