Warning: Turbulence ahead

By MATTHEW DEARNALEY

Howls of nationalistic outrage threaten to drown out any assurances Air New Zealand may offer passengers and staff today over the sale of a cornerstone share to its fiercest rival.

Word late on Friday that the national carrier had a firm proposal for the Government on the sale of a significant shareholding to Qantas gave employees of both airlines an anxious weekend.

Finance Minister Michael Cullen, custodian of an 82 per cent Government stake from last year's $885 million bailout, is ready to receive the proposal. Unions have been summoned to a meeting this morning with chief executive Ralph Norris.

Air New Zealand, which has been entertaining renewed overtures from Qantas since May for a slice of up to 25 per cent at about $500 million, will highlight a national interest package negotiated to preserve its brand and protect jobs.

But budget Australian airline Virgin Blue is already vowing to petition regulators, warning that the deal would wipe out the competition that has passengers smiling after a fare war between Air New Zealand and Qantas.

Virgin's Brisbane-based commercial manager, David Huttner, says he will urge the Commerce Commission to block the deal, because there will be little point for his airline in introducing transtasman services if the two bigger airlines are in cahoots.

Among other things, he will remind the regulator of legal action being taken by the Australian Competition and Consumer Commission over alleged "capacity dumping" and predatory pricing by Qantas against Virgin's pioneering air service between Brisbane and Adelaide.

This may be labouring the point, because any cross-ownership plan would have to be approved by the competition watchdogs of both countries - assuming the Government as a shareholder agrees to it.

Air New Zealand has offered passengers 30 per cent lower fares on average for its new no-meals domestic service, only to be matched by Qantas, which seemed ready to add to its multimillion dollar losses here by keeping a full service.

Air New Zealand's grumbling about predatory pricing petered out as an alliance deal became more imminent and the local carrier's strategy started paying off with a 20 per cent increase in passengers.

But Qantas kept piling on the pressure for an alliance by announcing plans to add three more Boeing 737s to its four-strong fleet here, widely seen as a declaration of what a jilted suitor could be capable of.

The Government, which would have its stake watered down by any issue of new shares to Qantas, must balance responsibilities to taxpayers and consumers.

Air New Zealand, with a $200 million profit forecast for next year, is in a healthier financial position than when Qantas approached it, on Dr Cullen's prompting, six months ago with its so-called "partnership of equals" proposal.

This will have strengthened Mr Norris' hand in trying to negotiate safeguards against having his brand munched up by the flying kangaroo.

But the Government, manifestly spooked by suggestions that a spurned Qantas could destroy Air New Zealand, remains nervous about any extra liabilities after rescuing the carrier from its loss last year of $1.4 billion, which was fuelled by the collapse of Australian subsidiary Ansett.

That loss was the biggest in New Zealand corporate history, and the Government inadvertently issued in April a forecast from the time of the bailout that the airline needed a capital infusion of $1.705 billion.

The Government later pledged a further $150 million, but Dr Cullen said the airline must meet the balance from cost-cutting and asset sales.

Air New Zealand hastened to explain at the time of the disclosure that the $1.7 billion was for a "workout" over an extended period, to achieve a lower ratio of indebtedness to its assets.

Even so, it has cut management ranks by 17 per cent and shed more than 1200 of the 10,914 staff employed directly and by subsidiary operations in September last year. It has also demanded a 12-month wage "pause" from most of the survivors.

Mr Norris, who will not confirm any proposal before telling the Stock Exchange, assured shareholders last month that negotiations with Qantas were not based on a need for new capital.

They were instead aimed at putting Air New Zealand in a healthy position for growth by developing a strong regional alliance to pull more passengers our way.

But the travel industry will need assurances that Qantas-appointed members of the Air New Zealand board will not try to torpedo the more than $20 million a year the airline spends promoting New Zealand attractions - as distinct from Australia's.

The likely appointment of two such directors deeply concerns analysts and former Air New Zealand directors such as Sir Selwyn Cushing, who has bitter recollections of the last time Qantas sat at the board table, from 1989 to 1996, as a 19.9 per cent shareholder.

Sir Selwyn told the Herald earlier in the negotiations that this made it very hard for managing directors to bring to the board projects which would have competed with Qantas, "who were your opponents, and vicious opponents".

Air New Zealand's managing director when the airline was privatised in 1988, Jim Scott, was even more explicit.

"Qantas sat at the table and dorked us," he said of successful Qantas efforts to scuttle a bid by Air New Zealand to buy the then state-owned Australian Airlines.

"Of course they were asked to leave [the board room], but they knew what was going on, they understood the strategy of Air New Zealand to strengthen its position."

Qantas chief executive Geoff Dixon denied in a letter to the Herald this month that directors passed confidential information back to his airline.

"When Qantas previously owned shares in Air New Zealand, our representatives on the board acted with absolute propriety," he wrote in response to qualms by Shareholders' Association chairman Bruce Sheppard about any new alliance.

But Mr Dixon acknowledged in August that his airline's involvement in Air New Zealand last time was on a "semi-hostile" basis, adding that "personalities had changed" and that any new relationship would develop only by mutual consent.

Mr Norris agrees that Qantas' previous shareholding did not work.

"This deal has to ensure that Air New Zealand retains its autonomy, it is managed by its own management, it is controlled by its own board, and it will be very much a minority position that Qantas has in this company," he said after last month's annual meeting.

The difficulty he faces in turning the theory into practice is that Qantas would become by far the largest non-government owner of the airline, therefore capable without rigorous safeguards of wielding influence greater than its nominal shareholding.

Qantas has shown no altruism towards Air New Zealand in the past.

It is widely blamed for pushing Air New Zealand to the brink of collapse last year, by enlisting Australian Government help to scuttle a plan for Singapore Airlines to raise its stake in the carrier while supplying funds needed to rescue Ansett Australia.

Dr Cullen preferred last year to blame what he called the incompetence of the former board under Sir Selwyn's chairmanship in signing up to buy its second 50 per cent share in Ansett without fully analysing Ansett's financial health.

Be that as it may, Qantas went all out last year to seek absolute control of Air New Zealand, with a pitch for what was then Singapore Airlines' 25 per cent share and Brierley Investments' 30 per cent, before Ansett crashed and all bids were off.

Air New Zealand staff can only hope their employer will see through any attempt by Qantas to renew its offer from last year of "development opportunities" which would have meant palming off unprofitable routes, such as to South America, to the junior partner.