First hurdle in Air NZ deal cleared

By CHRIS DANIELS

Qantas and Air New Zealand yesterday cleared the first, albeit the lowest, hurdle in the path of their alliance plans when the Government gave its conditional approval.

Air New Zealand can now expect a welcome Christmas present of a $98 million capital injection from Qantas, while competition regulators prepare to analyse the scheme.

In the next two weeks the Australian carrier will buy redeemable convertible notes in Air New Zealand, equivalent to 4.99 per cent of the company's shares, for $98.24 million, or 44.5c a share.

Qantas can remain as the owner of 4.99 per cent of Air New Zealand, as the notes convert to equity whether or not regulators approve the full deal.



New shares taking Qantas' Air NZ stake to 15 per cent will be issued if the proposal clears competition regulators. A further 7.5 per cent could be issued then, or, should Qantas choose, three years later.

A rights issue to raise a further $200 million is also planned by the Air New Zealand board next year.

If Qantas successfully buys its 22.5 per cent stake in Air New Zealand for about $550 million, the Government's holding will be diluted, dropping from 82 per cent to 64 per cent.

Air New Zealand chairman John Palmer welcomed the Government's decision.

"The endorsement is very much what we hoped it would be. The conditions that have been put on the approval are entirely sensible and appropriate."

The Government demanded yesterday that Air New Zealand must be able to get out of any alliance with Qantas at minimal cost.

In a letter to Palmer, Finance Minister Michael Cullen said he expected the board "will ensure that direct and indirect costs to Air New Zealand from any future termination of the alliance are minimised and that, in the event of termination, Air New Zealand will be able to operate independently from Qantas within a reasonable period of time".

Palmer said this requirement was no constraint on the company.

"We are setting up this alliance to succeed, and although one always needs to know what will happen in the event of failure, we are setting it up to succeed with the intention that the alliance will be an enduring one."

In their application to competition regulator the Commerce Commission, the airlines say their alliance "has no contractual prescribed termination date".

Either party could call the alliance off, but not until it had been going four years, and then only with 12 months' notice.



The commission yesterday published the airlines' joint application to approve the deal, despite it leading to reduced competition.

The airlines' own economic analysis predicts a 3.1 per cent increase in domestic fares and a 1.7 per cent jump in transtasman fares within three years.

The deal would entail Air New Zealand managing all flights and routes for both airlines to, from and within New Zealand. The commission is being asked to find that national interest benefits would outweigh the anti-competitive downside of the two airlines joining forces.

The Commerce Commission application outlines some familiar arguments from Air New Zealand and Qantas - that the whole aviation market has changed in the past few years, making it increasingly difficult for full service airlines to remain flying.

There is now a "one-off window of opportunity" to combine two strongly branded, locally based international airlines into a sustainable regional airline group, it says.

Without an alliance, the two would embark on cut-throat competition, with Air New Zealand likely to be forced into withdrawing from its long-haul routes.

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