Air New Zealand still flying, but with strings

The Government has come to the rescue of Air New Zealand, but some hard questions about the national carrier's future remain. ANDREW LAXON looks for answers.

Will Air New Zealand cut back on the routes it flies?

Yes, but it won't give any details until next week. A company statement yesterday said international and domestic flights would be reduced, with changes in the number of flights, routes covered and types of aircraft used. The cuts would achieve "significant cost reductions".

Aviation commentator Les Bloxham predicts the company may scrap up to four of its weekly flights to Los Angeles, with likely knock-on effects for its London service.

Herald business commentator Brian Gaynor agrees that the Los Angeles-London-Frankfurt routes could be the first to go, but says the airline's lack of reliable figures on route profitability will make any decision difficult.

Domestically, Bloxham expects that a drop in the number of international tourists using the Auckland-Christchurch route could persuade Air New Zealand to halve the number of flights but use bigger planes.

Possibly the hardest question is whether to cut unprofitable routes to small provincial centres.

Finance Minister Michael Cullen and Air New Zealand acting chairman Dr Jim Farmer promised yesterday that the Government's "sticky fingers" would not be involved in the day-to-day running of the airline.

But the chief executive officer of the Sydney-based Centre for Asia-Pacific Aviation, Phil McDermott, warns that Government-owned airlines usually found these decisions challenging. It would be an especially brave move to chop these services in election year.

Does Air NZ have any future in Australia now?

Analysts believe it must, to survive. McDermott, a New Zealander who moved to Sydney six months ago, says small airlines are getting squeezed everywhere and Air New Zealand depends on access to Australia for the transtasman traffic that drives its business.

He supports an earlier proposal for the company's no-frills Freedom brand to fly main trunk routes such as Sydney-Melbourne.

Another longstanding market rumour is that Singapore Airlines could still end up running Ansett, possibly with Air New Zealand as a junior partner. This was reinforced by yesterday's announcement that both airlines are giving Ansett technical and management assistance.

Will staff lose their jobs?

Yes, but again there will be no announcement until next week. Bloxham predicts between 1500 and 2000 workers - 15 to 20 per cent of the 10,000 employed at Air New Zealand - will go.

Struggling airlines around the world are already making an average of 10 to 20 per cent of their staff redundant because of the combined effect of a global downturn and last month's terrorist attacks in the US. The new board may also consider cutting the generous cheap travel perks for staff and their families.

Will the Government run the airline?

Probably for the next three years at least. By January, its initial $300 million loan will be turned into convertible preference shares, which will not be listed and are therefore effectively not for sale. They will become ordinary tradeable shares on January 1, 2005, which commentators see as a likely time for the Government to look for buyers.

Few expect Air New Zealand to be in a fit condition before then - Gaynor thinks it could take at least two years to become profitable - and any predictions about its value depend on the highly unstable state of world aviation.

Will taxpayers lose out from having to pay $885 million to save Air New Zealand?

The Government won't increase taxes or cuts spending to pay for the bailout. The main effect is that it will not be able to pay off debt as quickly as it would have otherwise.

In the long term the cost to taxpayers depends on what price the Government gets for its 83 per cent stake when it sells.

Gaynor reckons it cannot sell at a loss for political reasons, so it may have to be patient. It could also consider a full or partial float to the public.

Will taxpayers have to bail out the airline again?

Most analysts think so. Brokers believe the airline could do with another $250 million to make it more viable.

McDermott argues that the Government will not only have to put more money in, but needs to sort out the long-term issues, such as overly restrictive ownership rules, that led to Air New Zealand's problems.

He says the Government should not own Air New Zealand in the long term because its capital requirements, such as buying new planes, are too draining on taxpayers.

The more immediate problem was summed up yesterday by Christchurch International Airport chairman Syd Bradley, who said the airline still faced a lot of work.

"Today is just the first step. I would imagine they have huge cashflow problems. People aren't buying tickets."

What will happen to Air New Zealand shares?

When trading was suspended last Friday at Air New Zealand's request, shares were at 40c. As the new 83 per cent shareholder, the Government effectively set a new benchmark price of 24c yesterday.

Air New Zealand shares responded by closing at 28c for A shares and 26c for B shares.

Gaynor, a vocal supporter of small shareholders, is concerned at the prospects for the "Mum and Dad" shareholders with fewer than 5000 shares, who make up 35,000 of the company's 39,000 investors.

He worries that patriotic investors trying to prop up the airline could get hurt, especially as the big institutional investors have already got out.

Who's to blame for this?

Taking the long view, McDermott and other analysts blame the Australian Government for shutting New Zealand out of a common aviation market in 1994, forcing Air New Zealand to buy into Ansett in the first place.

Gaynor points the finger firmly at the company's 30 per cent shareholder Brierley, which he says went ahead with a full buyout of Ansett last year - despite knowing its extensive problems - to force Singapore Airlines, which wanted Ansett, to increase its stake in Air New Zealand instead.

Most analysts criticise the Government for acting too slowly, but believe it did not matter in the end because the original rescue packages would not have worked.

Until official papers are released, the jury is still out on whether Prime Minister Helen Clark's "don't sell" comments last week meant taxpayers paid too much for the airline. The Government says the 24c a share price was based on the weighted average price at which shares were selling on September 25, the day negotiations began - and the day before the Prime Minister's comments to the media.

nzherald.co.nz/aviation