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The Shoeshine Column: Strong's weak airline play

Friday 31st March 2000

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Qantas' attempt to derail Air New Zealand's Singapore alliance only underscores its benefits

Qantas chief executive James Strong is a very complex character. We know this because he habitually wears bow ties.

But his dapper exterior belies the alarm he clearly feels about the impending alliance of Air New Zealand and Singapore Airlines. His distress was betrayed this week by his clumsy attempt to derail the deal.

Spreading confusion in the enemy camp is an age-old tactic and on that score at least Mr Strong is doing well. While everyone runs about trying to second- and third-guess his intentions, Brierley Investments (BIL) has taken its Air New Zealand stake off the block, ostensibly while it completes its Ansett buy.

On the face of it Mr Strong's line of thinking is apparent. Qantas doesn't want to be faced with an alliance of Air New Zealand and Singapore Airlines (SIA) in international markets and Ansett in the Australian domestic market.

It's no secret SIA has been more interested all along in sharing Ansett with Air New Zealand through a 50% direct stake than in owning 25% of Air New Zealand/Ansett.

So why not offer SIA all of Ansett and see if the alliance breaks up?

True, Qantas will still face an integrated domestic/international competitor in SIA/Ansett. But it will have chipped Air New Zealand off the bloc.

For a host of reasons Qantas has no chance of succeeding. Mr Strong, not being dumb, must know this - hence analysts' suspicion he is pursuing a hidden agenda.

Qantas hasn't yet mentioned the price it might offer BIL for an Air New Zealand stake. Its purported interest is in either the 16.7% B (any owner) share stake BIL already owns or the 25% stake it is putting together for Singapore Airlines.

Were its bid genuine Qantas would presumably offer BIL a price higher than SIA's 300c a share.

But a successful Qantas bid would also see Air New Zealand stripped of Ansett Holdings, the prize it has fought so long and hard to gain.

To fill SIA's order BIL has to buy a further 46 million B shares on the market.

But the sale of a 25% stake would still leave BIL with a very substantial 30% holding in the A (New Zealanders only) shares so it would not be in its interest to do anything that will damage the airline's value. That in itself makes a nonsense of Qantas' "offer."

Some have speculated Mr Strong could offer to relieve BIL its entire 47% holding, leaving it with no cheapened rump of shares to worry about. But unless the regulatory situation changes dramatically he won't be allowed to do so.

Under Air New Zealand's constitution, 25% is the maximum stake a foreign airline may hold. The constitution can be amended to allow a higher threshold only with the approval of the government as Kiwi shareholder. And Prime Minister Helen Clark, sounded out by SIA, has already said she can't see her way to doing that. It's hard to see why her position would change if it were Qantas asking.

A second stumbling block is contained in Air New Zealand's constitution, which states the purchase of a stake of less than 25% by a foreign airline must be approved in writing by the Kiwi shareholder, in this case Transport Minister Mark Gosche. And it's doubtful Mr Gosche and his cabinet colleagues will be too enthused about Qantas being a major stakeholder.

The government no doubt wants a strong, independent flag carrier. It won't be taken in by Mr Strong's rhetoric about "a major airline group with the scale to compete aggressively in a rapidly changing international market." Qantas had a 19.9% Air New Zealand stake some years ago and sold it after squabbling with BIL and Air New Zealand directors and management.

The bid also faces regulatory problems but these are not the insuperable obstacles some have assumed.

Qantas and Air New Zealand between them operate more than 80% of flights between New Zealand and Australia, so if they proposed to become one entity both our Commerce Commission and Australia's ACCC would look into the deal.

It falls outside the Commerce Commission's "safe harbour" test. But Qantas could argue the 25% threshold in Air New Zealand's constitution implies government and industry acceptance that a stake of that size doesn't confer control. Air New Zealand would remain operationally independent.

So what does Qantas really hope to achieve with this week's bombshell?

Some analysts have suggested it is somehow trying to force SIA's hand on a mooted alliance with Sir Richard Branson's Virgin Airlines to start up an Australian domestic competitor to both Qantas and Ansett. SIA reportedly has until the end of this week to decide.

But SIA will hardly want to take equity in a competitor to Ansett if it partly owns it through an Air New Zealand stake.

And if the BIL deal doesn't go ahead there is no obvious reason why it shouldn't go back and negotiate with Virgin.

Talk is cheap and Qantas is probably simply trying to exploit what it perceives to be a testy relationship between BIL/Air New Zealand and SIA, hoping if it muddies the waters enough the alliance will fall apart.

It's unlikely to succeed. Each needs the other. And Mr Strong's manifest discomfort will only underline for them the strategic sense of going ahead with their deal.

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