Government should not fear increased Singapore Airlines stake in Air New Zealand

Tuesday 4th September 2001

Air New Zealand investors will be on tenterhooks in the next few weeks as they await a ruling by the New Zealand government on whether Singapore Airlines' 25% stakeholding in our national carrier can be extended to 49%. It has been repeated ad nauseam by the Air New Zealand board that this is the preferred option for the airline which needs an immediate $900 million to cover ongoing losses and replace its aging Ansett Australia fleet. Such a plan would see SIA pay $1.31 a share to lift its stake - an injection of almost $NZ700 million into Air New Zealand. Any lesser plan would necessitate a heavily discounted rights issue which the government will need to underwrite as major stakeholder Brierley Investments has indicated it will not take up its allocation.

The government is no longer in the business of owning airlines and should not even entertain any option of this vein. Finance Minister Michael Cullen says the Government's overriding interest was to ensure that Air New Zealand survived, was strong and viable, could promote the brand and offered competition domestically and internationally. It is difficult to see how SIA, as one of the world's leading airlines, would be a hindrance to the government's aims in this regard. All Cullen needs to do is to look abroad to see many well-established examples where increased foreign ownership of national airlines have not proved a barrier to issues such as landing rights, tourism opportunities or domestic competition.

In the past, the principle of national sovereignty over airspace has always been the backbone of the international aviation system and consequently, foreign ownership of national carriers has been kept to a minimum. The United States airline ownership regime has particularly been restrictive, with a 25% limit on foreign equity (similar to New Zealand). But even the US Department of Transportation has last year turned its attention to reviewing the restrictions that continue to be applied to its international air services. Change, however, is most notable with the European Union.

A good case study would be the national airlines of Switzerland and Belgium, Swissair and Sabena, who have worked closely together in a variety of ways since they first signed a co-operation agreement in 1995. In that year, Swissair acquired a 49.5% equity holding in Sabena after approval by the European Commission.

But it is the founding of the Swissair Sabena Airline Management Partnership (or AMP) last year that has given the co-operation agreement between the two airlines a completely new dimension. Based on the strategy "one network, two hubs, two brands", the AMP allows the partners to exploit all commercial synergies to strengthen the competitive position of each carrier and its respective hub, while at the same time retaining each carrier's individual brand identity and traffic rights.

The Swissair/Sabena AMP network now reaches 170 different destinations in 78 countries and has more than 170 aircraft. With annual savings of EUR 150 million envisaged by the end of 2001, aviation experts freely acknowledge that the new company is a ground-breaking step in airline alliances. Last year Swissair Group increased its holding in Sabena to 85 per cent - something that would probably be unthinkable in our part of the world.

Elsewhere around the globe, Hong Kong's national carrier Cathay Pacific Airways is 45% owned by Swire Pacific, one of Hong Kong's leading listed companies with diversified interests in industrial companies. The Swire Group's involvement in the airline dates to 1948 and its majority shareholding in the airline has not damaged Cathay Pacific's business and reputation in the last few decades.

Malaysia Airlines, which has been saddled with mountainous debts, is understood to be desperately in need to a strategic partner to inject fresh funds and management direction to turn it around. To this end, the Malaysian government has invited foreign airlines to make an offer for an equity stake - and to facilitate the entry of such a partner, the Malaysian government has lifted its foreign ownership ceiling from 30% to 45%. It also indicated for the first time its readiness to surrender its one "golden share" which allows it to veto any decisions.

There are many other examples of increased foreign ownership of national carriers. The national airline of Peru, Lan Peru, is 49% owned by Lan Chile while Lebanon's state airline MEA is majority-owned by Continental Airlines of the US. Air Egypt and Air Estonia are 49% owned by foreign carriers.

Elsewhere, Scandinavian Airlines Systems is 50% jointly held by the governments of Sweden, Norway and Denmark while the remaining 50% is owned by private shareholders from the three countries. In Taiwan, the government is looking at lifting the current foreign ownership level of airlines from 33% to 50%. And not so long ago, the Sri Lankan government approved the Emirates' purchase of 40% of Air Lankan.

With so many successful overseas examples to draw from, there can therefore be no justifiable reason for the New Zealand government to prevent Singapore Airlines from increasing its stakeholding in Air New Zealand. Air New Zealand maintains the Singapore Airlines deal is the best on the table. Singapore Airlines has furthermore indicated it will not require majority directorships on the Air New Zealand board and would be satisfied with its current level of representation.

An increased level of ownership will be the equity glue to an already strong alliance fabric between the two airlines. For the sake of our national carrier, and the many shareholders who have seen the value of their Air New Zealand shareholdings diminish significantly in recent times, the New Zealand Government must display some backbone and make the right decision.

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