Turmoil over $1.7b Air NZ bailout target

By FRAN O'SULLIVAN, VERNON SMALL and CATHY ARONSON

Air New Zealand directors and management were in turmoil last night after the Government inadvertently released an official forecast that the airline needed capital of $1.705 billion.

The forecast was made about the time that the Government put $885 million into the troubled airline.

The Government has since pledged a further $150 million, but Finance Minister Michael Cullen says the airline must cover the $670 million shortfall by a combination of cost cutting and asset sales.

Air New Zealand directors meeting in Christchurch yesterday were unaware that Government papers issued under the Official Information Act contained the sensitive $1.7 billion number to restore the airline to financial health.

Air New Zealand managing director Ralph Norris - speaking later last night from Sydney Airport - said the situation was "confused".

The documents say the airlines needed the $1.7 billion "to achieve a workout".

The time period had been deleted but the context of the document suggested the money was needed by June next year.

However, company secretary John Blair said last night that the workout was to be over an extended period and it was wrong to infer the company would not be viable if it were not achieved in the coming year.

The $1.7 billion was the amount estimated to be necessary to achieve a 65 per cent gearing (debt to equity) ratio.

"There are other means available to the company to improve gearing which do not require the capital gap to be funded entirely by further equity. These means include asset sales and improved and retained profits.

"The company currently has in excess of $550 million on short-term deposit and there is no reason to believe it is not viable over the coming year given its current position."

Mr Blair and Government affairs vice-president David Beatson flew back to Auckland last night to work on a "clarification" to be issued to the New Zealand Stock Exchange today.

The Government bailed out Air New Zealand with $885 million after it announced a $1.4 billion loss last September, the biggest in New Zealand's corporate history.

But the $1.7 billion overall capital target was not explicitly disclosed in forecasts to shareholders when they voted last December to approve the bailout terms.

A spokeswoman for Dr Cullen's office said the documents had been cleared at Government level for release in January/February this year, but the release had been delayed while they were worked over by Air New Zealand's lawyers and former major shareholder Singapore Airlines to ensure price-sensitive information was protected.

The $1.7 billion forecast - by Government advisers PA Consulting and Cameron & Co - was contained in a memorandum tabled at the Cabinet by Dr Cullen in mid-November weeks after the Government announced it $885 million bailout.

The paper advised the $1.7 billion capital requirement could be financed in part by Air NZ through cost-cutting and revenue-enhancing measures and also through selling non-core assets. Among the assets suggested for sale is the airline's engineering business.

Dr Cullen said yesterday that he expected the initial $885 million equity stake and a later $150 million payment to be the limit of the Government's contribution to the airline in the medium term.

But he muddied waters when he told reporters the $1.7 billion figure related to Air New Zealand and Ansett Australia combined.

"The recapitalisation requirement in the scenario of Ansett being retained kept growing till it reached that $1.7 billion, at one point you might recollect it was put at $1.5 to $2 billion."

But Ansett Australia was put into voluntary administration in early September. The official advice was dated November 12.

The papers note that if Air NZ's business plan works it will be able to reduce debt levels "in time to meet demands for additional capacity and fleet replacement in mid-2004 when global aviation markets are expected to have returned to pre-September 11 levels (assuming no further terrorist acts or other destabilisation events)."

Fears that the airline might need another capital injection increased concerns by flight attendants that they will top the list of another job-cutting exercise if the airline turns itself into a budget carrier as it prunes its costs.

Council of Trade Unions secretary Paul Goulter said a budget carrier would hurt the company's business and reputation.

The board has yet to make a decision over the budget carrier option.

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