Editorial: Pride in national airline will not pay the bills

Patriotism is a noble sentiment but its value in commercial decisions is highly suspect. Quite a number of prominent figures in New Zealand corporate life are behind an effort to keep Air New Zealand from the clutches of Qantas as we reported yesterday. One or two of them are adept at beating a patriotic drum when it is good for business. But national pride alone will not keep an airline flying.

Air NZ is vulnerable to a Qantas takeover because to be competitive it is going to need more capital than its major shareholder, the Government, wants to provide. The Government was a reluctant buyer last year, no matter how much it might be faulted for failing to sell to Singapore Airlines when it had the chance. Finance Minister Michael Cullen said at the time of the rescue that the Government did not intend to renationalise the airline permanently.

For all its rhetoric against privatisation and its dislike of private enterprise in health and education, Labour is wary of committing the taxpayer to trading ventures. And probably for the same reason that previous Governments got out of business: because life is too comfortable for a company backed by the taxpayer. In public ownership Air NZ is likely to come back often for capital. Dr Cullen obviously wants to nip that possibility in the bud.

And he will take some convincing that a domestic share issue, underwritten by the Government, would render the airline less of a public liability. A discounted rights issue to New Zealanders is just one possibility, say the opponents of a Qantas buy-in, but it is hard to imagine others. And it cannot be assumed that the shares would be readily taken. Patriotism alone might not compel many New Zealanders to give their money to a company that nearly came to grief last year.

Then again, the lesson of last year was that the Government will not allow Air NZ to fail. Potential investors will know that, as does the company. The investors and the company can take greater risks than they otherwise might, knowing that they effectively enjoy a Government guarantee. And that is the reason Dr Cullen is right to argue for a sale of a cornerstone stake to a major international airline.

But that airline should not be Qantas, for reasons that have been well rehearsed. Last week Air NZ gave us a further reason to resist a merger with its main competitor. At long last it appears to have reconciled itself to the demand for lower-cost domestic services. Its subsidiary Freedom Air, introduced when the British budget carrier Virgin was eying this market, has filled a gap. Freedom is to be withdrawn from domestic routes but the parent company has cut prices and is banking on greater volume.

In Europe and the United States nowadays budget airlines are expanding while the full-service carriers struggle. Airlines such as Qantas, and Air NZ previously, are desperate to drive out competitors which, as they see it, devalue their product. There is little doubt that if Qantas was to gain control of Air NZ now, the prospect of reasonably priced domestic services would evaporate, as would plans to increase Freedom Air flights over the Tasman.

There will probably always be a demand for full-service airlines for intercontinental flights, especially to and from this part of the world. Australia and New Zealand need to ensure that the two major alliances of airlines continue to have a presence here. When the Government sells a controlling stake in Air NZ it should be to a member of the Star Alliance, not OneWorld's Qantas. Until then, costly as it may be, the Government should hold its shares, give Air NZ time to test its latest plans and sell when, with any luck, the airline will be stronger.

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