Australia's other air force turns its guns on Air NZ

By FRAN O'SULLIVAN and MATHEW DERNALEY

In Sydney on Saturday night for the Bledisloe Cup final, Air New Zealand boss Ralph Norris got another lesson in Aussie mental toughness.

As the Wallabies beat an improving All Black side in the dying seconds of the game, the parallels must have been uncomfortably close for the new coach of team Air New Zealand.

Since he took over as chief executive in February, Norris has been turning standard airline economics on its head.

His plan for Air New Zealand follows the hugely successful model of budget airlines Easyjet and Ryanair - "The way of the new world in aviation".

But Norris' ability to forge a straight course is hampered by politics and an Australian competitor equipped to play ruthlessly by old aviation world rules.

Qantas, led by its formidable chief executive Geoff Dixon, has an overwhelming ambition to neutralise its transtasman competitor.

It is Dixon's extraordinary use of transtasman political and business clout to achieve Qantas' ends that makes New Zealand businessmen believe selling a 25 per cent stake in Air New Zealand to its Australian competitor is not in the country's interests.

Herald investigations have disclosed how effectively the Qantas lobbying machine operated during its 14-month battle to get a stake in Air New Zealand.

Dixon swayed Australian Prime Minister John Howard and his deputy John Anderson to support Qantas' fight to stop Singapore Airlines increasing its stake in a struggling Air New Zealand last year - and to back his own bid for Qantas to buy in instead.

Qantas' strategy was to stop Singapore gaining control of Air New Zealand and therefore Ansett.

It argued that Ansett would become a behemoth with the power to crush the Australian national carrier.

Howard rose to the bait and sent Anderson - dubbed as the "Minister for Qantas" in New Zealand - to push the Qantas alternative.

But the Dixon claim turned out to be nonsense.

Weeks earlier, the Australian Department of Transport and Regional Services had assessed the relative market shares between airlines in Australia.

It found that the Qantas-British Airways partnership had greater revenue per passenger-kilometre than an Air NZ-Ansett-Singapore partnership.

As Treasury officials advised the New Zealand Government: "This translates to Qantas being 75 per cent larger than Air NZ/Ansett/SIA in revenue terms.

"If this information is correct, assertions that the Singapore linkup is a threat to Qantas' future viability would appear questionable."

Despite this analysis, ministers were drawn in sufficiently to waste precious time entertaining a Qantas proposal to "force" Singapore Airlines to sell its holding in Air New Zealand to itself.

It has been public knowledge that the Qantas lobbying machine has never been far from the Beehive, since Air New Zealand's ownership went into play in May last year.

What has not been revealed is that Qantas' pressure tactics included defamation threats against Air New Zealand directors - particularly former chairman Sir Selwyn Cushing.

Cushing said that when he went public on TVNZ's Holmes show on the way Qantas got Howard to kill off Ansett's bid for survival, he was hit with a legal warning from Qantas' lawyers, Minter Ellison Rudd Watts.

Yet, he says, Dixon did not shy away from the accusations in an Australian interview a fortnight ago.

"Within 36 hours I got threatened with litigation - threatened for defamation - but now what I said has turned out to be exactly right because Dixon's owned up to it.

"I said Qantas got in the ear of Howard - it was absolutely damning because Air New Zealand had no show."

The damaging six-month battle over Air New Zealand's ownership forced it to cut adrift its loss-making subsidiary Ansett Australia, leaving Qantas to dominate its home turf.

Worse was to come on the home front.

The Government had to step in and rescue Air New Zealand late last year after it posted New Zealand's largest corporate loss, of $1. 4 billion.

Yet the taxpayers' $885 million bailout is still not sufficient to restore Air New Zealand's health.

In April, Air New Zealand directors and management were thrown into turmoil after the Government inadvertently made public an official forecast saying the capital requirement was $1.705 billion, not $885 million.

The Government has pledged it will contribute up to $150 million by June next year for a rights issue.

Qantas was interested too. It noticed revelations in the official documents that Finance Minister Michael Cullen had told Air New Zealand to cover the $670 million shortfall through cost cuts and asset sales.

