Koru and kangaroo deal faces pressure for takeoff

Friday 1st June 2001

FLYING INTO TURBULENT SKIES: Qantas is understood to be confident it can get around government objections by taking advantage of the Brierley Investments precedents. At right is Air NZ CEO Gary Toomey with acting chairman Jim Farmer

Qantas could 'carve up the world' if its audacious bid for Air New Zealand succeeds. NICHOLAS BRYANT investigates

Qantas sees Air New Zealand as an international aviation jewel, tarnished by poor judgment and a major shareholder who wants out of the airline business.

And while the market reacted with surprise this week at the news Qantas would like to own 55% of Air New Zealand, "Operation Piccolo," until recently called "Operation Cloud," has some history.

Its architect was Air New Zealand's chief executive of four months, Gary Toomey. "We're not going to make inappropriate use of our internal knowledge of Qantas' plans," he said with a remarkably straight face after Wednesday's press conference.

As far as Qantas was concerned Piccolo was signed and sealed a year ago, only for the government and Air New Zealand to walk from the table without telling it why. The Australian carrier figured the deal was lost.

Then two weeks ago Singapore Airlines and Brierley Investments approached Qantas, through their investment bankers, and it agreed to have another go.

So far the government has signalled it is unfavourable, while market analysts claim the legislative hurdles are too great, but Qantas sees things differently.

Here's how Qantas would like the deal to unfold.

Brierley Investments and Singapore Airlines would sell their combined 55% stake to Qantas, while Air New Zealand would sell Ansett Australia, as well as its 49% holding in the relatively minor operation Ansett International, to Singapore Airlines. The other 51% of Ansett International is held by Australian institutions.

Qantas believes those transactions would meet Australian Competition and Consumer Commission competition requirements in Australia.

New Zealand competition and legislative requirements, if you believe the analysts and politicians, would be a bigger hurdle. But Qantas does not believe it is unsurmountable.

Part of the deal whereby Singapore Airlines would take over Ansett Australia would see the Singaporeans undertake to turn Ansett into a strong transtasman competitor.

In an ironic twist given the collapse of Ansett buyer Tasman Pacific, the old Ansett New Zealand would return to local airports, ensuring the continuation of competition here - competition Virgin Blue is likely to help foster anyway.

Presuming the Commerce Commission agrees, then there's the legislative hurdle.

It is understood Qantas will pitch to the government that it has already accepted foreign ownership of Air New Zealand, without any diplomatic ill effects to our bilateral aviation agreements, by letting Brierley Investments own A shares. By that rationale, foreign interests currently own 55%.

With Brierley, a Singaporean company, having placed its shares in a trust with local interests running it, there is no reason Qantas could not adopt a similar structure. At least that's what Qantas will tell the government - that a precedent has been well and truly established.

Then there is the issue of the 25% cap on any single foreign airline owning Air New Zealand, the wall Singapore Airlines ran into last year.

As Air New Zealand public affairs manager David Beatson points out, "It is only government policy which has been part of international convention. More and more bilateral agreements are taking the substantive ownership restraint out, replacing them with principal place of business ... it doesn't require legislation to change, just the confidence it would not break down our bilateral agreements.

"The real issue is whether another government - and it would only be another government partnered through a bilateral air service agreement - chose to challenge the designation of a New Zealand carrier because a foreign carrier was the most significant controlling interest in that company.

It is understood Qantas is confident it could structure its ownership to "technically" meet the government's requirements, once again using Brierley Investments as an example.

And Qantas would probably satisfy New Zealanders on one of the most emotive aspects of the potential deal - whether Air New Zealand's much-loved koru brand would disappear.

Industry sources said Qantas' intention would be to develop Air New Zealand as both a strong domestic and international carrier, letting the airline grow rather than diverting its resources into the increasingly black hole that is Ansett Australia.

Under this scenario Air New Zealand would have access to the vast Qantas domestic network as well as its own domestic network. "What the two carriers would do would be to carve up the world," one commentator said.

Air New Zealand has access to a vast range of open skies agreements, with attractions such as unlimited capacity, unlimited frequency, unlimited choice of intermediate stops and points beyond which it has the right to serve.

It has access to "capacity opportunities" greater than those of Qantas, industry sources say. And unlike any Australian airline it does not have to bid for its traffic rights.

In Australia the International Air Services Commission holds all the traffic rights to fly into local and foreign ports. Qantas and other airlines, including Ansett, have to bid for them.

These traffic rights are doled out only on a five-yearly basis, so every five years they have to be renegotiated and renewed, always at a higher price. And, if an airline does not use its capacity it loses it.

This is part of the sparkle in Air New Zealand's special status - it is a jewel for Qantas because it has all its traffic rights in perpetuity. As there has never been another domestically based international airline of any significance, the government has never had to set up any bidding or allocation mechanism. Air New Zealand therefore enjoys all its traffic rights in perpetuity, whether it uses them or not.

But as an international airline it has not been making the most of that advantage. For example, it is not currently using all its traffic rights into Japan - rights that are a very rare and precious commodity in the eyes of other airlines.

It recently won very valuable "beyond rights" from Hong Kong into Europe. It has open skies rights into Singapore, where there is no limit on the number of flights it can run, the stops it can make on route, or the stops it can make beyond. The same applies with the US, Chile and large chunks of Europe, where the most recent deal is with Germany.

In the eyes of some commentators, Air New Zealand chairman Sir Selwyn Cushing was disingenuous when he claimed few organic growth opportunities existed for his airline other than to buy Ansett.

"It really is a vast amount of opportunity Air New Zealand hasn't taken advantage of. It has made very few commitments to new aircraft for its international fleet because it's been diverting everything into Ansett Australia," one analyst said.

Another reason the deal could be simpler than is generally perceived is that both sellers are keen to move fast.

If the deal goes through many will see it as fitting that Brierley Investments was one of the last companies to take advantage of a pre-Takeovers Code environment.

Before the Takeovers Code takes effect on July 1, Brierley Investments and Singapore Airlines could legally request a premium of Qantas without compelling Qantas to match the bid for small shareholders.

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