Dialogue: Air NZ flies into more flak

By FRAN O'SULLIVAN

Air New Zealand heads into yet another tumultuous week.

Today its lawyers will front up to the Australian Securities and Investments Commission in Sydney to try to head off what looks like an underarm attack by the regulators - a classic kangaroo court.

On Thursday, the national flag carrier reports its results for the six months to December 31. Analysts are divided on the airline's prospects, but it seems inevitable new chief executive Ralph Norris will take the opportunity to dump some more bad news and clear the airline's accounts for further growth.

It is perhaps not surprising, given the Australian Government's negative stance towards Air New Zealand, that its securities watchdog chose the week in which the airline's former Australian subsidiary Ansett finally died to announce another taskforce investigation.

The Aussie blame game has been running hot since Ansett failed for the second time in six months. Plans to resuscitate the airline ultimately failed last week and scalps are being sought.

It's not clear whether the ASIC is simply filibustering.

But it seems extraordinary that the regulators could decide not to take action (for now) against the previous Ansett directors (most of the previous Air New Zealand board) on claims that they had allowed the Australian airline to trade while insolvent, yet then decide to open another front: a further investigation into whether Air New Zealand had adequately informed the market about Ansett's difficulties.

Even more strange because the New Zealand Market Surveillance Panel has already investigated the issue and decided the former directors have no case to answer.

Yes, there are some equivocations. These will be settled in the standard New Zealand way of recommending changes to the Stock Exchange disclosure requirements.

But the panel is not launching an action against the former directors.

Even more disturbing is the comment by ASIC chairman David Knott that "depending on the outcome of the further inquiries", the public interest might be better served by the commencement of a representative action for damages against Air New Zealand in relation to the level of its financial disclosures before its decision to seek voluntary administration for Ansett. Knott is out of line by flagging such an outcome before his "taskforce" has even got off the ground.

His statements will inevitably shift some of the focus away from the Australian Government, the failed Tesna consortium and unions.

Knott seems to have overlooked one key factor in the ASIC's haste to find someone to ping for Ansett's demise. Although Air New Zealand was listed on the Australian Stock Exchange before the Ansett collapse, it had a foreign company exemption. This effectively meant it was subject to New Zealand rules on disclosure.

If the New Zealand regulators have not found the airline breached Stock Exchange disclosure rules, how can the Australian regulators take action?

Talk about double jeopardy.

Would Knott get away with such an announcement involving an Australian company? I doubt it.

But even before the ASIC's latest investigatory trial of Air New Zealand and its former directors has commenced, Knott has floated its outcome. Air New Zealand's lawyers should be well armed on this one.

Underlying the ASIC's decision to mount another investigation into Air New Zealand's stewardship of its Ansett Australia investment appears to be a mounting Australian perception that the "Kiwis" got away from their ill-fated investment scot-free.

The New Zealand Government pumped in A$150 million ($183 million) to Ansett's voluntary administrators Mark Mentha and Mark Korda - known colloquially in Australia as the "two Marks" - late last year as settlement of potential claims against Air New Zealand.

In retrospect is was probably a good deal.

The Ansett demise has had other serious effects on Air New Zealand.

The airline had been in discussions with Solomon Lew and Lindsay Fox's Tesna syndicate with a view to forming an informal transtasman alliance.

This alliance would have enabled Air New Zealand to gain access to vital feeder traffic from Ansett. In return Air New Zealand would have funnelled business in the other direction. But that option has gone.

Air New Zealand has had "tentative" talks with Sir Richard Branson's Virgin Blue - the major budget airline in Australia - but these are not at the substantive stage.

Out in left field is a potential demand from Rupert Murdoch's News Corp - delayed settlement of the airline's acquisition of 50 per cent of Ansett. At June last year this was estimated to be $82 million. The value of the deferred consideration due after June is $27 million.

It is unclear whether Air New Zealand will settle the News Corp payment as part of the Thursday announcement, or contest the News Corp demand.

Leaving aside the ASIC's machinations, it is odds on that the Government will be asked to dip into its coffers again to keep Air New Zealand flying.

Finance Minister Michael Cullen advised Air New Zealand last year the Government would be prepared to commit a further $150 million in capital before June next year.

At issue is whether the airline's liquidity problems are over.

Independent advisers Grant Samuel - in a report to Air New Zealand shareholders late last year - pointed out that the airline still faced considerable financial risk even after the Government's $885 million recapitalisation.

"Air New Zealand will not be in a financial position to sustain any further material extended downturn in business or other adverse impact," the advisers reported.

"In such circumstances the company will be dependent on the Crown's willingness to provide further loan or equity capital, or to underwrite a [rights] issue, or support a private placement possibly to another airline."

The airline has to keep minimum liquidity of $575 million with at least $350 million in cash - much higher than during its pre-Ansett glory days.

Its five-year plan has ambitious targets: cumulative cash flow in excess of $1.9 billion over five years, debt reduction of $1.5 billion, a gearing reduction to under 60 per cent - topped by growth in profitability of 7.8 per cent a year.

Air New Zealand has a disposal programme for surplus assets: Skifields such as Coronet Peak, the Remarkables and Mount Hutt have been put on the block and the Jetset retail travel agency has been sold.

But the key profitability drivers which will decide the airline's long-term future are its yield, load factors, capacity, fuel prices, foreign exchange and labour costs.

Analysts and journalists will not get an opportunity to peek beneath the airline's skirts until Thursday. But yields on international routes have been affected by the reduction in demand from the September 11 terrorist attacks.

Qantas is also driving a fiercely competitive war against Air New Zealand on the transtasman route. This route is still basically unprofitable, even at the best of times, though both airlines are posting a transtasman return fare of $1600 plus for economy, well above the $1200 at Christmas/New Year.

Business travellers can of course score better deals through advance bookings and company-wide discounting. But the point is that if both Qantas and Air New Zealand allow fares to rise to profitable levels on the Tasman the load factor may diminish. That is a scenario that Qantas could withstand, but it would pose problems for the national flag carrier.

To put the Ansett demise into perspective, it should be noted that passenger traffic across the Tasman makes up about 55 per cent of the airline's international business. If Air New Zealand cannot structure a compensating deal with Sir Richard's Virgin Blue it will increase the financial pressure.

Air New Zealand would appear less exposed on the capacity front - at least longer term. About 50 per cent of its fleet is funded through operating leases, some of which terminate in the next couple of years. This gives the airline flexibility to manage changes in demand, but in the meantime any spare capacity must be paid for.

The collapse of the New Zealand dollar and volatility in fuel prices placed exorbitant pressure on Air New Zealand in 2000/2001. Its low credit rating affected its ability to hedge fuel prices.

The recent firming of the NZ/US crossrate to above US42c will have a slight negative impact on yields, but it will be outweighed by the benefit to the company's bottom line because a large proportion of the airline's operational costs are denominated in US dollars. This includes fuel, offshore maintenance, parts and terminal services in some designated countries.

At issue also will be the extent and speed of Air New Zealand's downsizing.

The airline expects to shed up to 800 staff by the end of its financial year - June 30. The reduction is expected to save $50 million a year.

Longer term these are the issues which really matter, not Knott's public opinion pandering.

Dialogue on business

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