Scoop has an Ethical Paywall
Debate AirNZ Report On Propose Qantas/Air NZ Deal
DEBATE AIR NEW ZEALAND
www.debateairnz.org.nz
calls on the Government to SLOW DOWN the Kiwi Share approval of Qantas investment into Air New Zealand
The case for more deliberation, consultation and public say in the decision on whether Qantas should be allowed to acquire a shareholding in Air New Zealand
Prepared by Debate Air New Zealand, PO Box 1702, Wellington • http://www.debateairnz.org.nz
11 DECEMBER 2002
Dominion
Post
CONTENTS
- Introduction: "PULL
UP!"
- Ten good reasons for not rushing
into the Qantas proposal
- What others
are saying
- The December 18 Kiwi Share
decision
- Government’s exercise of its
Kiwi Share rights
- Is there an
alternative?
- The Commerce Commission
and Commerce Act
- Question and
Answer: Air New Zealand’s views and our reply
-
Will the airlines lower fares to encourage
demand?
In May 2001 Qantas
proposed that it acquire a shareholding in Air New Zealand.
PM Helen Clark indicated that there were "serious obstacles"
due to international landing rights, competition law and New
Zealand’s position as a high-class international tourist
destination.
At that time the Government was slowly
deliberating the merits of Singapore Airlines increasing its
stake in Air New Zealand. Previously the Government had
just as deliberately undertaken the review of Virgin Blue’s
application to fly the Tasman. Qantas is now asking for
Government approval, under the Kiwi Share powers, to be
allowed to acquire a shareholding in Air New Zealand and
Government has accepted a deadline of 17 business
days. Why are the "serious obstacles" no longer so
serious? There is a sorry tradition in New Zealand of
governments rushing major decisions that benefit some and
cause long-term harm to the country. We can all think of
examples. Right now Government seems headed towards
another hasty, arrogant decision by allowing Qantas to buy
into Air New Zealand. This paper questions the wisdom of
hurrying the decision and whether Qantas will really be that
good for Air New Zealand. In particular, we call on
the Government to . . . SLOW DOWN Why does
the Government (including the Kiwi Shareholding Minister)
need to make any decisions at this time? Urgency is being
driven by those who want to make the deal a fait accompli.
Making a decision now excludes the public.
LOOK Ministers should decide whether the Qantas option
is in the national interest AFTER the analysis has been
done, not before. They should delay making any commitment
on the Kiwi Share until after the Commerce Commission has
investigated the transactions costs and benefits. … AND
LISTEN Why has the issue been managed to minimize
public involvement? Details of the proposed deal were kept
quiet until very recently and now there is a barrage of
public relations pushing the Qantas option. The transaction
affects all New Zealanders and has significant commercial
and community consequences. Ministers need to listen to
these people before making a decision. 1.
NO URGENCY The claims that Air New Zealand is not
viable without the deal are not true. They are
scaremongering public relations. Air New Zealand has
recovered from the Ansett purchase. It is profitable. It has
the capacity to raise any capital it needs from the New
Zealand capital markets. The New Zealand Government is its
82% shareholder. It is part of the world’s largest airline
alliance. 2. ALTERNATIVES NEED TO BE
CONSIDERED There are better ways for Air New Zealand
to raise capital than tying the company to Qantas. The
Qantas deal is being promoted as the only viable option, but
there are other options. The best option may be Air New
Zealand raising needed capital from New Zealand investors
(without any loss of sovereignty). Air New Zealand does not
need an airline shareholder. 3. FARES WILL RISE UNDER A
MONOPOLY Air New Zealand claims that the transaction
would result in higher profits, lower fares, increased
services, and more engineering work. This is good PR but not
credible in the real world. The likely losers would be New
Zealanders and New Zealand companies, facing rising charges
and rationalized services. 4. AUSTRALIAN DOMINATION IS
NOT IN NEW ZEALAND’S INTEREST This deal is much more
to Australia’s advantage than New Zealand’s. The promises of
a ‘partnership of equals’ would count for nothing as Qantas
inevitably made business decisions in its own best interests
(e.g. why should it direct tourists to New Zealand?). Qantas
is in various ways the worst conceivable airline partner
because its commercial interests clash directly with Air New
Zealand’s. The strong diplomatic pressure from Australia for
New Zealand to accept the deal is a warning that it is
primarily to Australia’s advantage. Over time Air New
Zealand would wither as Qantas built itself up at Air New
Zealand’s expense. 5. AIR NEW ZEALAND DOESN’T NEED
QANTAS Air New Zealand does not need Qantas to survive
in the international airline market. Domestically, the
future is in being ‘low cost’ and Qantas is not low cost.
