Air New Zealand - Time for 'Plan C'? 

The Centre for Asia Pacific Aviation has published its latest edition of Aviation Analyst-Asia Pacific, including a feature report on Air New Zealand.

“Air New Zealand’s new billion dollar order sends a highly positive signal to the market – namely that the New Zealand government, as the major shareholder, is prepared to back its investment in Air New Zealand. If not through thick and thin, at least much more solidly than has previously been believed” said Peter Harbison, Managing Director, Centre for Asia Pacific Aviation.

According to the report, the “constant shocks” of the past few years have reinforced one key message for the world’s airlines – they cannot afford to relax. Airlines must continuously innovate and reinvent themselves. Few airlines have heeded this message more than Air New Zealand”.

The collapse of its subsidiary, Ansett Australia, almost simultaneously with the September 11, 2001 terrorist attacks on the US brought Air New Zealand itself to the brink of collapse. The carrier was saved by a NZD885 million bailout from the New Zealand Government, but a new direction was urgently needed.

It developed a new, “lower cost” model (but stopped short of a “pure” low cost operation) and responded positively to Qantas’ proposal to forge an alliance. The alliance is yet to be approved, with an appeal before Australia’s Competition Tribunal just wrapping up and hearings for another due to commence in the New Zealand High Court in July. But it is unlikely that anything more than a heavily compromised alliance will be permitted. If any alliance does emerge it will be from post-appeal negotiations between the airlines, designed to avoid the need for, or easily pass, any regulatory approval.

A year ago, this would have looked very bad for Air New Zealand. But, if the Centre for Asia Pacific Aviation's interpretation of the recent large order by the national airline is correct, Air New Zealand has a potentially solid future ahead of it. Even if Mr Norris sees no “Plan B”, new scenarios may be opening up.

According to the Centre’s Managing Director, Peter Harbison, Air New Zealand’s recent long haul aircraft order “marks a major milestone for Air New Zealand, on a road with many twists and turns”.

“Air New Zealand is a government-owned, listed airline. Consequently, basic financial analysis of the airline is only of secondary importance to the role of the strategic goals of the government”, explained Mr Harbison.

An aircraft order of this magnitude should be interpreted as a matter of national policy. That policy must be that the government supports the need for a home grown long haul operator to deliver its national transportation needs. This would be consistent with the government’s initial intervention in 2001 to renationalise its flag carrier, to preserve its tourism connections.

The government has been unexpectedly level-headed in entrusting management of the airline to its appointed managers, without undue interference. CEO Ralph Norris has been largely left to get on with the job. To date, he has delivered, with a solid restructure of the airline. 

But it is hard to imagine that such a fundamental issue as entrenching a long haul role for Air New Zealand could be decided without specific Cabinet approval. At the same time, the government shareholder must be alert to the need to react if the market turns. 

The airline market is intrinsically a high risk venture. And, as has been graphically illustrated over the past few years, the external environment can also be treacherous. The constant shock syndrome is a reality. These factors, including Air New Zealand’s long term need for some form of partnership, have helped keep its share price bumping along the bottom for the past few months.

In terms of risk management, the major shareholder will also be aware of the need to react quickly if the good news turns to bad. Here, the strategy appears to be well constructed.

The first, reasonably predictable, “shock” will be the Australian Competition Tribunal’s rejection of the Qantas alliance, although this is already pretty well built into the share price. But if competition intensifies on its key routes – and Qantas’ ability (and, perhaps, its will) to increase the heat on the Tasman, or domestically in New Zealand, should not be underestimated – there need to be avenues available for retreat. 

By preserving several options, Air New Zealand makes itself a more difficult target.

As a lower cost operation, with currently a very strong hold on its home market, the carrier is steadily entrenching a position where it can survive serious storms. Ultimately, the core domestic, South Pacific and Tasman routes are where Air New Zealand will retreat, if pressed. So cost reduction remains a cornerstone objective.

There may, as Ralph Norris has said, be “no Plan B” (if the Qantas alliance does not get up), but “Plan C” is rapidly materialising.

Consequently, if this interpretation is correct, this new billion dollar order sends a highly positive signal to the market – namely that the New Zealand government, as the major shareholder, is prepared to back its investment in Air New Zealand. If not through thick and thin, at least much more solidly than has previously been believed.

Air New Zealand’s next step is to find a partner, a search which will begin in earnest if the Qantas alliance falls. But, with this apparent promise of government solidarity, the path may be more promising than previously expected.

See: Air New Zealand to acquire eight new Boeing 777-200 ER and two Boeing 7E7 aircraft