Government shrewd investor in Air NZ

By NZPA

Wednesday 29th May 2002

The Government's decision to take the controls at Air New Zealand late last year is emerging as a shrewd investment decision.

Shares in the national carrier spiked 9 cents to 71 cents today -- a record high for the new single class of shares that started trading on December 24 as part of the Government's rescue package.

The shares have risen over 30 percent in four days and are worth almost triple the 24-27 cents per share the Government paid for its 82 percent stake. That means the Government has made a healthy paper profit of around 300 percent on its original $885 million investment.

Iron-stomached investors who bought into the stock in October when the stock plunged as low as 17c are even more in the money.

The rally was sparked by yesterday's announcement Air NZ will slash its business class services and inflight meals on domestic flights from October 27 and reduce fares in a bid to return to profitability.

The airline is also beefing up the trans-Tasman operations of its budget subsidiary Freedom Air, increasing its international operations and cutting 200 staff.

Opposition leaders and business groups chastised the Government for its decision rescue Air NZ following the collapse of its Australian subsidiary Ansett last year, describing the move as "throwing good money after bad".

Based on today's price of 71 cents per share the airline has a market capitalisation of $2 billion, compared with $78 million when the Government bought its second tranche of shares at 27c apiece earlier this year.

Very little of the stock is freely traded, however. The Government owns 82 percent, asset trader BIL International 5.5 percent, Singapore Airlines 4.5 percent and the remaining 8 percent is made up of mainly retail investors.

ASB Securities dealer Andrew Kelleher said it appeared the market approved of yesterday's announcement.

"(Air NZ chief executive) Ralph (Norris) is pushing the right buttons. Air NZ is a stock that your average New Zealand share investor seems to have a real affinity for and those investors have reacted well," he said.

But Macquarie Equities senior analyst Arthur Lim said last night Air NZ was running a high risk strategy by removing full in-flight services. The decision left it in danger of being neither a full service airline or a budget operator, he said.

The airline could be squeezed from the top by Qantas, if Qantas continued to offer a full inflight product, and from the bottom by potential new budget entrants like Virgin Blue or proposed carrier Jump Airlines.

"It is a very dangerous strategy unless the fare reductions are substantial," Mr Lim said.

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