Internationally, the future is being efficient and
interlinked with an alliance of airlines. Nothing Qantas can
offer will enhance Air New Zealand's current position in the
Star Alliance. 6. PUBLIC OPPOSITION All the
evidence suggests that a clear majority of New Zealanders
are opposed to the Qantas proposal. There is widespread
disquiet. Spokespeople representing tourism, export and
consumer interests oppose the plans. The Government and Kiwi
Share Minister do not have a mandate from the public to
commit New Zealand to the deal. 7. NEW ZEALAND’S
NATIONAL INTEREST IS NOT RECEIVING DUE CARE It
appears, on the current hasty schedule, that the Kiwi Share
Minister’s judgment of the public interest will be cursory
and incomplete. Many important issues, such as airfare and
freight price rises and reduction of services, will barely
be considered. 8. MORE DELIBERATION AND CONSULTATION
MAKES SENSE AND IS VIABLE There is no legal,
commercial or governmental reason why any decision needs to
be made at this time. Haste forestalls democratic input from
New Zealanders. The Government should take time to listen to
the wide range of New Zealanders with concerns before
considering any action. 9. NEW FACTS NEED TIME TO BE
CONSIDERED AND ASSESSED Government apparently received
the application on 25 November 2002. No substantive
statement of costs and benefits was put forward at that
time. On 9 December Air New Zealand made available a cost
benefit analysis on the transaction. A number of differences
are apparent between the benefits as originally announced
and those set out in the cost/benefit report. Airlines
have a track record of presenting ‘facts’ that suit their
immediate objectives. The Government needs to be very
sceptical and careful in considering the airlines’ proposal.
The original timetable allowed 17 working days from Air New
Zealand’s announcement to the time the Kiwi Share decision
is to be made. Now Government has 7 business days to digest
a 213 page report which includes new facts such as $183
million per annum of cost savings in New Zealand. 10.
PROPER PROCESS FOR A TRANSACTION WITH "SERIOUS
OBSTACLES"? There is no need for the Government or
Kiwi Share Minister to make a decision before the New
Zealand Commerce Commission has considered the competition
issues. A Ministerial declaration now on ‘National
Interest’, based on scant information and no proper scrutiny
of the airlines’ case, can only undermine the Commerce
Commission’s independence. A Kiwi Share decision now is in
direct contradiction of Hon Michael Cullen’s promise that
this transaction would be managed to avoid Government’s
inherent conflicts of interest as Air New Zealand’s main
shareholder, as the protector of National Interest and as
overseer of competition law. It is blatantly apparent that
the Minister of Finance’s interests are being given priority
and "serious obstacles" are not impeding his agenda. NZ Herald, 1 August 2002 In
one of the more extraordinary comments of the election
campaign Finance Minister Michael Cullen observed: "I cannot
understand this assumption that somehow or other Qantas
being involved is somehow worse than any other airline." Can
it really be true that the future of the airline is in the
hands of someone who: 1. Hasn’t noticed that any link
between Air New Zealand and Qantas would create an effective
monopoly in the domestic aviation market. 2. Isn’t aware
that the same two airlines also dominate the trans-Tasman
market and many international routes. 3. Doesn’t care that
the two airlines belong to different international
alliances. 4. Doesn’t recall that Qantas has had a stake
in Air New Zealand before with disastrous results. 5. Is
oblivious to the fact that it was largely due to the
machinations of Qantas that Air New Zealand got into the
mess in the first place. - Jim Eagles Underarm Bowling In The Boardroom, New
Zealand Herald, 8 August 2002. Jim Scott was boss when
[Air New Zealand was privatised in 1988]. Scott’s joy at
being ‘liberated’ from the shackles of government control
quickly turned sour. Qantas’ 19.9 per cent stake gave it
two board seats. The two directors had to leave the room
during discussions on sensitive competitive matters, but
Scott believes they picked up enough between meetings to
piece together Air New Zealand’s long-range
strategy. ‘Qantas sat at the table and dorked us – of
course they were asked to leave, but they knew what was
going on, they understood the strategy of Air New Zealand to
strengthen its position.
