KEY POINTS:
If Michael Cullen had sold a 25 per cent stake in Air New Zealand when the share price peaked at $3.12 last June, he would have realised enough cash to fund the $665 million buyback of Tranz Rail as well as the debt.
The Finance Minister resisted the pressure when market players - which included Air NZ chief executive Rob Fyfe - suggested a spot of profit-taking was in order last year as the share price rose on the back of private equity fervour.
The Government - which had a 76.57 per cent stake at that stage - would still have been able to exert majority shareholder control from a 51 per cent holding. It would still have been able to appoint a majority of directors who could exert sufficient influence to make sure the national flag carrier continued to look to the country's interests.
And the Government could have banked a cheque of at least $840 million for the 25 per cent stake based on the $3.12 share price. That figure would have come close to covering the Crown's original entry costs for 76 per cent of the company and have earned plaudits for smart dealing.
But Cullen was "not for selling".
Rising oil prices have now sent airlines into a tailspin as they raise fares, slash routes and hope rivals will go bust before they feel too much pressure on their own balance sheets.
Even Air New Zealand - which is in a better position than many competitors due to good management under Fyfe's reign - is forecasting a lower profit of some $200 million to $220 million for the year compared with the $268 million profit (before unusuals and tax) that it posted for the June 2007 year.
From a taxpayer's perspective, the Government still owns 76.47 per cent of Air New Zealand.
But that stake was worth a mere $912 million at yesterday's closing price of $1.14.
The most disturbing fact is this: The $912 million on paper value for the Government's Air New Zealand holding is less than the $1.034 billion it shelled out to acquire the stake in the first place through the $885 million capital injection at the 2001 bailout and a subsequent $149 million rights issue
If the share price continues to bump along at such a desultory level - which is indeed possible given the outlook for the airline sector - the next Government (either Labour or National) may find itself in the embarrassing position of having to write down the value of the airline holding in the next crown accounts.
The point about this little exercise is not to rub Cullen's nose in the mire - the share price arithmetic speaks for itself.
The point is to ram home the absurdity of Governments wedding themselves to a "don't sell" position out of sheer political blindness.
Cullen was happy enough to pocket a special dividend when Meridian Energy made an $800 million profit on the sale of Southern Hydro. The sale of its Australian subsidiary clearly reduced the overall value of Meridian Energy - but Cullen did not advise the state-owned enterprise "not to sell". In Air New Zealand's case, ideology has prevailed.
National leader John Key should be able to make political hay out of this run of events. But Key's decision to give a blanket assurance that National won't sell any state assets in its first parliamentary term as Government undercuts this reality.
The aviation sector is under a black cloud right now. Tristone Capital - which is an energy specialist investment bank - forecasts oil prices will be above US$100 a barrel for the next two years at least.
Delays to the entry of the Boeing 787-9 Dreamliner - a new aircraft with a 13,000km range, 280-seat capacity and lower fuel appetite - are affecting the ability of the industry to work through this patch. Air New Zealand, which has eight 787-9 aircraft on order, is seeking compensation from Boeing.
Some airlines like BA - which have not adequately hedged against rising oil prices - are being hammered. In Air New Zealand's case its own crude oil hedges are understood not to offset the growing cost differential of jet fuel.
Deutsche Bank suggests airlines will have to either slash growth, cut costs or sharply increase fares (or do the lot). There is general agreement that companies will have to address their business models - looking at all parts of the equation: pricing, networks and cost bases.
This environment should have brought home to Cullen the absolute necessity of making sure that the Government does not pay "over the line" for Tranz Rail.
But - and this is an absolute scandal - Treasury has been bypassed by Cullen in favour of mandating Ontrack to negotiate on the Government's behalf.
Requests under the Official Information Act for Treasury papers on the recent acquisition involving the assets of Toll NZ have been redirected to Ontrack which, according to Treasury, has had the lead role in negotiations since September 2007.
"Treasury therefore has no reports or papers relevant to your request" was the line given to one requester.
The Budget disclosed the Government expects to spend $1.47 billion by 2012 on the Tranz Rail assets and upgrading the state-owned national rail network. Apart from the $665 million purchase price there is also $80 million to $120 million of associated debt - the final figure is subject to the outcome of negotiations between Ontrack and Toll NZ. The acquisition of rolling stock and further upgrading of the rail network push the figure up towards the $1.47 billion.
But if Treasury hasn't done the work to justify these figures - who has? The answer seems to be that Cullen - working through his senior official Chris McKenzie - is in the box seat. Ontrack has a raft of consultants: PricewaterhouseCoopers - Brian Roche, Rob Cameron and Russell McVeagh are in the frame, according to Cullen's office. Simpson Grierson is fronting for Toll NZ.
The Ontrack team are highly experienced - but when the taxpayer will end up "tailend Charlie" for the buyback and upgrade, the Treasury should also be in the frame.
Cullen's track record of paying too much for assets (Tranz Rail) and failing to realise nifty profits when presented (Air NZ) does not bode well.
The only really good news on the state acquisition front is that Cullen does not intend a bid for Origin's Contact Energy stake. "Nothing is on the agenda," he said.
