O'Sullivan: Clock ticking for Air NZ

By FRAN O'SULLIVAN

Yet again it is "crunch time for Air New Zealand".

This may smack of deja vu after the months of on-again off-again negotiations over the fate of the national flag carrier.

But cliche, or not, Air New Zealand, its independent directors and the airline's two major shareholders have reached reality-check time.



This is the week when Singapore Airlines and Brierley Investments must come publicly to the party and increase their support for the failing national flag carrier, let Air New Zealand entice a new shareholder to put in capital - possibly Qantas Airways, or, recommend the Government puts the airline into statutory management.

Prime Minister Helen Clark and Finance Minister Michael Cullen have already had a range of discussions with Australian Prime Minister John Howard's Government as they endeavour to cauterise damage from a potential Air New Zealand collapse.

Late last week Government negotiator Rob Cameron was working with PriceWaterhouseCoopers' insolvency expert John Waller and former Coopers' principal Roger France on options. A potential statutory manager has been identified to take charge of Air New Zealand if its two major shareholders do not come smartly to the table, either today or early this week.

Other players put on weekend duty include Singapore Airlines' principals and those from Brierley Investments - Air New Zealand's two major shareholders. Neither party was actively pursuing its due diligence exercise on Air New Zealand late last week. Their priority was to consult with their own boards on whether they could extend a cast-iron assurance to fully support the planned bailout of Air New Zealand, or, whether they should simply walk away and writeoff their investments.

Three major factors are driving the reality check.

The first issue is whether the announced $850 million bailout for Air New Zealand will be sufficient to recapitalise the airline. The $850 million recapitalisation plan was thrown quickly together on the eve of Air New Zealand's 2001 annual result.

After months of negotiations over competing proposals put forward by Singapore Airlines and Qantas Airways, Air New Zealand had been left high and dry and was forced to put its loss-making Australian subsidiary into the hands of an Administrator.

Under the bailout proposal both Singapore Airlines and Brierley Investments would each pump a further $150 million into Air New Zealand based on a 67 cents a share threshold.

But by September 13 - the day Air New Zealand unveiled a $1.4 billion loss which had been racked up by a $1.3 billion writeoff of Ansett Australia - the aviation world was in turmoil. The terrorist onslaught in the United States had ripped aviation profitability into shreds and made clear that the planned bailout would have to be reconstructed to meet the new conditions.

A Macquarie Bank report - Air New Zealand - A Grim Future - forecasts that even with an $850 million bailout, the airline will struggle to achieve profitability.

Shareholders' funds will be $518 million against debt of $2.4 billion. Macquarie says the $300 million in combined capital which Singapore Airlines and Brierley Investments have pledged to inject might increase shareholders' funds to $818 million. But the airline will still be in an unsustainable situation - it will only be time before more capital is needed.

Government loans of $550 million will also be an added weight on the balance sheet.

Macquarie suggests up to another $500 million is needed to get a workable balance sheet. Even then, Air New Zealand will still face losses of about $280 million for the June 2002 year, and, while it will be cashflow positive the airline will have difficulty trading its way back to profitability.

The United States terrorist attack has forced the worldwide aviation industry to sharply downrate its prospects, other issues are threatening to put Air New Zealand under.

The second issue affecting decision-making is whether Air New Zealand can ring-fence itself from the debts of its loss-making subsidiary, Ansett Australia.

Try as the directors might, it is near impossible to erect a cordon sanitaire around Air New Zealand to stop a wave of legal actions challenging their decision to waive all responsibility forAnsett's liabilities.

Acting chairman Jim Farmer's bullish statements may have positioned Air Zealand to try and withstand the inevitable legal onslaught - particularly the shot he aimed over News Corporation's bows when he claimed that the set of accounts on which Air New Zealand based its decision to acquire the final 50 per cent of Ansett was dodgy - but despite the airline's strong denials the legal liability issue is not going away.

Both the Australian and New Zealand Government have had discussions over the expected legal action to recover $500-600 million empolyees' entitlements for the Ansett workers. The Howard Government has guaranteed to fund the entitlements through a $A10 levy on air tickets. There are suggestions John Howard will ensure Air New Zealand gets time to pay back any damages awarded against it by Australian courts.

But Singapore Airlines has said it will not support the Air New Zealand bailout if its $150 million flows straight through to meet Ansett liabilities.

There are other serious issues that Air New Zealand has to address:

Firstly the allegations that Air New Zealand asset-stripped Ansett to bolster its June 2001 result. Air New Zealand chiefs have already countered claims that the parent accessed fuel from its loss-making Australian subsidiary.

Other allegations that Air New Zealand 'swept' Ansett bank accounts to clear out surpluses into its own accounts are also likely to be probed.

A decision to sell Ansett planes and buildings and substitute ownership for leaseback arrangements may have helped Air New Zealand build a $1 billion cash stockpile by June 30, but it has made it difficult for the Ansett Administrator to find enough unencumbered planes to get Ansett flying again. On Friday, Adminstrator Mark Mentha of Arthur Anderson said that Ansett owes more on its planes than originally appeared. Arthur Anderson had been led to believe about 50 per cent of the fleet was unencumbered, but the figure was much less.

On Friday, Farmer told Singapore Airlines chief executive CK Cheong and Brierley Investments' Greg Terry that unless firm assurances were given, the Government would appoint a statutory manager.

The deteriorating international situation and the doubts over Air New Zealand's abilities to corral the Ansett liabilities make statutory management an attractive option. But the Government would prefer Air New Zealand's board to request that move, rather than wade in itself and risk international approbium for meddling with creditors' rights.

The statutory manager could suspend creditors' payments - apart from current payments - so the airline could stay in business until a new owner was found. Legal actions over the Ansett liabilities would also be suspended while the airline was in statutory management.

But the key issue would be to find a new owner for the company.

This is where Qantas Airways reemerges. The statutory manager could simply transfer Air New Zealand's assets into a new company and sell them, using the cash realised by the sale to pay out creditors.

For the Air New Zealand's two existing shareholders it is a nail-biting time. Under the September 13 proposal, BIl would increase its stake to 37 per cent from 30 per cent and Singapore Airlines from 25 per cent to 34 per cent. But those percentages were based at the 67 cents a share threshold. At Friday's prices - once again below 30 cents - the $150 million each that Singapore Airlines and Brierley Investments are to contribute would give them more than 80 per cent of Air New Zealand but not sufficient extra capital for the airline to trade back to profitability.

That is the prospect which is driving 'crunch-time.'

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