Air New Zealand Crisis: Ansett hoisted by Aussies' protectionist petard

Friday 14th September 2001

Amid the orgy of finger-pointing prompted by the Ansett debacle, shrewd observers of transtasman politics will be finding some delicious ironies.

Particularly amusing are the escapades of the Australian press, which is never short of a pithy phrase or an easy answer.

Thus the Australian Financial Review's Alan Kohler was able at the weekend to proclaim simply, "Blame it on the Air New Zealand board."

Not so, said the New Zealand Herald's Fran O'Sullivan on Monday - the blame belonged with the New Zealand government, whose (in) action "means Air New Zealand's opportunity to bank a Singaporean cheque on favourable terms has gone."

Writing on Tuesday the Sydney Morning Herald's Darren Goodsir agreed but added his own political leaders to the blacklist, saying both governments stood condemned for their "meddling and indecision."

The rush to finger the "guilty" will no doubt pick up pace but so far the blame-apportionment exercise hasn't made much sense.

Ansett, it is now apparent, was in deep trouble long before June 29, when Helen Clark's administration was asked to clear a higher Singapore Airlines stake. Even if it had done so within a week the few hundred million raised could hardly have staunched Ansett's blood loss.

And given the complicated national interest considerations involved so quick a decision would inevitably, and rightly, have been condemned as reckless.

By the same token the Howard government's advocacy of Qantas' "Australasian airline" solution can't be blamed either.

The roots of the Ansett mess stretch back to 1987, when the Australian carrier, then owned by transport operator TNT and Rupert Murdoch's News Corp, began to fly New Zealand routes as Air New Zealand's first competitor.

It lost money steadily but even so it squeezed the local carrier's revenue and margins. The big beneficiary was the consumer. Ticket prices fell, routes proliferated and service improved exponentially.

Australian travellers were not so lucky. The Australian government, which has traditionally favoured local companies and jobs over consumers, didn't get around to offering Air New Zealand the same rights on its own domestic routes until 1992.

That year Paul Keating's Labor administration signed the Single Aviation Market agreement, initially allowing Air New Zealand "beyond rights" to pick up and drop off passengers in Australia on its way to and from its home base.

Air New Zealand used its new right to good effect, "cherry-picking" the most profitable Asia-Australia routes and costing Qantas millions.

Qantas, as Australian companies do, went bleating to its government for help.

It got it. In July 1994, four months before Air New Zealand was to get rights to fly Australian domestic routes, transport minister Maurice Williamson got a fax from his counterpart Laurie Brereton cancelling the agreement.

That left Air New Zealand in the position so frequently expounded lately by directors and management. Competing internationally with far larger airlines, under attack in its tiny home market, and with no access to Australian domestic routes, it faced a revenue/cost squeeze that would eventually have put it out of business.

The only way into Australia - the only viable expansion plan - was to buy into Ansett, for which it paid $540 million for a half-share in 1996.

Last year it paid a further $744 million, and a deferred $125 million, for the other half, taking its total acquisition cost to $1.4 billion.

True to form the Australian government stepped in with the competitive shackles. To gain foreign investment approval Air New Zealand had to agree to:

No significant reduction in the workforce;
No significant reduction in the regional network, and no loss of regional destinations;
Ansett retaining substantial Australian headquarters and operational centres, and;
Growth on international routes being carried primarily by Ansett International.

Even so Air New Zealand thought it could extract $350 million of synergies a year over the following three years. That, as former managing director Jim McCrea pointed out this week, doesn't seem to have happened.

Why not, and whether those synergies were ever realistic, remain moot points. What is unarguable is that, had Ansett's ability to cut costs not been so severely hampered by the Howard government's protectionist stance, it would have been in a much better position to respond to the cocktail of fuel prices, weak currencies and sharper competition that have landed it in its present sorry state. Ansett's June 2000 financial year revenue, for example, was $4.19 billion. Divided among its 16,000 staff that's $262 an employee.

Air New Zealand's equivalent ratio was 55% higher at $406 a head.

It has yet to be revealed how much more money flying uneconomic "bush routes,, and maintaining needless offices, has been costing Air New Zealand.

Howard's government is now feeling the agony, two months out from an election, of the threat to 16,000 Ansett jobs and thousands more in allied industries. It has to take its own considerable share of the blame.

None of this exonerates totally Air New Zealand's directors or management.

But, given the bad press free market policies have attracted on this side of the Tasman, critics should be wondering whether Australia's protectionist mindset is the easy answer some think it is.

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