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Air NZ Achieves Full Ownership Of Ansett Holdings

PRESS RELEASE
AIR NEW ZEALAND

18 February, 2000

Air New Zealand Limited announced today that it will achieve full ownership of Ansett Holdings under an agreement with News Corporation Limited (News) to acquire News' 50% interest in the Australian airline group.

The agreement is the first step towards the creation of a new, globally competitive Australasian airline group which will rank among the world's top 20 airlines in terms of both revenue and passenger carrying capacity , according to the Chairman of Air New Zealand, Sir Selwyn Cushing.

"The new airline group formed through this transaction will be able to offer consumers a wider range of more competitive air services, products and benefits by harnessing the complementary strengths of Ansett and Air New Zealand airline operations and integrating their ownership, assets and resources," he said.

"The new group will continue to operate the airlines of Ansett Australia and Air New Zealand under their own brands in their own markets, but performance improvements will be accelerated as a result of :

oAccess to the expanded asset base, cashflows, borrowing and purchasing power of the combined group,oThe wider range of aircraft deployment options available from the combined group's fleet,oA stronger combined group presence in our increasingly competitive home markets;oImmediate expansion of the range of linked international service options available from Ansett Australia;oThe group's increased attractiveness as an Australasian airline system operator in international and global airline alliances; andoThe group's improved ability to contribute to the stimulation of valuable inbound tourism traffic into Australia, New Zealand and the south-west Pacific," Sir Selwyn said.

News' Chairman Lachlan Murdoch said: "News is pleased to have reached this agreement, particularly as it will enable us to retain an exposure to the merged Ansett/Air New Zealand Group. The Australasian group concept has compelling logic, and News expects an integrated Ansett/Air New Zealand group to be an increasingly important aviation force in this part of the world."

Transaction Details

Sir Selwyn said: "The price and payment structure agreed between the parties reflect the value of integration and synergy benefits available within the two airline groups. Other factors taken into account include progress made to date with the implementation of Ansett's Business Recovery Programme, and generally improved inbound traffic and economic conditions in Australasia." On receipt of necessary shareholder and regulatory consents, Air New Zealand will make an immediate cash payment to News of A$580 million (NZ$744 million).

Two to four years after the first payment (timing being at either News' or Air New Zealand's election), Air New Zealand will make a second payment by issuing Air New Zealand shares to News equal to 10.5% of the shares on issue at the time of completion, adjusted to take into account subsequent changes to the capital structure. In certain circumstances, News or Air New Zealand may elect for this payment to be made in cash equivalent to 10.5% of the average market capitalisation of Air New Zealand on the New Zealand Stock Exchange, averaged over a 90 day period.

If the second payment has not been triggered within the two to four year period, or if Air New Zealand has triggered the payment within the period and the settlement is to be made in equity, the number of shares issued will be adjusted to reflect an effective issue discount of 5%. At current market values, the second payment has a value in the order of A$100 million.

Sir Selwyn said: "The pricing formula provides Air New Zealand and News with flexibility in deciding the method by which the second payment to News will be made. It also scales the second payment to the market value of the integrated business at the relevant time. Air New Zealand's Board is confident that the total consideration is pitched at a level that will allow the enlarged Group to meet all shareholders' expectations for an investment of this magnitude."

The transaction creates a combined business group with access to:

oGross Assets of more than A$6,690 million (NZ$8,577 million) oAnnual revenues of more than A$5,800 million (NZ$7,446 million) oMore than 24,000 direct employees, with employment related expenditures in Australia and New Zealand of approximately A$1,655 million (NZ$2,122 million) per annum. oRoute networks with direct air operations to more than 100 airports; and · 110 passenger jet aircraft, plus significant fleets of turbo-prop regional aircraft.

The transaction does not include News' separate 100% ownership of Ansett New Zealand Limited, and News' interest in Ansett Worldwide Aviation Services (AWAS), an aircraft leasing business jointly owned by News and TNT Limited. The transaction does not change the majority ownership (51%) of Ansett International Limited by Australian investors.

The transaction is conditional on a number of issues, the main ones being:

oGovernment regulatory consents; and oApproval by Air New Zealand's shareholders.

Air New Zealand's 47% shareholder Brierley Investments Limited has indicated that it will support the shareholder resolutions.

As a consequence of the proposed Ansett acquisition, a special meeting of the shareholders of Air New Zealand will be convened to consider amendments to the company's constitution. It is intended a proposal will be considered in regard to an expanded Board structure. It is then intended to invite Mr Rod Eddington, the current Executive Chairman of Ansett Holdings Limited, to join this expanded Board. Mr James McCrea will continue to be Group Chief Executive Officer and Managing Director.

Strategic Objectives

Air New Zealand's Managing Director Jim McCrea said : "The transaction announced today realises our strategic vision of a truly Australasian airline system. It will reinforce the ability of Ansett and Air New Zealand to provide premium airline services, both domestically and internationally.

"Both airlines have won individual acclaim in their own markets and in their own right. Acting as one under an airline-focused owner, they will be able to make an even stronger product offering," he said.

"Ansett and Air New Zealand will continue to operate under their own brands in each of their home markets as members of the new airline group. While the group wishes to capitalise on the value of these two strong brands, it will also be committed to offering a consistent quality standard to consumers across Ansett and Air New Zealand. That standard will be competitive in price, service and value with the best that's available in the market.

