Air NZ rudderless as reefs loom

By DANIEL RIORDAN

Gary Toomey's resignation as Air New Zealand chief executive leaves the national carrier in the same perilous position it was a year ago - facing an uncertain future without a business leader.

This time the airline does not even have a longstanding board member prepared to take on the executive role, as Sir Selwyn Cushing did after Jim McCrea's abrupt departure. Not that the post-Ansett hole the airline dug for itself on Sir Selwyn's watch is anything to emulate.

If the need to knock newly acquired subsidiary Ansett into shape was last year's priority, this year's challenge is coping in an aviation world reeling after the terrorist attacks of September 11.

As well as having to operate in yet another management vacuum, Air NZ faces several uncertainties despite its $885 million recapitalisation plan agreed by the Government last week. Directors, and possibly the company itself, have yet to be absolved of any claims against them from across the Tasman.

At least Ansett's administrators are urging the airline's creditors to back the proposed settlement of Air NZ's liabilities to its subsidiary, or risk Air NZ's entire rescue package falling over, leaving Ansett's creditors with nothing.

The Australian Federal Court will decide on Friday whether to approve the Memorandum of Understanding between the parties to the recapitalisation plan.

Part of the deal involves Air NZ paying Ansett $A150 million ($183 million) in cash and the two airlines wiping intercompany debts.

Administrator Mark Mentha said in an affidavit to the court made public on Monday night that without the cash injection Ansett would be sold at a "fire-sale" price.

"[Co-administrator] Mark Korda and I are genuinely concerned that if we are unable to obtain the Air NZ settlement, we will lose the confidence and support of aircraft lessors, interested airline operators, Government and union and non-union employees," said Mr Mentha.

If the memorandum is approved, the administrators will forgo the right to take any action against Air NZ or its directors for negligence in their duties. But they have reserved the right to act if they uncover evidence of insolvent trading, reckless management or failure to act in good faith.

Although Mr Mentha says he has uncovered no evidence of any wrongdoing by directors, he told the court the administrators had yet to find the time to take a good close look at the directors' performance.

The Australian Securities and Investment Commission is also investigating the directors' actions, with help on this side of the Tasman from the Securities Commission and the Market Surveillance Panel.

Mr Mentha's affidavit also discloses that Air NZ baulked at paying 9 per cent above the bank rate on its $550 million loan from the Government, saying it could not afford that price. The loan is to be made at just over 9 per cent - 4 per cent above the bank rate.

Just how close Air NZ came to falling over is recounted by Mr Mentha in a blow-by-blow account of a September 23 crisis meeting in Melbourne with Air NZ acting chairman Jim Farmer and his advisers, including Roger France (appointed yesterday as an Air NZ executive director).

Through Mr France, Air NZ's bankers made it clear they would not allow Air NZ to promise Ansett more than $183 million. Mr France warned that if the administrators pushed for more, Air NZ would collapse into statutory management.

If that happened, Air NZ told the administrators, Ansett would not have been able to recover any money from Air NZ under the letter of comfort provided to Ansett by its parent.

Meanwhile, analysts at leading investment banks have given their views on the recapitalisation plan.

Salomon Smith Barney aviation analyst Jason Smith, in Sydney, said the $885 million rescue package was only half what the airline needed.

Cuts in services and staff announced on Monday would be just the first move in several big cuts required. He rated Air NZ "neutral, speculative" and said easier money was to be made elsewhere.

Deutsche Bank's Hong Kong-based Asia-Pacific aviation team rated the company "underperform" and said the recapitalisation still left the airline's gearing (net debt to equity) too high at 137 per cent at its June-year balance date next year - almost twice Qantas' and likely to rise in a deteriorating environment.

The bank expected Air NZ to lose $120 million this financial year but make a profit of $43 million the next.

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