Untying Air New Zealand's Gordian knot

Friday 6th July 2001

Transport Minister Mark Gosche and his cabinet colleagues might not know it but they're locked in a war of wills with Brierley Investments.

At stake is whether Air New Zealand gets the vast amounts of capital it needs to support Ansett and grow or whether it becomes, as one director puts it, "Air Vanuatu."

The decision is without doubt one of the most complex this government has faced. Its preferred position would presumably be both to maintain the current ownership ratios and to enable Air New Zealand to secure its money.

But its options are a simple "yes" or "no" to the proposal before it - that SIA be allowed to lift its 25% stake to at least 35%. Neither option will allow it to meet both its objectives. And whichever way it goes BIL will determine what actually happens.

A "yes" decision - which Treasurer Michael Cullen has already described as "very, very difficult" - won't get Air New Zealand out of the woods. A $1.31 a share placement to take SIA to 49% would raise only $466 million.

That's a start but Air New Zealand has already flagged a rights issue to raise more money later this year.

Both the placement and the issue would require majority approval from both the A and B shareholders. BIL has 60% of the As and so could vote down either move.

It most likely would. A higher SIA stake would lock it into an investment it's keen to exit, with a diluted holding. Nor would it be keen to put in more money via a rights issue. And if it didn't subscribe it would be further diluted.

But the consequence of a "no" vote is, as Air New Zealand chief executive Gary Toomey has warned, that the carrier will have to sell Ansett to SIA.

This is also the position if the government says no to a higher SIA stake.

An Ansett sale, as a major transaction, would also need A shareholders' approval.

Why should BIL approve a move that would give it, with time, a major holding in Air Vanuatu?

Its consent could be bought only with a package that will allow it to quit its holding. That package has been offered by Qantas.

On the face of it that would put the issue back on the government's table - whether it says yes or no to the current SIA proposal - as BIL's shares can be held only by New Zealanders.

Qantas says it has a cunning plan, "a mechanism involving complicated structures akin to trust structures" that will allow BIL to exit its holding without requiring any change to government ownership policy.

Just to make things really interesting, the Australian government also has to give its blessing to a higher SIA stake.

That's because Australia also has rules restricting ownership of an Australian airline by a foreign airline to 25%. SIA, owning 25% of Ansett owner Air New Zealand, is deemed to hold 25% of Ansett.

Both Air New Zealand and Qantas officials have been lobbying furiously in Canberra. The word is the Howard administration is leaning towards sanctioning an SIA placement.

The joke in all this is that BIL is foreign anyway. It's incorporated in Bermuda, it has its headquarters and its primary listing in Singapore, it is foreign-owned by a vast majority and only two of its eight directors and two of its eight top executives are New Zealanders.

Critics of BIL's stewardship of Air New Zealand have missed a crucial point. BIL has supported three rights issues in the past decade.

It has arguably been the only "New Zealand" entity both willing and able to do so.

Under the current ownership rules every dollar injected in equity from the bottomless overseas capital markets must be matched by a dollar from New Zealand's puny resources.

As things stand Air New Zealand has no chance of raising the several billion dollars needed to replace Ansett's fleet, even with a supportive BIL.

Acknowledging this reality Air New Zealand long ago put to the government a means of untangling the Gordian knot strangling the airline's growth.

Ministers could simply dismantle the A and B share structure, allowing market forces to resolve Air New Zealand's capital needs.

That would take care of the prime national interest - a strong airline that can access the capital it needs to replace Ansett's fleet and grow.

To ensure other national interest considerations are taken care of the government could amend the Kiwi share. Foreign airline ownership could be restricted to 49% if that's really necessary to protect bilateral landing rights agreements.

Under this government that's about as likely as a snowstorm in the Sahara. Prime Minister Helen Clark, Treasurer Michael Cullen and Alliance leader Jim Anderton have all expressed reluctance to allow higher foreign ownership in any form.

Perhaps a flag-waving "Air New Zealand for New Zealanders" stance will get them through the next election - even though Air New Zealand is already 79% foreign-owned.

But they will risk going down in the history books as the government that condemned Air New Zealand to atrophy into Air Vanuatu, a proudly owned biplane.

Better to hedge their bets and simply sanction a higher SIA stake. Then they can let those established bogeymen, BIL or the Australians, take the heat for what happens next.

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