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On a wing and a prayer

Monday 18th December 2000

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Pity the new boss of Air New Zealand

By Nikki Mandow

Air New Zealand is the country's largest company. No, really. With its June takeover of Ansett Australia, Air New Zealand's combined revenue is $7.9 billion, pushing it past the Dairy Board's $7.7 billion.

Don't expect it to stay that way. The Dairy Board is pipping revenue to hit $9 billion this year. And Air New Zealand? Well, it's serving up a dog's breakfast of troubles that not even new chief executive Greg Toomey will solve very soon.

You've got to pity the 45-year-old Australian. Or hope he's paid well. Starting in December, the former Qantas joint-number-two faces a range of tough tests: from institutional mutterings, and possible court action, over the quality of forecast financial information released before the airline's recent $284 million rights issue; to merger nightmares trying to blend the Ansett Australia and Air New Zealand cultures. As the new boss he'll want to stamp his mark early, but he'll have to doff his cap to the two interfering shareholders: Singapore Airlines (which owns 141.9 million, 25%, of the freely-traded B shares) and Brierley Investments (which owns 172.1 million, 30.3%, of the Kiwi-only A shares). There are cultural problems at home too, not least a legacy of non-people-friendly management. Apparently, it's an unhappy shop.

And then there are the numbers. Profits are slumping - analyst JB Were, for example, just slashed its June 2001 profit forecasts for the airline from $218 million to $67 million, following a warning from chairman Selwyn Cushing at the annual general meeting on November 2. The company made $178 million in the year to June 2000. Ansett Australia has been trading at a loss since June. Air New Zealand's share price is also in a sorry state - its B shares, trading at $2.75 as recently as August, had dropped below $2 as Unlimited went to press.

But Toomey's biggest headaches are across the Tasman. Some things he can do little about, like the soaring US currency and fuel prices. If oil prices don't fall, the company will pay a whopping $US100 million more for fuel than budgeted for. Compare that with rivals Qantas: a leak to an Australian broker said the airline had hedged its fuel price under $US20 for the next 12 months; the present price is over $US32. Speculation has it that the executive responsible for this smart move was Toomey, then Qantas' chief financial officer.

To top off its troubles, Ansett Australia is losing market share at home. Minnows like Richard Branson's Virgin Blue and former small Australian regional airline Impulse have nabbed 10% of the market. And Qantas, damn it, has been offering discounts of up to 25% to corporate customers. Struggling under its higher fuel costs, Ansett just can't compete. Five years ago Ansett was the biggest airline in Australia, with around 53% market share. It now has 41.5% and industry sources say its share could fall below 40%.

Like I said, pity the new guy at Air New Zealand.

Consolidate and grow

So what does Toomey need to do? Consolidate and grow, basically.

Ansett's former chief executive Rod Eddington, who left earlier this year to head up British Airways, once said that Ansett Australia was a great airline, but a lousy business. While staff describe the company as a big coherent family, for some years it has had its financial lifeblood sucked out by Rupert Murdoch's News Ltd, Ansett's former co-owner with freight company TNT.

"Ansett has a very mixed strategy," says Australia's leading aviation consultant Peter Harbison, head of the Centre for Asia Pacific Aviation in Sydney. "It's hard to see them being profitable in the next 12 months, while the new relationships are being bedded in. But with the powerful backing of Singapore Airlines, once the integration is complete they will be a real force to be reckoned with. How quickly the turnaround is achieved will be very much a reflection of Toomey's input."

On this side of the Tasman, Toomey has an easier task. Air New Zealand is basically a good airline. It's been through the restructuring necessary to turn it from a government department into a private company. It is profitable, has a great engineering team, a good safety record and high standards of in-flight service. Previous managing director Jim McCrea, the key mover in the Ansett merger, was an experienced airline man - he joined the organisation as an engineering apprentice in 1956, aged 17, and worked his way up, eventually spending nine years in the top job.

