Tuesday, October 14, 2008

Cullen leaves Air NZ vulnerable to bloodbath

According to Stuff Qantas, through Jetstar, is about to wage war on the NZ government state owned airline. The statement "Jetstar also plans to use the two centres as a hub for direct flights to the United States and Asia using the new Boeing 787 Dreamliners." (meaning Auckland and Christchurch) will send shivers down the spines of Air NZ's minority private shareholders.

Who should be surprised - it is exactly the consequence of Michael Cullen's decision to not allow Air NZ to be bought by Singapore Airlines in 2002.

Many will have forgotten how Michael Cullen effectively vetoed by indecision Singapore Airlines increasing its stake in (the 100% privately owned) Air New Zealand/Ansett from 25% to 49% in 2002, despite the Air NZ board voting unanimously for the deal, despite Air NZ desperately needing the capital to re-equip its fleet and Ansett's fleet, despite the deal being recommended by officials (who saw it as critical to enable the airline to grow and have a strong strategic future). Dr Cullen did it because Qantas made a rogue bid to invest in Air NZ, which Air NZ's then shareholders opposed, which would have kneecapped its strongest competitor to enable them to merge. A concept Qantas's cunning management sold to the Labour Government, with the undercurrent that it was better for Kiwis and Aussies to stick together and face the world as one (with an enormous monopoly airline), than for NZ to sell out to... others.

Dr Cullen wanted to consider both the Qantas and Singapore Airlines bids, whilst in the meantime Air NZ bled red ink, lacking capital, desperately needing to restructure Ansett - until finally, following September 11 2001, the airline was to fall over, and Dr Cullen renationalised it, on condition that Ansett was left to fail. The rest is history.

Qantas saw its longest standing competitor on domestic and some international routes fall over, granting it complete dominance over the lucrative domestic business market in Australia, it saw its growing international competitor - Ansett/Air NZ/Singapore Airlines - pull out of Australia. Qantas faced only a new and budget market driven Virgin Blue, and saw competition reduce on the lucrative USA and Japan routes.

Qantas owes Dr Cullen a great deal for letting its competitor fail - because Dr Cullen would rather own the airline himself, than let owners of one of the world's best and most successful airlines own it.

So after all that it tried again, and Dr Cullen supported Qantas buying the rump Air NZ - despite competition authorities saying it would be disastrous for the state owned carrier to be owned partly by its biggest competitor.

Thankfully that brought it all to an end. Air NZ restructured, became a profitable carrier, Singapore Airlines bailed out after Dr Cullen severely diluted its ownership, and as a result felt cheated by the Labour government. Air NZ is a shadow of its former self in terms of size, although it has upgraded its fleet and products to compete. Its long haul international network largely comprises routes it monopolises or dominates, with only traffic to Europe and Hong Kong facing serious competition. It does it very best, its efforts of late to install personal video screens on 767s and Airbus A320s for all Trans Tasman flights is a clever competitive move, as it providing more legroom for frequent flyers on its domestic 737s.

However it lacks capital and lack a strategic investor from a large foreign airline.

Dr Cullen would say it should have been Qantas, ignoring that this would decimate competition on domestic, Trans Tasman routes and from Auckland to LA. If the airline continues to be majority state owned with no new capital, it will face all of its lucrative markets under pressure from Qantas-Jetstar. It is already facing a significant decline in UK, Japan and US origin tourism.

Jetstar has a huge advantage over Qantas, in that it has a lower cost base, because the employment contracts were signed outside the legendary generous Qantas pay structure. Jetstar has the economies of scale of the Qantas group, and will aim at the primarily low yield NZ tourist market (the business market will remain with Air NZ, but this is rather small beyond domestic routes, USA and London routes).

So well done Dr Cullen - your own xenophobic preference for Australian capitalists over Singaporean capitalists, your bizarre refusal to give a damn about competition in the aviation industry, and your desire to own an airline come what may, has left Air NZ - which to its credit has improved its game enormously in recent years - vulnerable to the Qantas group waging a war of attrition against it.

Singapore Airlines wont buy it while Labour is in power, for obvious reasons, and indeed there will be little interest in the airline unless it has a presence in the Australian domestic market - already crowded with three airlines (Qantas-Jetstar, Virgin Blue and Tiger Airways). The choices are simple:
- Seek a substantial foreign investor (preferably a Lufthansa, Singapore Airlines, um that's about it in this environment);
- Pour taxpayers' money into financing a competitive battle;
- Let the airline withdraw from markets that are decimated by Qantas/Jetstar.

Well done Mr economic genius.

1 comment:

Canterbury Atheists said...

Air New Zealand has a history of grandiose ambitions and continual attempts to ‘box above its’ weight’. No better example was their ill-fated venture into Australia purchasing Ansett. At one point, if I remember correctly, Ansett was bleeding 1.5 million bucks a day, and in desperation Air New Zealand once offered the airline it to Qantas for $1.00. In 2001 Air New Zealand declared a loss of $ 1.4 billion and the Labour Government bailed them out to the tune of $900 million (odd), when the fairest thing for the tax-payer would have been to let them fail and be picked-up by an overseas competitor. Air New Zealand has always been a master of its own destiny, caring little about the N.Z traveling public and more about its image and self-preservation. You may not remember the dour monopolistic days of NAC but I do. Like all good quasi-government departments Air New Zealand knows they can always go running cap in hand to the tax-payer for a top-up any-time they face open competition , so normal ‘supply demand’ business models does not apply. The sooner an overseas airline takes them over the better.