Rocky road to airlines' transtasman marriage

Friday 2nd August 2002

Finance minister Michael Cullen can be forgiven for experiencing a sense of deja vu. This week, just like a year ago, he felt obliged to deny a report he had done a backroom deal to allow Qantas to buy a shareholding in Air New Zealand.

In fact all the ingredients of last year's airline ownership debate have predictably cropped up again: reports of "secret" meetings and private deals, worries the country's vital air links will be "sold down the line" to uncaring foreign interests, and a degree of transtasman mistrust and suspicion that is in no way justified by commercial reality.

The facts of the situation don't take long to state. Air New Zealand and Qantas have been discussing "a wide range of business issues" since last May. And Qantas has expressed an interest, as it did last year, in taking a minority equity stake in Air New Zealand.

On top of these can be embroidered two reasonable suppositions.

Qantas, if it is allowed to buy into Air New Zealand, will seek a 24.9% stake, the maximum a single foreign carrier is allowed to own. (Last year Singapore Airlines asked the government for more, and was turned down.)

And it will buy its shares from the government, which has said all along it's not a long-term holder and would like to see a cornerstone investor come in.

But an awful lot of water has still to pass under the bridge before this can happen. For starters, any proposal Qantas puts to the Air New Zealand board will have to wait while a freshly elected Labour administration hammers out a coalition deal and selects a cabinet.

Cullen said any such proposal would have to pass muster on three fronts: the national interest - that is, preserving New Zealand's strategic air links with the rest of the world; competition, or safeguarding consumers' access to the best possible services at the lowest possible prices; and the government's (taxpayers') interest as the airline's 82% owner.

The last one shouldn't give ministers too much trouble. At 64c the sale of a 25% stake, or 1.05 billion shares, to Qantas would free up $672 million of capital and would yield a $389 million profit on an investment made only last November.

If Qantas paid a reasonable - say, 15% - premium for its strategic stake the government would get $777 million and would bank a $494 million profit. And it would still have a controlling 57% stake. Not bad for an investment of $885 million.

It's the first two - national and competition interests - that will be the hardest nuts to crack. But the government did considerable groundwork on these last year and should be able to respond to a Qantas proposal fairly quickly.

The debate about whether Qantas should be allowed an equity stake has so far been characterised more by paranoia than by reasoned argument.

Some in the tourism industry have voiced the view Qantas has no interest in promoting New Zealand as a tourism destination and has a secret agenda to direct all downunder-bound traffic to Australia.

This argument is nonsense and fails to understand why airlines enter alliances. To run an airline involves sinking huge amounts of capital into buying or leasing aircraft, staffing and maintaining them, buying fuel, etc.

With so much money tied up in the enterprise, airlines' absolute priority is to carry as many paying passengers as possible, so traffic feed is all-important.

A successful alliance cuts costs and lifts traffic "load factors" for both partners. Both Air New Zealand and Qantas benefit from global alliances - Star Alliance and Oneworld respectively - which do just that.

If New Zealand is small and on the "edge" of the world, Australia is hardly less so. A great many tourists, particularly those from Europe and North America, visit both countries when they're down here.

An alliance between the two airlines, whether cemented by equity or not, could benefit both by allowing them to invest in joint northern hemisphere marketing. They could also benefit from code sharing and rationalisation and coordination of routes and flight frequencies. And this is where the competition issues kick in.

Take an admittedly simplistic example. Say both carriers operate two return flights a day between Auckland and Brisbane. And say all four aircraft fly half-empty. It would make sense for the carriers to drop one return flight each, saving fuel and crew costs. All other things being equal they could also sell or stop leasing the aircraft.

Provided demand was constant the two remaining flights would fly full, lifting the carriers' margins. But consumers would be left with fewer choices of flight times. Any agreement would attract the interest of the Commerce Commission and the Australian Competition and Consumer Commission.

Assuming the airlines can navigate their way through these issues some sort of alliance undoubtedly makes sense now that Air New Zealand's first choice, Singapore Airlines, has left the stage.

What isn't clear is why Qantas thinks it needs an equity stake. Airline equity alliances have become increasing less common in recent years as Star Alliance-type arrangements have grown.

If the point of alliances is to maximise returns on huge capital costs, tying up yet more capital in them seems counterproductive.

BA's 1992 alliance with Qantas via a 25% Qantas stake was much admired in its early years but recently there has been talk BA no longer sees any benefit in holding Qantas shares and wants to sell them.

No New Zealand government has shown a disposition to relax Air New Zealand's ownership rules. This one ruled it out, last year at least, and has a controlling shareholding to boot.

When Qantas chief executive Geoff Dixon takes any proposal to his board this one is going to take a lot of explaining.

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