KEY POINTS:
If Michael Cullen is feeling frisky, he might just look at selling off some Air New Zealand shares.
The 82 per cent stake that the Finance Minister picked up for $885 million when the Government bailed out the airline in 2001 is now worth $1.6 billion, nearly double the amount taxpayers forked out after Air NZ hit the skids. With this one fell swoop, Cullen could:
Cut the rug out from under a newly resurgent National by flicking some shares in a Government-owned enterprise while John Key and Bill English continue to just talk about it;
Give a fill-up to the NZX which is dying to get more listings to market;
Boost popular capitalism by selling some shares to mum-and-dad shareholders instead of to the ever-circling private equity boys, although it's clear the NZ market could not underwrite a full sell-down;
Reduce Government exposure to a risky sector;
Put some political wind into the Government's sails after 2006's annus horribilis;
Boost the Government's surplus with a one-off gain - the $885 million original purchase price was not borrowed but funded from the surplus;
Fund a round of tax cuts (Cullen expects journalists to say this, so I won't disappoint him);
Keep Trevor Mallard (who wants his job) in his place by getting his own sell-down away, while Mallard gets on with priming state-owned enterprises for partial listings in tune with his desire to convert them to agents of economic transformation.
Cullen couldn't write a better privatisation (or political) script if he tried.
The big question is whether he or the Labour-led Government and its coalition partners would try to quit the 85 per cent stake altogether by selling 100 per cent of the Government's shares to a private equity consortium or opt for a staged sell-down, which would leave the Government as the majority shareholder.
You can be sure that although it's the tailend of the holiday season, Cullen's favourite investment banker, Rob Cameron, will be thinking through the strategic options.
Air NZ's recent share price escalation is mainly due to the re-rating of airline stocks in the wake of the Macquarie consortium's $12.6 billion takeover bid for Qantas and the other private equity plays which are gobbling up airlines around the world.
In little more than six weeks, the Air NZ share price has risen by nearly one third, from $1.47 on November 21 to $1.94 at Friday's close, taking the airline's overall market capitalisation to $1.95 billion.
The price escalation may have further to go if Forsyth Barr aviation analyst Rob Mercer's prediction of a $2.20 per share valuation is correct. Mercer suggested airlines were heading into a sweet spot due to improving yields which have been helped by a shortage of wide-bodied aircraft. In Air NZ's case it was in an enviable position because it had perfectly executed the timing of its own fleet upgrade and was under-valued, compared to Qantas and to other global airlines.
The soaring fuel prices that have severely hobbled Air NZ's bottom line for two years are now in retreat.
The Forsyth Barr analyst is among those who do not believe Air NZ faces any short-term commercial jeopardy from the proposed ownership change at Qantas. If Qantas got stroppy and launched a hostile strategy on New Zealand domestic or Tasman routes, Air NZ could simply partner with one of Qantas' competitors, such as Virgin.
Air NZ chief executive Rob Fyfe is not so daft as to say so outright himself, but it's clear he's not wasting any sleep over the prospect that Qantas might turn its attention in the direction of his own company.
But Fyfe does need to pay attention to just how Qantas chief executive Geoff Dixon achieves the radical efficiencies that will be necessary to offset the huge amount of debt his company will be saddled with when the Macquarie-led consortium sets about extracting its purchase price from the airline's books.
If Qantas moves towards Ryanair's low cost model, as Dixon's existing strategy suggests, how will that affect Air NZ's transtasman operations or its own option to enter the Australian domestic market in a very competitive way?
Union leader Andrew Little is right to be concerned that Air NZ might be forced to outsource more of its operations to stay competitive against a slimmed-down Dixon machine. Australian unions are already calling for a full inquiry into the sale because of the threat to Qantas' 37,000 workers. Their worry is that jobs will be moved to jurisdictions with lower labour rates than Australia's.
Dixon suggests Macquarie's leveraged buyout will make Qantas more disciplined. But he also suggests Qantas may forge new links with other airlines, as the inevitable consolidation takes place in the industry.
If Qantas - the 10th biggest airline in the world - is not viable as an end-of-the-line carrier, what is Air NZ's outlook?
These are important issues that Cullen and Cameron, who must take account of the long-term value of the Government's 82 per cent stake, must weigh with some degree of urgency.
Despite the angst caused when Singapore Airlines was last a shareholder in Air NZ, it may be time for discussions at inter-government level about what the strategic options are for both government-controlled airlines, if a regional airline shakeout occurs in this part of the Asia-Pacific region.
Relationships became bitter after Cullen rejected Singapore Airlines' bid to basically get control of Air NZ during the tumultuous 2001 period. But this is business.
Cullen needs to use his upcoming meeting with Australian Treasurer Peter Costello to explore options for ensuring that the Australasian airline market remains competitive.
One option the Howard Government has is to remove Qantas' protection blanket on the profitable North
Great payoffs in the air if Cullen plays canny
Caption2: MICHAEL CULLEN
TurnFrom1:
American route in favour of open competition. In the past, it has rorted the rules to protect Qantas from Singapore Airlines.
But it owes the private equity consortium no favours.
The Macquarie deal is not entirely a foregone conclusion.
The airline sector - like news media, telecommunications, transport infrastructure and shipping services - is designated a sensitive industry under Australia's foreign investment rules. Costello has a major say on what national interest conditions the new owners must implement to protect Australian jobs and the country's vital aviation links.
But the more controversial issue is the extent of negative gearing that the Qantas takeover portends.
The $12.6 billion bid price amounts to 15 times Qantas' earnings. Australian banking analysts suggest the deal will only work if the consortium can extract a 20 per cent internal rate of return for 5-10 years. This leaves no room for the unexpected margin squeeze.
Recently, retired Reserve Bank Governor Ian MacFarlane warned that the whole Australian economy was becoming leveraged.
Debt-ratings agency Standard & Poors warn that defaults are likely to increase worldwide, as interest coverage becomes thinner in the wake of the private equity boom. For its part, the Australian Government is warning that Qantas debt will be junk-rated, and it won't fund a bailout if the airline later collapses under its mountain of debt.
These are the elements that suggest the Australasian aviation market will be in play for some years to come. Cullen has plenty on his plate when he gets back to work.
