Dialogue: Suitors should not be lacking

By MARC POTTER*

It would be the height of irony for the Government to bail out Air New Zealand - and by association Ansett - via any direct or indirect mechanism.

While the benefits of a strong flag carrier are manifest, the full set of remedies for the koru carrier's distress has likely not been fully explored and the current course may result in diminished returns.

In the early 1990s, Air NZ was one of the world's most profitable and fastest-growing airlines. It had enviable access to the world's best sources of tourists and its world-class cost structure, based on high fleet utilisation and relative low costs for high-skilled workers, made for good margins.

With the move towards free trade, management had to decide whether to expand into new markets or try to erect further entry barriers to NZ via fleet expansion and driving down its cost structure. Based on the airline's profitability, it had the luxury of contemplating both.

The obvious market for expansion was Australia. . Eventually, the airline was encouraged to buy into Ansett, which was already struggling through a lack of real international exposure or alliances, weakening productivity and anaemic capital funding. Air NZ's investment for 50 per cent of Ansett in 1997 brought no operational control and little apparent influence, but eroded the financial performance and flexibility of Air NZ and distracted management.

Once a deal was struck between News Corp and Singapore Airlines, Air NZ exercised its pre-emptive rights to secure control of Ansett in the hope of executing a turnaround of the business.

But it had to deal with approvals by the Australian Government, which eliminated the major value-creating options for the buyer, including significant job losses, shift of high-skilled jobs, reduction in non-profitable regional routes and head office rationalisation.

With the arrival of budget airlines Impulse and Virgin Blue, rising fuel costs and a clean-out of the management at Air NZ who had conceived and executed the Ansett buy-out, few levers for improvement remained.

The present management at Air NZ are in a tough spot. Ansett can and will improve, as many other turnarounds in Australia have demonstrated. But it will require funds and it will take time - three to five years, or two to four if the current crisis can be used to create an environment for change.

In the meantime, both NZ and Australia remain markets worthy of investment from external players. Air NZ Engineering has negotiated an investment from United States giant Pratt & Whitney in its Christchurch-based repair operation. Australia has seen investment from Britain in Virgin Blue, its airport sales have been hotly contested by consortiums backed by overseas players, and other major carriers continue to expand. The attractiveness of these markets means there are likely options beyond those served up to date.

A good example is Canadian Airlines International, which, when it looked like going under, was hotly contested by American Airlines as well as Air Canada, backed by alliance partners United and Lufthansa.

The two alliances - OneWorld (including Qantas, British Airways, American Airlines) and Star (including United, Lufthansa, Air NZ, Ansett, Singapore) - view Australasia as a critical link in their global networks. Their direct interest and its implications should make Air NZ attractive to many classes of investors, including those inside Australasia.

This should negate the need for the Government to back the airline and, in effect, underwrite the turnaround of Ansett. This involvement would eliminate the crisis, and give pause to future decisions that might otherwise encourage the entrance of new airlines and tougher competition.

Certainly Singapore Airlines would like an increase in its allowable shareholding if it were to underwrite the turnaround.

Because any increase above its current 25 per cent gives it effective long-term control of the airline, the discouraging effect on other potential airline and non-airline investors needs to be weighed against the likely impact on the airline, and economy of New Zealand. Knowledge jobs are important in Singapore, too. This scenario, therefore, calls for a set of fish-hooks, as illustrated by Canberra.

Options do exist. And while those on the table are not necessarily bad options, they need to be crafted so that the interests of the shareholders and investors are transparently linked to corporate governance and management action.

* Marc Potter, an ex-partner at Booz-Allen & Hamilton, had Air NZ as a client for six years. He is now a freelance consultant.