Dominion Post, 2 September 2002 Increasing numbers of
businesses in the Wellington region want Qantas Airlines to
keep its hands off Air New Zealand. The August BRC-Sherwin
Chan Walshe poll of more than 300 businesses, prepared for
the Dominion Post, shows 67 per cent of those questioned
were opposed to Qantas snapping up a stake in New Zealand’s
national carrier – up from 56% opposition in June. The
survey result comes as several leading investment houses and
business people put pressure on the Government, as Air New
Zealand’s controlling shareholder, to draw on New Zealand
investors to recapitalise the airline – rather than
undermining market competition by allowing Qantas on to the
share register. - Ho-Sang Mathew Loh New Zealand Herald 3 December
2002 Ralph Norris is the figurehead of a huge public
relations exercise to convince the public that a
near-monopoly and reduced competition in the airline
industry is good for the country. The business community
sees this as an extremely dangerous campaign, because Norris
must get Commerce Commission and the public to buy into this
story. They will only do this on the basis that the airline
industry, which will be dominated by a near monopoly, should
be more heavily regulated. - Brian
Gaynor New Zealand
Herald 26 November 2002 If the Air New Zealand-Qantas
deal seems to good to be true, that’s because it
is…. First there is the claim that it will be worth $450
million a year to the two airlines with no staff cuts, no
fare rises and no reduction in services…. Certainly,
co-ordinated marketing and a wider spread of flight times
(instead of two airlines operating almost identical
timetables) could well generate extra traffic. But the
suggestion that the two airlines can pick up an extra $450
million without reducing services or putting up fares is a
bit hard to swallow. Second, there is the constant
reference to this as a partnership of equals and not a
Qantas takeover. The sad truth is that the collapse of
Ansett Australia gave Qantas a big revenue boost and left a
wounded Air NZ convinced it needed a big brother in order to
survive. A 22.5% shareholding and two board seats would
usually be considered enough to call the shots (especially
as most of the other shares are held by a passive
investor). But in this case Qantas is further strengthened
by the fact that the advisory board running the joint
operation will have equal numbers from the two airlines and
any disagreements will go to the two chief executives. If
it comes to the crunch, who will have the most weight? Which
airline thinks it needs the other most? Whose interests will
come first? - Jim Eagles 1. Government is set to make
a Kiwi Share decision about the deal on 18 December. This
decision will be handed down after less than a month’s
consideration of the merits of the transaction. All the
signs are that key Ministers had made up their minds without
even going through the National Interest process. 2. There
is no reason for the Crown to not take a more consultative
and deliberative approach. Releasing a report on its
assessment of National Interest in December and allowing
interested parties to make submissions in, say, April would
not delay the final outcome by even one day (assuming that
the Government’s decision is the same under both
approaches). 3. The Kiwi Share criteria that Government
has set itself are absurd. They do not even include the
fundamental issue of whether the transaction will be likely
to result in higher or lower fares and better or worse air
services within NZ and between NZ and the world. 4. The
transaction put forward by AirNZ rests on a single precept.
AirNZ will lower fares to encourage demand. AirNZ will gain
great additional profitability (and NZ many more
international tourists) because more people will fly due to
low fares. Every single piece of evidence to hand points
to airlines setting price based on competition. Airlines do
not lower fares to encourage demand. If they do not have
enough passengers to fill their aircraft, they reduce
flights. 5. Over 2 million tourists visit NZ each year.
About half of these people fly on the Star Alliance. If
AirNZ leaves the Alliance it is very unlikely that those
people will follow AirNZ. Whatever passengers Qantas can
offer AirNZ it pales against the lost of feed from
Star. 6. AirNZ and Qantas do not have a ‘common vision’
despite the views of AirNZ’s current CEO and Chairman. AirNZ
was bailed out by the NZ Government because it recognized
that New Zealand would suffer great economic harm through
the loss of its national carrier. Qantas is the
quintessential Australian company. It is run for Australia.
Its CEO is an ex-Australian diplomat and the interlinkages
between Qantas and its Government are deep. NZ and Australia
are competitors in many areas, not least for the world’s
tourist dollar. The subjugation of AirNZ will see NZ take a
back seat to Australian interests. 7. The two aspects of
the deal (coordination of services and Qantas’ investment
into AirNZ) need not be linked. The Crown does not need to
allow Qantas to buy one share in AirNZ. THE
DEAL Financial 8. If the Government goes
ahead, AirNZ will issue a convertible note to Qantas for
$110m as soon as the Minister of Transport gives approval
(under his Kiwi Share rights). This is effectively 44.5
cents per AirNZ share. The Convertible Notes would give
Qantas 4.99% of AirNZ. Presumably if the deal ultimately
does not progress the Notes would be repaid by AirNZ. If the
deal progresses they convert into shares. 9. Once
regulatory and shareholder approval are given, Qantas will
acquire a further 10% for $245m (also 44.5 cents per AirNZ
share). Within 3 years of the second investment occurring
Qantas may acquire a further 7.5% for $183m (it is vague as
to whether Qantas could avoid ever making this
investment). 10. Also announced is an intention to
undertake a rights issue to raise $200m, but quite how fits
with the Qantas arrangement is uncertain. 11. AirNZ seems
likely to raise between $355m and $750m, with final
shareholdings of somewhere between Crown 64%, Qantas 22.5%,
Others 13.5%; and Crown 70.5%, Qantas 15%, Others
14.5%. Outcomes depend on whether Qantas buys 15% or 22.5%
and whether the rights issue progresses.
