Government rejects Air NZ strategy

By DANIEL RIORDAN aviation reporter

Air NZ's billion-dollar rescue plan is in tatters after the Government blanched at the risk of supporting its capital raising.

The Government had indicated it might give its decision yesterday on allowing Singapore Airlines to lift its stake in the national carrier from 25 per cent to a probable 40 per cent.

The Government would also have underwritten a rights issue, allowing Air NZ to recapitalise its troubled subsidiary, Ansett Australia.

A source close to the negotiations said they fell over at the last minute after Sir Richard Branson on Tuesday turned down Air NZ's offer to buy his Australian discount airline Virgin Blue.

Without Virgin Blue, analysts say, Ansett has no viable long-term business plan, regardless of how much money its parent pumps into it.

Now the Government has told Air NZ to go away until it can be more precise about its plans and their implications.

Finance Minister Michael Cullen said he expected Air NZ's board of directors - who held a crisis meeting yesterday - to revise substantially their business strategy.

Dr Cullen said the blame for delaying the decision on a rescue package did not lie with the Government, but he would not comment further on what may have gone wrong.

A spokesman for Dr Cullen's office, Peter Harris, said earlier that the cabinet policy committee had discussed proposals relating to Air NZ.

"The Government is concerned to ensure that any actions it takes or decisions it makes are in the best interests of Air New Zealand. The situation surrounding Air New Zealand is somewhat fluid.

"In those circumstances the Government is not in a position to make final decisions."

He would not say when a decision might be forthcoming.

The Government is understood to have been happy about allowing Singapore to move to 40 per cent - raising $248 million - and Singapore had begun due diligence.

But the Government was prepared to underwrite a rights issue that would have helped bridge the gap to the $1 billion the airline group needs for its short-term funding requirements, only if it could be assured of Ansett's future.

Where Air NZ goes from here is unclear. The Government is clearly not interested in Qantas Airways' counter-proposal and the last thing Air NZ wants to do is sell Ansett, citing its long-term strategic value.

After the board meeting, Air NZ spokesman Mark Champion said the airline was continuing to work with Government officials and representatives to provide information to assist the decision making. It remained hopeful it would be in a position to report progress when it announced its profit result on September 13.

Arcus Investment Management equities head Simon Botherway described the situation as a debacle.

He said Air NZ had needed to reassure the Government that Ansett could make money in the foreseeable future, but could not do that without Virgin Blue.

Ansett had no prospect of returning to profitability in the foreseeable future, he said, and called for Air NZ to write down its subsidiary's value - something Air NZ directors have said they do not want to do.

Such a move would put even further pressure on the company's share price. Air NZ A shares - available only to NZ nationals - fell 3c yesterday to 89c and the freely tradeable B shares dropped 7c to 99c. The A shares have fallen 43 per cent this year and the B shares 56 per cent.

Ansett needs Virgin Blue as it cannot start a discount airline alone.

Analysts estimate Ansett is losing $A1 million ($1.2 million) a day. They say it was breaking even over the first five months of the June year, but now expect it to report a loss of $A300 million for the year.

Ansett has about 39 per cent of the Australian market, down from 47 per cent before the entry of Virgin Blue and Impulse, the other discount airline now owned by Qantas.

Every 1 per cent in market share is worth $A15 million to Ansett's bottom-line profit, analysts say, and Virgin Blue, now trading profitably, is expected to add to its 5 per cent market share - gained in less than a year - largely at the expense of Ansett.

Air NZ would have used some of the proceeds of its capital raising to pay for Virgin Blue.

Southern Skies Properties Limited

Air wars - the cast list

www.nzherald.co.nz/travel