Air NZ hopes for third-time lucky

By Graeme Kennedy

Friday 29th November 2002

National pride and widespread government belief that a country's international worth was judged by its own flag-carrier cut Qantas' first ties with what was to become Air New Zealand.

The company's second attempt at partnership ended almost 60 years later in bitterness which appeared to endure as long as early this year with Qantas chief executive Geoff Dixon's widely publicised vow to "run Air New Zealand into the ground."

But, given the blessings from competition regulators on both sides of the Tasman, Qantas might have a lucky third strike in the long-awaited announcement this week of a true strategic alliance between the two carriers.

The post-September 11 events which worsened an already desperate aviation industry slump showed that no airline regardless of how large can remain immune from global market forces.

The flag-carriers of Switzerland and Belgium both went to the wall, the world's biggest carrier United is still facing Chapter 11 bankruptcy and many of the industry's major airlines have shed thousands of jobs as they watched revenues and profits sink.

Mr Dixon and his Air New Zealand counterpart, Ralph Norris, point out that together they have just 4% of the world international aviation market and in the difficult new environment would find it impossible to succeed and grow alone.

Alliances such as those taking shape among groups of major carriers overseas including Delta, Northwest and Continental, Alitalia and Air France and United and US Airways are now seen as the only real strategy for sustained growth and survival.

Qantas owned 23% of what was then Tasman Empire Airways (Teal) when the New Zealand carrier was created in 1940 out of the Union Steam Ship Co, which held 19% with the New Zealand government 20% and the UK's British Overseas Airways Corporation 38%.

A strong alliance between the two airlines at the bottom of the world was something Qantas' legendary leader Sir Hudson Fysh would have seriously pondered but the concept was cut short by the desire of both countries to fly their flag on government-owned airlines. By the early 1950s Teal was owned 50:50 by the Australian and New Zealand governments until New Zealand bought the lot in 1961 and cut Qantas out of any alliance thoughts it might have still had.

They were strongly revived, however, in 1988 when the government decided to privatise the national carrier.

The Air New Zealand board and management favoured British Airways as the carrier's major airline investor but the Labour government of the day pitched for Qantas to take the lead in a Brierley Investments-led consortium to buy 100% of the company.

BIL took 65% and onsold 30% to the New Zealand public, Qantas had 19.9% and Japan Airlines and American Airlines 7.5% each. The government had a "Kiwi share" to make up the balance.

It was a marriage doomed from the start an investment based purely on financing rather than being underpinned by a well-considered strategic alliance aimed at furthering the objectives of the partners.

A hostile shareholding with two Qantas directors on the Air New Zealand board and with no reciprocal representation, the Australians were reported to have made a practice of attending one board meeting with their New Zealand "partners" and another behind closed doors without them.

JAL and American appeared to soon tire of the game while Qantas sold its shares to institutional investors in 1997.

Singapore Airlines, then a favoured partner, bought 8.3% of Air New Zealand on the open market in 2000 and gained government approval to acquire BIL B shares to increase its holding to 25%.

The government rejected SIA's proposal to increase its stake to 49% and the carrier was left with its 25% now diluted to 4.5% and BIL's to 5.5% following the government's 2001 post-Ansett Australia $885 million bailout to become Air New Zealand's 82% shareholder.

Now hopefully third-time lucky Qantas' 22.5% holding will this time develop with a true strategic alliance for growth to back the Australian carrier's $550 million investment.

The agreement creates a new regional airline grouping which will focus on co-operating to achieve the best economic results for the two countries and their airlines while generating strength and size to compete against the heavyweights of the global aviation industry.

The airline said Qantas' capital injection alone could not achieve the results it hopes to gain from forming the alliance "Continuing as a stand-alone airline was an attractive option but the stark reality of the international aviation market is that it would be a high-risk path for us," the company said.

Air New Zealand chairman John Palmer said the board had considered the options of joining another airline and competing against Qantas or working with Qantas and competing in the market as a strong alliance.

"The Qantas alliance offered the best outcomes, both from the company and the national interest perspective. We believe the regulators, the New Zealand Commerce Commission and the Australian Competition and Consumer Commission, will see the merits of this strategic alliance," he said.

Admitting the deal was a "bold move," Air New Zealand said the basis of the partnership was for the airline to continue to be controlled and autonomously managed under its own board with about 70% of its shareholding retained in New Zealand.

Unlike the previous hostile position, Qantas will provide two of Air New Zealand's nine directors while Air New Zealand will have one representative in the Qantas boardroom.

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