Send in the clowns - NAC arises from the ashes

Friday 5th October 2001

Why were airlines worldwide in major trouble before September 11? Because they're not profitable - there's too much capacity and airfares are too low to provide a return.

Why isn't the industry profitable? Because it is undermined constantly by numerous airlines who do not have a profit motive - those airlines being the "national flagships and symbols" of governments stupefied by the aphrodisiac of jumbo-jet billboards.

What is the New Zealand government about to do? Resurrect the National Airways Corporation (NAC), a state-owned airline.

Send in the clowns.

Without doubt the largest mistake in the Air New Zealand debacle was made by the company's board when it decided to go double or quits and take the whole of Ansett Australia. Sure it was strong-armed into owning even half of that airline several years earlier by blackmail from an Australian government reluctant to offer reciprocal rights to its domestic routes after Ansett had got access to New Zealand's. But Air NZ's desperate lunge for all of Ansett Australia simply compounded the folly.

Since that fatal decision, though, the litany of mistakes that have led Air NZ itself to the knacker's yard have been all the Clark government's. It is incredible a prime minister could demonstrate such embarrassing incompetence.

But first the recent history - a reasonably biased version of which New Zealanders are fed in their daily press. The board of regulated private company Air NZ made a mistake last year - they bought a dud. Such incompetence happens all the time in the private sector; it's never been the sole prerogative of state sectors. Serious as the mistake was, that's where the company's errors ended. Thereafter the folly - which has led by the way to the destruction of the company and the plunder of the New Zealand taxpayer - has all been from the government.

Consider first what happens every day when some private sector company makes a fatal mistake and threatens to violate its banking covenants. There is immediately a scramble for a buyer to inject equity and save the company from wind-up, hopefully with existing stockholders coming out with a little more than their shirts.

But in the case of Air NZ, the regulatory cap on foreign ownership imposed a significant and fatal constraint. While Helen Clark and Michael Cullen took three months dithering over whether they should enable this bankrupt company to save itself, the only bidders on the block - Qantas and Singapore Air - were handed a time-out to consider their options.

In any predatory market situation like this, such a luxury is never afforded - there's the quick and the dead. Competition would simply compel the predator to take a calculated risk. This was the government's first and most costly demonstration of commercial naivety - it enabled, no compelled, the only two potential buyers to sit and contemplate.

Needless to say, a few weeks' musing enabled both bidders to realise that so long as the foreign ownership cap remained there would be a seriously "thin" market of bids for the fatally wounded airline. How often do you get so lucky that someone locks out competitive bids. To pay a billion for a sick man when it was odds-on government lethargy would deliver a corpse was a no-brainer. Air NZ customers wouldn't be going away.

From there it's been a litany of faux pas as Ms Clark has stumbled from one gaff to the next. From erasing the voicemail of the airline's banker to naively telling Mum and Dad investors they should buy, and finally signalling that mug Kiwi taxpayers would be taking the whole job lot, this will be a legendary case study in absolute commercial ineptitude. It is so embarrassing.

Now consider the reality of airlines. Does a country have to have a national airline? And if so does it have to be state-owned? The government's actions signal a resounding yes to both questions.

Yet the truth simply is no - no more than it should own a bank (oops, sorry) or a railroad (oh dear). There is no doubt our domestic skies would be filled quickly by competing airlines. As for the international link, the hoary argument is that this attracts tourists. There's a dearth of evidence to support this case, though what is certain is that the international airline business is notoriously hard not to lose money in.

There are two arguments for having a state-owned international airline - the promotion of the destination and the ability of the airline to capture tourist traffic. Obviously, successful promotion of the destination hardly needs potential visitors to travel on any specific airline - just so long as they can get here. And whether there's ready access to the country depends on the code-share arrangements of those airlines, whoever they may be, that have New Zealand on their schedules. We have seen on numerous occasions, when Air New Zealand hasn't been in strong alliances, tourist numbers from certain sources drop away quickly - witness the impact when British Airways switched to an alliance with Qantas and when US airlines dropped New Zealand from the schedules because of over-capacity.

So both arguments for taxpayer-owned airline are fallacious. But it will still happen - it's ideological, you see. And it will happen when globally the industry is rationalising, big-time. That Virgin Blue can transport passengers around Australia for 40% less than Qantas or Ansett should be enough warning. The work-practice agreements of the incumbents are reminiscent of the worst of the waterfront featherbedding practices from the past. This is not an industry for the less-than-nimble. And without low-cost airlines being allowed to access our market our hotel and tourism infrastructure will actually be in peril.

We don't need government to own banks or the railroads either, but it will. Meanwhile, elsewhere in the OECD taxes are being cut.

Email is garethm@infometrics.co.nz. Debates on and archive of these columns are on www.infometrics.co.nz

Comments from our readers

No comments yet