"As a function of the transaction, Ansett International will benefit from the strengthening of its 49% shareholder Ansett Holdings and from a closer working relationship with Air New Zealand International. Both these factors will contribute to the accelerated development of Ansett International.

"We are not creating this new airline system to be regarded as number two. We aspire to offer the very best standards, which will bring benefits to Australian and New Zealand consumers and all our other stakeholders," Mr McCrea said.

Ansett's Executive Chairman Rod Eddington said: "The world-wide dynamics of aviation industry regulation and restructuring mean the business integration made possible by this transaction is in the best interests of Ansett and Air New Zealand.

"Over the last three years, Ansett and Air New Zealand have worked as partners to improve their individual competitiveness by progressive alignment of their operations. Recent increases in fuel prices, the emergence of new and potential competition both internationally and in our home markets, and the growing international interest in travel to our region generated by major events such as the Sydney Olympics all add urgency to task of strengthening our airlines.

"The time has now come to accelerate the strengthening of Ansett and Air New Zealand by moving from progressive alignment to swift integration of our airline resources," he said. "Progress towards this objective is more readily attained under a unified structure with a single strategic purpose."

Business Reorganisation

Work will start immediately on detailed plans to develop the new Australasian airline system using the complementary strengths of both Ansett and Air New Zealand airline operations in their respective home markets.

Ansett will continue to operate under its own airline brands, and its head office will remain in Melbourne.

Air New Zealand's business units and airlines will also operate under their own brands.

The two airlines will report via the appropriate expanded Board structure.

Some critical functions such as network and fleet planning, schedule co-ordination, revenue management, strategic planning and corporate policy will be co-ordinated across Ansett and Air New Zealand operations.

Booz.Allen & Hamilton have worked with Air New Zealand to identify synergy and integration benefits over the next one to three years. These benefits include modern procurement processes, rationalisation of inventory, development of common information technology platforms and systems, and efficiencies in network and schedule development.

Integration management teams comprising senior managers from Ansett and Air New Zealand will be formed to realise market synergies and opportunities for optimising revenue and cost benefits across the combined group's operations With assistance from McKinsey & Company, the integration management teams will build detailed plans to integrate business activities, eliminate duplication and accelerate existing business improvement programmes within and between the airlines of Ansett and Air New Zealand.

Fleet requirements will now be reviewed across the combined group's networks to achieve the most efficient deployment of assets taking into account market growth and competitive pressures. Assessments made to date identify short-term issues that need to be addressed. However, the major issues of fleet planning for the combined group are medium term and strategic in nature. Both immediate and medium term fleet investment requirements are within the financial resources of the combined group.

Mr McCrea said: "There is a great deal of work to be done to realise the synergies that will flow from the integration of the two airlines. However, early benefit assessments indicate that upwards of an additional A$200 million EBIT (NZ$256 million) per annum is capable of being realised over a one to three year time-frame. This projected rate of payback provides strong justification for integration, quite apart from the strategic growth prospects evolving from the transaction."

Transaction Funding

On settlement, Air New Zealand will make a first payment of A$580million (NZ$744 million) to News comprising:

oA$230 million (NZ$295 million) from Air New Zealand cash and committed general credit lines; and oA$350 million (NZ$449 million) from committed special transaction credit lines. Within six months of the first settlement payment, Air New Zealand proposes to raise additional equity capital in the range of NZ$250 million to NZ$290 million by way of an underwritten rights issue.

Air New Zealand is in a sound position to fund the transaction. The company has virtually completed its own fleet re-equipment and development programme, reducing capital expenditure needs for the next five years to unusually low levels. Operational cashflows will be strengthened this year through operating one of the world's youngest fleets - average age of 5.9 years at June 2000 - as a result of recent fleet renewal.

The company has a solid balance sheet with a gearing ratio (net interest bearing debt/ equity plus net interest bearing debt) comfortably below global airline averages. Air New Zealand expects to retain an investment grade credit rating through the transaction.

The payment process for the transaction is structured in a manner that allows it to be supported by the realisation of synergy benefits over the first years of airline integration.

Transaction Timing

At the forthcoming special meeting to be called within the next few weeks, Air New Zealand's shareholders will consider resolutions giving effect to the transaction.

An application will be lodged soon seeking Australian Government approval for the transaction through the Foreign Investment Review Board. Early consultations with other regulatory agencies will also be initiated with a view to satisfying them in regard to any matter arising from the transaction.

The transaction is considered to be fully consistent with all Australian and New Zealand Government policy objectives, and very much in the national, economic and consumer interests of Australia and New Zealand.

Accordingly, Air New Zealand and News hope to have all conditions of the agreement satisfied in time to complete the transaction by the end of April this year. The latest date by which all conditions must be satisfied is 30 June 2000.

Sir Selwyn Cushing
Chairman
Air New Zealand Limited

James McCrea
Managing Director
Air New Zealand Limited

For further information: David Beatson, Manager Public Affairs. Air New Zealand Limited
Phone: 0064-9-336 2901. Fax: 0064-9-336 2759. Mobile: 021-737350.

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