The documents also disclosed Treasury advice that pouring cash into Air New Zealand had to be weighed against rapidly rising social needs - a heavy political consideration.

Dixon saw the opportunity and stepped up Qantas lobbying for a stake.

He and Qantas chairwoman Margaret Jackson have been pushing a "partnership of equals".

The deal has been pitched as a strong Australasian partnership between the two airlines, enabling them to tidy up their own backyards and free themselves to pursue international business.

When Dixon approached Cullen, he was sent to Air New Zealand's board.

Negotiations have been going on for four months, and all parties are bound by confidentiality agreements.

Norris denies election campaign claims by National MPs that the sale is a "done deal". He says there is a way to go yet.

"The whole thing is getting pretty heated. I'm sick of sending notices to the stock exchange every day - I don't want to say anything that could be misinterpreted."

"We haven't signed anything. We don't have a deal on the table. The board hasn't been presented with an offer."

Norris has assigned acting chief financial officer Shane Warbrick and company secretary John Blair to the negotiations.

Qantas' negotiators include its chief financial officer, Peter Gregg, and its general manager of airline strategy and network, Paul Edwards. Merchant banks are advising both sides.

The proposed deal has moved away from a simple sale of the Government's 82 per cent stake to Qantas.

Air New Zealand would simply issue new shares to Qantas at a discount on current share prices, and possibly take out the airline's key minority shareholders, Brierley Investments and Singapore Airlines, diluting the Government's stake.

Qantas has tested the waters with institutions over support for a rights issue.

It knows it has a crucial advantage - Air New Zealand's share price is not sustainable at current levels.

Valuations of the airline's business have been done examining two prices, Air New Zealand as it is, or with Qantas as a shareholder.

The Qantas deal may not be a one-way street. There have been discussions over whether Air New Zealand should swap holdings with Qantas.

But time is marching on and Air New Zealand must get its international strategy in place by the end of this year.

It has to secure its home base. If this is left unstrengthened, the most attractive area of competition could become vulnerable.

Its international services, apart from the lucrative Japan route, are not making money.

The big issue for Norris is Air New Zealand's competitiveness.

If the Qantas deal goes ahead - and it is still an "if" despite the leaks on all sides of the deal - Norris is adamant that Air New Zealand will retain its independence.

"It has to ensure that it does not get marginalised and that it is not restricted in its growth potential and that it has a high degree of autonomy.

"That's total autonomy - to make its own decisions on where it should fly and the frequency of that."

But Norris also knows about Aussie rules. As managing director of ASB Bank he reported to David Murray, the hard-driving CEO of Australia's Commonwealth Bank.

Murray is an aggressive patch protector but Qantas' Dixon is in a class of his own.

Observers of Dixon's track record are concerned that his gameplan is to marginalise Air New Zealand, by competition or through ownership.

A groundswell is building in New Zealand business to keep Air New Zealand locally owned.

Wellington investment banker Lloyd Morrison is waging a Kiwi fightback.

He wants Air New Zealand to stand its ground, and not be compromised by a Qantas shareholding.

A website campaign has started, and a ginger group of well-connected Auckland businesspeople is marshalling forces.

In an email blitz to sharebrokers to get support for a local capital issue, Morrison said Air New Zealand had sound long-term prospects, but had been left in a weak position because of its ill-timed purchase of Ansett Australia.

"The focus on low-cost services on short-haul routes is entirely consistent with worldwide trends - surprisingly for some, Air New Zealand with its superior workforce practices and flexibility is better-positioned to take advantage of this trend than Qantas," he said.

Morrison acknowledges his vested interest. His listed company Infratil is a majority shareholder in Wellington International Airport.

The airport might lose money if the two airlines work together.

But he says every travel wholesaler and member of the travelling public has an interest in preserving the integrity of the national carrier.

Nationalistic fervour is difficult to ignite when it comes with a multi-million dollar price tag - particularly as senior New Zealand politicians such as Prime Minister Helen Clark are understood to favour a closer partnership with Qantas.

Qantas has long recognised her influence on the process.

