THE PRESS SATURDAY, SEPTEMBER 24, 1988. Sharing Air New Zealand

Press, 24 September 1988, Page 24

THE PRESS SATURDAY, SEPTEMBER 24, 1988. Sharing Air New Zealand

The Government’s determination to sell part of Air New Zealand is contentious, but seemingly inexorable in spite of the arguments raised against ' it. If the Government will not be swayed from cashing in a quarter of its shareholding in the national flag-carrier for short-term gain, it must be doubly sure that the deal it strikes is the best possible, both in terms of the income derived from the sale and, more important, for the future of the airline. By naming Australia’s international airline, Qantas, this week as the preferred purchaser for a 25 per cent holding in Air New Zealand, the Government is speeding up its asset sales and apparently assumes that it is setting a new course for Air New Zealand. An association with Qantas probably makes better sense for Air New Zealand’s prospects than an alliance with a northern hemisphere airline. British Airways was the most frequently mentioned possibility in this regard, but was reluctant, nonetheless, to buy into an airline in which a Government, any Government, still held the majority of shares. Qantas and Air New Zealand face a common threat, and a considerable one, from the American mega-carriers. United Airlines and Continental Airlines have won dramatic increases in services between the United States and the South Pacific, both in frequency and capacity. Having Qantas and Air New Zealand working together rather than in competition will strengthen their response to this challenge. The share sale is not essential to this co-operation; but it should make co-operation easier.

Air New Zealand’s reluctance to have Australian interests sitting at the board table is understandable in view of its strong competitive presence in the Australian market-place. This has been built up over considerable time and at no little expense. The bulk of Air New Zealand’s international traffic originates in Australia and is carried much further than simply across the Tasman. Indeed, Air New Zealand’s newly won approval for non-stop flights from Australia to the United States, over-flying New Zealand, emphasises the point that Air New Zealand regards Australia as a vital part of its market. So vital is it, indeed, that Air New Zealand is only too happy to drop some of its services between Auckland and Los Angeles in order to be able to provide the new non-stop flights between Australia and the United States.

A complicating factor might be Air New Zealand’s embarrassment in view of the stand it has taken against the Australian intrusion into New Zealand skies by way of Ansett. Air New Zealand’s public relations and advertising campaigns in response to the arrival of this competitor on the domestic scene have unashamedly attacked the Australian influence in the domestic industry; now Air New Zealand faces the strong possibility that it will have to live with a part of that same influence at its own board table. Nonetheless, Air New Zealand’s jitters about how its successful penetration of the Australian market for overseas travel might be affected by a Qantas involvement is a genuine commercial worry that will have to be addressed. Technically, any Qantas directors on the Air New Zealand board should be dedicated to serving the interests of the New Zealand airline as a whole; and, of course,. they will be only a minority. Although they will be bound to look after the shareholding by acting in the best interests of Air New Zealand, it is apparent that the Government here thinks that the link will work towards a joining of forces. It believes that the alliance should create a new and greater force in Asia and the Pacific; this does not automatically follow from a sale of shares.

Qantas already has an established network, particularly good in Asia now that services have been increased dramatically to some 70 flights a week between Australia and Asian destinations. New Zealand tourism might expect to benefit from that flow, particularly if the two airlines decide to cooperate in pushing this corner of the Pacific as a multi-destination package. If an alliance is inevitable, another argument in favour of it being with Qantas is the compatibility of the

two fleets of aircraft. The fact that both Air New Zealand and Qantas have Boeing 747 and 767 aircraft should confer operational advantages. This said, any confidence in the development of a co-operative effort, calculated to benefit both airlines and both countries, must rest not on the sale of shares but on some agreement, and a firm one, that the association will be developed along particular lines. Were it not for the determination of the New Zealand Government to sell public assets, and were it not so unlikely that the Australian Government would comply, a far better approach would have been that New Zealand bought into Qantas as well as selling Air New Zealand shares. As things stand, the most that Air New Zealand can do is to hope that the deal will work to New Zealand’s benefit. In fact, this is little more than a one-way pipeline into Air New Zealand’s boardroom. Eventually, it is possible that Qantas will be owned by private shareholders and, unless the Australian law restricts the ownership of shares, the Australian proprietorship of Qantas could end through the sale of shares to foreign parties. The other restraint on this, like the restraint upon New Zealand selling more than, say, 30 per cent of its airline abroad, lies in the Government-to-Government bilateral air rights agreements. These would not be sustained if foreign ownership dominated, and existing international landing rights would disappear and have to be renegotiated.

To achieve dividends in return for its investment, Qantas can be reasonably expected to work towards making Air New Zealand as profitable as possible — but not at a net cost to the profitability of its own airline. To achieve the presumed or available benefits for Air New Zealand, the New Zealand airline may have to bear with some changes in its current place in the Australian market. This place has been the source of contention between the two airlines — sufficient contention to prevent achieving possible co-operation to date. The airlines have been keen competitors and Air New Zealand has been very successful in capturing the Australian market for international flights.

The fact is that, so far, the only benefit to New Zealand in the proposed deal is in receiving overseas funds for the sale of shares. Nothing more can be certain, except that the Australian Government will own a quarter of New Zealand’s main domestic airline and Australian shareholders own the second one.

It has been suggested that a link with Qantas could put the future of Air New Zealand’s Christchurch workshops — and the 950 jobs that hinge upon them — in jeopardy. In reality, there seems to be little chance of the Christchurch engineering base being closed and all jet servicing being transferred to Qantas’s huge Sydney base. It is most unlikely that Qantas would have the clout through its 25 per cent shareholding, or the desire, to close the Christchurch workshops. Qantas has no Boeing 737 s in its fleet and the Christchurch base is wholly committed to 737 s and the domestic Friendship fleet. Qantas’s Mascot workshops cater for 747 s and 767 s only; so Air New Zealand will still need somewhere to service its 737 s and Friendship aircraft.

The political considerations in a transTasman link cannot be lightly dismissed. If this deal comes off, there may be a strengthening in the economic ties that are of growing importance to both countries. It appears that the Government will brook no argument against the sale of part of the shareholding, though it has not produced a compelling reason for selling. If sale there must be, however, many points can be found in favour of making that sale to Qantas. The main questions then remaining are whether the price will be right, whether Qantas will be able to find the money, and whether Qantas will fulfil the expectations that some have for the deal. New Zealanders, who are the real shareholders in Air New Zealand, will not learn the answers to those questions until after the deal has been struck.