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Address By John Palmer, Chairman, Air New Zealand

December 9, 2002


Address By John Palmer, Chairman, Air New Zealand

The format for this afternoon will be in three parts. First I will outline the approval process for our proposed alliance with Qantas

Then Ralph will make some key points about the NECG economic report, and finally we will move into questions

Within the approval process there are three quite separate steps from Air New Zealand’s perspective

The first is the Kiwi Shareholder, in effect the Crown in the form of the Minister of Transport, agreeing in principle to the investment by Qantas in Air New Zealand

This is the decision the Kiwi Shareholder is expected to make during the week commencing December 16

The second step begins today with our filing of an application with the regulators. Air New Zealand and Qantas are responsible for the filing with the New Zealand Commerce Commission and Australian Competition and Consumer Commission, and both are joint applications

It is important to understand that the decision by the Kiwi Shareholder and the regulatory approval process are quite separate

The Kiwi Shareholder will consider the implications of Qantas’ proposed investment in Air New Zealand on areas of aviation policy and national interest. They relate primarily to our role and responsibilities as the national flag carrier

Meanwhile the Commerce Commission and Australian Competition and Consumer Commission will consider issues of competition effect and economic benefits raised by the proposed alliance

The application today is for authorisation to form an alliance that will result in diminished competition. As the NECG report notes, competition is a means not an end. The objective of competition is economic public benefit

Competition policy both in New Zealand and Australia recognises this by providing for authorisation of socially desirable conduct that would otherwise breach the competition laws

As part of the process the regulators will seek public submissions, and all who wish to have a say can examine our case and support, or challenge our point of view

In making our submission today we meet an Australian legal requirement to file an application within 14 days of announcing our intention to enter the alliance. It is sensible for the New Zealand application to be filed at the same time

Another point I want to clarify is why we announced our decision on November 25 rather than coordinate it better with seeking Crown approval? The answer to that is we are required by the rules of the New Zealand and Australian Stock Exchanges to announce such agreements to the market as soon as they are made

The boards of the respective companies signed the agreements to form the alliance on November 25, and it was on that day we announced our plans

The filing that is taking place today is in two parts. Firstly there is the application, and secondly the supporting documentation

Part of the supporting documentation is an independent economic report commissioned by Air New Zealand and Qantas from Network Economics Consulting Group (NECG). The underlying financial data in the report has been audited by accountants PricewaterhouseCoopers and the economic interpretation reviewed by other international economists

In terms of the actual application, the only information we have released to you today is the Executive Summary of the Commerce Commission Application

Established practice with the competition regulators requires that before the full application becomes a public document, we file a copy with the regulators. You will understand that we operate in a highly competitive market, and accordingly we have asked the Commerce Commission to consider maintaining confidentiality over a limited number of commercially sensitive elements

Only after agreement has been reached on confidentiality is our Application released by the regulators and made public

It is appropriate however to make the NECG report public, and shortly Ralph will touch on some key aspects of that report

The point needs to be made that this report is an independent one. It does not simply represent the views of Air New Zealand and Qantas, and in fact there are assumptions and extrapolations made within it that do not align with our own thinking. In some places our assumptions are more conservative, and in others more bullish

However we acknowledge that NECG’s views reflect current international economic theory and reflect the absolute necessity for NECG to maintain their independence and excellent reputation for professional integrity as economic advisors Finally, there is the third step in the process, which is shareholder approval. Some argue that if the Kiwi Shareholder agrees and the regulators agree, then it is a foregone conclusion that the Crown as a shareholder will agree

The Crown as shareholder has not expressed a view. The Kiwi Shareholder will consider the aviation and national interest issues. The competition regulators consider the competition effects and public benefits. The Crown as a shareholder will along with all the Company’s shareholders, consider the proposal from the legitimate self interest of any investor asking - is this transaction in the best interests of the Company and therefore me as a shareholder? The current difficulties confronting even the giant United Airlines are a cogent reminder of what can happen very quickly in this industry to an airline which in recent years earned annual profits in excess of two billion dollars

We anticipate that shareholder approval will be sought at an Extraordinary Shareholders’ Meeting, to be held in mid to late 2003. At that meeting all shareholders in Air New Zealand will have the opportunity to debate and vote on the merits of our proposed alliance

I see all three steps as totally separate, and the merits of our case have to be viewed and accepted on each occasion

Before handing over to Ralph, let me just touch on the comments made in the Executive Summary of the Application

I think we make it pretty clear that the alliance is about creating a platform for success for Air New Zealand. Not today, but in three to five years time

Currently Air New Zealand and Qantas both know that without the Alliance we face a war of attrition for the New Zealand domestic market which neither can afford to lose

Air New Zealand and Qantas both also know that it is only a matter of time before no frills operators enter the New Zealand domestic and trans Tasman markets

When that occurs, Air New Zealand will be vulnerable. When this happened in Australia, it was a major contributor to the collapse of Ansett

While Air New Zealand is currently in a position of relative strength compared to a year ago, we are not well placed to fight a battle of attrition over the medium to longterm, or to manage external risks such as significant fuel price rises and currency movements. Qantas knows that

Qantas is losing money in its New Zealand operations and in order to reverse that must increase capacity. Qantas too would prefer to focus their resources on product and network enhancements for their customers rather than fighting us

A one off equity injection is not the answer for Air New Zealand. It does not address the underlying problem. Nor is the solution an alliance with another airline which simply expands our international network outside Australasia

The strategic alliance is the only answer for both Air New Zealand and Qantas, and is essential if Air New Zealand is to survive in the long term

Now let me hand over to Ralph to touch on aspects of the economic report

ENDS

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