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Opinion: Air NZ yet to reveal plan C

By Simon Louisson of NZPA

Friday 17th November 2006

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Air New Zealand this week finally abandoned plans to tie up with rival Qantas.

First, regulators knocked back plans for the Australian airline to buy into Air NZ, then they quashed Plan B, to code share on routes across the Tasman. Now, the government-controlled airline will have to haul out the as yet unformulated, or unpublicised, Plan C.

It said on Wednesday it would pull its applications to share services on Tasman routes, with the Australian Competition and Consumer Commission (ACCC) and New Zealand's Ministry of Transport, after the ACCC's draft determination against the airlines.

Although Air NZ had previously threatened to cut services to reduce losses on the crowded route, or hike prices, there was no indication it plans to follow through.

"We're better off withdrawing our application and redeploying our resources," Air NZ chief executive Rob Fyfe said.

"We haven't got a master plan that is about to be rolled out tomorrow," he said.

"We still have a series of routes across the Tasman that are very poorly performing for us. We will now have to review how we address those issues."

Wellington, where the airline has lost $35 million on its Australian services since 2003, would be hardest hit by cuts.

Ian Thomas, of the Centre for Asia Pacific Aviation Studies in Sydney, said there was always a risk of a cut in trans-Tasman services because it is a low yield market.

The route was more important for Air NZ, than Qantas, the industry analyst said.

"I think they'd be reluctant to cut capacity at this stage but they may look at other modelling," Thomas said.

For Air NZ, the code-share had been seen as an essential part of its forward strategy.

"They really needed a relationship with Qantas on the Tasman to really, I suppose, impose some rationality in terms of pricing there."

Now, Air NZ would have to go to another plan, which might be a development of its own services, he said.

Thomas believes there could be some scaling up by Pacific Blue, the offshore arm of Australia's Virgin Blue, which had been holding back waiting for the code-share decision, he said.
"In the longer term there may be some rationalisation of services, which really counters any short-term benefit."

Air NZ shares have been undergoing something of a revival since September, rising 30% to $1.51 in response to falling fuel prices, the collapse of domestic regional rival Origin Pacific, a strong currency and lower costs.

Although the share price is 71% above where it was when the airline had to be rescued in 2001 after Ansett's collapse, it is still 42% below where it was during the false dawn of mid-2002. And the shares are a far cry from adjusted $15-plus they were at in 1999 before Ansett began its death-roll.

There has been a global trend of improving profits for airline companies. Many, including Air NZ, have gone through a period of radical cost cutting.

However, people might bear in mind that since 9/11 airlines have lost around $50 billion -- around double cumulative historic profits.

The world's second richest man, Warren Buffet, once famously wished he had been far-sighted and public spirited enough, to have shot down Orville Wright at Kitty Hawk in 1903.
That didn't stop him investing in US Air, which went into bankruptcy last year.

US airline industry commentator David Pauly reckons airlines keep making the same mistake: overloading the skies with planes and then cutting fares to unprofitable levels to fill them. Every 10 years or so there is a crisis which sees the weaker players dying.

That seems to be exactly what's happening across the Tasman.
Pauly said that given the industry's sorry history, it seemed unlikely airlines would ever cut capacity enough to pay their way.

"They still feel forced to match the low fares of the latest upstart -- a foolish reaction since the only low-fare (US) airline to succeed over time has been Southwest Airlines Co."

Despite this pessimistic view, Forsyth Barr's head of research Rob Mercer said Air NZ was getting into good shape after having overhauled every part of the business.

The long-haul, domestic and Pacific routes, staffing, engineering and servicing have all been reviewed and had costs taken out.
Even the trans-Tasman routes have had $50m in costs trimmed.

"They have bitten the bullet and already saved costs on the route and already heading down an improved outlook for their business," he said.

"I don't see it being a big factor in their business case."
Air NZ three years ago identified nearly $250m of annual costs it could knock out of the business and it is now at the tail end of the to-do list.

Mercer said growth would come from the airline's completion of its fleet upgrade and the uplift in yield from improved product position that that will allow.

As the flag carrier, Air NZ maintained leading market shares on most routes despite "quite a poor product".

It has been achieving better yield by selling more business class seats, which, with a lie-flat option, are as good as most first class seats .

The company has cut low yield routes and opened new ones -- to Shanghai, San Francisco and London via Hong Kong.
"They have methodically worked through a strategy that was put together three years ago and they are at the tail end of that," Mercer said.

The share price rise has caused some talk about the possibility of the Government selling down its 80% stake to 50.1%.

Even for a Labour Government it must be tempting to take the $150m paper profit on its $1 billion investment. Perhaps the sale could be justified to pay the cost of the World Cup rugby stadium.

Mercer said the company is still underperforming: "It's earning $100m less than it should be, but that's not bad given the fuel price environment and the transformation phase that it's gone through.

"They should start to see profitability really start to grow from 2008 onwards."

That's assuming one of the periodic industry crises doesn't roll around by then.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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