Soaring ambitions need foreign cash

A cabinet decision on the future of our national airline is imminent. SCOTT MacLEOD on what's at stake.

Air New Zealand's struggle to become a major force in aviation is entering a vital stage.

Without Government approval for a quick injection of capital, the airline's ambition to become a significant regional player is in danger of collapse.

Air NZ executives believe the capital should come from Singapore Airlines, which already owns 25 per cent.

But Government rules say no foreign airline can own more than 25 per cent of Air NZ, and that at least half the shareholders must be based in this country.

The Government has several fears.

They include worry about lessening competition and concern that allowing others more control over our airline might harm the promotion of New Zealand as a tourist destination.

There is also fear that conceding too much control of the national carrier would jeopardise its rights to fly in crucial international markets. This is because of what many see as archaic international constraints governing international aviation.

While ministers have yet to decide whether to grant a waiver and let the Singapore agreement go ahead, it appears Air NZ is proposing a conditional deal that may satisfy the Government's concerns.

The politicians have been just as unsure whether they should let Australia-based Virgin Blue, owned by Briton Sir Richard Branson, fly the Tasman.

Why is an airline's nationality soimportant?

In the world of international aviation, it is vital that airlines have a firm ownership base in just one country. The reason is that airlines can carry paying passengers and freight between countries only under deals that have been made between Governments - and airlines must be linked to one of the Governments to operate.

The first Chicago Convention of 1944 laid the foundation for international air transport, and outlined what became known as the seven freedoms of the air.

Bargaining between countries for rights has always been contentious. When the first agreement was negotiated between the United States and Britain, negotiators from both sides were flown to Bermuda and left there until they had hammered out a deal.

Today aviation is still one of the most restricted areas of international commerce.

Airlines still work under bilateral agreements negotiated between the two nations served. The basis of these is reciprocal benefits for the airlines of both countries.

Though these rules operated successfully for decades, the increasing complexity of international aviation and commerce has brought pressure for more flexibility.

There are now various types of arrangements made between countries or groups of countries, called limited bilateral arrangements, open skies and the so-called seventh freedom.

What are restricted and liberal aviation agreements?

While bilateral agreements govern all economic aspects of air services between two countries, restricted agreements leave Governments regulating seat capacity and price, as well as the markets to be served.

A liberal agreement removes Government restrictions on capacity and pricing but still defines markets.

What is an open skies agreement?

These deals break down legal barriers so airlines based in two or more countries can more easily fly within one another's airspace.

Open skies deals tend to promote competition and lower fares. They usually contain most or all of the "seven freedoms."

What are the seven freedoms?

Air access rights used to be broken into six freedoms. They are best explained by using three countries as examples - say New Zealand, Australia and Britain.

* The first freedom, if between New Zealand and Australia, would let aircraft from one of those countries fly over the other without landing.

* If New Zealand had second freedom rights, its aircraft could land in Australia for refuelling or maintenance, as long as they did not pick up or drop off a load.

* The third freedom would let New Zealand aircraft carry passengers or cargo to Australia and unload them there.

* The fourth freedom would let New Zealand aircraft pick up passengers or cargo in Australia and fly them back to New Zealand.

* The fifth, sixth and seventh freedoms relate to "beyond rights." The fifth freedom would let a New Zealand aircraft pick up passengers or cargo in Australia and take them to another country, say Britain - but only if the flight started or finishedin New Zealand.

* The sixth freedom lets an airline carry loads from one country, through its own country, to a third country. For example, it could let Qantas carry loads from England, through Australia, to New Zealand. A sixth freedom is effectively two sets of third and fourth freedoms.

* The seventh freedom was devised by Iceland and some other countries during the 1970s. It lets a national airline fly loads between other countries without landing in its own country - for example, Qantas could fly people from New Zealand to Britain without landing in Australia.

Seventh freedom rights have sparked a lot of arguing between airlines and politicians as the global aviation market grows.

What are the particular concerns the Government has about allowing Singapore Airlines greater control of Air NZ?

Four countries, Britain, France, Japan, and Fiji, have the right to withdraw landing rights to Air New Zealand if its ownership arrangements change significantly.

What are the arguments that could persuade the Government to agree to increasing Singapore Airlines' stake?

Of the four countries above, Japan is considered among the most important because of its economic significance. However, Japan has already agreed to an arrangement allowing Ansett International to operate there, which indicates that it would be unlikely to withdraw Air NZ's landing rights.

The trend in Europe is towards more open skies, and it is clearly in Fiji's interests to encourage tourism through encouraging international airlines to stop over there.

Why does Air NZ need Singapore Airlines' capital?

If Singapore Airlines increased its stake from 25 per cent to 49 per cent, it would inject around $465 million into Air NZ. Air NZ needs capital because of its investment in Ansett, which urgently needs expensive new aircraft.

Air NZ bought Ansett to give it the commercial muscle to compete effectively against much larger airlines. Absorbing Ansett into Air NZ created the 20th largest airline in the world.

What happens if the Government rejects the Singapore Airlines deal?

Air NZ could have to sell its troublesome Australian subsidiary. The most likely buyer would be Singapore Airlines, and it could effectively be a fire sale, with Singapore paying much less than Air NZ did.

Why is Singapore Airlines prepared to inject so much capital into Air NZ, rather than waiting to pick up Ansett cheaply?

Even if Singapore Airlines bought Ansett, it would be left with its present 25 per cent holding in a New Zealand airline which would effectively be restricted to the status of a small international carrier. By increasing its stake in Air NZ, Singapore Airlines wins both ways.

Why are ministers taking so long to decide about Air NZ and Virgin Blue?

New Zealand has an open skies deal with Australia which lets their national airlines fly across the Tasman and within each others' countries. But Australia-based Virgin Blue is owned by a Briton and is therefore technically a British airline.

Our Government is reluctant to give a British airline seventh freedom rights in New Zealand because Britain has so far refused Air NZ similar access tolucrative routes in Europe.

What access rights does Air NZ already have?

By the end of last year, New Zealand had open skies deals with Australia, the Cook Islands, Samoa, Peru, Luxembourg, Malaysia and the United Arab Emirates.

This year the Government has signed at least three deals, adding Germany and Japan to the open skies list, and breaking down access barriers to Scandinavia.

Last November the Government also struck the world's first multilateral open skies deal - with the United States, Singapore, Brunei and Chile.

All these open doors for Air NZ, or any other airline with majority New Zealand ownership.

What happens next?

Finance Minister Michael Cullen meets his officials to discuss the situation today, and meets Qantas representatives on Thursday. The cabinet is expected to make a final decision on Air NZ's ownership cap on Monday, July 30.

- ADDITIONAL REPORTING:STAFF REPORTERS

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