The Air New Zealand/Ansett saga has been a tortuous work in progress for several months – with the parameters shifting from week to week. Back in June, the issue was whether the New Zealand government should agree to Singapore Airlines (SIA) raising its stake in Air New Zealand (Air NZ) to 49%, given its subsidiary Ansett was seriously in need of cash. But within days, head of Qantas Geoff Dixon had stepped noisily into the fray, and the grounds of the dispute had shifted to Aussie territory. Nationalist sentiment bristled indignantly as he defined the debate in terms of regional hegemony. He argued that SIA's control of Air NZ would go against the national interest, "creating a serious imbalance in aviation forces in this region". A more appealing alternative, he argued, would be for Qantas to buy SIA's 25% stake in Air NZ, while SIA picked up Ansett in its entirety. Just how serious this offer was, however, will never really be known. According to Graeme Wald, director of equities research at UBS Warburg Australia, it amounted to mere posturing: "Dixon is not getting up there and saying he's going to win this. By beating the drum loudly and talking to the market about the various options, he's just laying the groundwork."
Nevertheless, by August the Australian government (wishy-washy on its stance until then) had suddenly become vocal and positioned itself squarely behind the Qantas bid. As all parties awaited the New Zealand government's decision on the matter, the debate became thoroughly blurred by politics, with commercial considerations pushed firmly to the background. Speaking with Asiamoney in late August, UBS Warburg's Australian joint CEO and head of corporate finance, Chris Mackay, was as mystified as most: "It appears to be as complex a situation as you would ever have in the combination of government politics and business. From the outside it's impossible to tell what all the issues are, or what the time pressures or politics are."
Those now seem like halcyon days. The issue is no longer 'who will dominate the region', but one of survival. In early September, Ansett's shares dropped drastically. Virgin Blue rejected Air NZ's advances and SIA quickly withdrew its offer of NZ$1.31 per share. Meanwhile, the Australian government and Qantas shied away, leaving Ansett to go belly up. Under administration the company's true financial status was revealed, and the picture became bleaker still. With 16,000 Australian jobs on the block, Ansett was found to have a mountain of debt and a bunch of encumbered assets. The administrators had to accept that a whole line of creditors, including those who had leased Ansett the majority of its planes, were waiting to make their claims.
Meanwhile, investors were coming to grips with the fact that Air NZ was also sinking fast. Having cut Ansett loose, its major shareholders, Brierley Investments (BIL) and SIA, reached an agreement with the New Zealand government to inject further capital into the airline. Each was to put in NZ$150 million (US$61 million) of additional equity at the price of NZ$0.67 per share (or at the average price of the 10 trading days prior to settlement). In turn the government would provide Air NZ with a note facility of up to NZ$550 million. On drawdown of this facility, Air NZ would issue two tranches to the government in equal proportions of seven-year and 10-year subordinated notes. Furthermore, the government would provide Air NZ with a two-year revolving credit facility of up to NZ$200 million for working capital purposes, to be set off against the note facility.
As Asiamoney went to press however, this deal looked extremely shaky. Air NZ's shares hit a low of NZ$0.16 during the last week of September, as the company's investors deliberated the worth of further funding.
And the outlook for the company is far from reassuring. The global slowdown in the aviation industry cannot be ignored. With talk of war, no airline is confident of its future earnings. There is also considerable speculation as to the extent of Air NZ's liabilities post-Ansett, with the spectre of A$500 million worth of employee entitlements beckoning. Accordingly, analysts predict Air NZ will require substantially more than the NZ$850 million on offer. With no end figure in sight, there is the disconcerting possibility that the new capital will disappear right before investors' eyes.
Plus, there is the added complication that SIA is refusing to proceed with the deal prior to due diligence, estimated to take another four to six weeks (although the New Zealand government is adamant it won't accept this and will proceed, with or without the airline).
It is ironic that given the low share price, SIA's stake, originally estimated to rise to about 34% upon injection of the NZ$150 million, could increase to about 43%. This would throw the New Zealand government's foreign ownership rule into disarray. With a crisis on hand, however, analysts brush this aside as irrelevant.
There are a couple of options to be considered at this stage. Firstly, there is the possibility other investors will agree to inject capital. The New Zealand government is also considering becoming a shareholder. Alternatively, if the rescue package fails altogether, prime minister Helen Clark has raised the possibility of Air NZ going into statutory administration – a form of temporary receivership. This would protect Air NZ from Ansett's creditors as it attempts to right its finances.
The jury is out on whether this option is desirable. Says Kevin O'Connor, regional aviation analyst at Deutsche Bank: "It's not the preferred – or the most likely – outcome. It doesn't allow the business strategic flexibility for a start." However, Ian Miles, regional aviation analyst at Macquarie Bank, sees it as necessary: "Statutory receivership allows the government a circuit breaker to sort things out. It provides an avenue to contain the liabilities with Ansett."
For the airline's employees, caterers and the tourism industry – not forgetting those travellers with precious air miles – it simply provides more time to fret.
Timeline
June 19With Air New Zealand (Air NZ)'s subsidiary Ansett cash-strapped, the company signs a memorandum of understanding with Singapore Airlines (SIA) to increase its stake from 24.9% to 49%. SIA agrees to a placement of additional shares at a price of NZ$1.31 (US$0.53) per share. A subsequent capital raising programme is to be pursued by Air NZ, substantially underwritten by SIA. (As part of the plan, Air NZ is to also pursue a takeover of Australian airline, Virgin Blue.)
June 20
Qantas seeks to block SIA's plan to increase its stake to 49%. It proposes an alternative scheme whereby it purchases SIA's 25% stake in Air NZ, while SIA buys out Ansett.
July 31
The New Zealand government convenes a committee to consider the rival bids.
August 1
The Australian government does an about face and publicly supports Qantas's proposal.
September 4
Virgin Blue owner Richard Branson rejects Air New Zealand's A$250 million (US$122 million) offer for his airline.
September 6
SIA backs down on its offer of NZ$1.31 per share to up its stake to 49%.
Financial assistance from the Australian government is suggested as an alternative.
September 10
Air NZ enters MOU with Qantas to sell its Ansett business.
September 12
Qantas withdraws its offer.
The Australian government is asked to underwrite Air NZ's efforts to restructure Ansett. The proposal is rejected.
The decision is made to place Ansett under voluntary administration. PricewaterhouseCoopers is appointed.
September 13
Ansett is grounded.
Air NZ, SIA, Brierley Investments (BIL)and the New Zealand government agree to a NZ$300 million equity injection by SIA and BIL and a NZ$550 million credit facility to be provided by the NZ government, pursuant to due diligence.
Air NZ announces a net loss after tax of NZ$1.425 billion for the financial year ended June 30 2001.
September 17
PricewaterhouseCoopers steps down after pressure from trade unions and Arthur Andersen is appointed as the new administrator.
September 24
Air NZ shares plummet to a low of NZ$0.18 (resident only A shares) and NZ$0.15 (unrestricted B shares) bringing the refinancing package into serious doubt. New Zealand prime minister, Helen Clark, says that statutory management is an option.