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Transcript From Air NZ/Qantas Deal Press Conf.

Transcript From Air NZ/Qantas Deal Press Conference

Trevor Mallard –

Thank you all for coming. I’m working on the assumption that people are aware of the processes that have been followed and the fact that there are two sets of decisions that have been made, Dr Cullen on the ownership side and Mr Swain on the regulatory side.

There are a number of factors that the Ministers will go into in some depth. One is around the importance of the long-term survival of Air NZ, of its reliance on the domestic market, the importance of the koru being seen around the world, and Air NZ’s future as a long haul airline.

There are matters around the taxpayer’s interest, and their priorities for money. Questions of whether health and education or an airline are the highest priorities for ongoing investments of hundreds and millions of dollars.

There are questions around the long-term independence of Air NZ - the question of the retention of and the ability to exit from the proposal that we have approved.

There are questions around guidance to the law, the decisions and the approach to be taken. D Cullen will outline that shortly.

The agreement has been approved by cabinet this afternoon. That approval will result in the NZ Government retaining a 64 % share holding in Air NZ. There has been an unconditional agreement for Qantas to take up new shares to the extent of 4.99% - about a hundred million dollars in Air NZ.

Even if this deal tips over at the regulatory stage, that investment will stay until such time as it’s sold on the market. There is also an agreement conditional on ….UNCLEAR ….and the Commerce Commission approval subject to there being no material changes to Qantas to take their shareholding to 22.5% of Air NZ.

Cabinet had an extensive discussion on this issue and we’ve looked at the ownership of Air NZ carefully. That was not particularly hard. We’ve also looked at the regulatory questions, and I want to emphasise that this decision is conditional on the regulatory authorities’ approval and there a are number of factors they will be focussing on.

Dr Cullen –

As Trevor said, it was relatively straightforward in terms of the ownership interest. We had to measure the best commercial interests of Air NZ going forward and of course that had to be measured against alternative scenarios. Most of the comment I’ve seen so far, assumes that the present situation will simply remain unchanged if this deal is not approved. That is a very unlikely assumption to make in the present situation. The advice we have from officials, supported by the independent analysis from First NZ Capital, which is employed by Treasury, was that the proposal will deliver significant benefits to the company and the shareholders and will also be the best option to secure Air NZ’s position as an international airline.

The alternatives are a much less attractive in terms of revenue generation, cost savings and the protection of Air NZ’s competitive position, particularly so because the most likely alternative scenario is of course greatly intensified competition from Qantas on Air NZ’s domestic routes.

The other thing is that Air NZ’s profitability at the present and indeed for some time, has depended almost entirely on its domestic services. It makes very little by way of profit on its international services.

There is a very real risk therefore that with an alternative scenario, Air NZ will shrink back to largely a domestic operation with very little long haul coverage at all.

That means therefore that the spread of the Air NZ brand internationally, will also be reduced.

There will also be a real risk within that kind of competitive scenario that the principal shareholders - the Government, at present with over 80% of the shares, will be called upon for significant surplus funds. This will also detract from the Government’s capacity to deal with other issues relating to health and education and other primary responsibilities.

Recognising the interests of control, remember I emphasised all the way through, that we had to be assured that we retain majority NZ ownership and control. We retain some 64% of ownership of the airline, which is majority ownership in any measure. Issues surround the relationship in terms of the JAO and how that may evolve over time. Certainly there was…that over time, Air NZ operations would become so merged with Qantas that it would become very difficult for Air NZ to exit and to operate as an independent airline subsequently. At Air NZ, the board is well aware of that issue and we agree with their assessment of that fact. Therefore the shareholder’s expectation, which is going to Mr Palmer, lays out very clearly the expectation of the shareholder that the board will reserve the capacity of Air NZ to exit from the alliance in good shape, and to operate, within a reasonably short time frame as a totally independent airline again - not involved in that strategic alliance.

And we will be assertively using our monitoring capacity to ensure that this is in fact happening. I think it’s fair to say….that the govt will be taking a more active approach to its shareholder role.

Mr Swain –

Part of the other assessment was the issue of the national interest considerations and as we outlined a few weeks ago we consider that there were six of those. Cabinet have decided on balance that the national interest considerations have been met. There were three of them that were particularly easily met - those were the air rights, the branding and the koru. And also the issues of jobs. There were two that were a little bit more problematic. Those were issues relating to tourism and the robust domestic airline and those two considerations really overlap with the work the Commerce Commission will undertake. We feel that that will benefit from extensive work from the Commerce Commissions over the next 6-9 months. The most problematic one I suppose was the issue of the effective control which overlaps particularly in relation to the advisory group under the JAO, and our view was that the advisory group encourages consensus and that there is a disputes resolution mechanism. The ultimate sanction in the end is exit and so on balance the Government considers the national interest test has been met, and for that reason we have given the green light to head to the next stage of regulatory authority with the conditions Trevor outlined.

