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Politics shattered Air NZ
14 April 2002
ROD ORAM
The collapse of Air New Zealand was the fault of the government and its politics. That is the only and stark conclusion to draw from the raft of documents released by the government last week.
The government had three sources of advice: the Treasury; PA Consulting, a UK-based firm with considerable expertise in international aviation; and Cameron & Co, the boutique Wellington investment bank.
All three agreed on one thing: Air NZ was a mess. "Do nothing" was not an option if the national carrier was to be saved. But the question of how to save it split the advisers with the government acting on the minority advice.
PA Consulting and the Treasury advised the best option was that favoured by the airline's board and supported by its main shareholders: Singapore International Airlines was willing to lead a capital raising which would see its stake in Air NZ increase from 25 percent to 49 percent.
This plan was always the most logical and appealing from an airline industry point of view. Air NZ would finally get the capital and strong international alliance it needed to rebuild Ansett and properly integrate it with Air NZ. Moreover, the combined Air NZ/Ansett would be big enough to be a real Australasian partner to Singapore.
Any other option - such as Air NZ selling some or all of Ansett to Singapore or even Qantas taking a stake in Air NZ - would relegate it to a regional player with a bit role in international alliances.
PA advised the best option was to make the most of its two remaining strategic assets. The first was Ansett. Recapitalised and better managed, Ansett could generate significant network economies and feed profitable traffic into New Zealand, PA said.
Air NZ's other asset was its new management team which had considerable experience in airline turnarounds. The report singled out chief executive Gary Toomey and chief financial officer Adam Maroney for their contribution to reviving Qantas in the mid 1990s, plus George Frazis on corporate strategy, Mike Swiatek on airline network strategies and Trevor Jensen on operations.
PA went on to list four key benefits to the deal but three have been blanked out in the released document. The one left says the deal would give Air NZ "funding to effectuate Ansett's turnaround".
In summary, PA Consulting concluded: "Of all the options available, an investment in Air NZ from Singapore has the greatest potential to meet these conditions" (required to save Air NZ/Ansett).
The July 23 report to the cabinet by the Treasury and Ministry of Transport came to the same conclusion: the best option was to endorse Air NZ's plan to let Singapore increase its stake to 49 percent.
The Treasury and Transport Ministry also analysed four other options including Singapore taking a 35 percent stake alongside a 10 percent holding by the Crown (option two) and Qantas taking the cornerstone shareholding in Air NZ (option four). But these offered less pros and more cons compared with option one.
The strong backing of Treasury and PA Consulting for Air NZ's plans came a month after Cameron & Co offered contrary advice to cabinet. In its June report, the Wellington firm argued Air NZ might be better off selling Ansett and capturing what synergies it could through an alliance with its new owners.
It based its case on judgements of trends in international aviation. "These observations raise the question as to how necessary ownership of Ansett is compared to having Ansett as part of a common alliance."
These judgements turned out to be 180 degrees different from the ones offered a month later by PA Consulting, an international aviation consultant and the Treasury but were insufficient to change the minds of Finance Minister Michael Cullen and Prime Minister Helen Clark. Both were sure Air NZ did not need Ansett; and without Ansett it would be a much smaller problem to solve in commercial and political terms.
As Cameron & Co noted on page two of its August 26 aide memoire for cabinet: "The Singapore International Airlines proposal was unattractive to ministers because it sought an equity stake in Air NZ of 49 percent."
It was this politically driven response from Clark and Cullen which prevented Air NZ from achieving the commercial solution to its problems. It was a sound plan from the airline's board and shareholders which had been endorsed by Treasury, the Transport Ministry and PA Consulting.
Clark and Cullen have already tried to argue that the level of foreign ownership was an irrelevant issue by last August.
Air NZ's problems were so deep - and spiralling so rapidly deeper - that the airline could only be saved by abandoning Ansett and by the injection of $1 billion of public money.
There's no doubt Air NZ was in near-terminal condition by then. But that in large part was the result of the failure of Air NZ's shareholders to achieve the optimal ownership structure and vital capital raising in the first half of 2000.
That best case scenario involved Brierley Investments exiting Air NZ and Singapore taking a 49% stake as the first step in a major recapitalisation.
But the government balked at that level of foreign ownership. The result was Singapore took only a 25 percent stake and plans to recapitalise Air NZ and sort out Ansett were set back by more than a year.
Sadly, the documents relating to this crucial period in the first half of 2000 were not released last week. The oldest document is a letter from Toomey to the prime minister dated March 19, 2001, making a strong case again for Singapore moving to 49 percent.
Both cabinet decisions were worse than bad politics. Apparently, the cabinet could not even understand that Air NZ already had a very large foreign shareholder: Brierley Investments is registered in Bermuda, headquartered and listed in Singapore and controlled by Tan Sri Quek, a Malaysian tycoon. The idea Brierley was a New Zealand company by 2000 is a complete flight of fancy.
Simply, Clark and Cullen are blinkered by their political prejudices. Worse, Air NZ is not an isolated incident. Their cold-shouldering of the recent Boston Consulting Group report on foreign direct investment suggests they are deeply uncomfortable with the concept of using overseas capital to build the New Zealand economy.
There is no way the economy can grow without huge slugs of foreign capital. If Clark and Cullen cannot overcome their innate suspicions of it, then the economy will fail to deliver the robust growth needed to halt New Zealand's decline.
The Air NZ documents are available at:
www.treasury. govt.nz/releases/airnz