Air NZ's bailout in peril

By FRAN O'SULLIVAN and DANIEL RIORDAN

Air New Zealand's $850 million bailout is already in jeopardy, just one day after the company unveiled the largest corporate loss in New Zealand history.

When acting chairman Dr Jim Farmer stepped up to the plate to unveil a $1.4 billion loss on Thursday, he had written pledges from the Government and its two major shareholders, Singapore Airlines and Brierley Investments, that they would pump in $850 million to keep the national flag carrier alive.

But the $850 million lifeline will quickly be swamped if an Australian Securities and Investment Commission investigation launched yesterday finds the airline's failed Australian offshoot, Ansett Australia, had traded while insolvent.

Yesterday Australia was in uproar against the "callous" way Air New Zealand had cut its losing Australian offshoot adrift without even honouring $A400 million entitlements for its employees.

Dr Farmer's blunt statement that "we don't have any kind of obligations to those employees" has resounded throughout Australia and sparked many New Zealanders to question the moral sensibility of the Air New Zealand directors.

Anger towards Air New Zealand erupted when distraught former Ansett employees blockaded Prime Minister Helen Clark's Air New Zealand flight on the tarmac at Melbourne Airport.

The Clark Government's commitment to the closer economic relations partnership between New Zealand and Australia is under question.

Confronted on the problems, Dr Farmer lashed out at the national carrier's major shareholders, Singapore Airlines and Brierley Investments.

"The fact of the matter is, the major reason why we're where we are precisely today is because ultimately, our two major shareholders, and Singapore Airlines in particular, weren't prepared to support the airline with its recapitalisation programme."

Herald investigations confirm that once Singapore Airlines pulled its $1.31 a share offer for a 49 per cent stake outlined in a July 12 plan, huge pressure went on Dr Farmer - New Zealand's top commercial Queen's Counsel - to find a solution.

Air New Zealand Ansett - as the company had proudly described itself - quickly reverted to being two separate airlines as Air New Zealand's lawyers moved in to stop the New Zealand carrier being buried under the weight of its Australian problem child.

But the Kiwi airline's website still boasts that in June last year, Ansett and Air New Zealand came together as "one business group" and the airline embarked on another period of development and innovation.

Air New Zealand's directors - some of the biggest names in Australasian business - are adamant they have not breached their directors' duties.

But players like Sir Selwyn Cushing, the former Air New Zealand chairman, and retiring banker Ralph Norris say they are "gutted".

If the ASIC investigation goes against Air New Zealand, it would be forced to broker a deal with Ansett's creditors to avoid a debt boomerang of up to $3 billion swamping its own balance sheet and putting it out of business. But Ansett's administrators were insistent there was still some real value left in the company.

Finance Minister Michael Cullen has already admitted some of the bailout cash may yet go towards Ansett's liabilities. But Dr Cullen will need more than his $1.4 billion Government surplus if he needs to organise another bailout for Air New Zealand.

The resulting legal battles will damage Air New Zealand's reputation in Australia and affect its prospects - and those of major shareholder Singapore Airlines - of launching an Australian-based low-cost domestic carrier in the short term.

The world's airlines are now losing hundreds of millions of dollars a day as the terrorist attack which demolished the World Trade Center and the subsequent United States airspace ban set the scene for a major downturn in the international aviation industry.

Air New Zealand is too small and under-capitalised to easily ride out a major downturn. Yesterday its shares again went into free fall in the first day's trading since the bailout. In the short term, it faces trouble on the Australasian front which will inevitably damage its brand and good reputation.

The legal tussles over Air New Zealand's controversial decision to put Ansett into the administrators' hands will take time to resolve.

But they are an added factor which will concentrate the minds of Government negotiators, and representatives of Brierley Investments and Singapore Airlines, when they begin due diligence on Air New Zealand before finalising their financial commitments.

The Government has committed a $550 million loan facility. Both Singapore Airlines and Brierley Investments are chipping in $150 million each to the rescue package.

On the surface, Brierley Investments and Singapore Airlines are getting a good deal at 67c a share. But each faces stunning losses. In BIL's case it will take a writedown on its 30 per cent Air New Zealand stake, pushing it to an annual loss.

But all parties can renegotiate the terms if Air New Zealand's business outlook and value worsens before the bailout package is put to minority shareholders for their approval.

Air New Zealand's $1.6 million a day losses from Ansett Australia have overshadowed the fact that it has also lost money on its international operations, scoring a $50.9 million loss before interest and tax in the June year.

Herald investigations disclose the airline has yet to form a credible business plan for the 2002 year. Management had been banking on the Singapore-led proposal to recapitalise Air New Zealand gaining Government and shareholder approval. But now they are back to the drawing board, unable to tap efficiency benefits from finishing the integration of Air New Zealand and Ansett.

Chief executive Gary Toomey took a hospital pass when he left Qantas to run Air New Zealand. He accepted the job in September last year but couldn't start until January, spending the intervening time on "gardening leave".

By then, Sir Selwyn Cushing had spent five months as executive chairman after the abrupt departure of managing director Jim McCrea and the resignation of Ansett chief Rod Eddington.

Any problems Ansett had when Air New Zealand bought its remaining 50 per cent of Ansett from News Corporation in June 2000, were exacerbated by the management vacuum at the two airlines.

An ashen-faced Mr Toomey talked this week of inheriting a mess far bigger than his hand-picked management team - many of them ex-Qantas - could handle.

He said the team found very little financial information or operational data, and spent its first few months trying to understand basic information.

There were the well-publicised maintenance problems which caused the groundings of Ansett's 767s at Christmas and Easter. But Ansett's route profitability model was also out by $200 million and had to be completely rebuilt so Air New Zealand could identify on which services it was making or losing money.

Teams of outside accountants were called in to help sort out the finances; one of the company's biggest customer accounts had not been reconciled for several years.

"We were working in a situation of not just trying to fix an airline but we were working in an information void," said Mr Toomey.

By June the company had the information it needed to hire investment bank Salomon Smith Barney to devise a recapitalisation plan, which was approved by the Air Zealand board. Singapore Airlines signed a memorandum of understanding outlining its support.

Terms were reached with Sir Richard Branson's Virgin Blue to acquire his nifty Australian low-cost carrier for $US120 million and the New Zealand and the Australian Governments were approached for their regulatory approvals.

"I'm personally not blaming anyone in this process," said Toomey.

"I'm actually shattered that this has occurred to Ansett and its employees because those people have been wonderfully loyal and have stuck by myself and my team during all of the period of upheaval we've had.

"I don't know what more we could have done. We identified in the coming year $500 million of savings. The second half last year when we came in, there had been $15 million identified in the first half, there were $115 million delivered in the second half.

"The strategy was developed, the branding, the product was all there, ready to go.

"People have worked extremely hard, as have the staff, to try and take this airline which clearly had been neglected for many, many years of uncertainty and so forth, and there was a strategy there.

"Whether it was the intervention of Government or whether it was the shareholders backing out, that's not for me to say. All I can say is at the end of the day from the management team's perspective, the shareholders weren't prepared to invest and, as a consequence, that's where we are today."

Mr Toomey may have been careful not to apportion blame, but yesterday he said those who accused Air New Zealand of running Ansett into the ground "simply don't know the facts".

"Ansett was in that condition when we bought it ... We all know the engineering horrors that emerged after we'd claimed management control of the airline.

"We weren't responsible for that. We immediately did our best in setting about to fix that and so those who say we ran it into the ground simply don't know the facts."

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