Operational 12. All New Zealand routes (and to and
from New Zealand) will be controlled by AirNZ. However,
overseeing this control will be an Advisory Group which will
include Qantas staff. 13. AirNZ will appoint one director
to Qantas. Qantas will appoint two directors to AirNZ. At
least one Qantas directors will be required to sign all
AirNZ board resolutions. AIRLINE IDENTIFIED
BENEFITS 14. Initially the claimed benefits of the
transaction were from an extra 50,000 international tourists
(an increase of 2.5% on the 2 million who visit now) and 200
jobs that would be created in NZ. 15. With the release of
the larger cost benefit report the shape and scale of
benefits has changed. Now the main feature of the benefits
is that the combined cost of the New Zealand operations of
Qantas and AirNZ will decline by $183 million per
annum. ‘PLAN B’ 16. AirNZ’s announcement said
that they had "considered two strategies, that of joining
with another airline and then competing against Qantas, or
working with Qantas and competing as a strong alliance. The
Qantas alliance offered the best outcomes, both from the
company's, and the national interest, perspective." No other
details are available. AirNZ seems not to have even
considered going it alone. GOVERNMENT’S DECISION
MAKING PROCESS 17. As set out at present the approval
process for the transaction starts on 18 December when
Government decides in principle whether it should exercise
its Kiwi Share rights. This will be followed by 6 months
of regulatory process, which will then be followed by the
shareholder process. Government’s two political moments of
choice are when the Kiwi Share rights are exercised and then
when it votes its shares. 18. In reality only the Kiwi
Share decision is important, because Michael Cullen has made
it very clear that he will vote the shares to support the
transaction once it has regulatory approval. WHAT IS
THE PUBLIC’S INTEREST 19. Before addressing the
criteria/process Government has set itself under the Kiwi
Share, it is worth noting what the public’s interest in the
outcome is, so the Kiwi Share criteria may be
benchmarked: (i) Consumer interests: — Lower airfares
and airfreight rates — More destinations — More frequent
flights — More convenient booking options (ii) Airline
interests: — Lower costs — Higher revenue per service
(via either higher loadings or prices) — New services
which are profitable (iii) Related industry interest: —
Purchase of NZ sourced goods and services by AirNZ — More
tourists (via lower fares, better services, more
advertising) (iv) Investor interests: — Greater
profitability. — Less risk. Not one of these points is
included in any obvious way in the Kiwi Share
criteria. THE KIWI SHARE RIGHTS 20. In AirNZ’s
constitution it states (clause 3.3): No person that owns or
operates an airline business, nor any other person where the
first-mentioned person and that other person are Associated
Persons, may hold or have an Interest in an Equity Security
unless the prior written consent of the Kiwi Shareholder has
been given to such holding or Interest, and any such consent
may be given on such terms and conditions as the Kiwi
Shareholder thinks fit. 21. The considerable leeway given
to the Minister should be noted. His decision depends on
what he ‘thinks fit’. The scope of the Minister of Transport
to act arbitrarily can be inferred from the last Minister’s
(Hon Mark Gosche) refusal to allow Virgin Blue to fly the
Tasman (24 November 2000). He provided no explanation of his
actions other than to note that Virgin was not an Australian
airline. 22. Cabinet minutes and the
Treasurer’s description of the criteria that Government will
address in reaching a decision on the 4.99% are set out
below. Salient points to note are: . It does not include
any consideration of competition or the efficiency of New
Zealand’s domestic or international air services. . It
does not include any consideration of the commercial logic
of the transaction. . Michael Cullen, as the shareholding
Minister, has said that he will make his decision on whether
the deal makes sense to the Crown as a major AirNZ
shareholder only once the deal has regulatory approval. .
There is no facility for public input or consultation. .
In theory Government has indicated that it will reach its
Kiwi Share decision within a month. . There is no reason
for the Kiwi Share decision to be made now or with any
particular urgency. As the final transaction is not expected
until the second half of 2003 there is plenty of time. .
