Struggling to secure its own survival, the efforts of Air New Zealand (ANZ) to find new cash for Australian subsidiary Ansett have failed. It has been forced to jettison the carrier and so ground it.

ANZ's three-month campaign to recapitalise ended dramatically in September when it discarded Ansett in exchange for New Zealand Government approval of a plan to save the New Zealand flag carrier. Under it, the government agrees to ease ANZ's foreign ownership cap, and major shareholders Singapore Airlines (SIA) and Brierley Investments each agree to inject NZ$150 million ($63 million), coupled with a NZ$550 million standby credit facility from government.

If cleared by shareholders and due diligence reviews, SIA and Brierley will lift their ANZ stakes to 34 and 37% respectively. The cap on ownership by a foreign airline had been 25%.

As details emerge from the drawn out negotiations, it appears that New Zealand officials doubted from the outset the viability of ANZ's proposed recapitalisation. A confidential key element was that ANZ would buy Virgin Blue, Australia's low-cost carrier responsible for much of Ansett's bleeding. After owner Sir Richard Branson rejected ANZ's A$250 million ($128 million) offer for Virgin Blue, and the extent of Ansett's losses became clearer, SIA retreated on how much capital it would contribute. With that, the original plan fell apart and ANZ was forced to quit Ansett to save itself.

But clouds still darken ANZ's horizon because of legal issues flowing from its NZ$1.3 billion write off of Ansett. Australian creditors and unions are furious, claiming that ANZ owes Ansett's 17,000 employees for unpaid benefits, that it stripped Ansett assets or obligated Ansett with ANZ expenses, that it is liable on guarantees to Ansett creditors, that ANZ directors allowed Ansett to keep on operating after insolvency, and that ANZ was remiss about stock exchange disclosures. ANZ denies all charges, but the legal battles could be long, bruising and with uncertain results.

Indeed, these potential liabilities have spawned concerns that SIA and Brierley, which face their own financial woes, could, after due diligence reviews, renege on their capital contributions. That would throw ANZ's entire recapitalisation into turmoil.

Since ANZ cut ties with Ansett, the scramble to save Australia's number two carrier has been frantic. Canberra refused requests to help finance a rehabilitation. In a moment of bitter irony, ANZ offered Ansett to Qantas, which rejected it after a quick review of Ansett's condition. ANZ placed Ansett in administration to buy time while it sought another buyer. Pilots and engineers dusted off an earlier proposal to rescue their company, and Emirates Air briefly looked at it. But neither plan went anywhere. With Ansett losing more every day administrator Arthur Andersen decided to ground it.

Andersen has received over 200 expressions of interest for Ansett's assets, and a week after the grounding Qantas proposed leasing 10 Ansett Airbus A320s for domestic routes, but was unable to finalise the deal. Aproposed start-up carrier, Australia World Airways (AWA), said it wanted to bid for some of Ansett's international routes - including those to Bali, Hong Kong and Japan.

Four Ansett regional subsidiaries - Hazelton, Skywest and Kendell Airlines, and Aeropelican Air Services - ceased operations when Ansett was grounded, but have since resumed some limited service.

Ansett's collapse marks the failure of a strategy that was always in doubt. The access that Ansett provided to Australia's domestic market was a big plus for ANZ, but analysts also questioned its ability to fund the rehabilitation Ansett so sorely needed. In the end, it seems they were proved right.

Source: Airline Business