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Statement by John Palmer, Chairman, Air New Zealand Limited regarding the Air New Zealand and Qantas strategic alliance

Search ASIA Travel Tips .com 25 November 2002

Statement made by John Palmer, Chairman, Air New Zealand Limited regarding the Air New Zealand and Qantas strategic alliance:

The Board and Management of Air New Zealand have unanimously supported the entry by the airline into a major strategic alliance with Qantas.

Earlier today, the Boards of the two companies concluded a far reaching agreement which will secure long-term opportunities for both parties, bringing substantial economic benefits to the companies and public benefits to New Zealand and Australia.

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.

Under the alliance all the airline activities of Air New Zealand will be combined with those parts of Qantas which operate to, from or within New Zealand, under the commercial management of Air New Zealand.

This establishment of a major airline grouping in the region provides both parties with a sound base from which to strengthen their global presence in overseas markets, develop new routes and improve scheduling and frequency of services. These markets account for over three quarters of Air New Zealand's international passengers who travel to this country as tourists and business visitors.

The strategic alliance is a bold response to the challenges both airlines face. The agreement emerged from a commonly held view of the future which sustained the lengthy discussions between the two parties initiated some 12 months ago.

Air New Zealand 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.

It makes commercial sense for two airlines with a common vision, based in this region, to work together. It ensures each airline remains successful and retains the potential to operate globally and remain its own country's national airline. Importantly, it promotes a sustainable future for Air New Zealand and builds our capability to develop new routes.

The name Air New Zealand will remain and the Koru symbol will continue to fly proudly to major international destinations.

To have reached an understanding with Qantas based on the strengths we can bring to the alliance demonstrates the progress Air New Zealand has made in 12 short months. Qantas recognises the additional value Air New Zealand has created through the strategic introduction of initiatives such as Express Class.

Independent economic analysis has identified benefits to New Zealand from the alliance approaching $1 billion over five years arising from areas including:-

- Generation of up to 50,000 additional tourists to New Zealand each year

- Additional and more effective promotion of New Zealand in overseas markets

- Enhancement of air-freight services to and from New Zealand

- Creation of more than 200 additional highly skilled jobs within Air New Zealand

It represents an excellent outcome for the country, for the travelling public, for New Zealand's exporters and business people, for all our shareholders and for all of the staff of our airline.

The alliance will be supported by an injection of approximately up to $550 million in new capital from Qantas who will subscribe for sufficient Air New Zealand shares equating to up to 22.5% of the Company's enlarged capital. An initial placement to Qantas of 4.99% is proposed in the form of Convertible Notes. The remaining shares are to be issued first upon approval of the transactions by Air New Zealand's shareholders, increasing Qantas' interest to 15% (including the Convertible Notes which would convert to shares at that time) and the balance of 7.5% either on the same date or, at Qantas' election, three years from that date. The issue of the Convertible Notes and the shares will require, and are subject to approval by, the Kiwi Shareholder.

An application by Qantas is being lodged today with the Minister of Transport, Hon Paul Swain, for consent to own shares in Air New Zealand.

In conjunction with this new capital, the Board currently plans to offer all shareholders an opportunity to participate in a rights issue next year to raise approximately a further $200 million. No final decision has been made and an announcement will be made about this issue early in 2003.

The co-ordination between the companies will be further strengthened by reciprocal Board representation. One director of Air New Zealand will be invited to join the Qantas Board and, reflecting their equity interest, two directors will be nominated by Qantas to join the Air New Zealand Board.

Once the strategic alliance is operational Air New Zealand will manage the commercial activities of operations within the alliance. That is the scheduling, pricing, routes and marketing of all Air New Zealand flights and all those Qantas flights which operate to, from or within New Zealand. Each airline will remain fully responsible for its own flight operations including matters such as aircrew, provision and maintenance of aircraft, and passenger services.

In addition we will be exploring with Qantas code share opportunities across their network.

The combined operations will be supported by a small advisory group made up of three representatives from each airline.

Air New Zealand sees for itself a future in which it:

- Takes New Zealand business and its trade and produce to world markets, and New Zealand travellers to international destinations

- Substantially increases the extent and effectiveness of the marketing of New Zealand as a tourism destination, bringing increasing numbers of tourists and visitors direct to New Zealand

- Provides domestic travellers with a world class and affordable service

- Retains its autonomy and identity

- Protects the commercial integrity of its Express Class, trans Tasman and long-haul services, and critical customer benefits such as Airpoints

- Provides a robust basis for growth.

The vision of a strong Australasian group building international influence in key global markets is critical for both airlines, which together account for less than 4% of the world's commercial aviation.

We believe that regulators, including the New Zealand Commerce Commission and Australian Competition and Consumer Commission, will see the merits of this strategic alliance.

The global airline industry has recognised it needs to change from traditional, stand alone national carriers competing against every other airline. The industry will continue to evolve as airlines seek ways to reverse the large financial losses many have experienced and many airlines are exploring opportunities to establish strategic relationships.

The alliance between Air New Zealand and Qantas was concluded following nearly a year of consideration and testing of a number of alternatives. None provided the benefits that the Qantas alliance creates.

A stand alone Air New Zealand is possible in the short-term but to think in the long-term we can be globally competitive with a New Zealand home market of four million people is unrealistic.

The people of Air New Zealand have demonstrated considerable resilience, determination and innovation in dramatically turning around the airline and rapidly rebuilding on the recapitalisation in February this year.

Our strategic shift in the New Zealand domestic market to Express Class has been a resounding success with the travelling public.

We now want to build on that spirit of innovation in meeting our customers' needs in international markets. That will require a strong market and financial base as we confront the enormous competitive resources of carriers based in far larger markets and the natural competitive advantages of recently established "value based" airlines which do not suffer the high cost legacy of most traditional carriers.

This alliance is a one time opportunity for New Zealand and Australia to co-ordinate our major airline resources and create a competitive, international airline operation with the interests of this region at its heart.

We anticipate a Kiwi Shareholder decision on Qantas taking up a 4.99% shareholding before year end.

The other regulatory and shareholder approvals necessary to proceed are expected to be resolved in the first half of 2003, at which stage the alliance will come into being.

Until then, for Air New Zealand it will remain business as usual.

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