Air NZ gets speed wobbles from a U-turn

When Qantas got its nose into the planning to save Air New Zealand, it destabilised the rescue mission, reports assistant editor FRAN O'SULLIVAN.

Air New Zealand has paid a huge price for the Government U-turn which let Qantas Airways toss in a spoiler ownership proposal five weeks before the Kiwi carrier was to report its annual result.

So too, it seems, has the New Zealand taxpayer.

On August 1, the New Zealand and Australian Governments said they would set up a working party to consider the Australasian aviation market and appoint a negotiating group to flesh out the details of two proposals - the existing Singapore Airlines bid, and a new bid from Qantas.

Letters sent by Air New Zealand acting chairman Jim Farmer to the Government - combined with evidence presented to the Australian Federal Court last week - show how the sudden decision to let Qantas back into the action seriously destabilised the recapitalisation timetable.

"From discussions that I had with the CEO of Qantas around this time, I became concerned that Qantas was deliberately interfering with the Air New Zealand recapitalisation proposal for their commercial ends and were obtaining assistance from the Australian Government in that objective", Dr Farmer said.

Air New Zealand already had a signed memorandum of understanding with its 25 per cent shareholder Singapore Airlines when the Governments made their surprise announcement.

On August 13, Dr Farmer wrote to Finance Minister Michael Cullen saying the directors recognised and acknowledged his duty to ensure an outcome, "in the best interests of New Zealand".

But the directors' burden had been made much greater by the Government's sudden change of direction following "your meeting with Deputy Prime Minister John Anderson of Australia".

The letter - signed by all 13 directors of Air New Zealand's then board - emphasised their unanimous support for the proposal the company and SIA had made to recapitalise the airline.

Obliquely attacking the Qantas proposal, Dr Farmer pointed out that modifications which entailed lower levels of new equity than the $650 million from SIA would not result in adequate recapitalisation of Air New Zealand to ensure its vitality and competitiveness.

He gave further implicit warnings:

* A forced sale of Ansett - as proposed under the Qantas option - would not raise enough cash to strengthen Air New Zealand's balance sheet, because the proceeds would be significantly less that the amount Air NZ paid for the Australian airline.

* Air New Zealand's future would be seriously compromised by the prospect of three competing Australasian carriers compared to the Singapore option which maintained the status quo

The August 13 plea to the Government to put a realistic time limit on the discussions had no effect on subsequent negotiations.

But the publicity over the Qantas proposal added dangerous uncertainty when when the directors should have been finalising a recapitalisation plan.

Even before the August 13 letter, the Government had been warned about the consequences of the U-turn.

In a three-page letter sent to the Finance Minister on August 3, Dr Farmer said he now had to call a special board meeting for August 8.

His independent directors team - himself, Liz Coutts, Ralph Norris and Sir Ron Carter - had been put in an invidious and potentially compromising position by the Government's "high-risk and speculative course", which endangered the Air New Zealand group.

The independent directors had repeatedly warned officials that they needed to resolve the recapitalisation well before the end of August. Time was running out.

It was also running out for the Ansett Group - Air New Zealand's problem child.

On August 8, the board approved a letter of comfort, effectively allowing the three main Ansett companies to draw up to $A400 million for working capital to tide them through for 12 months.

The Government's merchant banking advisers, Cameron & Co, had made a substantial review of Air New Zealand's financial position.

PA Consulting, also retained by the Government, had reviewed Air New Zealand's business plan.

"The critical consideration for the directors was whether the strategies being pursued had a reasonable likelihood of providing sufficient funds to maintain the group's solvency in the medium term," Dr Farmer said.

"The difficulty the directors had was that the process was now being controlled by two governments, with the Australian Government apparently being influenced by Air New Zealand's competitor, Qantas.

"However, we had no reason to think that the New Zealand Government would not approve our proposal, notwithstanding the intervention by Qantas and the Australian Government. Both Governments were well aware of the ramifications of not approving the recapitalisation proposal."

The directors still believed prospects of a recapitalisation proposal being implemented were good enough to justify the continuation of Air New Zealand and Ansett, with Air NZ's support.

"The directors specifically considered the impact of the letter of comfort on Air New Zealand's solvency and ability to meet its debts", said Dr Farmer.

"On the basis of the management reports and the SSB (Salomon Smith Barney) reports before the board and questioning of management, the directors concluded that even if Air New Zealand had to meet obligations under the letter of comfort and make advances for ordinary trade debts to the full amount of A$400 million, the company's assets would still significantly exceed the value of the company's liabilities and accordingly, it was appropriate to issue the letter of comfort and continue trading."

Air NZ chief executive Gary Toomey had also asked the Australian Government to stop supporting the Qantas proposal.

But once Ansett failed, the letter of comfort was quickly seized on by the voluntary administrators, who saw it as providing an effective guarantee to Ansett.

A settlement deal was struck.

Air New Zealand paid $A150 million to the administrators, and Air NZ escaped a potential liabilities claim.

Justice Alan Goldberg said in the Australian Federal Court last Friday, that if the claims had been issued, Air New Zealand and the directors would have resisted them.

The outcome of any proceeding against the directors could not be realistically assessed, he said.

"What is relevant for present purposes, is that extensive investigations would be required before any decision could be made whether any proceedings should be launched"

At a secret meeting with Dr Farmer in Melbourne on September 23, the administrators adopted Air New Zealand's view that it could survive only if Ansett were cut adrift.

Until they put Ansett into voluntary administration on September 12, the independent directors were fighting to keep it alive.

Dr Farmer said that when Qantas withdrew from last resort negotiations to acquire Ansett, he put a proposal to Mr Anderson to restructure Ansett as a value-based, low cost, airline with interim Australian Government financial support.

"This was rejected within hours".

Dr Farmer said Air New Zealand had made the seriousness of Ansett's and Air New Zealand's financial position clear to the Australian and New Zealand Governments on numerous occasions.

"There could be no factual basis for either Government to deny it had been well-informed and in plenty of time of the seriousness of the position".

He says cost reasons - many of them beyond Air New Zealand and Ansett's ability to alter - and other external shocks, meant Ansett's viability became impossible for Air New Zealand to continue to sustain in the face of "predatory" pricing by Qantas and the frustration of Air New Zealand's attempts to buy Virgin Blue and recapitalise Air New Zealand.

He is adamant that if the Singapore Airlines-led recapitalisation proposal been accepted within any reasonable timeframe, the problems which occurred would have been avoided.

"The board was dependent on the decision of the New Zealand Government and, in my view, could have done nothing more than was done to advance the recapitalisation proposal.

"During this period, Air New Zealand and Ansett, with Air NZ support, continued to meet their trade debts as they fell due. At all times Air New Zealand had substantial cash and undrawn banking facilities available.

"Ultimately, with the delays which occurred ... Air New Zealand simply ran out of time and voluntary administration for Ansett became the only remaining option" said the Farmer affidavit.

But the consequences of placing Ansett in voluntary administration had driven Air New Zealand to the brink of collapse.

The taxpayer will now meet that cost with an $885 million cheque.

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