O'Sullivan: Support for local ownership of Air NZ

By FRAN O'SULLIVAN

A groundswell is rapidly building to retain Air New Zealand's ownership in local hands.

By week's end, Operation Piccolo - the Qantas plan to gain control of Air New Zealand by outright or backdoor methods - needed a new songsheet.

But the Qantas plan had one unintended effect.

An Air New Zealand independent directors' committee set up to study the Qantas proposal - whereby the company's two main shareholders, Brierley Investments and Singapore Airlines would sell their interests to the Australian carrier - quickly found other players emerging with songsheets of their own.

Plenty of such interests - ranging from Star Alliance's United Airlines through to US institutions and New Zealand investors - do not want to see Air New Zealand's ambitions curbed through the lack of shareholders who will not contribute to a major recapitalisation.

The New Zealand Government is also being lobbied hard by local business and its own members to ensure the national flag carrier continues to provide an efficient and cost-competitive service both within and outside New Zealand.

Importantly, Air New Zealand's own leverage with its big shareholders has improved as a result of the interest now being shown.

The Air New Zealand committee, chaired by acting chairman Jim Farmer, has several ownership options and issues in front of it. The opportunistic Qantas proposal has brought the recapitalisation programme to a head - but the airline's first option should still be to get its main shareholders to contribute.

To recap: Sir Selwyn Cushing's honourable resignation as chairman of Air New Zealand and Brierley Investments last Tuesday came at exactly the right time.

By stepping down the former chairman has freed the airline's independent directors to get tough with Brierley Investments, Air New Zealand's 30 per cent shareholder - to pressure it either to fully contribute to the airline's recapitalisation, or to sell its stake to New Zealand-based institutions and eligible international investors who are prepared to support the national flag carrier.

Sentiment towards Brierley Investments had hardened by week's end as the Qantas proposal came under political pressure.

The plan is now seen as little more than an exit strategy for Brierley Investments which benefits Qantas at the expense of the New Zealand's long-term interests.

Singapore Airlines, the other proposed beneficiary, has since distanced itself from the Qantas plan.

It signalled that it had not lightly bought its own 25 per cent stake in Air New Zealand. Singapore Airlines intimated it had not originated the Qantas proposal and rated it no higher than any other option in front of Air New Zealand.

Nor was Singapore Airlines fixated on gaining ownership of Ansett Australia, which was to be its payoff for selling its Air New Zealand stake to Qantas.

Sir Selwyn had been walking a tightrope since Ansett Australia's problems brought forward the need to recapitalise Air New Zealand to finance a much-needed $5 billion fleet replacement. As chairman of the Air NZ finance committee, he had been charged with working with management and investment bank Salomon Smith Barney on a range of recapitalisation options for the airline's board to consider at its meeting this month.

The obvious option for Air New Zealand was to work with the existing major shareholders and get them to contribute further capital.

But Singapore has been blocked by the Government from increasing its own 25 per cent stake to 40 per cent.

Brierley Investments, which wanted to sell some of its stake to Singapore, wants to get out of Air New Zealand - but not at any price.

Air New Zealand is expected to discuss ownership options with the Government in Wellington tomorrow.

Its first option should be to ask the Government to relax the airline's ownership restrictions so that Singapore Airlines can lift its stake to 40 per cent and lead a major recapitalisation. Now that New Zealand has signed a closer economic partnership agreement with Singapore, this option should be looked on more favourably by Government than previously.

The second option is for a Star Alliance solution, under which another Star Alliance member - probably United Airlines - would take a 10 per cent stake in Air New Zealand.

This would be within Air New Zealand's constitution, which allows foreign airlines to hold 35 per cent of the company.

Importantly, this option would keep Air New Zealand within the global Star Alliance and ensure international competition was preserved.

If Air New Zealand leaves this alliance it will be hit with a $US25 million exit fee and other penalties.

The third option is to go with the Qantas plan. But already Singapore Airlines is showing hesitation. Qantas has also equivocated over the level of ownership it seeks.

When the proposal first emerged, Qantas chairwoman Margaret Jackson indicated a 49 per cent threshold, yet by acquiring both Singapore Airlines and BIL's holdings the Australasian carrier would get 55 per cent.

Qantas chief executive Geoff Dixon refashioned his airline's proposal to overcome political objections raised by Prime Minister Helen Clark. Mr Dixon said Air New Zealand's operations would be independent and it would maintain its own brand.

But his assurances are little more than window-dressing to make the Qantas takeover more palatable: a New Zealand-based head office, chairmanship by a New Zealander - these and other such conditions are all contained within Air New Zealand's constitution.

They are requirements that the Government has imposed as the holder of a Golden, or Kiwi, share in Air New Zealand to protect New Zealand's bilateral international landing rights.

The fourth option is a "New Zealand solution." Under this option, the Government would force Brierley Investments to unwind its trust structure and sell its holding to New Zealand and international investors who will support the airline going forward, or, contribute direct funding itself through convertible shares.

Both Sir Selwyn and Air New Zealand management have considered asking the Government to look at transitional funding for Air New Zealand if it feels it cannot relax its ownership restrictions. Under these restrictions, foreign airline participation is capped at 35 per cent, with total foreign ownership no more than 49 per cent.

Brierley Investments is a foreign-owned company, as is Singapore Airlines. Their 55 per cent combined holding is over the 49 per cent threshold. However, BIL's New Zealand trust structure to hold its Air New Zealand shares enables it to get around the restriction.

Suggestions have been made that Qantas could set up a similar New Zealand trust structure. But that would quickly be seen for what it is.

Under the New Zealand solution, other local interests would be encouraged to buy shares in the company if the BIL stake came on the market. Already there are signs that local businesspeople and institutions are prepared to bring a consortium together.

If BIL has to offload its stake, and take a haircut on the way, so be it.

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