Air NZ rebuffs Treasury concern

By NZPA

Thursday 13th February 2003

Air New Zealand has rebuffed concerns in advice to Government that the airline's autonomy is under threat if Qantas takes a 22.5 percent stake.

"Project Vanilla", as the proposed alliance is code-named in Treasury papers released yesterday, would result in cost saving decisions that would link Air NZ to Qantas "to a greater extent than may be considered desirable by shareholders", the Government was told.

However, Air NZ chief executive Ralph Norris said today the proposed deal would ensure the airline's autonomy, although Qantas would have some influence.

"It's very important that the company remains a separate entity, that it doesn't integrate too many of its processes, so that if there is a situation where the alliance doesn't work over time then Air New Zealand can extricate itself and still have the ability to support itself across a range of activities," Mr Norris told Radio New Zealand today.

He said he could not recollect whether the airline had made a presentation to Transport Minister Paul Swain about the proposal before the election.

"It would have only been in outline, not in specifics because the transaction was not agreed until the Sunday night prior to the announcement ... We had not put a recommendation to our board at that stage, in fact we were talking in generalities not specifics at that point.

"We had obviously made it quite public going back to May that there were discussions going on between Air NZ and Qantas."

The Government released the first tranche of a swag of papers on the deal, initially code-named Project K, ahead of the closing of submissions to the Commerce Commission tomorrow.

Finance Minister Michael Cullen revealed that the $550 million deal was finalised between the airlines only on the night before the proposal was submitted to the Government and announced to the stock exchange on November 25.

In a note accompanying the release of the papers, Dr Cullen acknowledged that the most important concern raised in advice was that Air NZ's ability to operate autonomously might be gradually compromised.

He said the advice suggested the best way to mitigate that was to protect Air NZ's ability to quit the alliance at minimal cost.

The Government has acted on that by requiring Air NZ to get guarantees that such costs are minimised in the event of termination.

Treasury said Air NZ would be in an inherently weaker position than Qantas within the alliance because a greater proportion of its business would be covered by the deal.

But Treasury concludes: "There are no viable alternatives that offer the same benefits as the strategic alliance with Qantas."

Yesterday, Australian budget airline Virgin Blue said it will fly on the trans-Tasman and New Zealand domestic routes regardless of an alliance between Air NZ and Qantas.

Sir Richard Branson's Virgin Blue said in its submission to the Commerce Commission it should be able to buy Air NZ offshoot Freedom Air immediately as a condition of the deal going ahead.

Virgin Blue said the alliance would remove competition between Qantas and Air NZ on the Tasman and New Zealand domestic markets as well as the Pacific.

The airline said the Air NZ/Qantas proposal relies on Virgin Blue's entry to the trans-Tasman and New Zealand domestic markets to help offset the anti-competitive effects of the alliance.

United Future party leader Peter Dunne said the Treasury papers had confirmed his opposition to the proposal.

"We are constantly being told by Air New Zealand that this is an all-or-nothing deal, that Air New Zealand will not survive unless we allow the rapacious kangaroo to gobble up the cowering koru-bearer," he said in a statement.

"Yet even the Treasury advice points out that letting Qantas into the New Zealand boardroom will not guarantee autonomy for our national carrier."

Mr Dunne quoted some of the advice, and said he was struck by Treasury's "blithe dismissal" of the New Zealand capital markets as a source of re-financing for Air New Zealand.

"I first raised these concerns in Parliament on August 28 last year and nothing I have seen or heard since has allayed my original fears," he said.

United Future has signed a support agreement with the Government and guarantees its majority on confidence votes in Parliament.

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