Cabinet gives Qantas-Air NZ deal its blessing

2.00pm

The Government today gave approval in principle for Qantas to proceed with its proposal to buy a 22.5 per cent of Air New Zealand.

The nod effectively leaves national interest questions to the New Zealand and Australian competition authorities -- the Commerce Commission and the Australian Competition and Consumer Commission (ACCC).

Qantas is proposing to buy the stake for around $550 million which would see the Government's holding diluted from 82 per cent to 64 per cent following the issue of new shares.

Qantas and Air NZ have applied to the watchdogs to approve their alliance proposal under national interest clauses of the Commerce Act which can over-ride any lessening of competition.

Under the proposal, Air NZ will control the operations of both airlines to, from, and within New Zealand and the airlines will share the commercial benefits.

While the Government took just 18 working days to make its decision, the Commerce Commission is expected to take until at least mid next year to decide the issue.

The Government said it gave conditional support to the proposed strategic alliance between the two airlines but said it reserved final approval until the completion of inquiries by competition watchdogs on both sides of the Tasman.

Three ministers were directly involved in today's decision.

Finance Minister Michael Cullen is responsible for deciding the financial and business aspects.

Transport Minister Paul Swain handles national interest criteria and Associate Finance Minister Trevor Mallard regulatory issues.

The Government has had legal advice that if it was drawn into negotiating aspects of the deal, it could jeopardise its right to vote if it gets to the point of shareholder approval.

Aviation analyst David Stone said the Government could be accused of putting its interest ahead of the national interest.

"The Government risks the perception that its own shareholding, rather than consumer and business welfare, now constitutes the 'country's broader interests'," Mr Stone said.

Meanwhile, the Stock Exchange said today that it had not felt a trading halt on Air NZ shares was necessary because the issue had been well flagged in the market.

"The NZSE considers that the market is sufficiently aware of the pending announcement, and therefore investors remain in the market for the stock with this knowledge and at their discretion."

Shares in Air NZ were up a cent to 51 just after the announcement.

The Government said it was aware the proposed alliance would reduce competition in New Zealand and across the Tasman "and has made it very clear to the airlines that they will need to get authorisation from the New Zealand Commerce Commission and the Australian Competition and Consumer Commission (ACCC)".

"The Government is concerned at the potential impact on consumers of any reduction in competition but has confidence in the ability of the Commerce Commission and of the regulatory framework in which it works to deal effectively with these matters," a statement by Dr Cullen, Mr Swain and Mr Mallard said.

Air NZ issued a statement, saying the decision was an "important first step" to ensuring Air NZ stayed a strong New Zealand-owned and managed global airline.

"Our focus will now move to that regulatory process. We must demonstrate to the competition regulators that the alliance is the only course which can adequately ensure the future of Air NZ as part of a viable and globally competitive airline industry, supporting the specific needs of this region."

Air NZ said it had already acknowledged the alliance would mean reduced competition, and that the net public benefits of $1.4 billion over five years offset this.

The regulatory process would give the public the chance to examine the joint submission in detail, it said.

It anticipated a decision from regulators before the middle of next year.

In the meantime, Qantas would subscribe for redeemable convertible notes in Air NZ worth $98.2 million, or 4.99 per cent of the company's shareholding.

The ministers said they were satisfied New Zealand had one of the toughest competition regimes in the world.

The Government supported the deal from a commercial perspective.

It was advised by merchant bank First New Zealand Capital that the proposal would "not only deliver significant benefits to the company and its shareholders but would be the best option for Air Zealand to secure its position as an international airline".

The ministers said the alternatives were much less attractive in terms of revenue generation, cost savings and protection of Air NZ's competitive position.

This was particularly so given Air NZ's assessment that the alternative was a war of attrition against the more financially muscular Qantas.

The ministers reiterated the argument that there was a risk Air NZ would shrink to its profitable domestic operations without the Qantas deal

"There would also be a real risk that the Government as the principal shareholder would be called on for further substantial funds, diverting Government expenditure away from higher priorities of health and education," they said.

From the controlling Kiwi Share perspective, the ministers said the New Zealanders would retain effective control, continue the airline's ability to exercise New Zealand's existing and future air rights, preserve its unique New Zealand identity, continue to promote tourism and travel, and preserve employment.

"On balance, we considered the proposal cleared these hurdles."

They said the retention of effective control was the most problematic issue.

Qantas would have significant influence on the board through its two seats and through the Strategic Alliance Advisor Group which will have three members from each airline.

"The Government needs to be satisfied that the governance arrangements will preserve Air New Zealand's autonomy and welfare."

The airline said it considered the best way to protect that was to protect its ability to quit the alliance at minimal cost and the Government agreed.

A letter has been sent to Air New Zealand chairman John Palmer putting the Government's position on that on record.

The ministers said only if the proposal was given approval by the watchdogs would the Government give final approval.

Then, the Government would vote its 82 per cent holding in favour of the deal at the shareholders' meeting, ensuring the vote would be won.

- NZPA

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