Forum Archive Index - September 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

I have been following the near collapse (and make no mistake that is 
what it was) of Air New Zealand over the last year, including the 
Frank Fernandez Stocktake column which appeared of late.

The core of the problem seems to be the whole structure of Ansett. 
This was fine when they held 60% of the Australian market but far 
too high in cost with market share down to 40% and shrinking.   It is 
clear that *none* of the operators in the Australian domestic market 
were making money over the last year.   This includes Virgin Blue.  
The only reason that Virgin Blue made a profit is that they wrote off 
their start up costs.  Qantas scored a coup by being able to take 
over the lower cost structure Compass and integrate it into their 
group.  I think that maybe the Australian government might want to 
have a look at their airline/company regulations (or lack of) which 
allowed such a market to develop.   Perhaps more flexible labour 
regulations are needed?  Perhaps the Australian Government could do 
something like in the Telecommunications sector where potential 
airlines over a certain size must bid for one of only 3 licences 
which allow them to operate?   This 'licence money' could then be 
used to bail out the industry if it got into difficulty, without a 
handout from the tax payer.

I think acting Air New Zealand chairman Jim Farmer has said that 
given what he knows now, Ansett might have responded to their 
discount airfare competitors differently.  Given how the strong 
unions in Australia might have reacted to a 'foreign' owner ripping 
into Ansett workers terms and conditions to get a discount 
operator 'Ansett 2' operation up and running, this might have been a 
little naieve.  Such a strategy also requires good cash flow 
information.  It would seem that Air New Zealand management never got 
to grips with the Ansett accounting systems.

That there was a 'clear out' of Ansett management after the Air 
New Zealand takeover was almost expected.   That Jim McRae, CEO of 
Air New Zealand resigned due to disgreements over his contract, 
without any alternative replacement being in the wings, was a serious 
blunder by the board IMHO.

I have not forgotten that shortly before the purchase of Ansett  
the directors fees were doubled (from $45,000 per year to $90,000 per 
year for 'ordinary ' directors) to bring directors fees in line with 
international rates for such a company.  This would have been fine if 
the directors employed had possessed international quality talent.   
It has since emerged that detailed due diligence was never done on 
Ansett.  IMO, the best business decisions are made when you can line 
up two alternative strategies side by side and then , in detail, go 
through the alternative plans side by side.   "Buy and hope' at any 
price, as appears to have happened with Ansett was not an acceptable 
strategy.

So who to blame?   It is now clear that the interim chief executive 
and chairman of the board, Sir Selwyn Cushing, was out of his depth 
at the helm of Air New Zealand.   This in itself is not a mistake if 
you have the people under you that have the know-how to carry you 
through.  IMO, Sir Selwyn did not, and this is the fault of the board 
and Sir Selwyn, being Chairman of the board, himself.   It was also 
clear to me at the time that to have Sir Selwyn as the Chairman of 
Brierley Investments, who wanted to get money out of of Air New 
Zealand at the same time as Air New Zealand needed capital to expand, 
meant he had two roles with a contradiction of objectives.   He 
should not have had both jobs!   He should have stepped down, or have 
been forced to step down as Chairman of Air New Zealand, when he was 
appointed to head Brierley Investments.   The people who allowed him 
to continue both roles were the independent directors of the time: 
Sir Ronald Carter, Dr James Farmer, Ralph Norris and Sean Wearing.   
All except Dr Farmer have now gone.  Sir Selwyn himself has now 
stepped aside as chariman of both companies, but far too late.   
Given that he brought Air New Zealand to the brink of collapse, and 
so threatened our entire overseas tourism industry, it seems 
incongruous that Sir Selwyn should retain his knighthood.

This all sounds rather negative, so perhaps I should add on a 
positive note that I think new CEO Gary Toomey has done a great job, 
given the baggage he was handed when he came into the hot seat.

Support for Air New Zealand from major shareholders Singapore 
Airlines and Brierley investments has been disappointing.  Offering 
to buy shares to refinance the company at 67c with a downward clause 
in the price to be paid should the Air New Zealand share price fall 
further is hardly a great vote of confidence in the future of the 
business.  Even with this cash injection, Air New Zealand is still 
way undercapitalised.  Now the AIR share price has fallen to 50c it 
seems this scheme is just a good way of transferring wealth from 
existing minority shareholders to Brierley Investments and Singapore 
Airlines.   From what I have heard so far I will be voting against 
this warped rights issue.  We need a 'fair to all parties' rights 
issue and maybe some more asset sales to solve the Air New Zealand 
undercapitalisation problem.   

Overall I must disagree with Frank Fernandez on the role of 
private capital in reconstructing Air New Zealand.   It seems that 
private business not only lacks the skills but also the capital to 
develop a small airline at the bottom ends of the earth.  Indeed it 
was only the discipline of the New Zealand government in not changing 
the regulations willy nilly, and holding back on any signing off of 
taxpayer support until the last minute that forced the Air 
New Zealand directors to come up with a credible survival plan.
It now seems that both Australia and New Zealand will be forced to 
accept that largely monopoly carriers will control their 
respective air spaces.   This is the result of unrestricted hands off
competition in the Airline industry, and is a result for which 
we, as consumers, will all be the poorer. SNOOPY


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Message posted by Harry Tennyson
 using Pegasus Mail 2.55
I have Word 97 to read attachments
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