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Norris warns against rights issue as regulator sets rules

By Duncan Bridgeman

Friday 12th September 2003

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Air New Zealand chief executive Ralph Norris yesterday ruled out the possibility of a rights issue without the benefits of a proposed alliance with Qantas.

The alliance plan, which would have Qantas taking a 22% equity stake in Air NZ, crashed this week after an emphatic rejection by Australian Competition and Consumer Commission (ACCC).

Both airlines said they would appeal the decision with Air New Zealand reiterating its well-documented argument that the deal was critical for its survival.

The prospect of a rights issue resurfaced last month when Air New Zealand released its full-year results, although Mr Norris said it would not be possible to issue a prospectus with the future of the alliance undecided.

But yesterday he dismissed the option if the alliance did not go ahead.

"People are only going to invest in an airline if they can get a reasonable return on their investment ... I don't think people are going to invest on the basis of sympathy."

While Air New Zealand had improved its financial situation dramatically ­ reporting a net profit of $165.7 million for the year to June 30 ­ the airline desperately needed cash to upgrade its aging fleet.

Mr Norris said the company would continue to perform "reasonably well" in the short term, but the big issue was making sufficient returns in the medium-to-long term to upgrade its long-haul fleet.

"You can't earn your cost of capital when it comes to a $3.6 billion reinvestment in long-haul aircraft if you haven't got an income stream to support that."

The airline was due next week to take delivery of a new fleet of more efficient Airbus A320 planes to use on medium-haul routes. And it was also looking at options for replacing its long-haul fleet of planes, with Boeing representatives here to promote new aircraft.

Talk of a rights issue was designed to raise $200 million to go toward that. The proposed Qantas purchase of 22.5% of Air New Zealand shares would bring $550 million to the airline. Mr Norris said Air New Zealand had looked at alternatives to the Qantas tie-up but none made sense from an operational point of view.

An alliance with any other airline was like "mixing oil with water," he said.

Singapore Airlines was still off the bargaining table after its 2001 proposal to lift its shareholding in Air New Zealand failed to get off the ground.

The Commerce Commission is due to make its decision on the Air NZ/Qantas alliance proposal before the end of the month.

Mr Norris said the two airlines would wait until the commission delivered its ruling before lodging an appeal with the Australian Competition Tribunal.

In that event he expected a hearing in the first quarter of next year and a ruling by the middle of next year ­ not the two years some have suggested.

There have also been suggestions the drawn-out alliance process was simply a crafty plan to buy time for Air New Zealand to get its house in order for renewed competition with Qantas.

"All I can say is that during the process Air New Zealand's financial position has somewhat strengthened," Mr Norris said.

"In regard to strategy development we haven't worked with Qantas at all."

Opponents of the alliance believe the process has been unduly influenced by both governments.

The New Zealand Commerce Commission has said it would not be influenced by the ACCC ruling.

But Air New Zealand and Qantas criticised the Australian regulator for allegedly not giving enough weight to the revised undertakings and additional information provided to the Commission.

"It begs the question whether it is decent and proper for them [the airlines] to maintain that there is life in the relationship when they are so obviously doomed," Chapman Tripp partner and Infratil spokesman Grant David said.

Mr David also criticised Finance Minister Michael Cullen for making comments to the media supporting the alliance in the capacity of major shareholder without making a submission to the Commerce Commission hearing last month.

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