O'Sullivan: Action vital in airline saga

By FRAN O'SULLIVAN

Prime Minister Helen Clark's cabinet is in a no-win situation as it grapples with Air New Zealand's future today.

The cabinet must show some leadership after months of vacillation on the issue.

The ministers' failure to quickly endorse Air New Zealand's request that it allow Singapore Airlines to increase its 25 per cent stake and lead a major recapitalisation has dangerously destabilised the airline.

The airline's directors have had their feet held to the fire for far too long when they should have been concentrating on the strategic direction of the airline.

The Government's vacillation also created a vacuum in which geo-political rivalries between Australia and Singapore have threatened to swamp its sovereign right to make decisions over the future ownership of its national flag carrier without being bullied.

Despite these swirling matters, the real issue is quite simple: Air New Zealand faces a dire shortage of capital.

It is not the same basket-case as Aerolineas Argentinas.

But airline chiefs have written to both the Australian and New Zealand Governments warning them of the consequences of undue delays in finalising its forthcoming recapitalisation. If the transtasman stalemate is not quickly brought to a close, the leaked letter says, the airline's corporate survival will be threatened.

The threat is not a light one: concentrating minds is Air New Zealand's 2001 result, due on September 4, and more than $1.5 billion in short-term loans due to be rolled over at that time.

The banking syndicate, led by Commonwealth Bank, Westpac and National Australia Bank, is not expected to call up the loans if the recapitalisation is not finalised by that time.

But all parties - the New Zealand and Australian Governments, Air New Zealand, the airline's major shareholders, Singapore Airlines and Brierley Investments, and prospective bidders Singapore Airlines and Qantas - are aware of the consequences if a decision is not made promptly.

Air New Zealand will unveil a substantial loss on September 4. The airline's financial statements will make it abundantly clear that it has taken a pounding. Increased competition in the Australian market and savage price discounting have taken their toll, on top of the effects of higher fuel prices which also affected the interim result.

Air New Zealand would be expected to write down the value of its investment in Ansett Australia when it reports its September 4 result. If substantial equity is not injected at that time, the airline will be in breach of its vital loan covenants.

It is not likely that the receivers would be called in. But the threat exists.

In April, credit agency Standard & Poor's put the airline on negative credit watch. Its debt had already been twice downgraded to the "speculative investment" category since Air New Zealand acquired Ansett Australia.

The agency said although earnings from Air New Zealand's domestic and international activities were expected to remain satisfactory, the performance would be more than offset by losses at Ansett - which accounts for more than half of Air New Zealand's revenue in fiscal 2001. Increased competitive pressures and a higher level of price discounting in the Australian domestic airline market were the major reasons.

Standard & Poor's noted Air New Zealand's cash-flow protection measures seemed to be considerably weaker when its rating was lowered to BB+ in November 2000.

Since then airline chief Gary Toomey has made great play of the $1 billion in cash which has been built up in recent months. Given the size of the airline's current liabilities, anything less would be foolhardy.

In April, the agency said it expected Air New Zealand's funds from operations-to-debt ratio to fall below 10 per cent - from 12 per cent in first half of 2001.

Interest cover was expected to be drop to 2 times (about 2.6 times in first half of fiscal 2001).

If the situation is substantially worse on September 4, Air New Zealand is bound to face another credit rating downgrade unless a recapitalisation is unveiled.

Two months ago, the airline has proposed that Singapore Airlines increase its 25 per cent stake to 49 per cent and lead a rights issue to increase the level of shareholders' funds.

But despite the unanimous boardroom support for the proposal, the Government has allowed the issue to become bogged down in transtasman and regional politics.

The cabinet's adviser, Wellington investment banker Rob Cameron, will present options to remedy the national flag carrier's dire capital shortage.

The cabinet has three options:

* To endorse Air New Zealand's request to allow Singapore Airlines to increase its 25 per cent stake to 49 per cent and lead a recapitalisation of the airline through a rights issue.

* To support Qantas Airways' proposal that it acquire Singapore Airline's 25 per cent stake in Air New Zealand. In return, Singapore Airlines would pick up 100 per cent of Ansett Australia.

* To extend Government funding to Air New Zealand through either capital notes or preference shares, or guarantee such an issue. This option could also include allowing Singapore to raise its ownership level to 35 per cent.

Both the Australian and Singaporean Governments now see ownership of Air New Zealand in geo-political terms. In Australia's case, Transport Minister John Anderson - who initially professed to be unconcerned by the Singapore proposal - has swung in behind Qantas' claim that it will be marginalised if it is unable to take up a 25 per cent stake in Air New Zealand.

For Singapore's part, it has recently signed a closer economic partnership deal with New Zealand, and does not want to become the subject of Australian whim.

No matter which path the Government chooses, there will be critics aplenty.

In my own view, the Government should endorse the Air New Zealand board's request. Singapore Airlines is a strong aviation player which has more than covered the cost of its capital over time.

Its market capitalisation is more than four times that of Qantas Airways.

It has already demonstrated willingness to be there for the long haul. By comparison Qantas sold out of Air New Zealand after failing to exercise sufficient ownership control.

If the Government really swallows the Qantas spin that a regional behemoth will be created if Singapore increases its stake to 49 per cent, it could always approve a smaller percentage increase and stump up extra funds to cover the gap itself.

Let's hope if it takes that option it extracts better terms than its $78 million investment in NZ Post's so-called People's Bank.

Whatever the outcome, the decision should be made smartly. Delaying is a costly option.

Southern Skies Properties Limited

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