Questions from the media

Q - How important was public opinion in your decision?

Michael Cullen –

Public opinion couldn’t play a role in consideration of this. The Government couldn’t own companies if it makes its ownership decisions on the basis of public opinion. But the expression of public opinion in terms of concern about the competition issues and so on, can of course be expressed via the Commerce Commission process, by making a submission. But people have to argue on the basis of facts, not on the basis of prejudice.

Trevor Mallard –

I think it’s fair to say that as we made a political assessment of this, we looked at the possibility of having to explain cuts to the health and education area while putting money into an airline that was losing money – that was not an attractive alternative for this Government.

Q – Were prices part of your consideration at all?

Trevor Mallard –

Cleary we’ve had some advice in that area, and we’ve also had advice as to alternative scenarios as far as ticket prices are concerned. I think people have got to be very careful that they don’t assume that the status quo would continue if we didn’t make this decision. It was quite clear and the advice was unanimous. There was some debate about what the new scenarios would be, but what was clear is that what has been a period of relative calm from Air NZ over the past 6-8 months, would be unlikely to continue.

Q - Did that advice say what the chance of fares staying at the same rates would be?

Trevor Mallard –

We had some clear advice, which I think has already been relayed by Air NZ on the question of ticket price.

Q - Dr Cullen, you said that intense competition would undermine a deal if Air NZ was to have a partner or no competition there’s no other choices are there?

Dr Cullen -

In terms of Air NZ’s position without the partner, it is clearly much more exposed than if it did have a partner. The probability is that Air NZ would struggle to survive in the long term. We have to face that reality because they’re a small airline, which is trying to maintain very broad international reach, which makes very little profit on those international services.

Q - So essentially you’re saying go with Qantas or be bullied by Qantas?

Michael Cullen –

No I’m not saying that at all. The scenario for Air NZ was to find a strategic partner and its consideration was that Qantas was the best, or to face a very difficult and uncertain future. For an airline as large as United to go into bankruptcy, it reminds us what a very fragile industry it is. And may I remind you of the classic summary position of the airline industry through history, the total net sum of profit in the United States airline industry since it began is zero.

Q - So what happens if the Commerce Commission says no?

Michael Cullen –

Failing that the Air NZ board will have to consider what it does.

Q - Any options?

Michael Cullen -

They will have to consider that if the Commerce Commission or the ACCC says no.

Q – So no plan B?

Michael Cullen –

No doubt plan B is to carry on and survive as best they can. But the risk around that very clearly now is that they will have to go back to the shareholders which is you and me for a great deal of more money.

Trevor Mallard –

And there are no other realistic partners on the horizon and it’s also clear that the medium term strategy will involve a fall back of long haul.

Q – what do you make of the political campaign?

Michael Cullen –

I’d invite you to ask Mr English that if National, by some extraordinary chance had won the last election, what their response to this proposal would have been. You might also ask more than one member of the ACT party what their views are as opposed to the ones making all the noise.

Q – Do you think it’s having any traction?

Michael Cullen –

There is no question the majority of the public opposes the proposal at this point, but as I said if the Government makes the decisions about the companies it owns on the basis of opinion polls, it shouldn’t own any companies at all.

Trevor Mallard –

I think it’s also fair to say that a lot of people in the public had thought that this decision was made weeks ago, and we’ve gone up in the polls. That might mean there are other factors around it of course.

Q - Do you think it’s Qantas’ intention to take over Air NZ?

Michael Cullen –

No I don’t think that’s Qantas’ intention at all, but commercial imperatives or advantages might suggest on a progressive basis that that could happen in a …unclear way……that you wouldn’t notice each stage happening but at the end of the process you find you’re in that position. Can I make the point that you need to remember that there’s a view on this side of the Tasman that Australia’s trying to monster Air NZ in some way. Qantas have major concerns about their own long term future. It’s not going to put 540 million dollars into Air NZ [unclear]. Qantas isn’t that rich.

Q – Critics of the deal have said it will push up prices over time.

Michael Cullen –

That’s a matter for the Commerce Commission to consider in light of the overall national interest.

Q – You wont be intervening in the Commerce Commission?

Michael Cullen –

Absolutely not. We’ve made that clear all the way through the process. The Commerce Commission will make its own independent judgement as will the ACCC.

Trevor Mallard -

Just make that absolutely clear - the Government has a power to give views and to direct on certain matters – we are not using those powers.

Q – Do you make a submission to the Commerce Commission?

Michael Cullen –

No.

Q – Why not?

Trevor Mallard –

Because we think the company is competent to make its own case and the Commerce Commission is competent to hear it.

Q – Star alliance membership?

Michael Cullen –

There’s some further work to be done on that as you’ll know from the Air NZ statement on this matter. One point to be emphasised from both airlines a week or so back is that this does not affect the air points, which will be of interest to many people.

ENDS

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