Air NZ heads back under the government's wing

Twelve years after it was privatised, Air New Zealand was on Thursday heading back into government hands under a rescue package that will cost taxpayers NZ$885m ($360m) and give the state an 83 per cent stake in the troubled national carrier.

After months of uncertainty over the airline's future, there was relief at the outcome – but less confidence that the bail-out will draw a line under the carrier's financial problems.

Although it has a profitable core Air New Zealand business and one of the world's youngest fleets, Air NZ could face continuing liabilities on Ansett, its loss-making Australian subsidiary, which went into voluntary administration last month.

A key element of the rescue package – which is subject to conditions including due diligence by the government – is an attempt to stem Air NZ's continuing exposure to Ansett.

The airline has agreed with Ansett's administrator to pay A$150m ($75m) to settle potential claims against it and not to pursue debts owed it for a further A$160m.

But although the administrator said Ansett's creditors had agreed to the settlement, analysts said it was possible Air NZ could still be pursued in the courts.

And some analysts say Air NZ may need an additional capital injection.

"We see a further capital raising some time in the next 12 to 18 months . . . to get into a comfortable position. I would prefer to see another NZ$250 million of equity," said Arthur Lim, senior investment adviser at Macquarie Equities.

Mr Lim said the airline – whose net debt stood at NZ$3.43bn at the end of June – was unlikely to make profits for at least the next two years after taking account of debt servicing from the rescue package.

Air NZ must now come up with a revised business plan that, among other things, will have to tackle job losses among the airline's 10,000 employees, a task made more difficult by government involvement.

The carrier has a market value of about NZ$205m, compared with NZ$1.4bn at the start of the year.

The government, which privatised the airline in 1989, agreed to inject up to NZ$585m in new equity and make a NZ$300m loan, which will later convert to preference shares.

The board is to be cut from 12 to eight directors, with the state entitled to make two appointments.

Michael Cullen, finance minister, said the cash and planned equity injection meant the airline would go forward without the faction-fighting board it had suffered under for too long.

While some opposition MPs welcomed the move, others were less convinced, saying the problem should have been left to the main shareholders, Brierley Investments and Singapore Airlines .

Among other things, as the airline itself noted, the company and its directors are being investigated by the Australian Securities and Investment Commission over whether Ansett breached regulations by continuing to trade while insolvent before it was placed in administration last month.

There are also questions over why the New Zealand Stock Exchange failed to suspend Air NZ's shares earlier – as the Australian Stock Exchange had done – given the uncertainty over the airline's future and its financial position for several weeks leading up to yesterday's deal.

But in spite of its considerable problems, the airline held out the prospects of a continuing involvement in the Australian market and of an ongoing relationship with Ansett.

Jim Farmer, acting chairman, said Air NZ executives were providing help to Ansett's administrator to get the carrier's grounded planes flying again and that Air NZ was also entering a commercial arrangement to make Ansett Mark II, as the slimmed down carrier is being known, its preferred partner.

But it also emerged that, with Air NZ's backing, SIA – which until a few weeks ago had been prepared to contribute NZ$150m to Air NZ's rescue package – was in talks over the possibility of investing in or running Ansett Mark II under a management contract.

SIA has long wanted to take over Ansett – it was blocked from acquiring a 50 per cent stake in the carrier by Air NZ in 1999 – and if it were to be involved that would ensure the Star Alliance retained a foothold in the Australian market.
Financial Times