There is no express linkage of the Kiwi Share criteria to
the reasons put forward when Government bailed out
AirNZ. 23. Minutes of the Cabinet Policy Committee 20
November 2002 1. noted that Qantas and Air New Zealand
have revealed to the market that the two airlines are in
discussions about a strategic partnership that includes
Qantas taking an equity stake in Air New Zealand; 2. noted
that should a proposal by the airlines be received within
the next week the Government will make an in-principle
decision on the ownership case, and a conditional Kiwi
Shareholder decision, in December 2002 [CAB Min (02)
31/23]; 3. noted that the Kiwi share is a device for
maintaining government control of aspects of the operation
of a publicly listed company, sufficient to ensure that
wider public interests are able to be protected; 4. noted
that a favourable Government decision in December 2002 will
mean Qantas will be advised that Kiwi Shareholder approval
has been given for the entire shareholding sought by Qantas,
subject to: 4.1 there being no material changes to the
commercial proposal, or significant new information being
revealed, during the subsequent competition and other
regulatory processes; 4.2 approval of the transaction by
Air New Zealand Shareholders, with respect to any portion of
shares requiring Shareholder approval; 5. noted that all
competition issues will be addressed by the Commerce
Commission and Australian Competition and Consumer
Commission; 6. agreed that the following considerations
should be used to assist the Government’s national interest
evaluation: 6.1 maintenance of effective control of Air
New Zealand by New Zealand nationals; 6.2 continuation of
Air New Zealand’s ability to exercise New Zealand’s existing
and future air rights; 6.3 preservation of the unique New
Zealand identity of Air New Zealand; 6.4 provision of
effective channels for international tourism and
travel; 6.5 provision of a durable domestic air services
network; and 6.6 preservation of New Zealand based
employment; 7. noted that the commercial proposal may
raise other issues of relevance to the national interest
evaluation which are not covered in paragraph 6 above; 8.
noted that in light of the considerations in paragraph 6
above, the information to be sought from the airlines,
without prejudice to further information that may be needed,
is: 8.1 any proposed amendments to the Air New Zealand
Constitution; 8.2 information on any proposed governance
and ownership changes; 8.3 expectations of branding,
marketing and promotion of Air New Zealand; 8.4
expectations of destination marketing of New Zealand; 8.5
any changes to the nature, distribution and quantum of Air
New Zealand’s activities globally; 8.6 international
routes, frequencies, and schedules; 8.7 alliance
implications, and expected costs and benefits, including
changes to expected passenger volumes, and seat
capacities; 8.8 Air New Zealand’s role and influence in
alliance and code sharing arrangements; 8.9 international
competition processes including US antitrust
timelines; 8.10 frequent flyer programmes’ status and
data; 8.11 structuring of holiday packages; 8.12
domestic routes, frequencies, and scheduling; 8.13
domestic partnership and international inter-line
arrangements; 8.14 any changes to the location and skill
mix of direct and indirect employment in New Zealand; 9.
noted that to ensure clarity and consistency of
communications and information flows to and from the
airlines, a single contact point (Treasury) within the
public sector on the national interest evaluation will be
established; 10. directed the Treasury to inform Qantas
and Air New Zealand of these considerations and request
information from the two airlines, as appropriate, to assist
the Government to make an informed decision; and 11. noted
that both the quality and timeliness of the information
provided by the airlines will have a significant influence
on whether the Government will be in a position make an
informed decision in December 2002 24. On 25 November 2002
Hon Dr Michael Cullen described how Government was the
manage its consideration of the AirNZ
proposal: The Ministers leading the Government’s
response are: Finance Minister Michael Cullen as holder of
the Crown’s 82 percent shareholding in Air New Zealand;
Transport Minister Paul Swain as holder of the Kiwi Share;
and Associate Finance Minister Trevor Mallard, who has been
delegated authority for regulatory issues by Dr
Cullen. "The Government intends to maintain majority
ownership and control of Air New Zealand for the foreseeable
future. The proposal is consistent with that
intention. However there are a number of other factors
which need to be considered," the Ministers said. The
Government will assess the proposal both from a principal
shareholder and from a Kiwi Shareholder perspective. As
principal shareholder it will have to be satisfied that the
proposal is in the best commercial interests of the company
going forward. As Kiwi Shareholder, it will have to assess
whether the proposal meets the national interest
considerations agreed by the Cabinet. These include: .
maintenance of effective control of Air NZ by New Zealand
nationals . continuation of Air New Zealand’s ability to
exercise New Zealand’s existing and future air rights .
