Aust analysts foresee big savings in Air NZ-Qantas alliance

By NZPA

Tuesday 11th June 2002

Investment bank Merrill Lynch rates the chances of an alliance between Qantas and Air New Zealand at "better than even odds" in the medium term, according to an Australian newspaper article.

The Sydney Morning Herald said analysts believe Qantas stands to gain at least $A80 million ($NZ94.47 million) in costs and boost earnings by an even greater amount should it succeed in striking an alliance with its trans-Tasman rival.

Savings, which could take two to three years to accrue, would come from reducing common routes, removing duplication, and combining and rationalising maintenance.

Analysts considered a formal pact between the two airlines as sensible and hugely beneficial from a regional standpoint.

"A tie-up with Air NZ and Qantas is a logical fit. It would give both a strong hold over the region," one analyst said.

"It is also about the industry being able to progress to a more rational economic footing," said Andrew Fitchie, transport analyst at UBS Warburg.

Qantas has recently confirmed it was again involved in talks to take a minority shareholding in Air NZ, with most speculation concerning a 25 percent shareholding.

An outcome is thought to be two to three months away because the talks also involve the airlines' respective governments and competition regulators.

Analysts generally estimate Qantas would reduce annual costs by at least $A100 million. Air NZ is expected to make similar savings but would enjoy a proportionally greater impact on its earnings given its battered financial state.

As well as savings, Merrill Lynch said a united approach by the two airlines could boost traffic by promoting Australasia to northern markets in a more concerted fashion -- a potential extra one percent a year in traffic growth.

Transport analyst Simon Gresham suggested Qantas could increase earnings before interest and tax by $A25 million from cutting overlapping services, particularly on the brutally competitive trans-Tasman route.

Cost synergies, achieved through less duplication in areas such as ground services, could total around $A80 million.

These two areas combined could deliver a total $A105 million fillip to Qantas' earnings before interest and tax, the merchant bank estimated -- a rise of 15 percent over market forecasts for 2001-02.

Merrill Lynch believes Virgin Blue will not present a threat to Qantas' earnings for another two years.

The New Zealand Government owns 82 per cent of Air NZ after stepping in last year with a $885 million rescue package to keep the airline flying.

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