Triple jeopardy dogs the struggling Air NZ

By Nick Stride

Friday 21st September 2001

JIM FARMER: Ansett's assets will meet pay entitlements

Air New Zealand chairman Jim Farmer QC was this week fighting to play down fears about his airline's financial viability.

As the share price languishes at all-time lows questions are swirling around the airline's profitability, the viability of its rescue plan, and whether it faces huge further Ansett liabilities.

Dr Farmer was adamant unpaid entitlements of Ansett employees, estimated by the new administrator to exceed $A500 million, would not come back to haunt Air New Zealand.

"We say there is no reason why those statutory entitlements will not be paid in full in due course from the proceeds of Ansett's assets."

The book value of those assets, he said, were $A3.5 billion. They wouldn't fetch that much but would be sufficient.

Administrator Mark Mentha of Arthur Andersen said Ansett's assets were around $A3 billion and its liabilities $A1.5 billion to $A2 billion.

With an election looming the Australian government jumped in with plans to levy around $A10 on all domestic air tickets. The aim was to raise at least $A300 million to pay off the Ansett employees.

Even if Ansett's liabilities ended up exceeding the proceeds of the sale of its assets, Dr Farmer told a press conference, Ansett was a limited liability company and Air New Zealand could not be pursued for the shortfall. "The legal corporate veil has not been lifted."

Australian lawyers were not so sure.

"If you're treating the corporations all as one, and you are ignoring the formalities of differences between them, there have been cases in the UK, the US, and Australia that say there are exceptions to that general [limited-liability] rule," said Warren Scott, a commercial lawyer with Coudert Bros in Sydney.

The most immediate question for investors is whether the drop in world airline profitability stemming from last week's terrorist attack will push Air New Zealand over the edge.

Analysts are divided on the issue and most say it's too early to tell.

The company reported it lost, excluding Ansett, $26.3 million in July and August.

That was only $3 million more than its loss last year in a traditional seasonal low period. Air New Zealand nonetheless finished that year in profit.

Macquarie Equities expects the airline to report bottom-line losses for the 2002 and 2003 years but analyst Arthur Lim said reports Air New Zealand might not be generating enough cash to pay its interest bills were unjustified.

"Obviously Air New Zealand can't cover interest on $3.5 billion of Ansett debt. But strip out Ansett and what's left is $815 million of equity and $2.1 billion of debt."

Air New Zealand's earnings before interest, tax, depreciation and amortisation for the June financial year were $253 million and its interest bill $226 million.

"After the restructuring I think they've got enough interest cover. But it's probable the government will have to put in equity," Mr Lim said.

A third worry overhanging the carrier is the risk last week's $850 million rescue package might be derailed.

A $550 million government stand-by debt facility and equity injections from Singapore Airlines and Brierley Investments are subject to due diligence, a process expected to last several weeks.

The government has effectively guaranteed Air New Zealand will stay in business.

"There will always be an Air New Zealand," Finance Minister Michael Cullen said this week.

He also said the government would look at providing some of the money as equity if necessary.

Dr Cullen said previously that BIL and SIA had vetoed a government shareholding in the carrier.

"They might want to change their minds, given the alternative," he said this week.

Sharemarket investors this week recovered some of their nerve. The A shares slumped to as low as 31c on Monday but had recovered to 38c on Wednesday.

Sharebrokers, however, are advising their clients to stay clear of the stock until some of the uncertainties are settled.

Dr Farmer also took the opportunity of last week's press conference to join the "blame game," accusing News Ltd of misleading Air New Zealand last year about the true state of Ansett's affairs.

"When Gary Toomey took over in January, what News had claimed was a profitable airline turned out not to be. It was mostly accounting adjustments."

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