Plan B where are you?

By Shoeshine

Friday 1st November 2002

If the plan at Air New Zealand's annual meeting on Tuesday was to send shareholders away feeling more relaxed about the company's future, Shoeshine suspects it didn't work.

Chairman John Palmer's speech made a fair stab at establishing a feel-good factor with an upbeat profit forecast for the 2003 year. But stand-in Roger France, reading it out in a wooden monotone, didn't sound like he quite believed it.

Based on a profit before unusuals and tax (pbut) of $30.4 million for the September quarter, traditionally the company's slowest, it is now forecasting a June 2003 full-year result of about $200 million.

Shoeshine can find no evidence the company put out a previous forecast on a "pbut" basis so it's unclear how much better that might be than previously thought.

It had forecast, on August 28, a profit of $100 million on an ebit (earnings before interest and tax) basis. It now says ebit will be "significantly higher."

Take your pick. The annual report shows profit on an ebitdra (earnings before interest, tax, depreciation, aircraft rentals and amortisation) basis.

Whether this hodge-podge of earnings measures and forecasts adds anything to investors' understanding of the company is something the disclosure committee might like to have a look at.

Or maybe that's the point.

In any case Palmer went on to throw such uncertainty over earnings performance for the rest of the year that you wonder why he bothered to make a forecast at all.

The first-quarter earnings lift, he said, showed the aviation industry's bright side. There was also a dark side.

The airline business was volatile and uncertain and had been for some time; there was economic uncertainty in most major parts of the world; a war in Iraq and instability in the Middle East could drive up fuel prices; and the Bali tragedy betrayed insecurity closer to home.

There was huge overcapacity in the international industry and, in the company's view, the volatility of the external environment was rising.

"That, however, is the airline business. We are not about to sit back on the sidelines and wait for things to sort themselves out," Palmer wrote.

We all know that. At the meeting France staunchly fought off a horde of shareholder queries about the state of talks with Qantas, saying, reasonably enough, that the issues were complex and difficult and that the outcome would be announced when there was something to be announced.

Shareholders, however, could be forgiven for thinking the board already had the welcome mat out.

Palmer's speech said the major strategic issue on the company's agenda was partnerships with other airlines and, specifically, the Qantas talks.

"The board's obligation is to make a thorough and detailed investigation of the options that are available [and] the extent to which they can be realistically pursued."

Taking it that a Qantas stake was Plan A, several shareholders, highly suspicious of the Australian carrier's motives, wanted to know what Plans B to Z were.

What other "options" had Air New Zealand investigated? France declined to enlighten them.

Sometimes, Palmer noted later in his speech, the company would have to disregard what was popular for what was right.

Shoeshine has some sympathy with those minorities who feel the national interest would not be served by a Qantas tie-up. The reality is that the government as dominant shareholder will decide. After all, it was elected to decide where the nation's interest lies.

In that democratic spirit Air New Zealand's board needs to come clean on what the alternatives are so they can be debated before an Aussie tie-up is announced as a fait accompli.

GPG's platinum parachutes

GPG's disreputable antics as it tries to embarrass takeover target Rubicon never cease to amaze.

Rubicon last week responded to an "open letter" from GPG demanding details of the executive incentive scheme, Rubicon's famous or infamous "tracking options."

Under the scheme's terms GPG's partial bid has triggered a right by Rubicon management to require payment. Before the bid the amount involved would have been $500,000 after tax to be shared among the eight-strong management team. The trigger lifts the amount to $1.3 million, or less than half a cent a Rubicon share, according to Rubicon.

Attached to the letter from GPG's Tony Gibbs was a copy of an article that appeared in the Independent in which GPG was quoted as being displeased with the trigger arrangement. "As Gibbs sees it, a target company should not change its capital structure after a formal bid has been received," the article said.

So Shoeshine was astonished to see the GPG director service contract disclosures necessitated by its board-recommended merger with Britain's Brunel Holdings.

"If an executive director of GPG is dismissed within two years of a change of control, or if that director gives not less than six months notice of his resignation, to expire within 12 months of a change of control, GPG is obliged to pay that director twice his annual total compensation and twice the average bonus received by that director in respect of the last two completed financial years, plus the full amount of his accrued long service leave and any pay in lieu of untaken holiday.

"GPG must also meet that director's reasonable legal costs in connection with recovering such compensation."

In the Brunel case the directors have agreed to waive their rights.

Just as well. In Gibbs' case the salary and bonus payment alone would come to $7.1 million.

Strangely for a company that professes itself so hot on disclosure, this arrangement doesn't appear in the annual report.

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