Editorial: Pitfalls of public equity in Air NZ

There seems no alternative now to the Government underwriting Air New Zealand in some form. The disastrous Ansett Australia purchase and events of the past month, have left the proud airline a financial cot-case. Unless the Government picks it up, its bankers could bring it down.

There will be those who say Air New Zealand should be left to its fate; that it ought to fail like any business when major shareholders and managers make poor decisions. It is not in the national interest to protect investors and managers from the consequences of their mistakes, and airlines are no exception. If any other airline in New Zealand found itself in the same plight, the Government would let it fall.

When Ansett NZ suffered mounting losses and, as Qantas NZ, finally folded, there was never a suggestion of a state rescue. Nor would there be relief for the smaller commuter airlines that serve many regions of the country, often in tough competition against Air New Zealand. When the Government agreed to bail out the national carrier with $550 million in loans last month, the most telling comment came from Robert Inglis, owner of Nelson-based airline Origin Pacific.

"It's galling," he said. "It is difficult enough in this business without having to compete with an airline that is not subject to the same commercial pressures." Therein lies the danger of making any airline immune to failure - it not only permits lax management in the favoured airline but discourages more efficient operators from coming into the service.

So why designate a "national carrier" and ensure it cannot fail? For domestic services there is no reason. If Air New Zealand went out of business, foreign carriers would quickly come in to provide peak services on the main trunk. And feeders such as Origin Pacific would expand, just as that airline has since the collapse of Qantas NZ. In short, the supply of services would settle into a new form, probably better suited to patterns of demand.

The national interest in a designated flag carrier lies entirely in international services and, even then, the benefit is not so much in the core business of air transport as in the value of the airline to tourism. Air New Zealand bears far more than its share of the country's tourism promotion. Any money the Government is about to inject into the ailing company is as an indirect subsidy to the tourism industry. The beneficiaries are hotels, motels, coach companies, car rentals, adventure operators and the like.

There is nothing to stop these industries banding together to promote New Zealand tourism to prospective travellers and for the Government to subsidise them directly and visibly rather than through its patronage of an airline. But New Zealand has some direct services, notably from Japan, that probably would not be provided by any other airline. And for as long as international air travel is regulated by governments dealing in reciprocal landing rights, a designated flag carrier is a good idea.

But how long will the industry remain in that form? The answer given today might be different from that of three weeks ago. Until the dreadful events of September 11, airlines were being steadily privatised and rationalised. Now Air New Zealand is by no means alone in looking to a Government for its survival. When the Government answers that plea, it must be mindful of the pitfalls.

Government-owned companies are not well-equipped to control their costs and take bold decisions. That may be a blessing, considering the last bold decision Air New Zealand made in the private sector. But if longstanding trends in the airline industry continue after the present hiccup, Air New Zealand will have to be nimble and astute in its associations to survive as an international carrier. It cannot afford the political interference that even state-owned enterprise now suffer.

Refloated largely with public money, the airline should be reconstituted in a way that makes it answerable to the Government through a form of blind trust. Directors should be accountable for its financial performance but otherwise be free to position the airline as they think best.

Now that it is clear Air New Zealand will not be allowed to fail, it will not be subject to the ultimate commercial discipline. The task will be to see that its immunity from collapse does not discourage competitors and that it earns a fair return on the taxpayer's charity.