Qantas a done deal? Not quite

By CHRIS DANIELS

Is Air New Zealand's talk of actively exploring alternatives to a deal with Qantas mere empty bluster or sensible strategy?

Aviation industry analysts are divided on the significance of the revelation at the airline's annual meeting that it is working on "options, other parties and Plan Bs".

One school of thought was that a deal with Qantas was "95 per cent done" and talk of alternatives was window dressing aimed at placating small shareholder opposition to a transtasman link-up.

But another was that Air New Zealand's financial position has hugely improved since the dark days when the Qantas talks began - it is looking at a $200 million profit next year - and so it could afford to look at other options and even to raising extra capital through a rights issue.

The discussions about the Australian carrier taking a stake of up to 25 per cent in Air New Zealand have been continuing for the past six months.

Air New Zealand's chairman, John Palmer, and chief executive, Ralph Norris, assured shareholders at the airline's annual meeting this week that a link with Qantas was not a done deal and, on the contrary, they were actively looking at other options.

Norris said talks with Qantas had not been based on any need for new capital and were instead an attempt to put Air New Zealand in a strong position for future growth.

One financial analyst told the Business Herald that he was convinced Air New Zealand's negotiating strength with Qantas had improved dramatically in the past six months.

When news of the talks between the two emerged earlier this year, it was leaked from political, not airline sources, he said.

Air New Zealand had then been in a desperate position, urgently needing capital to shore up its balance sheet.

This was not now the case, as it has joined other airlines in turning a good profit in the past six months.

An improving bottom line meant that the possibility of Air New Zealand launching a rights issue had increased. Under this scenario, the airline would offer all shareholders rights to buy something like one share for every four already owned.

This could be offered at 36c each.

The Government, as 82 per cent owner, would choose not to take up its rights to buy, presenting both retail and institutional investors with an opportunity to invest in their national carrier.

Such a move would mean that Air New Zealand gained the capital it needed, while not handing over any boardroom power to a rival such as Qantas.

But another industry analyst said alliance talk - the possible sharing of routes and co-operation with another airline - could really be done only with Qantas or Singapore Airlines because these were the only two airlines that could reasonably be interested in bringing passengers to this part of the world.

Air New Zealand directors' talk of other options and possible schemes was simply an attempt to convince shareholders that they were doing their job properly by investigating other deals.

In his view the Air New Zealand Qantas deal was "95 per cent done".

While there was a reasonable amount of money to be earned from rationalising its overseas routes, the main purpose of Air New Zealand joining forces with Qantas was to protect its lucrative domestic market from an ultimately destructive price war with the much larger Australian carrier.

Qantas was already competing on price in this market, while still offering a full-service product. Air New Zealand begins its new "express", one-class domestic service tomorrow.

The company now has a gearing ratio - debt against assets - of 73 per cent. This ratio has dropped from 91 per cent at the start of this year and includes the capitalisation of aircraft leases.

Norris said it was his intention to have this ratio between 50 per cent and 60 per cent.

One aspect of the Qantas talks that could have a negative effect on the Air New Zealand balance sheet is its future position within the Star Alliance of airlines.

When asked what sort of penalty Air New Zealand might suffer should it decide to leave the Star Alliance, neither board member Roger France nor Norris would give any details.

France said the contracts tying an airline into such an alliance were confidential, and he was not in a position to give out details.

Various multimillion-dollar penalty fees and fines have been rumoured to be part of these Star Alliance contracts, designed to make extraction painful.