"He understood how people in the airline thought and felt, and how the airline worked at all levels. He was also one of the most strategic thinkers I have ever come across," says Shotover Jet head Jim Boult, who worked with McCrea on the Tourism Board. Similar sentiments come from other tourism industry figures, including Mike Simm, head of Fullers Bay of Islands, also a former Tourism Board member. "Jim was a cautious but effective chief executive, in a difficult period of building Air New Zealand as a public company, following listing in 1989," says New Zealand-based aviation consultant and commentator David Stone.

What has not been easy, others say, is running a board dominated by Brierleys, led first by Bob Matthew and then Selwyn Cushing, neither of them easy men to work with. McCrea left the airline suddenly in June after a dispute with the board over his contract. One legacy Toomey will inherit is McCrea's poor people management. "Jim could be mean-spirited and Machiavellian," says a source close to the company. Staff were enticed by reasonable salaries and great travel privileges. Turnover was never high, but morale, as shown by low employee satisfaction surveys, remains bad.


"The new boss needs to be a strong, unifying force," says the source. "He'll need to be a charismatic, forthright, open person who will tell people what is going on."

Is that Toomey? It's hard to tell. The Qantas team has been successful, to be sure. But Qantas boss James Strong made sure his team was always that - a team - and Toomey's individual role is unclear. Australian analysts point to his strong financial skills, but are less sure about his gift for people. "From [shareholder] Singapore Airlines' point of view he's an ideal man," says one, referring to the Singaporean focus on getting Ansett to turn a profit as quickly as possible. "But my feeling is that there will be a lot of people management skills needed. The unions are going to need to be mollified, particularly inside Ansett, where a lot of good people have been lost."

Toomey's marketing skills are also untried - and he'll need great marketing skills to settle what one analyst called "the almost impossible tension between two brands [Ansett Australia and Air New Zealand] that can't mate".

On the other hand, if Air New Zealand is looking for someone with a strong understanding of airline strategy, Toomey has all the right references. A chartered accountant by training, he worked under James Strong at domestic carrier Australia Airlines for five years from the late 1980s, before taking a job at Arnotts and then being pulled back by Strong to work for Qantas. "He knows the enemy," Stone says. "It's a huge advantage for Air New Zealand to have someone from a senior rank of their principle rival. He's clearly a well-regarded administrator, and Qantas' strategic planning isn't going to change overnight."

Tentative approval

So far the analysts give Toomey the thumbs up. Harbison believes the combination of Toomey and Singapore Airlines is a winner. "There would have been very few people who would have been better qualified for the job," he says. "There are going to be challenges he hasn't dealt with in the past, but Toomey is a competent operator. The most important thing for Air New Zealand and Ansett is to have some certainty." Harbison believes Singapore Airlines will be highly influential in every decision, not just in the big strategic ones.

Ord Minnett head of research Blair Tallott also believes Toomey's appointment will be good for Air New Zealand, though accepts that he hasn't got an easy job. "Air New Zealand has lost a lot of investor credibility over the sudden revelation of the loss in the first quarter," he says. "The management team has to build back investor credibility. Toomey coming in could restore that."

Certainly airline customers - that's most of us these days - and surviving staff will be long-term winners if a joint Air New Zealand-Ansett becomes a large, efficient, credible regional or even international player. The outlook for investors is less sure.

Airlines are notoriously treacherous investments. In the last decade, Air New Zealand's share price has been hugely volatile, up near $4 one minute, down below $2 the next. In June, Fortune's canny investment columnist Andy Serwer wrote about investment in airline stocks. "Never, I repeat, never buy airlines," he said. His rationale was that airlines have the cost structure from hell. To whit:

  • They have to borrow huge sums of money to buy planes, leaving them at the whim of interest rates (a factor totally out of their control).

  • They use huge amounts of fuel, leaving them at the whim of oil prices (a factor totally out of their control).

  • They are at the whim of strong unions (you guessed it, a factor almost totally out of their control).

If, Serwer argues, some of the world's most serious investors - including Warren Buffett with US Air - can lose big-time buying into airlines, what hope is there for the rest of us?

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