preservation of the unique New Zealand identity of Air New
Zealand . provision of effective channels for
international tourism and travel . provision of a durable
domestic air services network, and . preservation of New
Zealand based employment. The two companies will be
expected to provide any information required to assist this
evaluation. The Government has undertaken to come back to
Air New Zealand on 18 December with conditional
decisions. The airlines will apply to the Commerce
Commission in New Zealand and to the Australian Competition
and Consumer Commission across the Tasman. Consideration
by these bodies is expected to take some months. "We have
made it clear that the proposal will have to satisfy all the
normal regulatory and competition criteria. There is no way
that we will intervene legislatively to remove or even to
lower any of those hurdles. Only after this process has been
completed will the Government be in a position to make a
final decision. We ask the media meanwhile to be aware
that until then, our legal advice is that we should avoid
publicly commenting on the detail of the proposal or what we
think of it. Because the Crown has an ownership interest in
Air New Zealand, we are covered by the insider trading laws
and must avoid any public statements which might be
construed as advising or encouraging the purchase or sale of
Air New Zealand shares," the Ministers said. from
Dr Michael Cullen’s website 25. The previous
National-lead Government policy was: "The Government
believes that while it is in the country’s best interests to
have a well-performed international airline headquartered in
New Zealand, the interests of New Zealand airlines should
not be permitted to override the country’s broader
interests." International Air Transport Policy of New
Zealand, issued by the Hon. Maurice Williamson, Minister
of Transport, February 1998. This may not be the best
policy, but it is at least recognising that what matters is
"country’s broader interests" rather than merely those of
AirNZ as perceived by a few Treasury officials. 26. To quote the Commission: The overriding
purpose of the Commerce Commission (‘the Commission’) is to
promote market efficiency by fostering: . healthy
competition amongst businesses; . informed choice by
consumers; and . sound economic regulation. This purpose
definition represents the Commission’s view of its various
statutory responsibilities. The purpose of the principal
Act, the Commerce Act, is to promote competition in markets
for the long term benefit of consumers within New
Zealand. 27. The Commerce Act is a set of generic
competition laws that prohibit anti-competitive market
behaviour and structure. The Act prohibits: . contracts or
arrangements by businesses that could lead to a substantial
lessening of competition; . the taking advantage of
substantial market power to deter or eliminate competition;
and . mergers or acquisitions that would substantially
lessen competition 28. Seemingly an arrangement between
AirNZ and Qantas that is mainly intended to work by reducing
competition would run foul of the Commission and the Act. In
practice the Commission’s criteria are not black and white.
Against the cost to consumers will be the various benefits
of the arrangement (e.g. lower costs). This form of
cost/benefit analysis is somewhat arcane and it is not
difficult to imagine small algebraic adjustments giving
unexpected outcomes. 29. AirNZ has indicated that one of
the merits of the transaction is that it will enable the
airline to attract more passengers, as well as some
additional engineering work. They have indicated: .
AirNZ has estimated its synergy benefits from the deal will
amount to $200m p.a. after three years. . Qantas have
estimated total synergies of between NZ$330m and NZ$450m
p.a. after three years. The benefits will be adjusted
between the two airlines in accordance with an agreed
mechanism with reference to capacity and route
profitability. . Almost all synergy benefits are revenue
driven (i.e. not from cost reductions) To be sceptical,
AirNZ did not achieve anything like this benefit from its
takeover of Ansett. Previously when AirNZ and Qantas stopped
code sharing, when Qantas sold its shareholding to
Singapore, there was negligible revenue impact. 30.
AirNZ has set out the following Q&A. We have added
alternative comments below each Air New Zealand
answer. How will you ensure consumers continue to be
offered competitively priced airfares? AIR NEW
ZEALAND’S ANSWER: Our fare structures are based on the
need to stimulate the market through affordable fares,
higher loads and better aircraft utilisation. Our commitment
to this approach is shown through initiatives such as
Express Class and the enhanced trans-Tasman services for
Freedom Air. Express Class and Freedom Air will continue and
the current airfare structure is here to stay. DEBATE
AIR NEW ZEALAND’S RESPONSE: Airline pricing is
determined by the ability to set fares rather than
altruism. Between March 1990 and June 2002 the cost of
domestic air travel rose 95%. The cost of international air
travel rose 2% (Dept of Statistics). The international
market has been competitive. The domestic market was not.
Ansett NZ was a lame duck and prices were set by AirNZ.
Competition is the only factor which stimulates lower
fares. Can you assure consumers that fares will not go
up? AIR NEW ZEALAND’S ANSWER: Air New Zealand
can confirm that its Express Class and Freedom Air fare
structure will remain competitive. Fares will continue to
be market competitive. Express Class and Freedom Air’s
expansion are prime examples. DEBATE AIR NEW
ZEALAND’S RESPONSE: “The New Zealand domestic passenger
market is fully deregulated, and barriers to entry are
low. Successful competitive entry is available at current
fare levels, and thus imposes a real constraint on pricing
by incumbent airlines.” [para 6 Air New Zealand submission
to the Commerce Commission on its application to buy Ansett
Australia 27 February 1996] Between December 1995 and June
2002 the cost of domestic air travel in New Zealand rose
44.8%. The cost of international air travel fell
3.6%. Fares will rise unless there is competition.
