How CK's bombshells stunned Air NZ

The Singapore Airlines chief was looking at a possible Ansett II as fraught negotiations continued over extra money for the New Zealand carrier, FRAN O'SULLIVAN reports.

Singapore Airlines chief executive 'CK' Cheong pulled plans to contribute cash to Air New Zealand's bailout the day he officially began discussions on SIA's involvement in managing Ansett Mark II.

Rumours of a courtship between Dr Cheong and Ansett's administrators caused a furore among Air NZ directors when they surfaced on September 19 - days after the New York terrorist attacks rendered absurd the terms of a planned $850 million rescue package for the airline.

If Dr Cheong could make a clean start with a reborn Ansett, the question went, why would he bother to pump more cash into Air NZ?

Former Air NZ chairman Sir Selwyn Cushing - who had stood down from discussions within Brierley Investments on the issue - had been concerned the deal might not stick.

But it was not until Friday, September 21, that Dr Cheong and Brierley Investments representatives told Air NZ's board they were not prepared to forego an eight-week due diligence assessment and bring forward their proposed $150 million contributions.

Air NZ advisers Roger France and John Waller had put new projections to the board showing trading conditions had dramatically worsened since the original bailout was announced on September 13.

With the shareholders' refusal to recommit, the board had no option but to go to the Government for additional support.

That evening, Dr Cheong advised that the administrators were anxious to discuss a possible settlement of Air NZ's exposures to liabilities from the collapse of Ansett - and the possible involvement of SIA in the management of a new airline using the failed group's assets, personnel and infrastructure.

Air NZ acting chairman Jim Farmer and the advisers flew to Melbourne for a secret meeting and struck a deal with the administrator.

The $1 billion in equity Air NZ needed was not going to come from its major shareholders - though Dr Cheong indicated SIA would provide $15 million immediately as a gesture of good faith.

This was just the final twist in a extraordinary six-month saga which resulted in Air NZ's major shareholders effectively walking away from the airline.

Both parties must back the Government's controversial $885 million bailout when Air NZ shareholders vote on the issue in December. Instead of having 80 per cent of Air New Zealand between them, the shareholders will have 10 per cent.

Their refusal to commit funds until Air NZ finalised its 2001 business plan didn't occur until after months of turbulent negotiations.

Air NZ advisers John Waller and Roger France (now executive director of the airline) had proposed that BIL and SIA place additional equity into Air NZ to assure its viability. Now directors had to consider asking for Air New Zealand to be placed under statutory management.

On September 6, Singapore Airlines indicated it was no longer willing to stick to the $1.31 a share pricing in a memorandum of understanding (MOU) it entered in June 2001, under which it would subscribe for substantial new equity and support a rights issue. That made funding from the Government imperative if statutory management was to be avoided.

Dr Cheong, his executive vice-president Michael Tan and Charles Goode, ANZ's Australian chairman and a director of Singapore Airlines, joined Air NZ's board on August 9, last year.

Dr Farmer said Air NZ believed its association with SIA, coupled with the expertise of Dr Cheong and Mr Tan on its board and the acquisition of the 100 per cent shareholding in Ansett, were "all positive steps" towards achieving the company's strategic objectives.

"Our assessment was that Ansett would not survive in the long run against Qantas without an alliance of the kind that we were offering and without the integration benefits and cost savings that would result from our acquisition Ansett would struggle to maintain its viability," he said.

Air NZ quickly discovered serious deficiencies in basic Ansett management and financial reporting systems - and ultimately aircraft maintenance processes.

Sir Selwyn, Dr Farmer, and Air NZ chief executive Gary Toomey had met Helen Clark on March 19 to outline why the airline's two classes of shares should be merged to allow an international recapitalisation.

Further discussions took place at Government level over the board's preference for the 25 per cent cap on SIA's stake to be lifted. "There was every reason to believe that if the Government was prepared to change its existing policy on the level of foreign airline ownership in Air New Zealand, substantial further equity would be available from SIA which would then form a platform for further capital raisings as and when required," said Dr Farmer.

On April 27, the possible sale of Ansett was flagged at an airline board meeting - but Dr Cheong was "particularly opposed".

Airlines such as United and Lufthansa were mooted as potential equity partners, but again Dr Cheong was in opposition.

Air NZ's proposal to remove one of Ansett's competitors by acquiring Virgin Blue for $US100 million surfaced in May. It was forecast to create an additional $A239 million annually for the group.

On May 25, Air NZ's then chairman Sir Selwyn Cushing was cut out of the play. Qantas chief executive Geoff Dixon came to Auckland and left Sir Selwyn with a proposal for a transtasman partnership between the two airlines. Under the proposal, Qantas would acquire all SIA's and BIL's shareholdings in Air New Zealand and the sale of Ansett to SIA.

SIA's reaction was "initially equivocal," says Dr Farmer.

So Air NZ and advisers Salomon Smith Barney developed a range of proposals, including one based on the Qantas option and another based on funding from SIA.

But at the June 17-18 board meeting, Dr Cheong advised that SIA would not sell its Air NZ shares.

A memorandum of understanding was signed fixing SIA's new equity subscription at $1.31 a share - conditional on Government approval for the share merger and SIA lifting its stake to 49 per cent. SIA would contribute $650 million of a $1.05 billion capital raising to improve Air NZ's position.

SIA also agreed to use its best endeavours to support Air NZ's attempts to buy Virgin Blue, but Dr Cheong opposed the $US100 million purchase price.

By July, the May trading position was clear: the group had lost $132.6 million before unusual items and tax.

Selling Ansett was an option that was raised, but Dr Cheong and Brierley Investments chief executive Greg Terry were opposed. Mr Goode, an SIA nominated director, requested a letter of comfort for Ansett. The decision was rolled forward.

Board tensions increased until the independent directors forced a vote on August 22 giving management the authority to offer to buy Virgin Blue for $US120 million - the price Sir Richard Branson had named. But Qantas was back in the picture with a spoiler proposal.

The independent directors believed the obstructions to the SIA-led recapitalisation could still be overcome, and Air NZ would get the breathing space to either complete the Virgin Blue deal or, if that failed, sell down its Ansett interest in an orderly manner. But the SIA chief was reportedly still unhappy at paying $US120 million for Virgin Blue.

On August 30, Salomon Smith Barney advised Air New Zealand's unsecured bankers were expressing concerns: If Ansett had to be sold, any price below $A400 million would breach vital banking covenants. "At this time it was thought this was not particularly likely and indeed Mr Terry, the CEO of BIL, said that BIL would itself be an interested purchaser if the price was that low," said Dr Farmer. But six days later, Sir Richard tore up a mock cheque and with it Air NZ's plans.

On September 5, Salomon reported Air NZ needed an injection of up to $800 million to support both companies in the medium term. There was little option but to liquidate Ansett or place the company in administration.

One day later, Dr Cheong dropped another bombshell. He advised that SIA would not proceed under the MOU and in particular would not acquire shares at $1.31.

He later advised the shareholders' funding support and the possibility of Government funding depended on a clean sale of Ansett.

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