Air NZ papers show it pleaded with Government for mercy

11.20am

Papers released today show Air New Zealand was pleading with the Government to lift its share price until the last moment before a package was agreed to rescue the airline last year.

Papers released under the Official Information Act underline the desperate state the national airline was in and how little choice the company had to accept any $885 million deal the Government offered to keep it in the air.

Finance Minister Michael Cullen signed off the bailout on November 27, giving the Government an 82 per cent stake in the battered airline after months of intense negotiations.

On November 25, Air NZ's acting chairman Jim Farmer wrote to the Government's negotiator making a last attempt for a more "reasonable" offer.

Dr Farmer said the board was "grateful" for support and acknowledged that without it the "company would be in statutory management and its shares would be worthless. On that basis, an issue price of one cent per share could be regarded as reasonable".

He argued that to be fair the Government should acknowledge it was getting an "international airline with an excellent reputation" and a strong domestic airline, which would cost a lot of money to set up.

Air NZ would also earn $28 million more for every cent the US dollar declined by, Dr Farmer wrote. Since then, the US dollar has declined in value against the New Zealand dollar.

While the Government was offering around 25-26 cents a share, the board thought a final price range of 26 to 29 cents was more reasonable.

In the end, the Government agreed to pay 27 cents a share, costing $585 million on top of an earlier $300 million for convertible preference shares at 24 cents a share.

While the last-minute haggling didn't increase the overall price paid by the Government, it did slightly water down its ownership stake.

This was partly done because the company wanted to "move further away from the penny dreadful class".

The hundreds of pages of letters, briefing papers and cabinet minutes confirm the Government has already agreed it will pay another $150 million to the airline before June 2003. However, the $1.03 billion in total to bail out the company is not enough to guarantee the airline's future.

Earlier in the negotiations the Crown's negotiators advised: "Air NZ is a viable business, notwithstanding a high risk one, but requires capital of $1.705 billion."

While parts of the relevant papers are censored, the Government was told Air NZ would meet the shortfall "through cost cutting and revenue enhancing measures" as well asset sales.

The Government was advised not to fully bail out the airline to keep "maximum pressure" on it to restructure and to also find other ways to raise cash. This would also leave open the risk that the Government may have to stump up more cash in the future.

If Air NZ's business plan worked it would 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)", government officials advised.

Treasury also canvassed the option of buying out all shareholders at share prices between 10 cents and 16 cents a share -- with a total cost of between $77 million and $131 million. At the time (November 2001) the shares were trading at 28 cents a share.

The Government rejected the idea of a total buyout and also tried to keep secret from Air NZ bankers that it was contemplating putting more than the $885 million into the company.

- NZPA

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