Why has Air New Zealand chosen to go with Qantas,
particularly given the fact that many New Zealanders have
expressed their lack of support for the move? AIR
NEW ZEALAND’S ANSWER: This alliance is a bold move that
is good for the country as well as Air New Zealand. It will
create wealth and employment. Now that we have at last been
able to tell New Zealanders the terms of the agreement they
will be able to appreciate that this was too good an
opportunity to miss. It will: – Allow continuation of
affordable, convenient travel for New Zealanders using their
own national airline carrier – Provide economic benefits
for New Zealand of close to NZ $1 billion over five
years – Ensure Air New Zealand has a successful future as
a global, New Zealand owned and managed company Leave us
in charge of our own destiny DEBATE AIR NEW ZEALAND’S
RESPONSE: “Qantas… has done everything in its power to
prevent a transaction that is in Air NZ’s best interest and
clearly in New Zealand national interest” “This sort of
hostile action by Qantas against Air NZ’s interests and the
national interests of New Zealand is nothing new” [Air
New Zealand counsel describing Qantas’ position on Air New
Zealand’s expansion into Australia to the Commerce
Commission in Air New Zealand’s application to buy Ansett
Australia 27 February 1996] How much control will
Qantas have over Air New Zealand? AIR NEW
ZEALAND’S ANSWER: The basis of the strategic alliance
is the absolute commitment of both parties to Air New
Zealand being New Zealand controlled, and managed
autonomously under the oversight and direction of its own
Board. Air New Zealand will control its own destiny and
retain its identity as New Zealand’s airline. Some 70% of
shareholding will remain in New Zealand hands and the Kiwi
Share structure will remain. The commercial management of
the combined operations of Air New Zealand and Qantas in New
Zealand and across the Tasman will be Air New Zealand’s
responsibility. DEBATE AIR NEW ZEALAND’S RESPONSE:
AirNZ may control both airlines’ NZ domestic and
international operations, but this control is to be overseen
by an “Advisory Group” which will include Qantas
staff. Qantas’ shareholding will be only 2.5% below the
level necessary to vote down any special resolution. It will
have an effective veto over any major transaction AirNZ may
subsequently wish to undertake. Will Qantas have
boardroom control? AIR NEW ZEALAND’S ANSWER:
Qantas will have only two out of nine board positions, 22%
is well short of control. At one time British Airways had
as much as a 25% shareholding in Qantas. That did not
constitute control of Qantas. DEBATE AIR NEW ZEALAND’S
RESPONSE: Qantas will appoint two directors to AirNZ
and at least one director will be required to sign all AirNZ
board resolutions. What does the alliance mean for the
travelling public? AIR NEW ZEALAND’S ANSWER:
An even stronger, growing Air New Zealand. This translates
into: – The retention of affordable fares for Express
Class and Freedom Air – The extension of Airpoints, in
time, to Qantas services. – Greater options and
flexibility in the number of flights through code sharing
with one of the world’s leading airlines. Choice will be
increased threefold. – Code share access to routes from
New Zealand, Sydney to Singapore, London and Europe
DEBATE AIR NEW ZEALAND’S RESPONSE: The economic
rationale for the transaction is to increase aircraft
utilisation. There are two ways for this to
happen. Fares can be lowered to encourage patronage or
capacity can be reduced. There is no protection against
the latter option. It is the much more likely consequence of
the deal. What exactly has happened between Air New
Zealand and Qantas? AIR NEW ZEALAND’S ANSWER:
We have formed a new regional airline grouping in this part
of the world. Our focus will be on co-operating so that we
do what is best for New Zealand and Australia, our
respective customers and for Air New Zealand and
Qantas. We are co-operating so we have the size and
strength to take on the rest of the world’s airlines.
