Last-ditch rescue manoeuvre for Air NZ

By FRAN O'SULLIVAN and VERNON SMALL

The Government may take a direct equity stake in Air New Zealand if a due diligence exercise finds the proposed $850 million bailout of the airline does not cover its financial problems.

Prime Minister Helen Clark last night confirmed that the $550 million loan that the Government is making to Air New Zealand - as part of the bailout - could be converted to shares if the outlook worsened.

An Air New Zealand director says the airline will be better off if the Government moves now to establish confidence by signalling it will convert its loan into shares, rather than waiting for further deterioration.

But Finance Minister Michael Cullen said the Government would not put any money into Air New Zealand until it had completed the four- to six-week due diligence exercise. A bigger loan than $550 million had not been contemplated.

If the capital structure "was not sufficiently robust to bear a debt instrument of that size" but the airline could trade its way out of trouble, then a loan that converted into shares could be reconsidered.

The Government has a fallback option to put Air New Zealand into statutory management if the airline fails to trade out of its predicament.

Helen Clark said the "in extremis" move presented some difficulties.

The statutory option has been examined as the airline's share price plummets and world airlines come under pressure following the terrorist attacks in the United States.

Dr Cullen yesterday said statutory management contained risks because Air New Zealand's assets, including its aeroplanes, "could be nabbed while they are overseas" by those owed money.

"Basically, you put a sticker on it once it gets there," he said.

Acting Air New Zealand chairman Jim Farmer met Helen Clark and Dr Cullen at the Beehive yesterday as the firm's problems escalated.

Dr Farmer dismissed the statutory management option: "There is no proposal to put the company into statutory management that I am aware of, and certainly nothing was said to me by the highest ministers in the land.

"I have been down tonight and briefed and updated the Prime Minister, Treasurer, [Deputy Prime Minister] Mr Anderton and [Transport Minister] Mr Gosche on a whole range of issues that are current about the company and there is no proposal to put the company into statutory management.

"I have heard the rumours and was asked about it by TV when I came out and I felt, 'What else are you going to give us'."

Air New Zealand was yesterday focused on trading its way out of its difficulties. But reaction to the collapse of Ansett Australia and the drop in international travel are seriously affecting profitability.

In Australia, the administrator appointed to Air New Zealand's subsidiary, Ansett Australia, quit last night, citing lack of union support.

The administrator, PricewaterhouseCoopers, has been replaced by Arthur Andersen.

Allan Watson, of PricewaterhouseCoopers, said the firm had quit because "support from all parties was an essential ingredient to a successful administration and this support was lacking".

PricewaterhouseCoopers issued a joint statement with the Australian Council of Trade Unions after discussions with unions representing employee creditors.

Mr Watson said that without the unions' strongest support, no administrator could continue in its role.

PricewaterhouseCoopers was about to serve demands on Air New Zealand for a further $A380 million ($466 million) under a letter of comfort with court action to follow.

The administrator had also started negotiations with "several interested parties who could purchase elements of the group - thus preserving jobs of many Ansett employees".

"Given the status of the financial affairs of the company, the easy option would have been liquidation, but we made the hard decision to attempt to reconstruct the organisation, so that the maximum number of jobs might be saved," he said. "Unfortunately, tough business decisions seldom please everyone."

Australian Council of Trade Unions secretary Greg Combet said the unions appreciated the effort and commitment that the administrator had put into the Ansett talks but agreed that its resignation was in the best interest of all parties.

NZ Government negotiator Rob Cameron and Air New Zealand's major shareholders, Brierley Investments and Singapore Airlines, have begun work on the due diligence exercise.

Under the rescue package announced last week, both BIL and SIA agreed to inject $150 million on top of the Government's loan of $550 million. Since then, a threatened boycott by Australian workers and a plunge in airline passenger travel the terrorist attacks on the USntehave devastated the Air New Zealand share price.

Asked if he was confident the deal would stick, Dr Farmer said the agreement was conditional - but for a fixed sum.

"Singapore have on an earlier occasion, as you know, reneged on a $1.30 [a share] figure, so you should talk to them."

Dr Cullen said Singapore Airlines, which is majority owned by the Singapore Government, and Brierley Investments had opposed a direct equity stake by the Government during the rescue package negotiations.

Air New Zealand's market capitalisation - the market value of all the company's shares - fell 40 per cent to about $250 million yesterday.

Helen Clark has called for New Zealanders to back their national flag carrier and has criticised as counter-productive calls for a boycott in Australia since the collapse of Ansett.

"I feel it is absurd for the whole country to bear the blame for the decision of one board of directors, a board, I might say, which has three Australian directors on it."

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