Dialogue: Match doomed from start

Air NZ, jilted at the altar three times, saw a marriage with Ansett as the only way to fly Australian skies. By IAN THOMAS*

It was a shotgun marriage that ended in a quickie divorce.

Unfortunately for transtasman aviation and Australia-New Zealand relations, the break-up of Air New Zealand and Ansett is proving to be just as angst-ridden as their protracted courtship.

The bitterness and inevitable recriminations now being played out in both countries reflect the tragic culmination of a five-year alliance and almost a decade of careful planning that promised much but delivered relatively little.

As blame is being apportioned, the focus naturally falls on Air NZ management and the board. However, the former Australian Labor Government under Paul Keating must accept its fair share for manipulating events which drove Air NZ to Ansett in the first place.

Without that Government's heavy-handed intervention in the mid-1990s, Air NZ probably would be happily flying its own operations on Australian domestic routes.

In terms of collateral damage to Closer Economic Relations (CER), the collapse of Ansett ranks alongside the underarm bowling incident, the Keating Government's rejection of Air New Zealand's 1992 bid to buy Australian Airlines, and its decision two years later to renege on the agreement to allow the New Zealand flag carrier into the domestic market. New Zealand has been on the receiving end in most cases, with Australia the transgressor.

The fact that three of the four recent black marks against CER concern aviation is no coincidence. Air services between the two countries are the glue that binds the relationship both in an economic and symbolic context.

As such, the aviation sector stands at the sensitive frontline of the Australia-New Zealand relationship and all that it represents. Government policy-making underwrites its considerable importance to both countries.

Indeed, the development of a Single Aviation Market (SAM) drawing together the disparate markets of Australia and New Zealand, though laboured in its creation, remains an accomplishment that few other flying nations have achieved.

While SAM represents a significant win for cross-border relations, history is unlikely to look favourably on the Air NZ-Ansett experiment. The latter, above all else, has been testament to the folly of direct government interference at the highest level in driving commercial outcomes and corporate strategy.

Within Air NZ, it has long been recognised as a commercial necessity for the national carrier to secure a presence through equity or otherwise in the much larger Australian marketplace to overcome isolation and strengthen its regional base. The airline's rationale was founded on self-interest, as well as the needs of the broader New Zealand economy, particularly in tourism.

From the early 1990s, Air NZ management was concentrated intensively on what amounted to a seemingly commonsense strategy of long-term preservation. Ironically, that same apparently prudent, risk-averse strategy has now brought the airline close to extinction. How then did it all go wrong?

The original plan was the so-called tricycle option: Air NZ would join forces with Australia's domestic and international carriers, Australian Airlines and Qantas, to form an Australasian troika. This would have been a neat answer to Air NZ's strategic requirements, but it was not to be.

Enter the Keating Labor Government. In 1992, the Government provided a perfect entree for Air NZ to purse the tricycle arrangement when it began seeking buyers for Australian Airlines, then wholly owned by the federal Government. The New Zealand carrier undertook due diligence and lodged a non-binding bid, pitched at the book value for Australian, of $A400 million ($492 million).

Within days, however, the Government announced it would sell Australian to Qantas at the same price Air NZ had offered. The reasons for the decision were not given at the time, but it later emerged that Qantas needed a domestic arm to satisfy the prerequisites of British Airways, the eventual buyer of 25 per cent of the airline.

In other words, Air NZ's ambitions to gain entry to the Australian market and the potential furthering of CER were sacrificed to the Government's privatisation priorities for its own flag-carrier. To add insult to injury, the New Zealanders were also ruled out of the bidding for a shareholding in Qantas.

Australian Government interference again reared its head in October 1994. This time, Air NZ was poised to take up operations on the other side of the Tasman in its own right, in accord with the Memorandum of Understanding for SAM, struck in 1992.

But the day before Air NZ was due to gain domestic access to Australia, then-Transport Minister Laurie Brereton issued his now-notorious fax to his New Zealand Government counterpart, Maurice Williamson, rescinding the offer. The "Dear Maurice" fax arrived on a public holiday in New Zealand, ensuring that news of the unilateral decision was broken to the Government through the newspapers.

Little explanation was given. The fax merely referred to Australia's concerns that New Zealand had not taken up the One Nation concept of a common border, adding that it had not fulfilled its commitment to implement appropriate passenger facilitation arrangements.

Air NZ's Australian strategy was frustrated yet again by the Keating Government's intervention.

While the underlying agenda was never stated, the move was apparently designed to protect Qantas' interests and, more particularly, to assist News Corporation in its desire to exit Ansett. It soon became clear to the New Zealanders that the only avenue into the market would be through buying into Ansett.

The Government's action effectively forced Air NZ into two years of ultimately fruitless negotiations with News Corp. As it turned out, the New Zealanders could not reach a deal with News and finally acquired 50 per cent of Ansett from the other partner in the airline, TNT, in 1996.

Air NZ had achieved its initial goal, but was hamstrung in its attempts to drive the development and integration of the airline by News Corp's retention of management rights over Ansett and the casting vote on the board. With control resting with News until its departure last year, progress was slow and the relationship continued on a relatively unstable and unharmonious footing.

Areas of the two airlines, such as maintenance and engineering, were brought into joint structures as a halfway house to integration to appease the unions. Other back-office operations were also due to be merged, as part of an ambitious programme to deliver major gains in productivity, revenue and profitability.

But there was scant evidence of this in the $1.4 billion bottom-line loss announced by Air NZ last week.

Indeed, the inherent fragility of the partnership was exposed by 18 months of tough market conditions - enough to push an over-extended Air NZ and its capital-starved subsidiary Ansett to the brink.

Financial issues aside, the union of the two carriers was fraught with problems from the beginning. The loss of key management and cultural differences between the airlines exacerbated what was always going to be a difficult situation.

Air NZ and Ansett's partnership was born out of necessity and a lack of alternate options and it has essentially died in the same way.

* Ian Thomas is a senior consultant with the Centre for Asia Pacific Aviation in Sydney.

www.nzherald.co.nz/aviation

www.nzherald.co.nz/travel