New horizons for transtasman airlines in eventful year

By DANIEL RIORDAN

It may have looked like musical chairs in the skies above New Zealand and Australia, but there was method to last year's aerial ballet.

Air New Zealand, now run by a former Qantas executive and whose biggest shareholders are a Singapore investment company and Singapore Airlines, ended the year doing most of its business in Australia after a full takeover of Ansett Holdings.

Qantas finished the year flying within New Zealand under a franchise agreement with the former Ansett NZ, whose chairman used to work for the company that sold Air NZ its stake in Ansett Holdings.

Confused? One step at a time, please.

Start in April when, after protracted negotiations, Singapore Airlines took a 25 per cent stake in Air NZ, bringing to the koru boardroom its expertise and considerable financial clout.

The stake was bought on-market from Brierley Investments.

While Singapore and Air NZ would like the Government to relax its 25 per cent cap on foreign airline ownership and let Singapore go further, Transport Minister Mark Gosche has ruled that out.

The next significant event came when, after years of striving, Air NZ managing director Jim McCrea achieved his goal of full ownership of Ansett Holdings, turning Air NZ into a true Australasian airline.

But ironically, shortly after the deal was inked in June, Mr McCrea abruptly resigned, apparently over a contract dispute.

After nine years in the top job and 44 years with the airline, he was obviously not seen by the board as the ideal pilot for the company's new course.

Chairman Sir Selwyn Cushing took a tighter grip on the controls, which will be passed on this month to Gary Toomey, former Qantas finance head and a renowned cost-cutter.

Mr Toomey's appointment was greeted positively by airline watchers familiar with his record at Qantas.

For much of the year, Sir Selwyn ran the company in his indomitable style, but flew into flak over the company's handling of its $284 million rights issue, needed to help pay for the Ansett acquisition.

Two days before the issue closed in early November and after bullish roadshows, Air NZ slashed its profit forecasts, citing higher fuel costs and problems at Ansett Australia - mocking claims in the issue prospectus that it expected to do well in fiscal 2001.

Sir Selwyn defended the turnaround, pointing to prospectus disclaimers that allowed for changing circumstances between the issue's offering date and closure, but rarely had the investment community been as unified as it was in its criticism of the airline's actions.

The rights issue closed $19 million under target, with the shortfall picked up by underwriters.

The Securities Commission found no grounds for action, while the Stock Exchange's market surveillance panel has yet to complete its investigation.

Standard & Poor's downgraded the airline's credit rating to a notch below investment grade, meaning the company's $150 million capital notes issue in the first part of this year will have to be sweetened with a higher interest rate.

After 20 months of negative credit-watch, the rating agency said the downgrade reflected the airline's high debt burden, higher costs, greater competition, slowing economic activity in its markets and the inevitable problems of integration with Ansett Australia.

While Air NZ's head office spluttered through the financial flak, many employees will spend an uneasy holiday as the combined company looks to trim staff numbers to avoid duplication of tasks.

Several senior managers retired early, middle management ranks were pruned and last month almost all the 23,000 staff were given the option of applying for voluntary redundancy. The company has not said what kinds of workers it wants to go.

While Air NZ was undergoing one of the most eventful years in its history, big changes were also taking place at its domestic rival, Ansett NZ.

In March a group of New Zealand and Australian businessmen, headed by former Ansett Australia and News Corp executive Ken Cowley and glued together by Auckland merchant banker David Belcher, bought the airline from News Corp.

From September the airline flew as Qantas NZ, the first franchise operation in the Aussie icon's history.

With Air NZ's full ownership of Ansett Australia, the Australian domestic market suddenly became more important to it than the New Zealand domestic market.

Qantas became a bigger and a more efficient competitor. Its hedging policies against the rising US dollar proved far more effective than Air NZ's, offering greater protection against higher fuel prices through most of the year.

At the same time, the new entrants to the Australian market, Virgin and Impulse, raised the heat on an already underperforming Ansett Australia to blowtorch intensity.

Against this backdrop, the battle between Ansett and Qantas for ownership of Australian regional airline Hazelton took on major significance.

Both airlines want Hazelton, in large part for its landing slots at the nation's busiest airport, Sydney. The year ended with Australia's competition watchdog saying it would oppose both airlines' bids.

While carriers on both sides of the Tasman fought their battles, breakthroughs in international agreements affecting access to other nations - so-called open skies agreements - promised benefits for all.

Such deals eliminate restrictions on how often carriers can fly, the kind of aircraft they use, the prices they charge and what routes can be flown between signatories.

Bilateral open skies agreements are common - New Zealand has them with about 40 countries, including its new multilateral partners. But a multilateral pact with the United States, Singapore, Brunei and Chile, signed in November, broke new ground, making it easier for airlines of a member country to carry traffic from a second member country on to a third.

At the same time, a bilateral open skies agreement with Australia, capping a decade of often tetchy talks, scrapped the limit on how many people Australian airlines can fly out of New Zealand, and vice versa.

That limit was the equivalent of 12 jumbo jets, but the new "through-rights" mean Australian planes coming here can pick up as many New Zealanders as they like before carrying on to a third country.

Our Government hopes Qantas will fly more people out of New Zealand, sparking a price war with Air NZ that will cut fares on major routes.

It also hopes Asian travellers on Air NZ flights to Australia will carry on here, but no one knows for sure what will happen.

On the ground, airlines were upset by Auckland International Airport's decision to raise landing fees.

Although the airport maintained that it met its legal obligations by consulting for the best part of a year with its users, the airlines disputed the basis for the increases (a compound 19 per cent over the next three years).

Air NZ took the airport to the High Court, although the case is not expected to be heard for several months.

Just before Christmas a similar disagreement erupted between airlines and Christchurch International Airport.

All air travellers can look forward to flying in the new behemoth of the sky, the 555-seater Airbus A380, the first real competition to Boeing's long-standing dominance in the super-aircraft market.

By year-end six customers, including Qantas, had ordered 50 of the planes, due for delivery from 2005.

Air NZ (including Ansett) has yet to decide which manufacturer it will choose.

As the A380 and its new Boeing rival, the 520-seater 747X-Stretch jumbo, cost over half a billion dollars each, the decision is not to be taken lightly.

Herald Online features:

2000 - Year in Review

2000 - Month by month

2000 - The obituaries