Ten days after Air New Zealand's mammoth loss was announced, an Asia 2000 dinner for former Thai Deputy Prime Minister Supachai Panitchpakdi was held at Auckland's Hilton Hotel.

Minter Ellison special counsel Lex Henry, an Asia 2000 trustee, had eased Qantas in as a prime sponsor of the September 25 dinner.

That night, he ensured that Qantas official David Hawes, the man charged with cultivating influence in Wellington, was seated next to Helen Clark.

A week earlier, Dixon had written to Cullen: "We are saddened by the rhetoric that has erupted on both sides of the Tasman following the demise of Ansett."

Dixon warned that the first bailout proposal - under which the Government, Singapore and Brierley Investments would all have contributed - "may have some difficulty".

"If this proves to be the case, we still believe the best outcome for aviation in the region is an Air New Zealand/Qantas tie-up that delivers worldwide tourists to both countries."

He concluded: "In short, do not forget Qantas if you need to seek a different independent future for Air New Zealand."

For his part, Norris is adamant that cheaper fares are here to stay, regardless of whether Qantas grabs a cornerstone stake in Air New Zealand.

It was a matter of keeping faith with customers new and old, he said at the launch of Air New Zealand's slimmed-down domestic Express service last week.

The fares are not one-offs, Norris insists, but part of a new brand of no-frills flights to fend off competition and expand the market among people who have never before considered flying within New Zealand.

For now, the daily battle for passengers between Air New Zealand and Qantas looks more intense than ever, despite the wider takeover drama being played out behind the scenes.

Qantas is pressing ahead with plans to expand its New Zealand operations, advertising for more cabin crew and managers so it can add three more planes to its local fleet of four Boeing 737s.

It has applied for a New Zealand operating certificate to replace a temporary document it has used since the collapse last year of franchise-holder Tasman Pacific.

But analysts believe it is developing a fallback position in case its bid for a stake in Air New Zealand falls over - not to mention trying to spook the Government into allowing a sale, for fear that Air New Zealand will be crippled if Qantas continues to undercut its fares.

The Travel Agents' Association is confident Qantas is here to stay, but only about 15 to 20 per cent of main trunk passengers are jumping aboard the flying kangaroos.

This is despite Qantas offering return fares as low as $197 between Auckland and Wellington.

Air New Zealand claims these fares are predatory pricing, a subsidy from the Australian travelling public.

Air New Zealand's budget subsidiary Freedom Air has similarly low fares, but with none of the extras, such as meals, available on Qantas flights, which also cater for business-class passengers.

Qantas needs to keep its flag flying here to feed business into its profitable Kangaroo route, operated from Australia to Europe with alliance partner British Airways - even if this means having to match Air New Zealand fares of as low as $120 return between Auckland and Wellington.

If Qantas does buy into Air New Zealand, the Commerce Commission will have to ask whether it will pull up stumps here once it has a junior partner to feed traffic its way.

And if it does, Air New Zealand's fares could soar straight back up again.

An Auckland analyst for the Australian-owned MacQuarie Bank, Arthur Lim, say the commission can do nothing to make Qantas stay in New Zealand, particularly if it would keep losing money by doing so.

But he believes the travelling public would not necessarily miss out if Qantas and Air New Zealand establish a code-sharing arrangement, in which they pooled flights to lift passenger loads.

Lim says the resulting higher revenue could stabilise the domestic market because the operators would be making enough money to be satisfied with existing fares.

If he is proved wrong, the departure of Freedom Air from domestic routes in October could prove ominous for New Zealand passengers.

For Qantas the question is how long it can afford to bleed money in New Zealand.

An Air New Zealand insider estimates Qantas could be facing losses of up to $100 million a year because of its decision to increase capacity in New Zealand and on the transtasman route.

"Those are big bucks, and people in Australia are probably getting a bit brassed off about feeling they are being gouged on some routes by Qantas, then seeing Qantas offering super cheapies in NZ and losing significant amounts of money on it".

* Tomorrow: Former Air NZ chiefs reveal why Qantas should not be allowed on board again.

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