Air NZ: have we learned nothing?
NZ "Weekend Herald."
03.08.2002 -
The proposed sale of a major stake in Air New Zealand to Qantas is bizarre and irrational.
The carriers have been fierce competitors for decades, and their relationship has been even frostier than that between John O'Neill and the New Zealand Rugby Football Union.
A sale to Qantas would be a further step in our compulsion to sell strategic stakes in our largest companies to foreign interests.
We continue to adopt this flawed policy despite clear evidence that these sales have resulted in a huge transfer in wealth to overseas interests.
Why are we looking to sell a strategic stake in Air New Zealand to Qantas? Why have we been selling our largest companies to foreign investors?
New Zealand has a number of serious economic problems, including the low level of savings and the lack of investment in the productive sector. These problems have been covered many times in the Weekend Herald, but no emphasis was placed on them during the election campaign.
The New Zealand Stock Exchange (NZSE), which should be the primary source of equity for the productive sector, has gone nowhere in the past 15 years. When the market closed on July 31, its total value was just $42.4 billion, the same as it was at the end of 1986. In the same period, the value of the Australian Stock Exchange grew from A$137 billion to A$670 billion.
The NZSE's value is equal to just 35 per cent of GDP, whereas the ASX represents 95 per cent of Australia's GDP. Because of the small size of the New Zealand sharemarket - the market's value-to-GDP ratio should be at least 60 per cent - there is a limited pool of local equity to fund the productive sector.
As the sharemarket is now only 53 per cent domestically owned, compared with almost 100 per cent 16 years ago, New Zealanders have reduced their investment in the NZSE by almost $20 billion since December 1986.
In the same period, they have increased their residential mortgage borrowings from less than $10 billion to $68 billion.
This is a major problem, because we don't have a large pool of equity available to purchase assets from the public sector or rescue companies when they get into trouble.
As a result, we rely heavily on overseas capital. We have become weak sellers of our strategic assets and overseas investors have taken more than their fair share of the spoils.
Our asset sales policies of the late 80s and early 90s were hopelessly flawed. The main emphasis should have been to restore confidence in the sharemarket and privatise state-owned assets through public floats once that confidence had been restored.
Instead, politicians sold Crown assets at low prices to offshore interests and implemented none of the sharemarket reforms recommended by the Securities Commission, Russell Report and Roach Report.
The poor performance of our sharemarket has had a big impact on Air New Zealand in the past 14 years.
When the Government offered 25 per cent of Air New Zealand for sale in 1988, Qantas and British Airways bid $165 million each.
The Treasury recommended British Airways because it believed that Qantas wanted only to stop British Airways acquiring a cornerstone in its transtasman rival.
Air New Zealand's management was also opposed to Qantas and saw far greater benefits from British Airways' involvement.
But the budget deficit was spiralling out of control after the October 1987 sharemarket crash, and Finance Minister Roger Douglas wanted to accelerate the privatisation programme.
After acrimonious debate among senior Cabinet ministers it was decided to sell 100 per cent of the national carrier, but the NZSE was far too small to accommodate a capital raising of this magnitude. The Crown proceeded with a trade sale and a Qantas consortium (Qantas 20 per cent, Brierley Investments 65 per cent, American Airlines and Japan Air Lines 7.5 per cent each) made the highest bid at $660 million or $2.36 a share.
In October 1989, BIL sold a 25 per cent shareholding to the public at $2.40 a share and 5 per cent to staff at $2.16.
American Airlines and Japan Air Lines didn't stay long. Qantas sold its 20 per cent stake in March 1997 and took a profit in excess of $120 million. Australia's national carrier achieved its aim of keeping British Airways out of Air New Zealand and the London-based company subsequently became Qantas' highly successful cornerstone shareholder.
The poor state of the New Zealand sharemarket also contributed to Air New Zealand's heavy reliance on debt when it bought into Ansett.
The initial 50 per cent of Ansett, which cost $540 million in October 1996, was 44 per cent financed by new equity from shareholders and the remaining 50 per cent, acquired for $744 million in June 2000, was 38 per cent funded by new capital.
This was a low level of equity funding, particularly as Ansett itself was hopelessly undercapitalised.
When Air New Zealand ran into trouble last year, the New Zealand sharemarket was far too small to fund its recapitalisation and the Government had to inject $885 million of new capital, $225 million more than it received for the 1989 sale.
The national carrier still needs more capital and the Government is reluctant to make a further contribution. Consequently it wants to sell a proportion of its 82 per cent shareholding to Qantas or have the company offer new shares to the Australian carrier.
But Qantas' interests are purely defensive: it wants to dampen Air New Zealand's competitiveness in Australasia and doesn't want a strong international carrier to take a cornerstone shareholding in Air NZ.
Qantas, along with all overseas companies that invest in New Zealand, has its self-interest clearly to the fore. These are just a few examples of the massive transfer in wealth that has occurred through the sale of strategic shareholdings to overseas investors:
* The Bank of New Zealand was sold for $850 million in 1992. Based on its current profitability and the market value of Australian banks, it is now worth in excess of $5 billion.
* Telecom was sold to a consortium of foreign-dominated interests for $4.25 billion in 1990. When Ameritech sold its 25 per cent shareholding at $8.85 a share in 1999 it made a profit of $6.1 billion and left our largest listed company with a relatively weak balance sheet.
* The consortium that acquired New Zealand Rail had an effective purchase price of just 20c a share after a capital restructuring and repayment. Shortly afterwards, new shares were sold to the New Zealand public at $6.19 each and the consortium members sold all their holdings at $3.60 a share or above. They have left Tranz Rail in a weak operating and financial position.
Finance Minister Dr Michael Cullen would be extremely foolish to allow Qantas to take a strategic stake in the national carrier. His first priority should be to find ways to encourage New Zealanders to invest in Air New Zealand and the sharemarket.
This requires innovative thinking. Air New Zealand could raise new capital through a convertible note issue aimed at institutional investors and a new type of security - called "shareholder partnership shares" by a Weekend Herald reader - for the public.
These partnership shares, which would convert into ordinary shares after three years, could have $3000 worth of travel coupons attached to every $10,000 worth of shares.
No interest or dividends would be paid on these shares and the coupons, which would be transferable, could be used to pay for travel on Air New Zealand's domestic and international routes.
The New Zealand investment community has to start developing new and exciting securities to attract investors back to the sharemarket. Unless this occurs we will have little option but to continue to sell strategic stakes to offshore interests and suffer major transfers in wealth out of New Zealand as a result.