Airline strikes profit turbulence

By DANIEL RIORDAN

Air New Zealand's rights issue debacle has alienated investors and underwriters and attracted the scrutiny of the Securities Commission and the Stock Exchange.

Institutions that agreed to sub-underwrite Air New Zealand's $284 million rights issue will be forced to make up the shortfall after the issue closed at 5 pm yesterday.

Although Air NZ has yet to say how much of the issue was taken up, the widespread market view is that it will be well undersubscribed.

This comes after fund managers reacted with alarm to the company's slashing of its profit forecast and its subsequent share price fall.

With the A shares closing yesterday at 148c, below the rights price of 150c, they had no incentive to subscribe.

Company chairman Sir Selwyn Cushing warned that first-half profit before one-time gains would drop by 50 per cent from last year's $83.4 million because of higher fuel costs, the lower dollar and increasing competition.

Analysts responded by downgrading their full-year forecasts by more than 40 per cent to an average of between $140 million and $145 million.

Air New Zealand has asked at least two Sydney analysts to downgrade their forecasts further.

Many smaller investors who sent in their applications for the 1 for 3 rights issue before Wednesday's stunning profit downgrade - triggered by a $252.5 million blowout in fuel costs - have renounced their applications, although opinion on whether they can legally do this is divided.

Securities Commission chief executive John Farrell has asked Air New Zealand for explanations, and the Stock Exchange's Market Surveillance Panel is also investigating.

Air New Zealand yesterday issued a statement in which it said it remained confident it would still achieve a "sound" financial result for the current year.

It said directors had received an updated report on the deterioration in the company's trading performance on Wednesday morning just before the annual meeting.

Market cynics find that assertion a bit hard to swallow.

The statement was seen by some as an attempt to placate the stock exchange and ensure it did not invalidate the rights issue, needed to help pay for the company's June acquisition of the half of Ansett Holdings it did not already own.

It's not just the prospectus statements coming under scrutiny.

Air New Zealand management undertook an international roadshow in October pitching the rights issue to institutions.

Despite issuing the usual caveats about performance, the airline presented a bullish picture about future prospects.

There was no hint that September revenue had been hit so heavily.

Questions Air NZ will have to answer include why it did not know until Wednesday morning how poorly it had done during September, and why its accounting system did not pick up the trends earlier.