Qantas seeks Air NZ stake

Qantas might get greater access internationally but face tougher competition at home

Australian flagship airline Qantas has started negotiations to acquire a major stake in Air New Zealand, only weeks after it was given the regulatory go-ahead to buy Aussie low-cost carrier Impulse.

If successful, you could call it a partnership, but there is a long way to go

Michael Sharp
Qantas

Qantas wants to buy shares in Air NZ from the company's two main shareholders, Singapore Airlines which owns a 25% stake and Singapore-based Brierley Investment which has 30%.

"If successful, you could call it a partnership, but there is a long way to go," said Qantas spokesman Michael Sharp, insisting it is not a takeover.

Under New Zealand law, foreign airlines are banned from owning more than 35% of Air NZ.

Ansett sale

However, if the two airlines were to join forces, they would dominate the airline markets in both New Zealand and Australia, as well as the market for flights between the two countries.

Air New Zealand is struggling with its finances

In Australia, where Qantas's main competitor, Ansett, is 100% owned by Air NZ, an alliance would dominate the market.

The only remaining competitor would be Sir Richard Branson's low-cost airline Virgin Blue.

In New Zealand, there is no competitor after Qantas franchise operator, Tasman Pacific, collapsed.

However - although good for Qantas and Air NZ - such excessive market power is unlikely to be accepted by the two countries' anti-monopoly watchdogs.

As part of the deal, and in an effort to win over the competition commissions, Air New Zealand would be likely to sell Ansett to Singapore Airlines.

Good deal

One analyst described the series of transactions as a win-win situation where everyone involved would end up being better off.

We're not sellers at one dollar per share

Andrew Shepherd
Brierley Investment

Both Qantas and Air NZ are in financial difficulties, so joining forces to get a tighter grip on the market would make sense.

This is particularly true for Air NZ which was recently forced to go cap-in-hand to the Kiwi government to beg for a financial injection of up to 700m NZ dollars ($295m, £208m) to help it upgrade its fleet.

While for Qantas it would solve the problem of replacing Tasman Pacific.

For Ansett - suffering a severe lack of financial backing from its parent - a deal between its competitor and its parent would make sense since it would end up being backed by the much wealthier Singapore Airlines.

Singapore Airlines would lose its foothold in the New Zealand market, but would gain access to the more lucrative Australian market, and, at the same time, be able to jettison its poorly-performing Air NZ shares.

The right price

This is also true for Brierley which has been trying to rid itself of its Air NZ stake for some time.

However, the company will only sell if the price moves beyond the current one Kiwi dollar per share market value.

"We're not sellers at one dollar per share," said chief financial officer Andrew Shepherd.

Upping the price could solve this problem, though this would raise questions about the value of the deal to the buyer.

In fact, some analysts are already puzzled by the rationale behind the deal.

The question they pose is whether the additional grip on the trans-Tasman routes and access to the New Zealand domestic market would be enough to compensate Qantas for the tougher competition at home from a strengthened Ansett.

Two alliances

Other complications could arise since the two airlines are members of different international alliances:

Qantas is a Oneworld member while Air NZ is a Star Alliance member.

Analysts do not expect any deal to be imminent.

"I think it's the first line in the sand of what could be a very long and protracted process," AMP Henderson Global Investors fund manager Craig Brown said.

Nevertheless, shares in both Qantas and Air NZ rose on the news.