No easy answer to air savings

By YOKE HAR LEE

Air New Zealand's full ownership of Ansett Australia will force it to take a hard look at how to deliver the savings it desires.

Chairman Sir Selwyn Cushing has said savings of $100 million a year should be achievable within a year of the two airlines merging.

Ansett International is expected to be an early candidate for close scrutiny. A first signal is likely to be shown around October when new schedules come into place, say industry observers.

"There is potential competition between Ansett International and Air NZ. Ansett has indicated it wants to fly Sydney-Los Angeles. Air NZ does the same. One of the things Air NZ has to deal with are the competitive elements from Ansett," one industry official said.

Air NZ flies to 18 countries; Ansett International flies only to Denpasar, Hong Kong, Taiwan, Fiji and Osaka. The two airlines already codeshare with Singapore Airlines.

Australian media speculate that between 3000 and 5000 jobs will be lost once the airlines are integrated. But Air NZ has dismissed the numbers as misleading.

Iain Lang, federal president of the Australian Licensed Aircraft Engineers Association, said he did not think there would be much scope for cutting jobs in engineering.

"There will be some rationalisation of specific parts - when the airline moves to create centres of excellence, say, in the overhaul of pneumatic components or hydraulic components," Mr Lang said.

But he believed 3000 to 5000 lost jobs was over the top. He does, however, expect clerical and administrative jobs to come under scrutiny.

Alastair Carthew, for Air NZ, said the company had shown it could rationalise without shedding jobs. "An example is Newco, where engineering and maintenance is being rationalised in three centres, Christchurch, Melbourne and Auckland. That has been done without any job losses."

Another observer said: "The two management teams are likely to be streamlined into one, with a single base either in Australia or in New Zealand."

Mr Carthew said it was too early to say which areas would be dealt with first. "That's the job of the integration team. We have indicated that the areas they would be looking into include network planning, scheduling, revenue management and strategic planning."

Chin Lim, a regional aviation analyst for the US investment bank Morgan Stanley Dean Witter, said Ansett remained a more costly operator.

"The point to make is Ansett is a high-cost carrier. In Australia, there is likely to be a third competitor, which is a no-frills airline. That's going to drive the fares down.

"The bottom line is, I think Air NZ is going to have a tough time with margins, having to driving costs down when fares come under pressure," Mr Lim said.

Other aviation analysts consider that the market's intense dislike of the deal - shown in the sharp fall in the price of its A and B shares - has to do with the impact of net debt to equity of the merged airlines. Since then they have rallied, the A shares closing yesterday at 198c and B shares at 225c.

One regional aviation analyst said: "Even if Air NZ paid $A580 million, with some $265 million being in equity, that will bring the net debt to equity, to around 96 per cent. Sure, that is not a problem. But if you consolidate Air NZ's balance sheet with Ansett's, and assuming Ansett has to borrow, that can quickly raise that [net debt to equity] to over 125 per cent.

"Is that manageable? Yes, from an airline's point of view, that might not be a problem, considering Asian airlines have that.

"But to move from 63 per cent [debt to equity] to 125 per cent, especially when you are buying Ansett on the basis that profits will come under pressure from competition, that's a major risk."

* Additional research by Susan Jennison.