Technically Speaking: Singapore Airlines holds strong hand in Air NZ-Qantas sky war

Friday 11th May 2001

Chart 1: Air New Zealand class B

Chart 2: Qantas

Air New Zealand (chart 1) and Qantas (chart 2) are billed as locked in mortal combat for Australasian domestic full-fare and no-frills markets.

Although both airlines contend they are keen to wage price war over some domestic routes on either side of the Tasman, it can hardly be to the advantage of either to slash into their own precarious profitability. Their no-frills offshoots threaten to detract from full-fare services of friend or foe alike.

Freight and passenger loadings are liable to deteriorate anyway in a weaker world economy, so Qantas and Air New Zealand taking a mutually assured destruction approach is unlikely to enrich their shareholders. Beggar-thy-neighbour discount wars between competitors selling essentially the same service usually end in stalemate.

Listed brewers, for example, have proved the point on both sides of the Tasman. Profits drop, market share growth stalls and the share price dives. The result is self-commoditised, stagnating brands.

Air New Zealand and Qantas both showed poor share price performance before the Ansett Australia and Tasman Pacific debacles. The discounting path will not lead either listing far back up the charts.

While media emphasis has made a drama of intensifying direct competition between the two airlines, neither is large by international standards. They may be pawns or proxies in a bigger struggle between background shareholders British Airways, with 25% of Qantas, and Singapore Airlines, holds 25% of Air New Zealand. The connection between Singapore Airlines and Richard Branson's Virgin Holdings raises some further intriguing possibilities.

Virgin Holdings owns 100% of Virgin Blue, the no-frills airline Mr Branson hopes to operate transtasman. So far Transport Minister Mark Gosche does not seem wildly excited about arranging the necessary permission for Virgin Blue to travel across the ditch.

But there could be public interest benefits from taking a kindly view of Virgin Blue's request. In the domestic air travel market, it may be that the budget carrier could force down airfares on routes where Air New Zealand and Qantas do not want to compete vigorously with each other. On the transtasman route, Virgin Blue could introduce permanently lower prices, which would attract more tourists to New Zealand and boost foreign exchange earnings.

Business and politics mix where airlines are concerned. There are not just governmentally negotiated landing rights agreements to protect by keeping Air New Zealand more than 50% New Zealand-owned but also more intangible branding values of having a national carrier aloft in the world's skies. Air New Zealand is a flying advertisement for our country.

Already there is a nudge-nudge, wink-wink arrangement letting 30% shareholder Brierley Investments, a Bermuda-
registered company with its head office in Singapore, look like a New Zealand-based shareholder. Together, the two Singapore-based companies, Brierley Investments and Singapore Airlines, hold a combined Air New Zealand shareholding of 55%, which could swell to 70% if Singapore Airlines is allowed to take its shareholding to 40%, although dilution factors could lower the total percentage.

There is the possibility the government instead might take a shareholding in Air New Zealand. A recent precedent exists in the way the Malaysian government bought out a private shareholder to rescue debt-strapped Malaysian Airlines.

The truly intriguing part of the saga lies in the joint venture of Virgin Holdings (51%) with Singapore Airlines (49%) in Virgin Atlantic. The latter airline is a competitor for British Airways. Virgin Holdings is a business partner with Singapore Airlines through Virgin Atlantic but a competitor through Virgin Blue.

Air New Zealand is unlikely to benefit from increased Virgin Blue presence in Australasia, especially if Virgin Atlantic starts to fly into the region as an international carrier for which Virgin Blue provides integrated domestic services. But then neither is Qantas.

Singapore Airlines, by contrast, might not have an acute problem with such a situation.

After all, it already shares codings and landing rights with Virgin Atlantic. It could always buy into potential Trojan horse Virgin Blue and certainly would have no problem with extending code-sharing to the new Australasian domestic carrier. Mr Branson may be fronting for such a manoeuvre.

Singapore, which has an Air New Zealand/Ansett Australia link but also an interest in Virgin Atlantic that could be extended into the Australasian market through Virgin Blue, is sitting prettiest in the midst of all the plotting and intrigue. If Qantas pushes Air New Zealand too hard, then the New Zealand government may crumble on allowing Singapore Airlines to take greater equity in New Zealand's national carrier and, by extension, its Ansett subsidiary.

If the government refuses this course of action and Air New Zealand folds, Singapore Airlines could still hope for an arrangement with Virgin Blue. But it is unlikely any government in New Zealand would dare to let the national carrier go bust. Not if it wanted to be re-elected. Re-nationalisation in part or whole of the airline would be politically less odious than liquidation.

Qantas will also need to do some strategic thinking behind the bluster about shooting down Air New Zealand. Greater investment by either Singapore Airlines or the New Zealand government in an ailing Air New Zealand might have the reverse effect of what Qantas is seeking in being the undisputed dominant player.

Alternatively, Singapore Airlines could move closer to Virgin Blue as a possible back-up strategy. It seems unlikely that Qantas could itself achieve an accommodation with Virgin Blue, considering its cornerstone shareholder, British Airways, has a history of bad blood with Mr Branson.

The game may not be up yet for Air New Zealand, and Qantas might not be in such a strong position as it imagines. The betting must be on Singapore Airlines as the carrier most likely to succeed through the dilemma it has created in being a shareholder in both Virgin Atlantic and Air New Zealand.

Comments from our readers

No comments yet