DEBATE AIR NEW ZEALAND’S RESPONSE: Size does not
equate with strength in the airline industry. Large badly
run airlines are going bust. Small well-run airlines are
prospering. “Pure economies of firm size are not important
in the airline industry, since airlines with a few aircraft
can operate efficiently.” [Air New Zealand expert
witness Dr P Forsyth submission to the Commerce Commission
on Air New Zealand’s application to buy Ansett Australia 27
February 1996] How will the alliance
operate? AIR NEW ZEALAND’S ANSWER: Two of the
more important operational aspects are Air New Zealand and
Qantas continuing to operate their own services in New
Zealand and trans-Tasman, but commercial management of
scheduling, pricing, routes and marketing will be the
responsibility of Air New Zealand We will co-operate to
develop new routes internationally and improve scheduling
and frequency DEBATE AIR NEW ZEALAND’S RESPONSE:
(As above) AirNZ may control both airlines’ NZ domestic and
international operations, but this control is to be overseen
by an “Advisory Group” which will include Qantas
staff. Qantas will appoint two directors to AirNZ and at
least one director will be required to sign all AirNZ board
resolutions. Why didn’t Air New Zealand get New
Zealanders to invest in the company rather than selling out
to Qantas? AIR NEW ZEALAND’S ANSWER:
Continuing as a stand alone airline was an attractive
notion. The stark reality of the international aviation
market is however that it would be a high risk path for Air
New Zealand. This alliance is not about the short or
medium term. Our vision is on the long term and we are
determined to be a New Zealand owned, globally operating and
sustainable airline of which every New Zealander will be
proud. This is a strategic vision which capital alone could
not fulfil DEBATE AIR NEW ZEALAND’S RESPONSE:
There is no reason why the two aspects of the transaction
(the operational agreement and the shareholding) need be
linked. AirNZ and Qantas could have seen if a regulator
would approve the operational links, while AirNZ could have
raised its capital requirements from the NZ capital
market. This alliance is dependent on Commerce
Commission and Government approval. What happens to Air New
Zealand if they do not give that approval? AIR
NEW ZEALAND’S ANSWER: We believe that when the
regulatory authorities examine the alliance in detail and
the benefits that will accrue to the respective countries
and airlines, we will get agreement to proceed. We have no
doubt shareholders and the majority of New Zealanders will
see the very real wealth creation benefits that will come
from the alliance DEBATE AIR NEW ZEALAND’S RESPONSE:
The transaction is blatantly against the intention of
the Commerce Act. It may of course get through, but it would
be nice to know why AirNZ adopted an approach which means
its whole resource is focused only such a problematic deal.
If it fails what will Michael Cullen think of John Palmer?
What should the electorate think of Michael Cullen?
What is Air New Zealand giving Qantas in return?
AIR NEW ZEALAND’S ANSWER: We share a common vision of
what is best for this region and the common realisation that
we need to work together to compete against existing and
future competition that comes from other carriers. Qantas
also clearly value our outstanding reputation for service,
safety and technical excellence. DEBATE AIR NEW
ZEALAND’S RESPONSE: As noted “This sort of hostile
action by Qantas against Air NZ’s interests and the national
interests of New Zealand is nothing new”. Qantas and AirNZ
have never had a common vision until now. Why has it taken
John Palmer (kiwifruit grower) and Ralph Norris (ex
Australian bank employee) to find “common vision”?
What happens to Airpoints and existing alliances?
AIR NEW ZEALAND’S ANSWER: The benefits of Air New
Zealand Airpoints members are fully protected. In time it
is planned to extend Airpoints to Qantas services. Air New
Zealand is a member of the Star Alliance. No decision will
be made in the near future and it should not be assumed that
Air New Zealand will leave the Star Alliance. DEBATE
AIR NEW ZEALAND’S RESPONSE: AirNZ cannot remain a
member of Star Alliance if this transaction occurs, unless
Qantas leaves the One World Alliance. Will Qantas
still operate domestically in New Zealand?? AIR
NEW ZEALAND’S ANSWER: Qantas will operate on domestic
New Zealand routes and Qantas will be responsible for flight
operations matters such as air crew, provision and
maintenance of aircraft, and passenger services.
DEBATE AIR NEW ZEALAND’S RESPONSE: At present Qantas
operates NZ domestic services using Polynesian Airways
aircraft. If the transaction occurs Qantas will use AirNZ
aircraft.
Introduction: PULL UP!
TEN GOOD REASONS FOR
NOT RUSHING INTO THE QANTAS PROPOSAL
WHAT OTHERS ARE
SAYING
THE DECEMBER 18 KIWI
SHARE DECISION
GOVERNMENT’S EXERCISE OF ITS KIWI SHARE
RIGHTS
The Government today received a
proposal for Air New Zealand to enter a strategic alliance
with Qantas under which Qantas would take a minority stake
in Air New Zealand.
IS THERE AN
ALTERNATIVE POLICY?
WHAT IS THE ROLE OF
THE COMMERCE COMMISSION AND COMMERCE ACT?
Question and
Answer: AIR NEW ZEALAND’S VIEWS
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